Scope 2 emissions play a key role in understanding and managing an organisation's carbon footprint. These emissions, stemming from the consumption of purchased electricity, steam, heating, or cooling, represent an indirect yet significant contribution to greenhouse gas emissions. In this blog, we delve into the intricacies of Scope 2 emissions, exploring their definition, significance, and methods for calculation and reporting. By comprehensively understanding Scope 2 emissions, organisations can take proactive steps towards reducing their environmental impact and fostering sustainability across their operations.
What are Scope 2 emissions?
Scope 2 emissions refer to the indirect greenhouse gas emissions that result from the consumption of purchased or acquired electricity, steam, heating, or cooling by an organisation. These emissions are categorised as indirect because they occur from sources that are not directly owned or controlled by the organisation but are associated with the generation of the energy purchased and used by the organisation.
In the context of Scope 2, organisations assess and report the emissions associated with the production of the electricity or energy they consume, considering factors such as the energy mix, efficiency, and emissions intensity of the external energy sources. By accounting for Scope 2 emissions, organisations gain a more comprehensive understanding of their overall carbon footprint, encompassing both direct (Scope 1) and indirect emissions. This information is valuable for sustainability reporting, setting emission reduction targets, and making informed decisions to minimize environmental impact.
Forms of Energy Consumption Impacting Scope 2 Emissions
Understanding the different forms of energy consumption that contribute to Scope 2 emissions is essential for accurate accounting and management. These include:
- Electricity: The most common energy source, electricity powers a wide array of operations in commercial and industrial settings, from lighting and machinery operations to powering electric vehicles and certain heating/cooling systems. The emissions are linked to the generation of electricity consumed by the organisation.
- Steam: Often used in industrial processes, steam serves multiple purposes, including mechanical work, heating, or as a process medium. Steam can be generated from various energy sources, and its use is a prevalent aspect of industrial operations.
- Combined Heat and Power (CHP) Facilities: These facilities produce multiple forms of energy, typically electricity and heat, from a single fuel source. By utilizing the waste heat from electricity generation, CHP facilities can significantly improve energy efficiency. However, the emissions from the fuel combusted in these processes contribute to an organisation's Scope 2 footprint.
- Heat: Beyond electrical heating, many commercial buildings and industrial processes require heat generated through solar thermal energy, natural gas, or other fuels. While the generation process may vary, the indirect emissions associated with this purchased heat fall under Scope 2.
- Cooling: Similar to heating, cooling can be achieved through various means, including electricity and chilled water systems. The emissions are attributed to the energy used to produce and distribute this cooling.
GHG Protocol Scope 2 Guidance
To standardise and guide organisations in measuring and reporting Scope 2 emissions, the GHG Protocol has published specific Scope 2 Guidance. This guidance is a critical resource for corporations, offering a detailed framework for accounting, establishing quality criteria for data, and promoting transparent disclosure of energy purchases. The Scope 2 Guidance emphasizes the importance of understanding the source of energy and the associated emissions, whether from local grid electricity or more specific sources. It lays out principles for accurately calculating and reporting these indirect emissions, fostering greater corporate responsibility and more informed stakeholder engagement.
The Significance of Scope 2 Accounting
As businesses globally strive towards sustainability, understanding the impact of their activities is crucial. This is where Scope 2 accounting becomes a pivotal aspect of corporate environmental strategy. It reflects a company's commitment to reducing its carbon footprint and aligns with broader sustainability goals. Here's an in-depth look at why Scope 2 accounting is essential for any forward-thinking business.
Identifying Risks and Opportunities from Purchased Energy
Scope 2 accounting helps companies identify and understand the risks and opportunities associated with the emissions from purchased and consumed electricity. For many organisations, electricity consumption is a significant portion of their carbon footprint. By understanding these emissions, companies can make informed decisions about energy sourcing, efficiency improvements, and potential investments in renewable energy. It allows companies to assess the volatility and future changes in energy prices, potential regulatory impacts, and the availability of renewable energy sources, thereby managing risks and capitalizing on opportunities.
Facilitating Internal GHG Reduction Opportunities
Accurate Scope 2 accounting is integral for identifying areas within an organisation where greenhouse gas emissions can be reduced. It enables companies to set tangible, achievable reduction targets and track their performance over time. By pinpointing the specific sources of emissions related to energy consumption, companies can implement targeted strategies such as energy efficiency measures, shifts to less carbon-intensive energy sources, or investments in renewable energy. This not only reduces emissions but often leads to cost savings and operational efficiencies.
Engaging with Energy Suppliers and Partners
Understanding the emissions from purchased energy allows companies to engage more effectively with their energy suppliers and partners in greenhouse gas management. Businesses can drive demand for lower-emission electricity and encourage their suppliers to disclose their emissions and reduce their carbon footprint. This collaborative approach can lead to the development of innovative products and services, helping both the company and its suppliers to achieve their sustainability goals.
Enhancing Stakeholder Information and Corporate Reputation
Transparent public reporting of Scope 2 emissions is fundamental to enhancing stakeholder trust and the company's reputation. Stakeholders, including customers, investors, and regulatory bodies, are increasingly interested in the sustainability practices of companies. By openly reporting Scope 2 emissions, organisations demonstrate their commitment to transparency and accountability. This can lead to increased stakeholder confidence, improved investor relations, and a stronger market position. Moreover, it aligns with global reporting initiatives and compliance with emerging regulations focused on sustainability and climate change.
Scope 2 Accounting Methods
The GHG Protocol's Scope 2 Guidance provides standardised methods for companies to calculate their indirect emissions from purchased energy. Primarily, there are two recognised methods of accounting for these emissions: the location-based method and the market-based method.
The choice between location-based and market-based accounting methods can significantly affect how a company's Scope 2 emissions are perceived and managed. The location-based method offers a broad view, aligning with regional emission factors and the collective impact of the energy mix.
Every company must report a location-based emission total to understand the physical impacts of its operation without taking into account market influences. In contrast, the market-based method provides specificity, aligning with corporate sustainability strategies and renewable energy commitments.
For companies committed to transparency and informed decision-making, understanding the nuances and applications of both methods is crucial. It enables them to accurately reflect their electricity sourcing decisions, engage stakeholders with precise information, and devise more effective strategies to reduce their indirect emissions.
Location-Based Method
The location-based method calculates the average emissions intensity of the grids from which a company draws its electricity. Essentially, it involves multiplying the amount of electricity consumed by the average emission factor of the regional grid. Multiply the product by Global Warming Potential (GWP) values to calculate total emissions in carbon dioxide equivalent. This method reflects the mix of electricity generation sources feeding into the grid (such as coal, natural gas, renewables, etc.) and their respective emissions intensities.
The location-based method provides a generalized view of the emissions attributable to electricity consumption, representing the broader environmental impact of the regional energy mix.
Market-Based Method
The market-based method, on the other hand, reflects the emissions from electricity sources specifically chosen by companies. This method allows companies to claim the environmental attributes of the electricity they purchase, such as lower emissions intensity or renewable sourcing, through contractual instruments or any type of contract between two parties for selling and purchasing energy bundled with attributes about the energy generation, or for unbundled attribute claims. Examples of these include Renewable Energy Certificates (RECs) or Guarantees of Origin (GOs). The market-based method provides a more tailored view of a company's electricity sourcing decisions and their environmental implications.
This method involves calculating emissions based on the specific emission factor associated with the company's contracted or chosen energy supply. It allows companies to demonstrate the impact of their sustainability efforts, such as investing in renewable energy or choosing low-carbon electricity suppliers. The market-based method aligns with the corporate push towards more renewable and sustainable energy sourcing, reflecting the direct choices and actions taken by companies to reduce their carbon footprint.
Calculating Scope 2 Emissions: A Step-by-Step Guide
Accurate calculation and reporting of Scope 2 emissions are crucial for identifying reduction opportunities and enhancing corporate sustainability. Grounded in the principles of the GHGP, this detailed walkthrough covers every aspect of calculating Scope 2 emissions, from establishing inventory boundaries to reporting the final emissions data.
Step 1: Establish inventory boundaries
Defining the scope and boundaries of the company's greenhouse gas (GHG) emissions is the foundational step in accurate reporting.
- Define organisational Boundaries: Choose the appropriate consolidation approach for your organisation—equity share, financial control, or operational control. This defines which operations and entities will be included in the GHG inventory.
- Define Operational Boundaries: Classify the company's emissions into direct (Scope 1) and indirect (Scope 2 and Scope 3). Scope 2 specifically covers indirect emissions from purchased electricity, heat, steam, or cooling.
Step 2: Identify Scope 2 emission sources
Identify all the sources of indirect emissions from purchased energy. This typically includes:
- Electricity: The most common source of Scope 2 emissions, used for lighting, machinery, and more.
- Steam, Heat, and Cooling: Often used in industrial processes or for climate control.
You should document the types of energy your organisation consumes and the purpose for which it is used.
Step 3: Determine the applicability of market-based approach
Determine if differentiated energy products in contractual instruments (like green power) are available in the jurisdictions in which you operate. If they are, then reporting in alignment with the GHGP will require you to calculate and disclose market-based emissions regardless of whether you purchase renewable energy or other instruments.
For further details, check out Chapter 6 in GHGP’s Scope 2 Guidance.
Step 4: Collect activity data
Obtain data specifying consumption in MWh or kWh units from utility bills, energy meters, or estimates where direct metering isn't possible. This should be as accurate and comprehensive as possible, covering all organisational activities within the defined boundaries.
This data may not be available in shared spaces where energy consumption is not metered. In these scenarios, use the Area Method to allocate an entire building’s electricity usage to all tenants based on individual tenants’ square footage and the building’s occupancy rate.
Step 5: Determine emission factors for each method
Obtain the most appropriate, accurate, precise, and highest-quality emission factors for each method. These factors indicate the amount of greenhouse gases emitted per unit of energy consumed.
The GHGP recommends the following emission factors for each method, presented in order of preference:
- Location-based emission factors reflect the average emissions intensity of the regional grid. Regional or subnational emission factors are recommended first, followed by national production emission factors.
- Market-based emission factors reflect the specific emissions of your organisation's energy contracts or certificates. Energy attribute certificates are recommended first, followed by contracts, supplier and utility emission fates, residual mix, and other grid-average emission factors.
See Table 6.2 in GHGP’s Scope 2 Guidance for additional information.
Step 6: Calculate emissions
Multiply energy consumption data by the appropriate emission factor. For either method, multiply energy usage (in MWh or kWh) by the average emissions factor for the grid. Emissions (Scope 2) = Energy Consumption (MWh or kWh) × Emission Factor
You’ll then need to multiply the GHG emissions totals by the global warming potential (GWP) values to calculate total emissions in CO2 equivalent (CO2e).
Finally, you’ll present the final Scope 2 emissions data by each method in metric tons of each GHG (where available) and in metric tons of CO2e.
Step 7: Consider Renewable Energy Credits (RECs) or Guarantees of Origin (GOs)
Adjust the market-based emissions calculation if the organisation purchases renewable energy certificates or guarantees of origin and these instruments were not accounted for within the market-based emission factors. These instruments may enable a reduction in market-based emissions associated with purchased electricity.
Step 8: Aggregate and report
Sum up the calculated emissions from each energy source to determine the total Scope 2 emissions for your organisation.
You should then prepare a detailed report of the methodology, data, calculations, and results. This should be comprehensive, transparent, and aligned with reporting standards like the GHG Protocol. The final Scope 2 emissions should be reported in metric tons of each GHG (where available) and in metric tons of CO2e, typically included in sustainability reports or other CSR communications.
Conclusion
Calculating Scope 2 emissions is a critical step for any organisation committed to understanding and reducing its environmental impact. By following this detailed guide and adhering to the GHG Protocol's standards, organisations can ensure accurate, credible reporting of their carbon footprint. With a robust approach to Scope 2 accounting, organisations can make informed decisions, engage in meaningful dialogue with energy suppliers, and contribute positively to the global effort of reducing GHG emissions.
