Scope 2 emissions — the indirect greenhouse gas emissions from purchased electricity, steam, heat, and cooling — are among the most consequential GHG accounting categories for corporate sustainability reporting. They are also among the most misunderstood. The difference between the market-based and location-based accounting methods for Scope 2 emissions can result in dramatically different reported emission figures from the same physical electricity consumption — sometimes the difference between claiming “100% renewable electricity” and reporting millions of tonnes of CO₂.
For sustainability professionals, CFOs, and ESG reporting officers, understanding these two methods is not optional. They underpin CDP disclosures, GHG Protocol corporate inventories, Science Based Targets (SBTi) commitments, EU CSRD reporting, and SEC climate risk disclosures. This guide explains both methods in depth, when each applies, their advantages and limitations, and what companies operating in the U.S. should do to report correctly under GHG Protocol requirements.
The GHG Protocol Scope 2 Guidance: The Authoritative Framework
The GHG Protocol Scope 2 Guidance, published in 2015, established the current dual-reporting standard for Scope 2 emissions. Crucially, the guidance requires companies to report Scope 2 emissions using both the location-based and market-based methods — not just one. This dual-reporting requirement ensures transparency about both the physical emissions associated with electricity consumption and the market instruments companies use to make renewable energy claims.
Location-Based Method: What It Measures and How It Works
The location-based method calculates Scope 2 emissions using the average emission intensity of the electrical grid where electricity is consumed — typically expressed as kilograms or tonnes of CO₂ equivalent per megawatt-hour (kgCO₂e/MWh or tCO₂e/MWh).
Emission Factor Sources for Location-Based Reporting:
In the United States, the most commonly used emission factors for location-based Scope 2 reporting come from the EPA eGRID (Emissions & Generation Resource Integrated Database), published annually. eGRID provides emission factors at multiple geographic levels: the national average, 26 subregions, and individual balancing areas — allowing companies to use increasingly precise geographic-level factors that reflect the actual grid supplying their facilities.
The choice of geographic granularity matters substantially. The U.S. national average emission factor is approximately 0.386 tCO₂e/MWh (2022 eGRID). But California’s CAMX subregion factor is approximately 0.210 tCO₂e/MWh (reflecting the state’s high renewable penetration), while the Midwest’s MROE subregion is approximately 0.632 tCO₂e/MWh (reflecting coal-heavy generation). A company consuming 100,000 MWh annually reports 21,000 tCO₂e in California versus 63,200 tCO₂e in the Midwest — three times higher — using location-based accounting.
What Location-Based Captures: The average carbon intensity of the electricity system where the company operates — reflecting the actual physical mix of generation sources on the grid. This is a physically meaningful measure that relates to real-world grid conditions.
What Location-Based Does Not Capture: Any voluntary renewable energy procurement the company has done. A company that has purchased 100% renewable energy certificates (RECs) still reports the same location-based emission as a company that has not — because location-based accounting reflects grid physics, not market instruments.
Market-Based Method: What It Measures and How It Works
The market-based method calculates Scope 2 emissions using the emission attributes of electricity that the company has contractually procured — as documented by specific instruments called energy attribute certificates (EACs).
Energy Attribute Certificates (EACs) — The Core of Market-Based Accounting:
EACs are certificates that represent the environmental attributes of one megawatt-hour of electricity generated from a specific renewable energy source at a specific location and time. They serve as the unit of account for renewable energy claims in market-based Scope 2 reporting.
In the United States, the primary EAC type is the Renewable Energy Certificate (REC). Each REC represents one MWh of renewable electricity generated and fed into the grid. RECs are tracked in regional certification systems (M-RETS, WECC WREGIS, NEPOOL GIS, PJM GATS, NC-RETS, ERCOT, etc.) and must be retired (formally consumed) to make a renewable energy claim.
In Europe, Guarantees of Origin (GOs) serve the equivalent function. In other markets, I-RECs (International Renewable Energy Certificates) are used. These instruments have different quality standards, geographic applicability, and temporal matching requirements — details that significantly affect the credibility of market-based claims.
The Market-Based Emission Factor Hierarchy:
The GHG Protocol establishes a preference hierarchy for market-based emission factors, from most to least preferred:
1. Supplier-specific emission factors from direct electricity supply contracts — Power Purchase Agreements (PPAs) with disclosed generation attributes from specific generators.
2. EAC-based emission factors from renewable energy certificates with associated generation attribute disclosures — RECs, GOs, I-RECs.
3. Contractual instrument emission factors from utility green tariffs or green pricing programs with verified emission attributes.
4. Residual mix emission factors — if no contractual instruments are available, companies must use the residual mix emission factor for their grid. In the U.S., the Association of Issuing Bodies (AIB) and regional tracking systems publish residual mix factors representing the grid’s average intensity after EACs have been allocated. Residual mix factors in the U.S. are typically higher than the unadjusted grid average because RECs purchased by other entities have been removed.
What Market-Based Captures: The emission attributes of the specific electricity contracts and instruments the company has purchased. A company that purchases unbundled RECs equivalent to 100% of its consumption can report zero market-based Scope 2 emissions — representing the claim that it has matched its electricity consumption with renewable energy generation.
The Key Differences: Location-Based vs. Market-Based at a Glance
What they measure: Location-based measures the average carbon intensity of the physical electricity grid; market-based measures the emission attributes of contractually procured electricity instruments.
How they differ for renewable energy buyers: A company with 100% REC coverage reports zero market-based Scope 2 but the full grid-average location-based Scope 2. The gap between these figures represents the “market-based benefit” — the difference attributable to renewable energy procurement.
Which is “real”: Both are real — they measure different things. Location-based reflects physical grid reality. Market-based reflects market signals and renewable energy finance — the mechanism by which corporate renewable energy procurement channels money to renewable generators.
Which do stakeholders prioritize: This is evolving. The Science Based Targets initiative (SBTi) uses market-based Scope 2 for target-setting. CDP uses both. CSRD under EU law requires both. SEC climate rules (where final) reference both. Many advanced stakeholders — including investor coalitions and academic researchers — have raised concerns about the additionality and temporal matching of unbundled RECs, pushing companies toward higher-quality instruments like Power Purchase Agreements (PPAs) and 24/7 carbon-free energy matching.
REC Quality Issues: The Unbundled REC Controversy
Not all RECs are created equal. The GHG Protocol allows companies to report zero market-based Scope 2 emissions using any retired REC — regardless of the REC’s vintage (age), the additionality of the underlying generation, or the temporal match between generation and consumption. This has generated substantial controversy in the sustainability community.
Vintage Issues: RECs can be retired up to five years after the electricity was generated. A company retiring 2019-vintage RECs in 2024 is claiming environmental attributes from five-year-old renewable electricity — which may have been built with or without corporate renewable energy support.
Additionality Issues: If a renewable generator was built solely for merchant electricity sales (without needing REC revenue), then the REC purchase may not represent “additional” renewable generation beyond what would have occurred anyway. Bundled RECs from direct PPAs with new-build renewable projects are considered highly additional; unbundled RECs from aging facilities with zero-cost production are considered low-additional.
Geographic Mismatch: Companies can purchase RECs from generators in different grid regions than where their electricity is consumed. A New York company purchasing Iowa wind RECs may be retired in a grid where the renewable electricity cannot physically affect the company’s electricity supply.
Temporal Mismatch: Standard annual REC matching does not ensure that renewable electricity is on the grid at the same hours as the company’s electricity demand. Google, Microsoft, and other tech giants pioneering 24/7 carbon-free energy commitments have documented that hourly-matched renewable procurement is significantly more additive to grid decarbonization than annual-matched REC purchases.
Higher-Quality Market-Based Instruments
In response to REC quality concerns, leading companies are shifting to higher-quality renewable energy procurement instruments:
Power Purchase Agreements (PPAs): Long-term contracts (typically 10–20 years) with new-build renewable energy projects, providing both electricity supply and bundled RECs. PPAs provide high additionality (contracting revenue supports project financing), geographic proximity, and annual volume matching. Virtual PPAs (financial hedges without physical electricity delivery) are the most common corporate PPA structure in the U.S.
Utility Green Tariffs: Programs offered by regulated utilities allowing large customers to pay a premium for utility-procured renewable electricity, with associated RECs retired on the customer’s behalf. Quality and additionality vary significantly by program and utility.
24/7 Carbon-Free Energy (24/7 CFE) Matching: The emerging frontier of renewable energy procurement — hourly-matched renewable energy certificates ensuring that for every hour of the year, the company’s electricity consumption is matched with carbon-free electricity generation in the same grid region. Google’s 24/7 CFE framework and the Energy Attribute Certificate working groups advancing hourly matching standards represent the leading edge of market-based Scope 2 accounting quality.
Dual Reporting Requirement: Practical Guidance
The GHG Protocol Scope 2 Guidance requires companies to report both location-based and market-based Scope 2 figures whenever both can be calculated. In practice:
Always calculate and report both numbers. Single-method reporting violates GHG Protocol requirements and is increasingly challenged by auditors and CDP reviewers.
For market-based, apply the hierarchy strictly. If you have PPAs or utility green tariffs for some facilities, use those supplier-specific factors. For remaining consumption without contractual instruments, apply the residual mix emission factor — not the gross grid average.
Document your instruments. Maintain records of REC retirement statements, PPA contract details, and utility green tariff enrollment documentation. Third-party assurance providers will audit these records.
Explain the difference. When market-based Scope 2 is significantly lower than location-based, explain the instruments used, their vintage, their geographic source, and their additionality characteristics. Transparency builds credibility; uncontextualized zero claims invite scrutiny.
Common Scope 2 Accounting Mistakes to Avoid
Using gross grid emission factors for market-based instead of residual mix: When no contractual instruments are held, residual mix factors — not unadjusted eGRID factors — must be used for market-based reporting. Many companies make this error, underreporting market-based Scope 2 when residual mix is higher than the gross grid average.
Claiming zero market-based Scope 2 without retaining REC documentation: The claim is only valid as long as the retired RECs remain documented and auditable. CDP auditors and GHG assurance providers will ask to see retirement certificates.
Using national rather than subregion eGRID factors for U.S. location-based reporting: The GHG Protocol recommends the most geographically granular emission factor available. Using the national average instead of facility-specific subregion factors reduces reporting accuracy significantly.
Reporting only market-based Scope 2 (typically zero) without location-based: This violates GHG Protocol dual-reporting requirements and masks the company’s physical electricity consumption footprint.
Double-counting RECs across organizational boundaries: In complex corporate structures, RECs must be retired at the entity level that consumed the electricity. Subsidiaries, joint ventures, and franchise operations require careful boundary setting to prevent double-counting.
Scope 2 Accounting Under CSRD, CDP, and SBTi
Major disclosure frameworks align with GHG Protocol Scope 2 requirements but add specific interpretations:
CSRD/ESRS E1: European Sustainability Reporting Standards require both location-based and market-based Scope 2 reporting. EU issuers must explicitly disclose Guarantees of Origin used for market-based calculations and assess the quality and additionality of their renewable energy claims.
CDP Climate Change: CDP requires both methods. CDP scoring methodology assesses renewable energy procurement quality — companies using PPAs and bundled instruments score higher on renewable energy questions than those relying solely on unbundled RECs.
Science Based Targets initiative (SBTi): SBTi uses market-based Scope 2 for target-setting for the electricity sector. For non-electricity sectors, SBTi’s Absolute Contraction Approach applies to both market-based and location-based Scope 2. SBTi’s Net-Zero Standard encourages high-quality renewable energy procurement with additionality and geographic matching requirements for near-term targets.
Mastering the distinction between location-based and market-based Scope 2 — and applying both correctly — is a fundamental competency for any sustainability professional responsible for GHG reporting. The methods are not alternatives; they are complementary lenses on the same emissions challenge, and the GHG Protocol requires both for good reason.
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