Key Points
- Location-based uses grid-average emission factors; market-based uses factors from contractual instruments such as Guarantees of Origin.
- ESRS E1 paragraph 49 requires entities to report Scope 2 using both methods separately.
- The market-based figure can be 30% to 80% lower than the location-based figure when renewable energy certificates cover most consumption.
- Use the location-based method to show physical grid dependency and the market-based method to show procurement decisions.
The problem this distinction creates
Every Scope 2 number you put in front of a review partner is actually two numbers, and they can diverge by 30% or more. One reflects the physical grid; the other reflects what the entity bought on paper. The gap between them is where most of the assurance arguments happen. An entity reporting only the market-based figure (because it is lower and looks better in the press release) leaves an incomplete sustainability statement. An entity reporting only the location-based figure ignores the commercial reality of its energy contracts. ESRS E1 paragraph 49 requires both, and the GHG Protocol Scope 2 Guidance (2015) has required dual reporting since its publication. Where judgment starts: deciding whether each contractual instrument actually qualifies under the GHG Protocol hierarchy, or whether it is window dressing that the residual mix must absorb.
Side-by-side comparison
| Dimension | Location-based | Market-based |
|---|---|---|
| Emission factor source | Grid-average factor for the region where electricity is consumed (national or sub-national) | Factor from a contractual instrument: GO, REC, PPA, green tariff, or (as fallback) the residual mix |
| What it measures | Physical carbon intensity of the grid supplying the entity | The entity's energy purchasing decisions and their emission consequences |
| When the figure is zero | Never (unless the grid itself is zero-carbon) | When contractual instruments cover 100% of consumption with zero-emission sources |
| Sensitivity to procurement action | None; switching to a green tariff does not change the location-based figure | Direct; every GO or PPA certificate reduces the market-based total |
| Residual mix fallback | Not applicable | Required for any consumption volume not covered by a qualifying instrument (AIB European Residual Mixes or equivalent) |
| GHG Protocol hierarchy | Single factor source: grid-average from national or regional authority | Tiered: direct contracts first, then certificates, then supplier-specific factors, then residual mix |
Report location-based Scope 2 to show the physical carbon intensity of the grid the entity depends on. Report market-based Scope 2 to show the emission consequence of the entity's energy procurement choices. Under ESRS E1 and the GHG Protocol, both figures are mandatory.
What is Location-Based vs Market-Based Emissions?
A mid-sized manufacturer buys 100% renewable electricity through a green tariff and expects its Scope 2 to be zero. The sustainability team puts zero in the draft ESRS E1 disclosure. Then the auditor asks for the location-based figure. The entity has never calculated one, because nobody told them they needed both. That scene plays out repeatedly in first-year CSRD engagements, and it is exactly why the distinction matters.
The two methods produce different Scope 2 totals for any entity that holds renewable energy certificates or operates under a green tariff. Location-based Scope 2 multiplies energy consumed by the grid-average emission factor for the region, reflecting the physical carbon intensity of the local electricity supply. Market-based Scope 2 uses emission factors from contractual instruments (Guarantees of Origin, RECs, PPAs, or green tariffs) to reflect the entity's purchasing choices. If the entity sets its GHG reduction target against market-based Scope 2 (common because the figure is lower and responds to procurement action), the assurance provider must verify that every contractual instrument is valid, matches the reporting period, and covers the claimed consumption volume. ESRS E1 paragraph 44 requires disclosure of total GHG emissions, and paragraph 49 specifies that the Scope 2 component must appear as both location-based and market-based figures.
An entity that reports only the market-based figure (a frequent shortcut) produces an incomplete sustainability statement. The CSRD assurance provider performing a limited assurance engagement flags the omission because the disclosure requirement is explicit. At firms like ours, this is one of the first things we check when ticking and bashing through the E1 disclosures.
Worked example: Henriksen Shipping A/S
Henriksen Shipping A/S is a Danish maritime logistics company reporting under IFRS for FY2025 (revenue EUR 140M) and preparing its first CSRD sustainability statement. The company operates a corporate headquarters in Copenhagen, two warehouse terminals (Aarhus and Hamburg), and a fleet of owned vessels. Scope 2 covers the shore-side electricity at all four sites (vessels burn fuel directly, which falls under Scope 1).
Location-based calculation
Start by collecting consumption data from invoices. Copenhagen HQ consumed 1,400 MWh, the Aarhus terminal 6,200 MWh, and the Hamburg terminal 4,800 MWh. Total purchased electricity: 12,400 MWh. No district heating or cooling is purchased.
Apply the grid-average emission factors for each country. Denmark grid factor (Energinet, 2024 publication): 0.108 kg CO2e/kWh. Germany grid factor (UBA, 2024 publication): 0.380 kg CO2e/kWh. Copenhagen and Aarhus: 7,600 MWh x 0.108 = 821 tonnes CO2e. Hamburg: 4,800 MWh x 0.380 = 1,824 tonnes CO2e. Total location-based Scope 2: 2,645 tonnes CO2e.
Market-based calculation
Identify the contractual instruments on file. Henriksen holds GOs covering 8,000 MWh of Danish wind power for the Copenhagen and Aarhus sites. The Hamburg terminal has no contractual instrument.
Now calculate market-based Scope 2. GO-covered consumption (Denmark): 7,600 MWh x 0 = 0 tonnes CO2e (the GOs cover the full Danish consumption of 7,600 MWh, with 400 MWh of unused certificates). The remaining GOs (400 MWh) cannot be applied to the Hamburg site because the GHG Protocol Scope 2 Guidance requires instruments to match the market boundary. Hamburg (no instrument, residual mix): 4,800 MWh x 0.601 kg CO2e/kWh (AIB German residual mix, 2024) = 2,885 tonnes CO2e. Total market-based Scope 2: 2,885 tonnes CO2e.
Henriksen's location-based Scope 2 is 2,645 tonnes CO2e and its market-based figure is 2,885 tonnes CO2e. The market-based figure is higher in this case because the Hamburg residual mix factor (0.601) exceeds the German grid average (0.380). This is the kind of result that surprises clients who assume market-based always comes in lower. If the practitioner had applied the grid-average factor instead of the residual mix for the uncovered Hamburg volume, the market-based figure would be understated by 1,061 tonnes.
Why it matters in practice
- Entities frequently apply the grid-average emission factor to uncovered consumption when calculating the market-based figure. The GHG Protocol Scope 2 Guidance Chapter 7 specifies that the residual mix factor (which strips out energy already claimed via contractual instruments) must be used for any consumption not backed by a qualifying instrument. Using the grid average instead of the residual mix double-counts the renewable energy claimed by certificate holders elsewhere on the same grid.
- Teams sometimes apply Guarantees of Origin (GOs) or RECs across national borders without checking whether the instrument matches the market boundary. The GHG Protocol defines market boundaries as the geographic area within which a contractual instrument can be reasonably claimed. Applying Danish GOs to German consumption violates this boundary rule and inflates the market-based emission reduction.
Where review partners disagree
We have seen one engagement review partner accept a market-based Scope 2 of zero based on GOs covering 100% of consumption, while a second partner on the same file questioned whether the GOs met the "deliverable to the entity" criterion in the GHG Protocol hierarchy. The GOs were sourced from a broker and backed by Norwegian hydro, covering a factory in southern Germany. Partner A argued that the certificates were valid and properly retired for the correct reporting period. Partner B argued that a certificate from a Norwegian plant cannot credibly represent the electricity consumed at a Bavarian factory, and that the residual mix should apply. The standard does not resolve this clearly. The 2015 Guidance permits cross-border GOs within the same market boundary (which currently includes all of Europe under the AIB system), but the ongoing GHG Protocol revision is proposing to tighten this to grid-deliverable sources. Until the revision is final, both positions are defensible, which is exactly why the file needs a clear judgment memo.
The perverse incentive
Market-based reporting creates a quiet incentive to buy the cheapest available GOs (often Scandinavian hydro, trading at EUR 0.30-0.50 per MWh) rather than investing in on-site renewables or local PPAs that actually change the grid mix. An entity can report zero market-based Scope 2 for a few thousand euros in certificates while its physical electricity comes from a coal-heavy grid. The location-based figure tells a different story, which is precisely why ESRS E1 requires both. Practitioners who only glance at the market-based number miss the point. The frustrating part is watching an entity's sustainability report celebrate "carbon-neutral electricity" when the location-based figure shows 4,000 tonnes of CO2e from a grid running 40% on lignite.
Related terms
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Frequently asked questions
What is the difference between location-based and market-based Scope 2 emissions?
Location-based Scope 2 multiplies energy consumed by the grid-average emission factor for the region, reflecting the physical carbon intensity of the local electricity supply. Market-based Scope 2 uses emission factors from contractual instruments (Guarantees of Origin, RECs, PPAs, or green tariffs) to reflect the entity's purchasing choices. The GHG Protocol Scope 2 Guidance (2015) and ESRS E1 paragraph 49 require both.
Do I have to report both methods under the CSRD?
Yes. ESRS E1 Disclosure Requirement E1-6 paragraph 49 explicitly requires disclosure of gross Scope 2 GHG emissions using both the location-based and the market-based method. Reporting only one method produces an incomplete sustainability statement that the assurance provider will flag as a missing mandatory datapoint.
Will the revised GHG Protocol Scope 2 standard change how I calculate market-based emissions?
The GHG Protocol's public consultation (October 2025 to January 2026) proposed requiring hourly matching of certificates to consumption and limiting contractual instruments to deliverable sources on the same grid. A second consultation is expected in 2026, with the final standard targeted for 2027. Entities should monitor the revision but continue reporting under the 2015 Guidance until the new standard takes effect.