Introduction
The Greenhouse Gas (GHG) Protocol, the gold standard for emissions analysis and reporting, is currently undergoing an overhaul, with a revised version expected this year and final guidance in 2025. In parallel, the Securities and Exchange Commission (SEC) has adopted long-awaited rules to standardize and enhance climate-related disclosures by public companies and public offerings. The rules require Scope 1 and Scope 2 emissions reporting for larger companies for the fiscal year beginning in 2026, making it crucial to comprehend various carbon accounting methods for effective and accurate carbon reduction strategies and climate disclosure compliance.
This blog post will explain the differences between the two primary emissions reporting approaches, market-based and location-based, offer insights into how to calculate each, possible implications for businesses, and recommendations for reducing one's carbon footprint with the most impact.
What Are Location-Based Emissions?
Location-based emissions encompass on-site energy use and are calculated using the local grid’s average emissions intensity. Actual emissions factors (EFs) are expressed in kg of CO2e per kWh and can be found using the Environmental Protection Agency’s (EPA’s) Emissions and Generation Resource Integrated Database (eGrid) resource. This carbon accounting method is valuable for showcasing the following:
- GHG grid intensity where operations occur, regardless of market type
- Aggregate GHG performance in energy-intensive sectors
- Risks and opportunities aligned with local grid resources and emissions
Reducing Scope 2 emissions (i.e., indirect emissions from generation of purchased electricity, heat, steam, or cooling) involves minimizing overall purchased electricity consumption, such as increasing on-site renewable energy generation. The formula for calculating location-based Scope 2 emissions is:
=Location Based Scope 2 GHG Emissions (kg of CO2e)
What Are Market-Based Emissions?
Unlike location-based emissions, the market-based carbon reporting method considers contractual agreements for purchased power, such as Renewable Energy Certificates (RECs) or Power Purchase Agreements (PPAs), not the power a local grid generates. This method is best for illustrating:
- Individual corporate procurement actions
- Opportunities to influence electricity suppliers
- Risks and opportunities in contractual relationships with specific sources and suppliers
The equation for calculating Scope 2 market-based emissions is described below:
=Market Based Scope 2 GHG Emissions (kg of CO2e)
For example, if an organization purchases offsite renewable energy, the emissions factor will generally be zero. All market-based factors must be evaluated against the GHG Protocol’s Scope 2 Quality Criteria.
In cases where the energy provider does not provide an emission factor, a residual mix factor can be used as an alternative. This residual mix pertains to the emission factor for the grid, excluding electricity generation attributed to your chosen electricity contracts. Also, per the GHG Protocol Hierarchy, it is advisable to prioritize higher precision emissions factors to ensure the utmost accuracy whenever possible.
Comparing the Two Carbon Accounting Methods
The World Resources Institute explains the difference between the two approaches, "The location-based method reveals what the company is physically putting into the air, and the market-based method shows emissions the company is responsible for through its purchasing decisions."
Market-based emissions offer greater detail and accuracy yet are more complicated to calculate. Having a clear understanding of contract emissions factors and verifying 100% renewable sources is essential for using this method.
On the other hand, location-based emissions are less nuanced and provide a view of physical emissions from a site. However, it should be noted that the original energy source of purchased electricity from the grid cannot be distinguished, so an average emissions factor based on the local generation mix is used.
Despite the differences, the latest GHG Protocol guidance requires organizations to calculate emissions using both methods (also known as “dual reporting”) for full transparency. The emissions should be disclosed separately rather than aggregated, with decarbonization goals set for both carbon reporting methods.
On-Site Renewable Energy Generation
One of the most effective and impactful approaches for lowering emissions is to take control of your energy with on-site renewable generation. Using the location-based carbon accounting approach, you can showcase the physical emissions generated at your site while powering your facilities with 100% clean energy. Other benefits of on-site generation include: enhanced reliability, energy independence, predictable and stable electricity pricing, energy optimization, emergency power, and derisked operations.
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