Quick Comparison
| Market-Based Method | Location-Based Method | |
|---|---|---|
| Scope | Reflects emissions from electricity the company has purposefully chosen | Reflects average grid emissions where consumption occurs |
| Applicability | Companies procuring renewable energy via contracts, RECs, or PPAs | All companies reporting Scope 2 emissions |
| Required/Voluntary | Required alongside location-based under GHG Protocol Scope 2 Guidance | Required as the baseline method |
| Geography | Depends on contractual instruments available in the market | Based on grid-average emission factors by region |
| Key Focus | Consumer choice and market signals for clean energy | Physical reality of the grid serving the facility |
What is the Location-Based Method?
The location-based method calculates Scope 2 emissions using average grid emission factors for the region where electricity consumption occurs. If your facility is in Texas, you use the ERCOT grid emission factor. If it's in France, you use the French grid factor. The method reflects the physical reality of the electricity grid—what mix of generation sources actually delivers power to your location.
Grid emission factors are published by agencies like the EPA (eGRID in the United States), the International Energy Agency (IEA), and national environment agencies. They represent the average carbon intensity of electricity generation in a defined area, typically expressed in kg CO₂e per kWh. A facility on a coal-heavy grid will report higher location-based emissions than an identical facility on a hydro-dominated grid.
The location-based method is straightforward and universally applicable. It requires no contractual instruments, no special procurement arrangements, and no market participation. Every organization that consumes grid electricity can calculate a location-based figure. The GHG Protocol Scope 2 Guidance (2015) requires all reporters to disclose location-based results, making it the non-negotiable baseline for Scope 2 accounting.
What is the Market-Based Method?
The market-based method calculates Scope 2 emissions using emission factors derived from contractual instruments that the company has purposefully chosen. These instruments include energy attribute certificates (such as Renewable Energy Certificates in North America or Guarantees of Origin in Europe), power purchase agreements (PPAs) with specific generators, green tariffs offered by utilities, and direct contracts with renewable energy suppliers.
When a company buys RECs equivalent to its electricity consumption, the market-based method allows it to claim the emission factor associated with those RECs—typically zero for wind or solar—instead of the grid average. If no contractual instrument exists for a portion of consumption, the company applies a "residual mix" factor, which represents the grid emissions remaining after all contractual claims have been removed.
The market-based method exists to reward and incentivize clean energy procurement. Without it, a company investing millions in a solar PPA would report the same Scope 2 emissions as a competitor doing nothing—the grid average doesn't change based on individual procurement decisions. However, this method has drawn criticism for enabling "paper decarbonization" when companies buy cheap, unbundled RECs that don't drive new renewable capacity.
Key Differences
1. What they measure. Location-based captures the physical emissions profile of the grid. Market-based captures the contractual choices a company makes about its electricity supply. Neither is wrong; they answer different questions.
2. Data sources. Location-based uses published grid-average emission factors. Market-based uses supplier-specific factors, contractual instrument factors, or residual mix factors, in a defined hierarchy specified by the GHG Protocol.
3. Sensitivity to procurement. Switching to a renewable energy contract reduces market-based emissions immediately but has no effect on location-based emissions. Conversely, grid decarbonization (new renewables displacing coal) reduces location-based emissions for all consumers but doesn't change market-based figures unless contractual arrangements change.
4. Residual mix. The market-based method introduces the concept of a residual mix—the emission factor of the grid after all tracked contractual instruments are removed. In Europe, the Association of Issuing Bodies (AIB) publishes residual mix factors annually. In many regions, reliable residual mix data doesn't yet exist, complicating market-based calculations.
5. Reporting requirements. The GHG Protocol requires dual reporting: location-based must always be disclosed. If a company uses the market-based method, both figures must appear. Many frameworks (CDP, SBTi, TCFD) specify which method feeds into target-setting and performance tracking.
6. Impact on targets. The SBTi accepts market-based accounting for Scope 2 target tracking, meaning companies can demonstrate progress through renewable energy procurement. However, SBTi also requires that the instruments meet quality criteria—annual matching, same-market sourcing, and preference for instruments that drive additionality.
7. Regional availability. Market-based accounting requires functioning certificate markets. In North America and Europe, robust systems exist (RECs, GOs). In parts of Asia, Africa, and Latin America, certificate markets are nascent or nonexistent, limiting the applicability of market-based methods.
Which One Do You Need?
You need both. The GHG Protocol Scope 2 Guidance mandates location-based disclosure for all reporters. If you also use contractual instruments, you report market-based alongside it.
For target-setting with SBTi, most companies use the market-based method because it reflects the impact of renewable energy procurement decisions. If your strategy centers on buying clean energy—through PPAs, green tariffs, or RECs—market-based accounting is how you demonstrate progress.
If your organization is early in its sustainability journey and hasn't yet procured renewable energy instruments, your location-based and market-based figures will likely be similar (using grid average or residual mix, which are close in many regions). As you invest in clean energy procurement, the two figures will diverge.
For operations in regions without established certificate markets, location-based will be your primary metric. Focus advocacy efforts on grid decarbonization, energy efficiency, and on-site generation, which reduce both location-based and market-based emissions simultaneously.
Can You Use Both?
You must use both—that's the GHG Protocol's requirement. The dual-reporting mandate exists precisely because each method tells a partial story. Location-based shows the emissions physically associated with your electricity consumption. Market-based shows how your procurement choices differ from the grid default.
Sophisticated reporters use the gap between the two figures analytically. A large gap (low market-based, high location-based) indicates heavy reliance on contractual instruments without physical grid impact. A small gap suggests either minimal clean energy procurement or operation on an already-clean grid. Stakeholders increasingly scrutinize both numbers, and companies that report only a market-based zero while operating on coal-heavy grids face credibility questions.
The most robust Scope 2 strategies reduce both figures: procure additional renewable energy (market-based improvement) in a way that drives new capacity on the grid where you operate (location-based improvement). Time-matched, locally sourced PPAs with new-build renewables achieve this dual objective.
Council Fire's Perspective
We advise clients to treat both methods as essential, not competing. The location-based figure is your physical footprint reality check—it keeps you honest about the grid you're actually drawing from. The market-based figure reflects the intentional choices you've made to shift the energy market. Reporting only one number, whichever looks better, is a transparency failure.
The quality of your market-based instruments matters enormously. Buying decade-old RECs from an existing wind farm in a different country at $1 each is legal under current rules, but it's not driving decarbonization and sophisticated stakeholders know it. We push clients toward time-matched, geographically relevant procurement from new-build projects—instruments that reduce both your market-based figure and, over time, the grid emission factor for everyone.
Frequently Asked Questions
Can my Scope 2 emissions be zero under the market-based method?
Yes. If you procure enough renewable energy certificates or contract enough zero-emission electricity to cover 100% of your consumption, your market-based Scope 2 figure can be zero. However, your location-based figure will still reflect the grid average, and you must report both.
Which method does the SBTi use for target tracking?
SBTi allows companies to track Scope 2 targets using either method but most companies use market-based because it reflects procurement decisions. SBTi's criteria require that renewable energy instruments meet quality standards, including same-market sourcing and a preference for contracts that drive new renewable capacity.
What is the residual mix, and why does it matter?
The residual mix is the emission factor of the electricity grid after all tracked contractual instruments (RECs, GOs, PPAs) have been removed. It's used in market-based accounting when a company hasn't procured instruments for all its consumption. The residual mix is typically higher than the grid average because clean energy attributes have been claimed by others, leaving a "dirtier" unclaimed remainder.
Do on-site solar panels count under both methods?
Yes. On-site generation that you own reduces emissions under both location-based and market-based methods because the electricity never comes from the grid. It's one of the few measures that improves both figures simultaneously.
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