Your executive just reviewed the sustainability report and is puzzled: "Why do we have two different numbers for our electricity emissions? And why are we showing higher emissions when we've bought all these renewable certificates?"
If you're working in corporate sustainability, you've probably faced similar questions. Let's dive deep into these two methods, understand what they are, and when to use which.
Understanding the Two Methods
Location-Based Method This approach tells you the (approximately) real emissions from the electricity you consume based on where your facilities are located. It uses the average emissions intensity of the power grid serving your location. Think of it as measuring what's actually flowing through your power lines.
Market-Based Method This method reflects emissions from electricity that you've chosen to buy through contracts or instruments like RECs (Renewable Energy Certificates). It's like having a claim on specific power plants, regardless of the physical electricity flowing to your facilities.
Location-Based Method
The location-based method is grounded in physical reality. It uses grid emission factors that represent the average mix of power generation sources (coal, gas, nuclear, renewables) in your grid region.
Imagine you're managing sustainability for a major beverage company with facilities across the United States. Your Atlanta plant uses the same amount of electricity as your Seattle plant, but Atlanta's location-based emissions are three times higher. Why? Georgia's grid relies heavily on fossil fuels, while Washington state's hydropower keeps grid emissions low. When your Atlanta plant improves its bottling line efficiency by 20%, you see a direct, measurable drop in emissions that reflects real environmental impact. This is location-based accounting showing its true value - helping you understand and reduce your actual carbon footprint.
Pros:
Reflects actual grid conditions and physical emissions
Shows real impact of energy efficiency measures
Helps identify high-impact locations for reduction efforts
Supports grid-aware load management decisions
Cons:
Doesn't reflect your renewable energy purchases
Limited ability to show voluntary green power investments
Can't control grid mix in your region
May show high emissions despite sustainability efforts
Market-Based Method
Market-based accounting is like having a claim check on specific power generation. Think of the electricity grid as a giant pool where all power sources - coal, solar, wind, nuclear - feed their electricity. While you can't physically separate which electrons come from which source, market-based accounting lets you claim ownership of specific generation through contractual instruments.
Here's how it works: When a wind farm generates 1 MWh of electricity, it creates two products - the physical electricity that goes into the grid, and a certificate (REC) that represents the renewable attributes of that generation. Companies can buy these certificates to 'claim' the renewable energy, regardless of their physical location.
Let's look at a real-world example that shows both the power and the complexity of this approach:
A global tech company operates a massive data center in Virginia. The facility consumes 500,000 MWh annually, running on a grid that's primarily powered by natural gas and coal. Under location-based accounting, their emissions are substantial. However, they've signed a Virtual Power Purchase Agreement (VPPA) with a new solar farm in Texas, buying both the power and RECs. Now their market-based emissions show as zero, and they can claim to be '100% renewable powered.'
But here's where it gets interesting: The solar farm generates most power during Texas daylight hours, while the data center runs 24/7 in Virginia. The company's market-based emissions are zero, but their actual grid impact varies significantly throughout the day. This illustrates both the power of market-based instruments to drive renewable development and their limitations in reflecting real-time grid impacts.
Pros:
Reflects voluntary renewable energy purchases
Allows companies to show "zero carbon" electricity
Supports renewable energy markets
Aligns with corporate renewable energy goals
Cons:
May mask actual grid conditions
Can lead to focus on certificate trading over physical reductions
Doesn't capture time-of-use emissions
Risk of double-counting benefits
When to Use Which Method
The choice between these methods often depends on your goals and stakeholders. For most companies, the smart approach is using both methods in concert. Take an automotive supplier we know: They use location-based calculations to optimize their production schedules, shifting energy-intensive processes to times when the grid is cleanest. But they also invest in RECs and PPAs, using market-based accounting to demonstrate progress toward their science-based targets. The key is understanding how each method serves different purposes in your sustainability strategy.
Here's a practical guide for when to use each method:
Use Location-Based When:
Making operational decisions about facility locations
Planning load management strategies
Evaluating energy efficiency investments
Understanding real grid impacts
Communicating with local stakeholders
Use Market-Based When:
Reporting progress on renewable energy goals
Demonstrating voluntary green power investments
Communicating with investors focused on ESG metrics
Participating in renewable energy markets
Use Both When:
Reporting to CDP or other frameworks requiring dual reporting
Making comprehensive facility location decisions
Developing holistic energy strategies
Communicating transparently with stakeholders
Remember: It's not about choosing one method over the other. It's about understanding how each method informs different decisions and using both to drive real decarbonization. The companies that get this right are the ones making genuine progress in reducing their climate impact while building resilient, future-proof operations.