The terms market-based and location-based emissions refer to two different methods of accounting for Scope 2 greenhouse gas emissions, which are the emissions associated with the electricity, heat, and steam that a company purchases. The EU has a strong emphasis on renewable energy targets, energy markets, and carbon trading mechanisms, which influence how organizations account for emissions. We discuss these differences below.
1. Location-Based Emissions
This method calculates emissions based on the average carbon intensity of the grid in the location where the energy is consumed. It doesn’t consider the specific electricity contracts a company has; instead, it reflects the broader mix of energy sources (e.g., coal, natural gas, renewables) used in the regional grid. For example, let us assume that a company operating in New York uses 1,000 MWh of electricity. The regional grid in New York is powered by a mix of fossil fuels, nuclear, and renewable energy, which results in an average emissions factor of 500 kg CO₂ per MWh. Under the location-based approach, the company’s Scope 2 emissions would be:
1,000 MWh × 500 kg CO₂/MWh = 500,000 kg CO₂ (or 500 metric tons)
This calculation is straightforward and based on the regional grid’s average emissions, regardless of whether the company has purchased green or renewable energy.
2. Market-Based Emissions
The market-based approach accounts for the actual emissions associated with the specific electricity purchases a company makes. This method considers contracts for renewable energy, power purchase agreements (PPAs), or renewable energy certificates (RECs) that a company might have. It allows businesses to claim lower emissions if they are purchasing electricity from renewable sources. For example, the same company in New York uses 1,000 MWh of electricity, but it has signed a contract to buy 100% of its electricity from a solar farm, which generates zero carbon emissions. Under the market-based approach, the company’s Scope 2 emissions would be:
1,000 MWh × 0 kg CO₂/MWh (since it’s from renewable energy) = 0 kg CO₂
Here, the company’s emissions are reduced to zero because it purchased electricity from a carbon-free source, even though the broader grid still emits carbon.
Thus location-based emission provides a baseline of emissions based on the general carbon intensity of the local electricity supply while market-based emission reflects the emissions from the energy the company has contracted to purchase, considering green energy investments.
Scope 2 Estimation in the European Union
When comparing market-based and location-based emissions in the European Union (EU), there are several key differences that arise due to the region’s energy policies, regulatory frameworks, and grid dynamics. The EU has a strong emphasis on renewable energy targets, energy markets, and carbon trading mechanisms, which influence how organizations account for emissions.
In the EU, the Guarantees of Origin (GOs) play a critical role in the market-based approach for emissions accounting. Under the EU’s Renewable Energy Directive, GOs are issued for each megawatt-hour (MWh) of renewable electricity generated. Organizations that buy renewable electricity can use GOs to claim lower market-based emissions. GOs provide proof that the electricity is sourced from renewable energy, such as wind, solar, or hydro, allowing companies to report reduced emissions in their carbon accounting.
The location-based method in the EU relies on the national or regional grid mix. Although the EU has increased its share of renewable energy, many countries still have energy systems with varying degrees of reliance on fossil fuels (e.g., coal, natural gas). In regions with more carbon-intensive energy grids, location-based emissions remain higher, even if the organization purchases renewable energy through GOs.
We provide a table of comparison of the two methods in EU given its stricter regulations
| Aspect | Market-Based | Location-Based |
| Energy Mix | Reflects contractual purchases of renewable energy via GOs | Reflects the average emissions intensity of the national or regional grid |
| Use of Renewable Energy | Includes renewable purchases backed by GOs or Power Purchase Agreements (PPAs) | Reflects the actual share of renewables in the grid mix |
| Regulatory Mechanisms | Tied to EU Renewable Energy Directive and GOs | No direct link to GOs, based on grid data |
| Variability by Country | Low market-based emissions in countries with high renewable energy penetration (Germany, Denmark) | Location-based emissions vary depending on the country’s energy mix (e.g., lower in Sweden, higher in Poland) |
| Carbon Pricing Influence | Indirect influence through EU ETS on energy sourcing decisions | Indirect influence as carbon pricing shifts energy grids toward decarbonization |
| Accounting for Carbon Credits | Organizations can reduce emissions via purchasing renewable energy instruments (GOs) | No credits or instruments, reflecting grid realities only |
We illustrate the operation using Austria, Sweden, Germany, and Poland.
EU Member Countries (Source:https://schengen.news/schengen-area-member-countries/)
Market-Based Emissions: A company based in Vienna that purchases renewable energy from a hydropower producer using Guarantees of Origin (GOs) will report very low, or even zero, market-based Scope 2 emissions.
Austria:
Market-Based Emissions: Very low if companies purchase renewable energy backed by Guarantees of Origin (GOs), especially due to Austria’s large hydropower capacity and availability of renewables.
Location-Based Emissions: Low, as Austria’s energy grid is predominantly powered by renewable sources like hydropower, wind, and solar, making it one of the cleaner grids in Europe..
Germany:
Market-Based Emissions: Low if companies purchase renewable energy through PPAs or GOs, especially with Germany’s large renewable energy capacity.
Location-Based Emissions: Higher than Sweden, as Germany still relies on coal and natural gas, despite its strong investment in renewables.
Poland:
Market-Based Emissions: Can be reduced if companies purchase GOs or renewable energy contracts, but the options for renewables are fewer compared to countries like Germany or Denmark.
Location-Based Emissions: Very high, as Poland relies heavily on coal for electricity generation.
In summary, in the EU, both market-based and location-based emissions accounting methods are influenced by a range of factors including GOs, national grid mixes, and regional energy markets. Market-based emissions allow organizations to take advantage of renewable energy instruments like GOs, while location-based emissions reflect the actual energy mix of the national or regional grids. The EU’s complex regulatory environment, including the ETS and Renewable Energy Directive, adds further layers to emissions accounting, making it crucial for companies to consider both methods in their environmental reporting.
References:
European Commission. (2021). Austria National Energy and Climate Plan (NECP). Retrieved from https://ec.europa.eu/energy
Austrian Energy Agency. (2020). Energy Mix of Austria: 75% Renewable Electricity. Retrieved from https://www.energyagency.at
European Union Emissions Trading System (EU ETS). 2020 Compliance Data. Retrieved from https://ec.europa.eu/clima
Guarantees of Origin (GO). Renewable Energy Tracking in Austria. Retrieved from https://www.aib-net.org
