Scope 2 emissions

What Are Scope 2 Emissions?

Scope 2 emissions are indirect greenhouse gas (GHG) emissions that result from the generation of purchased or acquired electricity, steam, heat, or cooling consumed by a reporting organization. Unlike direct emissions that occur from sources owned or controlled by a company, Scope 2 emissions are a consequence of the reporting organization's activities but physically occur at facilities owned or controlled by another entity, such as a power plant or utility company. These emissions are a critical component of a company's overall carbon footprint and are a significant focus within Environmental, Social, and Governance (ESG) considerations and corporate sustainability reporting. Addressing Scope 2 emissions is essential for organizations aiming to manage their environmental impact and demonstrate commitment to climate action.

History and Origin

The concept of classifying greenhouse gas emissions into different "scopes" originated with the Greenhouse Gas Protocol, a widely used international accounting standard for quantifying and reporting GHG emissions. Launched in 2001 by the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD), the GHG Protocol established a common framework that businesses and governments could use to measure their emissions. The differentiation between Scope 1, Scope 2, and Scope 3 emissions was introduced to provide clarity and prevent double counting across organizational boundaries. The specific "Scope 2 Guidance" was developed over four years with input from more than 200 representatives from companies, utilities, governments, and academia, and was officially released in January 2015 to provide comprehensive clarity on measuring emissions from purchased electricity and other energy types.⁹ This amendment to the Corporate Standard aimed to standardize how companies account for these significant indirect emissions, pushing for greater transparency and incentivizing the procurement of low-carbon energy.⁸

Key Takeaways

• Scope 2 emissions are indirect greenhouse gas emissions from purchased electricity, steam, heat, or cooling.
• They are a critical part of a company's environmental reporting under frameworks like the GHG Protocol.
• Companies often use both location-based and market-based methods to calculate Scope 2 emissions.
• Reducing Scope 2 emissions frequently involves improving energy efficiency and sourcing renewable energy.
• Accurate reporting of Scope 2 emissions is increasingly demanded by stakeholders and regulators.

Formula and Calculation

Calculating Scope 2 emissions primarily involves multiplying the amount of energy consumed by an appropriate emissions factor. The GHG Protocol's Scope 2 Guidance mandates that companies report their Scope 2 emissions using two distinct methods:

1. Location-Based Method: This method reflects the average GHG emissions intensity of the grids where electricity consumption occurs. It is calculated using grid-average emissions factors.

   $$\text{Scope 2 Emissions (Location-Based)} = \text{Purchased Energy (MWh)} \times \text{Grid Emissions Factor (tCO2e/MWh)}$$

   Where:

   • Purchased Energy (MWh) represents the total megawatt-hours of electricity, steam, heat, or cooling consumed by the organization.
   • Grid Emissions Factor (tCO2e/MWh) is the average greenhouse gas intensity of the specific electricity grid from which the energy was purchased, typically expressed in tonnes of carbon dioxide equivalent per megawatt-hour.

2. Market-Based Method: This method reflects emissions from electricity that companies have purposefully chosen or directly contracted. It uses emissions factors from contractual instruments, such as direct contracts with specific energy suppliers or Renewable Energy Certificates (RECs).

   $$\text{Scope 2 Emissions (Market-Based)} = \sum (\text{Energy from Specific Source (MWh)} \times \text{Source-Specific Emissions Factor (tCO2e/MWh)})$$

   Where:

   • Energy from Specific Source (MWh) is the megawatt-hours of energy obtained from a particular supplier or associated with a specific contractual instrument.
   • Source-Specific Emissions Factor (tCO2e/MWh) is the emissions intensity of that specific energy source or instrument. If contractual instruments representing zero-emission energy (e.g., from wind or solar) are purchased, their emissions factor would be zero.

Companies typically present both totals to provide a comprehensive view of their Scope 2 emissions.

Interpreting Scope 2 Emissions

Interpreting Scope 2 emissions involves understanding both the quantity of emissions and the methods used for their calculation. A company's reported Scope 2 emissions provide insight into its reliance on grid electricity and its efforts to procure renewable or low-carbon energy. Lower Scope 2 figures generally indicate a stronger performance in reducing indirect emissions.

The distinction between location-based and market-based reporting is crucial for proper interpretation. The location-based figure indicates a company's impact based on the actual emissions intensity of the grids it operates within, reflecting geographical realities. The market-based figure, however, highlights the company's proactive choices in energy procurement, such as investments in renewable energy certificates or direct purchase agreements with green energy providers. A significant difference between the two figures, particularly a lower market-based number, suggests active steps towards decarbonization beyond merely benefiting from general grid improvements. Understanding these metrics helps investors and other stakeholders assess a company's commitment to and progress on climate goals.

Hypothetical Example

Consider "Green Innovations Inc.," a technology company operating several data centers and offices. In a given year, Green Innovations Inc. consumed 100,000 MWh of electricity across its facilities.

• Location-Based Calculation: Assume the average grid emissions factor for the regions where Green Innovations Inc. operates is 0.4 tonnes of CO2e per MWh. $$\text{Scope 2 Emissions (Location-Based)} = 100,000 \text{ MWh} \times 0.4 \text{ tCO2e/MWh} = 40,000 \text{ tCO2e}$$
• Market-Based Calculation: Green Innovations Inc. proactively purchased 70,000 MWh of electricity bundled with renewable energy certificates, which have an emissions factor of 0 tCO2e/MWh. The remaining 30,000 MWh came from the standard grid mix (using the same 0.4 tCO2e/MWh factor for the unbundled portion). $$\text{Scope 2 Emissions (Market-Based)} = (70,000 \text{ MWh} \times 0 \text{ tCO2e/MWh}) + (30,000 \text{ MWh} \times 0.4 \text{ tCO2e/MWh})$$ $$= 0 \text{ tCO2e} + 12,000 \text{ tCO2e} = 12,000 \text{ tCO2e}$$

In this example, Green Innovations Inc.'s location-based Scope 2 emissions are 40,000 tCO2e, while its market-based emissions are significantly lower at 12,000 tCO2e. This difference highlights the impact of their strategic decision to invest in renewable energy, demonstrating their active efforts to reduce their carbon footprint through direct procurement choices.

Practical Applications

Scope 2 emissions data is increasingly vital in various financial and strategic contexts. Companies use this information to inform their sustainability strategies, set Net Zero targets, and identify opportunities for capital expenditure in renewable energy or efficiency upgrades. For example, a company might decide to install solar panels on its facilities or sign power purchase agreements with renewable energy providers to reduce its Scope 2 footprint.

In the investment world, analysts and investors incorporate Scope 2 emissions data into their ESG assessments, evaluating a company's exposure to climate change risks and its proactive measures to mitigate them. This data influences investment decisions, as companies with lower or improving Scope 2 emissions may be viewed as less exposed to future carbon taxes or regulatory pressures. Regulators are also increasingly mandating the disclosure of Scope 2 emissions. On March 6, 2024, the U.S. Securities and Exchange Commission (SEC) adopted final rules requiring registrants to disclose material Scope 1 and Scope 2 GHG emissions in their registration statements and annual reports.⁷,⁶ This regulatory shift underscores the growing importance of transparent and verifiable Scope 2 reporting for publicly traded companies. For instance, Thomson Reuters announced in 2021 that it had significantly reduced its Scope 1 and Scope 2 emissions, primarily through investments in renewable power, demonstrating how companies are actively working to achieve such reductions.⁵

Limitations and Criticisms

Despite their widespread adoption, the accounting and reporting of Scope 2 emissions, particularly using the market-based method, face several limitations and criticisms. One primary concern is that the market-based method, which relies on Renewable Energy Certificates (RECs) or similar contractual instruments, may not always lead to actual, additional renewable energy generation. Critics argue that purchasing RECs, especially from existing renewable projects, might not incentivize new clean energy infrastructure development, leading to "creative accounting" rather than real emissions reductions.⁴,³ This can create a disconnect between reported reductions and actual environmental impact.

Another limitation is the potential for double-counting or misallocation of emissions if not rigorously managed, though the Greenhouse Gas Protocol provides guidance to avoid this.² Furthermore, while Scope 2 provides crucial insights into electricity consumption, it does not capture other indirect emissions from a company's supply chain or product use, which are categorized under Scope 3. The complexity of grid dynamics and the varying quality of contractual instruments also pose challenges to accurate and transparent reporting, leading some experts to call for improvements in how these emissions are accounted for to better reflect real-world reductions.¹

Scope 2 Emissions vs. Scope 1 Emissions

Scope 2 emissions and Scope 1 emissions both represent parts of a company's total greenhouse gas footprint, but they differ significantly in their source and control.

Scope 1 emissions, often called direct emissions, are those released directly from sources owned or controlled by the reporting organization. Examples include emissions from company-owned vehicles, on-site fuel combustion for heating or manufacturing processes, or fugitive emissions from industrial activities. These are emissions that the company has direct operational control over.

In contrast, Scope 2 emissions are indirect emissions that arise from the generation of purchased or acquired electricity, steam, heat, or cooling that the company consumes. While a company consumes this energy, the actual emissions occur at the utility or power generation facility, not on the company's premises. The company does not directly control the power plant that generates these emissions, but it influences them through its energy purchasing decisions.

The key distinction lies in the directness of control. A company can directly reduce its Scope 1 emissions by, for example, upgrading its fleet to electric vehicles or improving the efficiency of its on-site boilers. For Scope 2 emissions, reductions are achieved through actions like reducing electricity consumption, improving energy efficiency, or purchasing renewable energy certificates or green tariffs from energy providers. Both Scope 1 and Scope 2 emissions are typically mandatory for disclosure in many regulatory frameworks and sustainability reporting standards, as seen with the SEC's climate disclosure rules.

FAQs

What is the primary difference between location-based and market-based Scope 2 reporting?

The location-based method calculates Scope 2 emissions based on the average emissions intensity of the electricity grid where consumption occurs. It reflects the carbon intensity of the physical grid. The market-based method, however, accounts for emissions based on contractual instruments (like renewable energy certificates) that a company has purchased, reflecting specific purchasing choices for energy with a declared emissions profile.

Why are Scope 2 emissions important for companies?

Scope 2 emissions represent a significant portion of many companies' overall greenhouse gas footprint, especially for businesses with high electricity consumption. Managing and reducing these emissions is crucial for meeting climate change goals, enhancing a company's Corporate Social Responsibility reputation, attracting ESG-focused investors, and complying with emerging sustainability reporting regulations. It also helps companies identify opportunities for cost savings through energy efficiency measures.

Are Scope 2 emissions subject to financial disclosure requirements?

Yes, increasingly so. Regulatory bodies like the U.S. Securities and Exchange Commission (SEC) have adopted rules requiring public companies to disclose material Scope 1 and Scope 2 emissions in their financial statements and annual reports. This signifies a growing recognition of climate-related risks as material financial considerations for investors and other stakeholders.

How can a company reduce its Scope 2 emissions?

Companies can reduce their Scope 2 emissions through several strategies, including:

1. Energy Efficiency: Implementing measures to reduce overall electricity consumption (e.g., LED lighting, optimized HVAC systems).
2. Renewable Energy Procurement: Purchasing electricity directly from renewable energy generators through Power Purchase Agreements (PPAs) or subscribing to green tariffs from utility providers.
3. Renewable Energy Credits (RECs): Purchasing and retiring RECs that represent renewable electricity generation.
4. On-site Generation: Installing on-site renewable energy systems, such as solar panels, to produce their own clean electricity.

What are the challenges in accurately reporting Scope 2 emissions?

Challenges in accurately reporting Scope 2 emissions include the complexity of tracking energy consumption across diverse operations, the variability of grid emissions factors, and ensuring the credibility and additionality of renewable energy certificates. Moreover, choosing between location-based and market-based methods can lead to different reported figures, requiring clear explanation and context for risk management and investor understanding.