Scope 2 criteria revision: market-based vs location-based
The environmental impact of companies, particularly regarding energy consumption, has become a key focus in corporate social responsibility. In this context, the Greenhouse Gas Protocol (GHG Protocol) plays a pivotal role by establishing international standards and methodologies for measuring greenhouse gas emissions, including the market-based and location-based approaches.
To enhance the accuracy and relevance of these accounting methods—while reflecting advancements in energy markets and aligning these standards with global climate goals—the GHG Protocol recently announced the formation of several dedicated working groups to review the criteria for Scope 2 emissions accounting.
- Understanding the GHG Protocol and the Scopes
- Market-based and location-based methods
- GHG Protocol brings together working groups to review Scope 2 criteria
- Expected timeline for Scope 2 criteria revisions
- Insufficient industry representation in Scope 2 review committees
Understanding the GHG Protocol and the Scopes
Scopes are categories that classify a company’s greenhouse gas emissions under the GHG Protocol. Scope 1 covers direct emissions, Scope 2 includes indirect emissions resulting from purchased energy, and Scope 3 includes all other indirect emissions across the value chain.
The GHG Protocol, as a global framework, has established guidelines for measuring and reporting these emissions. However, two approaches to Scope 2 accounting are under discussion: the market-based method and the location-based method.
Market-based and location-based methods for Scope 2 emissions accounting
To gain an overall understanding of greenhouse gas (GHG) emissions related to an organization’s energy consumption, two calculation methods are commonly used: market-based and location-based. These methods represent a significant challenge, as they influence how emissions are reported and, consequently, the energy choices made by organizations.
Market-based method
The market-based method reflects emissions from electricity that companies have deliberately chosen (or not chosen) through instruments such as Guarantees of Origin (GO). This method emphasizes corporate responsibility in energy procurement decisions, promoting informed choices that support renewable energy.
This method provides significant flexibility to companies, allowing them to align their environmental goals with concrete actions. Additionally, it better reflects the dynamics of the energy market, as it accounts for individual choices and incentives to invest in renewable energy.
The market-based method thus encourages companies to adopt responsible practices and invest in sustainable solutions.
Location-based method
The location-based method reflects the average emissions intensity of the grids where energy consumption occurs (using primarily grid-average emission factor data). This method estimates emissions using broader averages and does not account for companies’ specific energy procurement choices.
However, this approach can provide an incomplete view of actual emissions. For instance, in Norway, the average carbon intensity appears very low when calculated using the location-based method. Yet, this does not reflect reality: Norway exports nearly all its Guarantees of Origin, implying that most of the electricity consumed domestically may not be as renewable as it appears.
By relying on this method, key aspects of today’s energy market are overlooked, where purchasing decisions and energy source traceability play a crucial role in understanding and reducing greenhouse gas emissions.
GHG Protocol brings together working groups to review Scope 2 criteria
The GHG Protocol recently announced the formation of several dedicated working groups to oversee and guide the review of Scope 2 criteria.
This initiative aims to enhance the accuracy and relevance of accounting methods by reflecting advancements in energy markets and new emission tracking technologies. Another key objective is to align these standards with global climate goals, integrating calculations into a pathway consistent with limiting warming to 1.5°C and supporting net-zero commitments by 2050.
These working groups will notably include:
- Steering committee, that plays a key role in the strategic direction of the revision process ;
- Independent standards board, that provides external oversight and validation for the process ;
- Technical specific working groups, to focus on specific technical aspects of the revision.
Expected timeline for Scope 2 criteria revisions
The formation of these committees and working groups ensures that the GHG Protocol maintains a rigorous, transparent, and inclusive revision process.
Although precise deadlines are not specified, the main Scope 2 standards revision process is underway and could take 1 to 2 years. Preliminary decisions and recommendations from these governance bodies are expected to be announced by the end of 2024 or early 2025.
The GHG Protocol typically follows a comprehensive consultation process involving numerous stakeholders, which can significantly affect the timing of its conclusions.
Insufficient industry representation in Scope 2 review committees
It is worth noting that electricity distributors and consumers are relatively underrepresented within these committees, even though they are directly affected by the choice of accounting methods. Companies in the sector have a vested interest in promoting market tools, yet their limited presence could potentially sway future decisions toward the location-based model.
At Nvalue, we are closely monitoring the progress of these discussions and the resulting decisions. The question of Scope 2 emissions accounting is crucial for the future of sustainability standards.
If you would like to learn more about our vision and positioning regarding market developments and potential impacts on decarbonization strategies, get in touch with our team today.
Nvalue is here to help you start and succeed in your climate journey by focusing on renewable energy. Together, let’s build a future where clean energy is at the heart of your strategy.
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