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

Two Methods, Two Different Stories

There are two ways to calculate emissions from a company's purchased electricity — Scope 2. These two methods can produce very different results for the same company, and which one you use directly affects how your climate performance is perceived.

The GHG Protocol officially defined these two methods in its Scope 2 Guidance published in 2015, and requested that companies report both (WRI/WBCSD, GHG Protocol Scope 2 Guidance, 2015). However, in the years since, different frameworks and standards have engaged with these two methods in different ways. This article compares both methods and evaluates when each should be preferred.

Location-Based Method

How It Works

The location-based method uses the grid average for the region where the company consumes electricity. The calculation is straightforward:

Scope 2 Emissions = Electricity Consumption (kWh) x Grid Emission Factor (kg CO2e/kWh)

The grid emission factor reflects the weighted average of all electricity generation sources in that region (coal, natural gas, wind, solar, nuclear, etc.).

What It Shows

The location-based method reflects the carbon intensity of physical electricity generation in the region where the company operates. This method:

• Represents the actual emissions profile of the grid
• Does not reflect an individual company's renewable energy purchasing decisions
• Uses the same emission factor for all companies drawing from the same grid
• Changes over time reflect grid decarbonization

Market-Based Method

How It Works

The market-based method uses the company's electricity supply contracts and contractual instruments. If a company can document that it has purchased renewable energy or procured low-carbon electricity, it can reduce its Scope 2 emissions through this method.

Contractual Instruments

The GHG Protocol Scope 2 Guidance defines the contractual instruments that can be used in the market-based method (GHG Protocol Scope 2 Guidance, Chapter 7, 2015):

Energy Attribute Certificates (EAC):

• In Europe: Guarantees of Origin (GO)
• In North America: Renewable Energy Certificates (REC)
• These certificates represent 1 MWh of renewable energy generation and are transferable

Power Purchase Agreements (PPA):

• Direct PPA: The company purchases electricity directly from a renewable energy producer
• Virtual PPA: Energy attributes are transferred through a financial contract without physical electricity delivery

Green Tariffs:

• Renewable energy tariff options offered by the electricity supplier
• The supplier certifies that electricity provided under this tariff is generated from renewable sources

On-site Generation:

• Renewable electricity generated at the company's own facility (rooftop solar panels, wind turbines, etc.)
• The market-based emission factor for this electricity is considered zero

Residual Mix Factor

In the market-based method, a "residual mix" emission factor is used for electricity consumption not covered by contractual instruments. This factor represents the emission intensity remaining after the certified portion of renewable energy has been removed from the grid.

The residual mix factor is typically higher than the grid average because a portion of renewable energy has been allocated through certificates. This means that companies not purchasing renewable energy certificates may have higher emissions under the market-based method than under the location-based method.

Comparative Example

Assume a manufacturing facility consumes 10,000 MWh of electricity annually:

Note: Emission factors are illustrative; current national factors should be used in actual calculations.

This table clearly shows how differently the two methods can perform. Under the location-based method, the company's certificate purchases do not change the result — the grid emission factor is the same for everyone. Under the market-based method, certificates and PPAs can bring emissions down to zero.

Dual Reporting Requirement

The GHG Protocol Scope 2 Guidance requests that companies report both methods. The rationale is clear: no single method tells the full story (GHG Protocol Scope 2 Guidance, Section 5.4, 2015).

• Location-based: Reflects the physical reality of the grid
• Market-based: Reflects the company's deliberate energy procurement decisions

Both pieces of information are valuable to different stakeholders. Investors use market-based results to evaluate a company's renewable energy strategy; policymakers use location-based data to track grid decarbonization rates.

What Different Frameworks Require

CSRD / ESRS E1

ESRS E1 requires reporting both methods for Scope 2 emissions. Companies must disclose both location-based and market-based Scope 2 emissions. Dual reporting is mandatory for companies within the scope of CSRD (Commission Delegated Regulation 2023/2772, ESRS E1-6, Paragraph 44).

CDP

In the CDP climate change questionnaire, companies are asked to report Scope 2 emissions using both methods. CDP does not designate the market-based method as "preferred" — it evaluates both equally.

SBTi

SBTi uses the market-based method as the basis for target-setting and progress tracking. When a company validates an SBTi target and reports annual progress, Scope 2 emissions are evaluated using the market-based method. This means that renewable energy purchasing strategies contribute directly to SBTi targets (SBTi Criteria and Recommendations, v5.1, Criterion C6, 2023).

RE100

The RE100 initiative is a network of companies committed to 100 percent renewable electricity. RE100 Technical Criteria use the market-based method to verify renewable energy consumption. Companies' renewable energy usage rates are calculated through energy attribute certificates and PPAs (RE100 Technical Criteria, 2022).

The Situation in Turkey

Grid Emission Factor

Turkey's national grid emission factor varies annually according to the energy mix. Because coal and natural gas account for a significant share of energy generation, Turkey's grid factor is above the European average. This keeps location-based Scope 2 emissions high.

Renewable Energy Certificates

Turkey uses the I-REC (International Renewable Energy Certificate) system. I-REC certificates can be obtained from renewable energy generation facilities in Turkey and used in market-based Scope 2 calculations.

However, there are points to consider:

• The debate continues on whether I-REC certificates create "additional" renewable energy
• Some frameworks prefer certificates to be sourced from within the same market boundaries as the generation facility
• PPAs generally signal a stronger climate impact compared to unbundled certificates

Practical Recommendations

A strategic approach for companies operating in Turkey:

1. Calculate and report both methods — this is required for both GHG Protocol and ESRS compliance
2. Use I-RECs or PPAs to reflect your renewable energy strategy in the market-based method
3. If you have SBTi targets, prioritize the market-based method — contribute to your targets through renewable energy investments
4. Do not overlook the residual mix factor — it applies to the portion without certificates and may be higher than the grid average

Conclusion

While Scope 2 calculation may seem like a simple multiplication, the choice of method directly affects how a company's climate performance is perceived. Both methods provide valuable information: the location-based method reflects physical reality, while the market-based method reflects strategic decisions. The cardinal rule is to report both — although different frameworks prioritize different methods, transparency always wins.

Key Takeaway: Reducing market-based Scope 2 emissions to zero does not eliminate physical grid emissions. Reporting the location-based method as well provides transparency and keeps alive the motivation to contribute to grid decarbonization.

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