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Scope 2 Accounting: Market-Based vs. Location-Based Methods Explained

Article Overview

An established framework for the measurement and management of greenhouse gas emissions, the Greenhouse Gas (GHG) Protocol, breaks down emissions into three distinct categories known as scopes 1, 2, and 3.

Scope 1 concerns direct emissions created from the operations owned or controlled by an entity; scope 2 emissions come from purchased electricity, heat, steam, and cooling;  and scope 3 emissions include all other indirect emissions both up and downstream in an entity’s value chain.

Energy generation, directly correlated to scope 2 emissions, is responsible for approximately 40% of global emissions and is considered one of the simplest to reduce through energy efficiency measures and the adoption of renewable energy. Therefore, scope 2 is incredibly important for companies who want to make quick reductions to their emissions. In 2015, the GHG Protocol updated its guidance on how scope 2 emissions should be measured. This update means that most reporting companies now have to report their scope 2 emissions in two ways: a market-based approach and a location-based approach, also known as “dual reporting.”

While this guidance has been out for a while, as investor and regulatory pressure to report GHG emissions increases, it is important for companies new to the GHG accounting space to understand, given its implications for tracking progress towards emission reduction goals.

Why is Dual Reporting Needed?

Up until 2015, renewable energy purchases in scope 2 were calculated inconsistently, with some companies applying a credit for avoided emissions, others applying a zero-emission factor, and some not altering their calculations at all. This variability led to a lack of comparability across a company’s operations and between companies, limiting stakeholders' ability to accurately assess performance. Most methodologies also failed to reflect the complexity of renewable energy options and their relative impact on grid emissions. For example, on-site renewable energy installations can have a direct impact on a company’s use of renewable energy, while purchased renewable energy credits (RECs) may be based on existing renewable projects and don’t explicitly drive an increase in renewable energy availability.

Dual reporting addresses this complexity, by differentiating between renewable energy purchase types and reflecting this variability across the two reporting methods.

What is Location-Based Accounting?

Location-based accounting reflects the emissions associated with the energy delivered to a company. For most purchased electricity, this means the average emission intensity of the grid for the region where energy is consumed. For renewable energy, beyond what is included in grid averages, only on-site and direct-line sources are reflected in location-based accounting. This approach ensures that changes to renewable energy over time reflect actual changes to the grid. However, it excludes the vast majority of renewable energy purchases, which can help increase renewables on the grid, but don’t necessarily include the direct delivery of the underlying renewable energy.

It is important for every company to report a location-based emission total to understand the physical impacts of its operation without market influences being taken into account. However, most companies will set goals based on their market-based emissions total to allow for more flexibility in goal achievement.

What is Market-Based Accounting?

Market-based accounting reflects the emissions associated with purchasing decisions. Purchasing decisions are underpinned by  ‘contractual instruments’, which are contracts to claim the renewable energy attributes (e.g., 0 emissions), regardless of whether the underlying energy is purchased and delivered to the company.  These contracts can vary widely across regions and markets. It is important to note that where contractual instruments are not involved, emissions should still be calculated and included in the market-based emissions total using an average supplier factor, a residual mix factor, or a location-based factor if there is no readily available supplier or residual mix factor.

Below are a few examples of contractual instruments:

  • Power Purchase Agreement (PPA) - investing in a specific renewable energy project either including the underlying energy (Physical PPA) or including only the energy attributes (Virtual PPA)
  • Supplier Specific Contracts - coordinating with suppliers to purchase a specific product with lower emissions than the supplier’s average emissions; these contracts can vary widely by region based on how the local energy grid is regulated, it is important to understand what is included in a supplier contract to assess the quality of the purchase, for example: whether the renewable energy is generated by the supplier or purchased from the market
  • Energy Attribute Certificates (EACs) - certificates verifying the right to claim energy attributes, which can be bundled with the underlying energy or unbundled and purchased on a spot market; EACs can underpin other contractual instruments, such as a PPA or a supplier contract;
  • There are different EACs depending on the market, for example in the US the most common products are Renewable Energy Credits (RECs) and in Europe, the most common products are Guarantees of Origin (GOs)

How Can Carbon Accounting Software Help With Market and Location-Based Accounting?

Carbon accounting software can be used to streamline and simplify the carbon accounting process. Software such as Persefoni’s Climate Management and Accounting Platform (CMAP) has codified the most recent editions of the GHG Protocol allowing companies to easily measure, manage, and report on their emissions within one platform. As the accounting standards continue to evolve, software solutions can also reduce the burden of learning new guidance, integrating the complexities and nuances into platform updates. Persefoni is monitoring the accounting landscape and will continue to integrate new and emerging guidance related to the GHG Protocol, which is likely for scope 2 in the coming years as the renewable energy market evolves.

Climate Management and Accounting Platforms make the complexity of measuring scope 1, 2, and 3 emissions seem simple, with support for every calculation across both market-based and location-based scope 2 accounting. To find out how you can easily measure your scope 2 emissions, schedule a demo.

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