More than ever, companies pursue emissions inventories that align with the leading emissions reporting standard: the Greenhouse Gas Protocol. Several factors contribute to the rise in emissions accounting—emerging reporting regulations, increasing investor scrutiny, and the desire to participate in emissions trading schemes, to name a few.
For companies new to greenhouse gas (GHG) emissions accounting—or seasoned sustainability professionals looking for a technical reminder —it’s important to know the two distinct methods to calculate emissions from purchased electricity.
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Why two methods?
Sometimes companies with aggressive carbon emissions abatement goals find themselves located where renewable energy infrastructure doesn’t match their aspirations. Purchasing environmental attributes from renewable energy developments elsewhere allows companies to meet their renewable electricity and climate change targets without waiting for their local grid to decarbonize. But physical emissions from fossil fuels still occur and must be disclosed to stakeholders in the interest of transparency. Per the GHG Protocol, companies should also report on the features and policy context of their contractual instruments.
The location-based approach
The location-based approach to emissions accounting for purchased electricity approximates the greenhouse gases emitted to the atmosphere from the electricity physically delivered to a company. It relies on average regional grid emission factors.
All companies must calculate emissions from electricity under this method. This includes electricity delivered by a local utility or another direct-line grid at standard commercial rates and grid-connected onsite renewable energy installations—like rooftop solar—that a company owns.
Renewable electricity or attributes a company purchases are not factored into the location-based approach. That means a company’s location-based emissions can’t be reduced through renewable energy instruments.
The market-based approach
In 2019, nearly 38% of companies that publicly reported their emissions to CDP used the market-based approach. This number is bound to increase as more companies align with the GHG Protocol and implement renewable energy strategies in pursuit of net-zero targets.
The market-based approach to emissions accounting for purchased electricity represents emissions based on how an organization buys its energy. When companies execute green power contracts, invest in renewable energy development projects, or purchase renewable energy certificates, their initiatives support a larger-scale transition to renewable energy.
When companies only purchase from fossil fuel-based energy supplies, their market-based emissions can be similar to or even higher than their location-based emissions. This can happen when a company buys energy on the open market to lock in a price for a specified term in anticipation of price increases. The company sources cheaper energy on the open market, but that energy mix could have a higher fossil fuel percentage than the energy mix from its local grid.
Most companies operate in markets with access to various electricity suppliers and renewable energy instruments and must report GHG emissions according to both methods, even if they don’t buy these products. The market-based approach is most accurate when emissions calculations use energy supply-specific emission factors. For example, if a company buys its energy on the open market, it can ask the supplier to provide an emissions factor specific to the energy mix. It would then use that factor to calculate emissions—a more accurate method compared to applying an average regional factor (like eGrid, for example, or a country factor). Although these custom factors are often unavailable, companies should at least ask their suppliers. If unavailable, use an average regional grid factor to approximate.
How do market- and location-based approaches work in practice?
Companies without contractual instruments track their kWh consumption from grid electricity—information typically found on utility bills. Companies with contractual purchases need to also track their grid electricity consumption, plus consumption tied to each energy supply agreement (and, if available, associated emission factors), and all purchases of offsite renewable energy. This includes physical power purchase agreements (PPAs) and financial instruments, like virtual PPAs, equity investments, and renewable energy certificates (RECs). Don’t worry though, this is not double counting.
Sustain.Life automatically calculates emissions under both approaches. Users will see two scope 2 indirect emissions numbers—market-based and location-based. For companies without contractual electricity purchases or access to emission factors from their utility provider, the values are identical. When evaluating progress against climate targets, companies use emissions calculated under the market-based approach to take credit for their renewable energy strategy.
Scope 2 quality criteria
Not all contractual instruments qualify for inclusion in a scope 2 market-based inventory. The GHG Protocol outlines quality criteria for credible renewable energy instruments. It states that an environmental attribute must be fully representative of the electricity produced, and no other instrument has been generated from the electricity a party claims. The attribution is for one party only and must be redeemed around the time of energy consumption, then must be subsequently retired. The attributes must be sourced in the market where the physical electricity consumption occurs, so renewable energy credits purchased in the EU don’t apply to electricity consumption in the U.S.
For companies with energy procurement, emissions reduction, and decarbonization strategies, calculating and disclosing emissions under the location-based and market-based approaches benefits stakeholders who seek to understand those strategies better.