Moving from Location-Based to Market-Based Accounting for Scope 2 Emissions

Scope 2 emissions are the indirect greenhouse gas (GHG) emissions caused by the consumption of purchased electricity, steam, heat or cooling. It’s crucial for organizations to calculate these emissions so that they can understand their environmental impact and make informed decisions about how to reduce them. But the method behind the calculation – location-based or market-based accounting – makes a significant difference in the actionability of the data for an organization.

The limitations of location-based calculations

Calculating Scope 2 emissions traditionally relied on location-based methods, which consider the average emissions intensity of the grid in the location where the electricity was consumed. An organization’s emissions impact from its electricity usage was directly tied to the source of electricity in its geographic region.

However, the shift towards renewable energy sources and the decarbonization of electricity grids has made location-based calculations less accurate. With location-based accounting, a company located in a region with a high mix of renewables has a lower emissions intensity compared to a company located in a region with a higher mix of fossil fuels, even if the latter company has purchased more renewable energy. This model makes it challenging for organizations to understand the impact – and see the benefit – of their individual decarbonization decisions.

The benefits of market-based accounting

Market-based accounting, on the other hand, uses data from the electricity market to determine the emissions intensity of the electricity consumed. This approach takes into account your contracted mix of generation sources (direct energy products and/or data from your specific utility provider), rather than just the average emissions intensity of the grid. This provides a more accurate picture of the emissions associated with an organization’s electricity consumption, allowing them to make better informed decisions on how to reduce their emissions.

This shift from location-based to market-based calculation has been driven in part by international initiatives such as the Task Force on Climate-related Financial Disclosures (TCFD) and the Science Based Targets (SBT) initiative. These organizations see market-based accounting for Scope 2 emissions as a more transparent and accurate way of reporting emissions, meaning this method can support the development of credible and science-based emissions reduction targets.

The market-based approach is also in line with carbon pricing, which sets an internal price of emissions within an organization and often accounts for this cost through reduction initiatives. By using market-based calculations, organizations can reflect the cost of emissions in their own accounting, helping to drive investment in low-carbon technologies and support the transition to a low-carbon economy.

Deciding on an approach

While the benefits of market-based accounting are clear, some organizations may choose to proceed with location-based accounting for their Scope 2 emissions – it can be simpler, more predictable, and in some cases is the only method recognized by regulatory requirements. Some organizations may choose to use a combination of both methods to get the most comprehensive understanding of their emissions from all angles – and Optera’s software supports both methods. But for organizations looking to make progress on their net zero strategy, market-based accounting leads in accuracy and actionability.