10 Apr 2024

Explainer Series | The landscape of Market-Based Approaches for Scope 2 emissions accounting

Posted in: Measure and Report Emissions

The landscape of Market-Based Approaches for Scope 2 emissions accounting

Scope 2 emissions are indirect greenhouse gas (GHG) emissions associated with the purchase of electricity and are one of the largest sources of GHG emissions globally. Indirect emissions are a consequence of an organisation’s activities but occur from sources not owned or controlled by it. When an organisation accounts for the emissions from purchased electricity, they must use an emissions factor that represents the GHG emissions for the electricity depending on whether it was generated using renewable or fossil-based energy, or a mix of both.

When organisations calculate the emissions associated with their electricity consumption they can use two reporting methods, the location-based method or the market-based method. The location-based method uses an emission factor calculated from all electricity delivered to the grid in a year or quarter (in New Zealand this is published by the Ministry for the Environment). The market-based method uses contractual instruments, described below, which reflect emissions from renewable electricity generation that companies have purposefully chosen, enabling organisations to use their purchasing power to accelerate the deployment of renewable energy and reduce the emissions associated with their electricity consumption.

Both methods, like the majority of GHG calculations, make use of emission factors that represent the conversion of a given activity into GHG emissions based on the average emissions associated with that activity. For organisations not directly connected to their own renewable electricity supply, market-based reporting allows them to purchase renewable electricity connected to the grid and claim the low emissions factor attributes associated with that renewable electricity. This reduces an organisation’s emissions and sends a demand signal for new renewable electricity generation, helping to further decarbonise the electricity grid.

There are a few types of contractual instruments:

  1. Energy Attribute Certificates (EACs) are commonly also known as Renewable Energy Certificates (RECs). These certificates are generated per electricity unit (1 megawatt-hour). EACs legally give the attributes of renewable electricity generation (including the emissions profile of that generation) to their owner and serve as the basis for a renewable electricity consumption claim. The owner of an EAC has exclusive rights to the attributes of one megawatt-hour of renewable electricity and may make unique claims associated with the renewable electricity that generated the EAC.
  2. Direct Contracts often in the form of Power Purchase Agreements (PPAs) are long-term contracts between electricity generators and a customer or group of customers. They can provide the attributes of entire new renewable electricity generation to single organisations. Popular with large electricity consumers they provide supply and market certainty and can help fund new renewable projects, that might not otherwise be built.
  3. Supplier Specific emission rates are low or zero emissions rates that electricity retailers may provide for some or all of their products. These rates are independently verified by organisations such as Toitū to international standards and can be purchased by consumers for the short or long term on demand, knowing that they are purchasing a certified low or net carbonzero product.

Some organisations such as Toitū and RE100, have introduced criteria under which market-based reporting can be used, aligning with international standards such as GHG Protocol, ISO 14064-1:2018 and Science Based Targets Initiative (SBTi) Using criteria helps control the supply of available contractual instruments and ensure that the instruments have the desired result and impact which is to encourage and provide increased demand for new renewable electricity projects.

Organisations are requiring more methods to meet their emission reduction goals and demonstrate their impact on emission reductions to their stakeholders. 24/7 Carbon Free Energy is another mechanism that means all electricity consumption is from carbon-free electricity sources “every hour of every day everywhere”. Greater granularity and demonstration of electricity consumption at hourly or half-hourly periods with attributes of renewable electricity consumption in the same period allow organisations to show their impact on emissions reduction through demand-side management. Organisations can point to their electricity procurement policy and make verifiable claims about the impact they are having on supporting new renewable electricity development.

In summary, market-based accounting approaches for scope 2 electricity can provide a mechanism for organisations to make and claim emission reductions. They also play a growing role in providing demand for new renewable electricity supply. Organisations through their electricity purchasing options have more ways to support increased renewable low or zero-emissions electricity generation and meet their emission reduction targets.

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