Market-Based and Location-Based: Reporting Scope 2 Correctly
Seeing two numbers in Scope 2 is confusing. Both answer different questions, and the report language should be structured accordingly.
Market-Based and Location-Based: Reporting Scope 2 Correctly
In Scope 2 reporting, two different numbers appear in many reports. One line shows location-based, the other shows market-based. Teams sometimes debate "which is real." The correct approach is to accept that the two numbers answer two different questions.
In this article, we cover in detail the difference between the two approaches, calculation methods, certificate usage, and reporting requirements.
What are Scope 2 emissions?
Scope 2 covers indirect emissions from the generation of purchased electricity, heat, steam, and cooling. The company consumes this energy but does not own the production facility. Emissions occur at the energy producer's facility.
GHG Protocol Scope 2 Guidance (2015) defines in detail how these emissions should be calculated and offers two calculation approaches.
Location-based approach
The location-based approach is based on the average emission intensity of the grid where electricity is consumed. If you consume electricity in Turkey, you use the Turkey grid average.
Calculation
Emissions = Electricity consumption (kWh) × Grid emission factor (kg CO2e/kWh)
The grid emission factor is calculated based on the mix of all power plants generating electricity in that grid. The shares of sources like coal, natural gas, renewables, and nuclear determine this factor.
What does it measure?
This approach reflects physical reality: what is the average carbon intensity of electricity drawn from the grid? It shows the average impact of electricity consumed in that geography, regardless of the company's energy choices.
Data sources
- National grid factors (TEİAŞ for Turkey)
- IEA (International Energy Agency) country factors
- Regional grid factors (EPA eGRID for the US)
Market-based approach
The market-based approach reflects the company's energy procurement choices. What type of electricity does the company choose to purchase from the energy market?
Contractual instruments
Contractual instruments are used in market-based calculations:
Renewable energy certificates: I-REC (International Renewable Energy Certificate), GO (Guarantee of Origin), REC (Renewable Energy Certificate). These certificates represent the environmental attribute of renewable energy generation.
Direct supply contracts (PPA): Power Purchase Agreements are long-term energy purchase contracts made directly between producer and consumer. They can be physical PPAs or virtual (financial) PPAs.
Green tariffs: Tariff options offered by electricity suppliers that include energy from a specific source (renewable).
Supplier emission factors: Factors calculated by the supplier based on their own generation mix.
Residual mix: The residual mix factor used for consumption without contractual instruments. It represents the remaining grid mix after certified renewable energy is removed.
Calculation
If certificate exists: Certificate amount (kWh) × 0 (or certificate factor) = 0 emissions Remaining consumption: Remaining amount (kWh) × Residual mix factor = Emissions
What does it measure?
This approach measures the company's decisions in the energy market. When a company purchases renewable energy certificates, this preference is reflected in the market-based value.
Why are they different?
When a company purchases renewable energy certificates:
- Market-based value decreases (can even become zero)
- Location-based value stays the same
Because purchasing certificates does not change the carbon intensity of electricity physically drawn from the grid. The grid continues to operate with the same mix. The certificate provides a claim of ownership over the environmental attribute of renewable energy generation.
These two numbers answer different questions:
- Location-based: "What is the carbon intensity of my grid?"
- Market-based: "What type of energy do I choose to purchase?"
Reporting requirements
GHG Protocol Scope 2 Guidance recommends reporting both approaches. Presenting a single value may be considered incomplete reporting.
CDP
CDP requests both location-based and market-based values. It also requests detailed information about contractual instruments used and their quantities.
SBTi
SBTi allows market-based or location-based to be used in target tracking. Which approach will be used is selected when setting the target and should be applied consistently.
GRI
GRI 305 requires reporting Scope 2 emissions with both approaches.
Things to consider in certificate usage
For I-RECs and similar certificates to be effective in market-based calculations, the following criteria must be met:
Temporal matching
The certificate should match the consumption period. For 2024 consumption, certificates with 2024 production dates should be used. Some standards allow a certain tolerance period.
Geographic scope
The certificate should be compatible with the market or grid where consumption occurs. Using GO in Europe and I-REC in Turkey is appropriate. Certificates from different continents are generally not accepted.
Double counting prevention
The certificate must be retired. Retirement prevents the certificate from being used by another party. Retirement evidence should be kept.
Documentation
Certificate documents, retirement evidence, matching tables, and calculation methodology should be documented.
Residual mix and its importance
In market-based calculations, the residual mix factor is used for consumption without certificates. Residual mix represents the remaining mix after certified renewable energy is removed from the grid mix.
The residual mix factor is generally higher than the grid average. Because renewable energy has been separated with certificates, the remaining mix is fossil-heavy.
If no residual mix factor exists, the location-based factor can also be used in market-based calculations. But this situation should be documented.
Benefits of dual reporting
Reporting both approaches together provides strategic advantages:
- Transparency: Stakeholders see both physical reality and company preferences
- Comparability: Location-based enables comparison with companies in similar geographies
- Progress tracking: Market-based shows the impact of renewable energy investments
- Regulatory compliance: Different reporting frameworks may request different approaches
I-REC usage in Turkey
I-REC certificates are available in Turkey and can be used in market-based calculations. The Turkey I-REC market is growing, and it is possible to obtain certificates from renewable energy power plants. Things to consider when using I-REC:
- Certificate production date should match the reporting period
- Certificate should be from the Turkey market (geographic compatibility)
- Retirement statement should be kept
- A matching table with consumption should be created
Practical recommendations
- Calculate and report both approaches
- Check criteria if using certificates
- Look for residual mix factor or justify its absence
- Document methodology and data sources
- Maintain consistency across years
Conclusion
Location-based shows the carbon intensity of where you are. Market-based shows what energy you choose to prefer. Together, they paint the full picture of energy strategy. Understanding and correctly applying both approaches increases the reliability of Scope 2 reporting.
