Calculating your portfolio’s carbon footprint is a critical first step in carbon accounting and decarbonization planning. But as with many things in ESG, the process for getting there is not always straightforward.
In this article, we’ll explore a fundamental concept in greenhouse gas reporting: the two primary greenhouse gas accounting methods for Scope 2 emissions.
Simply put, emissions factors are coefficients that correlate different activities with the amount of greenhouse gas emissions they release. They are used to convert electric power generation and consumption into emissions (generally in terms of carbon dioxide equivalent/CO2e).
For organizations seeking to calculate and report Scope 2 emissions from purchased electricity, emissions factors are a key tool in the arsenal. Organizations have access to their electricity consumption (whether through utility bills or meter data), and emissions factors translate that electricity data into greenhouse gas emissions data.
At a high-level, there are two primary approaches for calculating greenhouse gas emissions: the location-based method and the market-based method. Per the Greenhouse Gas (GHG) Protocol’s latest Scope 2 reporting guidance, organizations now must use both of these methods when calculating and reporting their emissions (a process known as “dual reporting”).
Why use both? To summarize the GHG Protocol’s guidance, both calculation methods are important. Location-based factors help organizations gauge their impact within the physical locations where they operate, while the market-based method accounts for the complexities and ramifications of purchasing decisions on the power mix.
With the continued rise of renewable energy as a key decarbonization strategy, the GHG Protocol’s requirements ensure consistency, standardization, and comparability of companies’ GHG reports and disclosures, helping organizations, regulators, and industry stakeholders understand the full picture.
As the name suggests, the location-based method uses emission factors that provide an average of the emissions from all power sources within a specific geographic region over a given period of time. They are typically calculated based on data from a grid operator or power market, and take into account the mix of energy sources, fuel types, and generation capacity in a given region.
In the US, the EPA’s eGRID resource is the industry standard for annual location-based factors. Globally, the IEA also maintains a dataset of annual emissions factors. For more granularity and greater accuracy, organizations may opt to use monthly or hourly location-based factors to calculate their emissions.
The market-based method differs from the location-based method in that it considers specific information from contractual energy procurement instruments, such as Renewable Energy Certificates (RECs) or Power Purchase Agreements (PPAs). Rather than applying local grid conditions to energy usage, market-based emissions factors take into account the actual sources of purchased energy based on the direct arrangements an organization may have with its suppliers.
One notable application is renewable energy. When an organization purchases offsite renewable energy (i.e. through RECs or other instruments), the corresponding usage will typically have an emissions factor of zero. The location-based method will not take into account the existence of these instruments, and will instead assign an emissions factor to the electricity usage based on the local grid mix.
Another related concept to understand is marginal emissions. So named because they represent the additional “marginal” emissions that are generated as new load is added to the grid, marginal emissions factors can help organizations forecast the impact of using more or less electricity in a given power market. They can be used to enable advanced use cases, including flexible load shifting (i.e. optimizing electricity usage for times when there is lower emissions intensity on the grid). They can also be used to measure and value emissions-reducing projects based on their actual carbon reduction potential – per one potent example, a wind project in West Virginia would reduce twice as much carbon dioxide as an equivalent project in California, based on the conventional power sources and marginal emissions that would be displaced by the project.
The Rocky Mountain Institute (RMI) put together a helpful example that illustrates the difference between average and marginal emissions factors:
Imagine a time when hydropower is providing 75 percent of [the Pacific Northwest’s] power, and gas-fired power plants are providing the remaining 25 percent. This means that the average emissions factor of power in the Pacific Northwest would be very clean, at 25 percent the emissions intensity of natural gas….at first glance, a great way to reduce a company’s or a person’s carbon footprint would be to move to the Pacific Northwest, where the electricity is very clean. Yet in many cases, natural gas is the marginal resource, meaning that if a new kilowatt-hour of electricity is needed at a certain time, it will be provided by natural gas. So a company or an individual moving to the Pacific Northwest would increase carbon emissions at a rate equal to 100 percent of natural gas (840 lbs. CO2 per MWh)—a very big difference! Thinking in marginal rather than average carbon emissions can dramatically affect a company’s or a person’s choice of optimal environmental impact.
Understanding location- and market-based GHG accounting methods is key to ensuring accurate Scope 2 calculations and meeting regulatory and stakeholder reporting requirements. For organizations seeking to pursue flexible load shifting or understand the impact of investing in energy projects in different regions, marginal emissions may be an important added layer. On the whole, knowing how and when to apply different emissions factors to your electricity usage is key to staying in compliance and ensuring you can make the right downstream decisions.
Aquicore can help you calculate and manage your portfolio’s carbon footprint. Learn more and get in touch with our team.