Same electricity, two correct answers 38.6 per cent apart. The difference is contracts, not physics, and the residual mix is where most market-based figures go wrong.
Location-based Scope 2 multiplies each site's electricity by the average emission factor of its grid; market-based multiplies it by the factor of whatever contract the company holds, a power purchase agreement, certificates or a supplier tariff, and by the residual mix factor where it holds none. An illustrative three-site portfolio company using 25,000 MWh reports 9,200 tonnes of CO2e location-based and 5,650 tonnes market-based, 38.6 per cent lower. Both are correct, and both must be reported.
Worked in full in The ESG Manager in Private Equity by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The GHG Protocol Scope 2 Guidance requires companies with operations in markets that offer contractual instruments to report both figures. The location-based method shows the emissions of the grids the company actually draws from. The market-based method shows the emissions of the electricity the company has chosen to buy. The ESRS climate standard asks for both as well, so a portfolio company in scope will publish two numbers, and the ESG manager has to be able to rebuild each one.
Location-based = Σ MWhsite × grid average factorsite
Market-based = Σ MWhcovered × instrument factor + Σ MWhuncovered × residual mix factor
Excel: =SUMPRODUCT(MWh,GridFactor) and =SUMPRODUCT(MWh,IF(HasInstrument,InstrumentFactor,ResidualMix))
The residual mix is the grid's emission factor after the renewable generation claimed by certificate holders has been taken out. It exists so that the same clean megawatt-hour cannot be counted by the company that bought the certificate and again by everyone else on the grid average.
A fictional manufacturer held by a buyout fund runs two plants and a warehouse in three countries. All emission factors are illustrative orders of magnitude, not published values; in practice the grid factors come from a national or international database and the residual mix from the issuing body for the country's certificates.
| Site | MWh | Grid average | Residual mix | Factor used, market-based |
|---|---|---|---|---|
| Plant A, renewable PPA with certificates | 12,000 | 0.250 | 0.380 | 0.000 |
| Plant B, supplier-specific tariff | 8,000 | 0.400 | 0.420 | 0.300 |
| Warehouse C, no instrument | 5,000 | 0.600 | 0.650 | 0.650 |
| Total | 25,000 |
Step 1, location-based. Every megawatt-hour takes its own grid's average, whatever the contracts say. Plant A is 12,000 × 0.250 = 3,000 tonnes, plant B 8,000 × 0.400 = 3,200, warehouse C 5,000 × 0.600 = 3,000.
Step 2, market-based. Plant A's power purchase agreement comes with the certificates for its output, so its factor is zero. Plant B buys on a supplier tariff with a disclosed factor of 0.300: 2,400 tonnes. Warehouse C holds nothing, so it takes the residual mix: 5,000 × 0.650 = 3,250 tonnes.
| Site | Location-based | Market-based |
|---|---|---|
| Plant A | 3,000 | 0 |
| Plant B | 3,200 | 2,400 |
| Warehouse C | 3,000 | 3,250 |
| Total | 9,200 | 5,650 |
The company reports 9,200 tonnes location-based, an average of 0.368 tonnes per MWh, and 5,650 tonnes market-based, 0.226 per MWh. The 3,550 tonne difference is entirely contractual: the same electrons flowed into the same machines. Note warehouse C, where the market-based figure is higher than the location-based one, because the residual mix is dirtier than the average once other buyers have claimed the clean output. For financed emissions at fund level the company figure is then attributed by the fund's share, as worked in how to calculate financed emissions for a private equity fund.
| Change | Location-based | Market-based | Cost, EUR |
|---|---|---|---|
| Base case | 9,200 | 5,650 | 0 |
| Unbundled certificates for half of C | 9,200 | 4,025 | 2,500 |
| Unbundled certificates for all of C | 9,200 | 2,400 | 5,000 |
| Plant B tariff ends, residual mix | 9,200 | 6,610 | 0 |
| Plant A PPA lapses, residual mix | 9,200 | 10,210 | 0 |
At an illustrative 1.00 euro per MWh, certificates for the warehouse remove 3,250 market-based tonnes for 5,000 euros, 1.54 euros a tonne, and change nothing on the grid. A 10 per cent efficiency gain at the same warehouse saves 500 MWh, which cuts both figures, by 300 tonnes location-based and 325 market-based. A value creation plan that reports the first as abatement next to measures like the second is mixing units. If plant A's agreement lapses, the market-based figure jumps to 10,210 tonnes, above the location-based figure, which is why contract expiry dates belong in the carbon data, not only in procurement. The same choice of method fixes the base year of any reduction target, so a 1.5 degree pathway set on the market-based figure, as in how to calculate an SBTi near-term target, has to be met on that figure every year.
The data dictionary, the collection calendar and the validation log for a portfolio's core metrics are among the working documents with the free workbook for this book.
Because consumption not covered by a contract takes the residual mix factor, which excludes the renewable output already claimed by others and is often higher than the grid average. In the worked case, if plant A's renewable contract lapsed, its 12,000 MWh would take the 0.380 residual mix, and the market-based total would rise to 10,210 tonnes, above the 9,200 location-based.
Report both at company level, since the GHG Protocol requires dual reporting and the ESRS ask for both. For targets and value creation, track the market-based figure because contracts move it, but check the location-based one moves too. In the worked case, buying certificates for the warehouse cuts market-based by 3,250 tonnes and location-based by none.
The emission factor of the electricity left on a grid after all contractually claimed generation, such as certificated renewables, has been removed. It prevents the same clean megawatt-hour being counted twice. In the worked case the warehouse uses 0.650 tonnes per MWh from the residual mix against a grid average of 0.600, so its market-based figure is 3,250 tonnes, not 3,000.
This article is one calculation from The ESG Manager in Private Equity. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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