Location-Based vs Market-Based Scope 2 Reporting: Which Method Should You Use?

Of all the choices embedded in a corporate GHG inventory, the one most likely to produce two wildly different numbers from the exact same electricity bill is how you calculate Scope 2. The Greenhouse Gas Protocol sets out two distinct methods, location-based and market-based, and for an organisation that has invested in renewable energy contracts, the gap between them can be dramatic. Understanding both, and which one your reporting obligation actually requires, is essential before you commit to a figure.

Location-based: what the grid actually delivered

The location-based method calculates your Scope 2 emissions using the average emissions intensity of the electricity grid you are physically connected to, regardless of any renewable energy contracts or certificates you may hold. It answers the question: given the mix of generation sources actually feeding the grid in your region, what emissions are associated with the electricity you consumed? This method uses grid-average emissions factors published for the relevant network or region, applied to your actual electricity consumption.

Because it reflects physical reality rather than contractual arrangements, location-based figures are comparable between organisations operating in the same grid region, and they cannot be improved simply by purchasing renewable energy certificates. If your operations sit on a grid still heavily reliant on coal or gas generation, your location-based Scope 2 figure will reflect that, no matter what you have purchased on paper.

Market-based: what you contracted to buy

The market-based method instead reflects the emissions associated with the specific electricity products an organisation has deliberately chosen through contractual instruments: power purchase agreements, renewable energy certificates, green energy tariffs, or supplier-specific emission factors. Where no such contractual instrument exists for a portion of consumption, the method typically falls back to a residual mix factor, representing the emissions intensity of the generation left over once contracted renewable electricity has been accounted for elsewhere in the market.

This method is what allows an organisation that has genuinely invested in renewable electricity procurement to see that investment reflected in its reported figures. It is also, for the same reason, more exposed to differences in disclosure quality between organisations, since it depends on the credibility and specificity of the underlying contractual instruments, not just the physical grid.

Why the gap between the two can be significant

For an organisation with no renewable electricity contracts, the two methods typically produce similar figures, both essentially reflecting grid averages. For an organisation that has signed a power purchase agreement for renewable electricity, or purchases certificates covering a substantial share of its consumption, the market-based figure can be dramatically lower than the location-based figure, sometimes near zero for the contracted portion, even though the same physical electrons, drawn from the same grid, are consumed either way. Neither number is “wrong”. They are answering genuinely different questions, and conflating them is one of the most common sources of confusion, and occasionally scepticism, when an organisation’s reported emissions do not match a reader’s expectations.

Which one do you actually need to report

This is increasingly not a matter of preference. Under Australia’s mandatory climate disclosure regime, AASB S2 requires entities to disclose their Scope 2 emissions on a location-based basis, and separately provide information about any contractual instruments relevant to understanding their market-based position, rather than allowing the market-based figure to substitute for the location-based one. This reflects the same principle underpinning the Greenhouse Gas Protocol’s own guidance: both figures matter, they answer different questions, and one should not be reported in place of the other.

For organisations not currently subject to mandatory disclosure, industry practice under the Greenhouse Gas Protocol’s dual-reporting requirement is to disclose both figures side by side wherever a market-based approach is used, precisely so that a reader is not misled about what a low market-based figure does, and does not, represent.

What this means in practice

If your organisation is investing in renewable energy contracts as part of a genuine decarbonisation strategy, that investment deserves to be reflected and communicated, through a properly calculated market-based figure with transparent disclosure of the underlying contracts. But your location-based figure should not disappear from the conversation, because it is what regulators, and increasingly sophisticated customers and investors, will expect to see, and it is the number that actually reflects your exposure to the emissions intensity of the grid you depend on.