Scope 2 Emissions: What They Are, and How to Reduce Them
Scope 2 emissions, as defined by the GHG Protocol, are indirect emissions from a company’s purchased electricity, steam, heat, or cooling.
They represent a large source of GHG emissions for many companies. Since they don’t have control over production, companies may overlook Scope 2 emissions as a possible source of emissions reductions. Yet at least a third of global GHG emissions come from Scope 2, and therefore reducing those emissions can have a big impact.
Although Scope 2 emissions are considered ‘indirect’ emissions, companies can exert control through the selection of energy sources. Additionally, with changes to the electricity market, such as deregulation, growth of renewables, and new market-based instruments, companies now have more options to reduce Scope 2 emissions.
In this article, you’ll learn what Scope 2 emissions are and how companies can reduce their Scope 2 emissions.
What are Scope 2 Emissions?
The Greenhouse Gas Protocol Corporate Standard requires organizations to quantify emissions from the generation of acquired and consumed electricity, steam, heat or cooling (collectively referred to as “electricity”). Scope 2 is considered an indirect emissions source because, while companies purchase electricity, the production and emissions are controlled by another organization.
Figure 1 illustrates the difference between Scope 1 emissions (direct) and Scope 2 emissions (indirect). Electricity consumers have significant opportunities to reduce those emissions by reducing electricity demand and increasingly play a role in shifting energy supply to alternative low-carbon resources.
Figure 1. Electricity distribution on the grid, Scope 2 emissions are from energy consumer.
In 2015, the GHG Protocol published the Scope 2 Guidance, which outlined new requirements for accounting for emissions from market-based instruments like energy contracts and renewable energy certificates. It also highlighted eight Scope 2 Quality Criteria that all contractual instruments must meet in order to be a reliable data source for the Scope 2 market-based emissions method. In this new guidance, organizations that exist in markets with options for energy contracts must report their Scope 2 emissions using two methods: the location-based method and the market-based method.
Location-based Emissions Accounting Method
The location-based method reflects the average emissions intensity of grids on which energy consumption occurs (using mostly grid-average emission factor data). This energy consumption is not purposefully chosen but rather based on the location and the subsequent grid mix in that region.
Market-based Emissions Accounting Method
The market-based method reflects emissions from the electricity that companies have purposefully chosen, such as buying renewable energy certificates which will be represented with an emission factor of zero in their Scope 2 emissions.
Alternatively, the market-based method may reflect a company’s lack of choice and use the residual mix emissions factor to calculate their market-based scope 2 emissions. The residual mix is derived by removing all the energy certificated from the grid and using the emission factor of the leftover grid (generally more coal intensive and, therefore, a higher emission factor).
The market-based method derives emission factors from contractual instruments, which include any type of contract for the sale and purchase of energy bundled with attributes about the energy generation or for unbundled attribute claims.
Markets differ as to what contractual instruments are commonly available or used by companies to purchase energy or claim specific attributes about it, but they can include energy attribute certificates (renewable energy certificates, Guarantees of Origin, etc.), direct contracts (for low-carbon, renewable, or fossil fuel generation), supplier-specific emission rates, and other default emission factors representing the untracked or unclaimed energy and emissions (termed the “residual mix”) if a company does not have other contractual information that meets the Scope 2 Quality Criteria.
The GHG Protocol requires companies to report both location and market-based emissions for a few important reasons. First, so that organizations can distinguish between purchasing choices versus changes in grid emissions intensity in their reduction targets. Second, it provides transparency for stakeholders and improves comparability across operations.
How to Reduce Scope 2 Emissions
Once companies obtain a holistic view of their emissions and report them, they can create a plan for reductions. We outline reduction strategies and market-based instruments in the following sections. Although this section focuses on market-based instruments, a holistic emissions reduction strategy should also include overall energy reductions and efficiency of operations.
Generate Renewable Energy
Owning and generating renewable energy onsite through solar or wind energy is an effective solution to reduce emissions. These projects show a clear commitment to clean energy and can demonstrate the impact of direct emissions reductions. These projects require an upfront capital investment, but they result in reduced electricity costs down the road and can keep the company insulated from changing energy costs.
For some companies with the capacity and financial ability, producing their own renewable energy could be a good solution to reduce their purchased electricity and ensure they have consistent, clean power for their facilities. Other considerations include where the facility is located, as access to renewable resources can impact the plausibility of these projects. In some cases, companies will choose to build an off-site project if an on-site project is not feasible, in which the project is built off-site but is either connected to the facility by a direct line or it is not located near the facility, and the renewable energy is transported to the facility by the grid.
Because the company has financial control over the site, it owns the renewable energy certificates associated with the renewable energy generated. Off-site options have similar benefits to on-site; however, they require a greater level of planning and complexity in most cases. Both options have a high impact because the investment directly results in a new renewable power project.
Purchase Energy Attribute Certificates (RECs)
Energy attribute certificates are a category of contractual instrument that represents certain information about the energy generated but does not represent the energy itself. This includes a variety of instruments with different names, including certificates, tags, credits, or generator declarations. In Europe, these certificates are called Guarantees of Origin (GOs), and in the US, they’re called Renewable Energy Certificates (RECs). For the purposes of this article, we will refer to RECs to describe energy attribute certificates.
RECs represent proof that one megawatt-hour of electricity was generated from a renewable energy source and fed into the grid. When you purchase RECs, you make it possible for more clean energy projects to supply power to the grid in which they operate. Purchasing RECs can contribute to a reduction of carbon emissions by increasing renewable energy on the grid.
RECs can be “bundled,” where they are sold with the underlying electricity, or “unbundled,” where they are sold separately from the underlying electricity. Although purchasing bundled RECs is generally accepted as a more effective means of bringing renewable energy to the grid, unbundled RECs can be sold nationally and are, therefore, a good option for companies with facilities in areas with regulated electricity markets.
The Scope 2 Guidance states that RECs can be purchased directly from renewable energy project developers, conveyed through a power purchase agreement or bought through a broker. To make claims that you are reducing Scope 2 emissions, you must buy RECs that haven't been purchased before, and you must "retire" those RECs, which means that you hold them forever and don't sell them to anyone else.
Green-e provides a list of projects that sell RECs that are certified by the organization, which means that they have not been sold more than once or claimed by more than one party. Figure 2 outlines the pathway for a REC, illustrating the difference between unbundled and bundled RECs.
Figure 2. GHG Protocol Scope 2 Guidance energy attribute certificate pathways.
Enter Into Power Purchase Agreements (PPAs)
A Power Purchase Agreement (PPA) is a long-term contract where a business agrees to purchase electricity directly from a renewable energy generator. These contracts allow companies to lock in prices of renewable energy, allowing for the long-term development of a renewable project and allotted usage of that energy. There are two kinds of PPAs, physical and financial.
In a physical PPA, companies receive the physical delivery of electricity from the renewable energy generator it is in contract with through the grid. Physical PPAs can be on-site or offsite. An on-site project is constructed on the company’s property but financed, developed, and maintained by the renewable energy generator. An off-site project is not on the company property but still in the grid region, and electricity can flow directly to the company facility. It is also important to note that the company must own the associated project RECs in order to make claims about using renewable power from the project. Physical PPAs allow for long-term electricity cost stability and predictability and require no up-front capital costs. A consideration with physical PPAs is understanding if a company’s facilities are located in competitive electricity markets and the same grid region as the generation facility (if an off-site project).
Alternatively, in a financial PPA, physical electricity is not delivered from the generator to the buyer, but rather the renewable energy generator will sell the energy to the grid at the floating market price. The generator and buyer have created an agreement where they’ve decided on the price per kilowatt-hour, which the buyer will pay the generator for the electricity it puts onto the grid. If the electricity sells for more or less than the agreed-upon price, the monetary difference is exchanged between the two parties. The RECs associated with the renewable energy generated are usually contractually given to the buyer in a financial PPA. Financial PPAs give customers a less volatile cost of electricity and can be a good option for companies with facilities spread out through different regions.
Participate in Utility Green Tariffs
Utility green tariffs can be a good option for companies in regulated energy markets where a company cannot participate in a PPA. Utility green tariffs allow larger commercial and industrial customers to buy bundled renewable electricity from a specific project through a special utility tariff rate. Since these agreements are based on renewable energy that is already being produced, these green tariffs do not have as much of an impact on bringing new renewable energy projects online and therefore are not as effective as other reduction options.
In some cases, the utility procures a long-term contract with the third-party green power generator and allows multiple customers to sign up for a portion of the project. This can lessen the complexities associated with negotiating terms and contracts. Green tariffs can be a good solution in regions where retail access to generators is not authorized.5
Next Steps
Scope 2 emissions continue to play a large role in the carbon footprint of companies around the world, and companies have increasing control over where they source their electricity. The first step is to understand the quantity and underlying nature of your company’s Scope 2 emissions. Then it is essential to evaluate the various market instruments and reduction opportunities to craft a strategic plan for your organization.
To learn more, check out the full White Paper on Scope 2 Emissions and Strategies for Reductions.
And you can contact us if you’re interested in quantifying your company’s emissions or creating an action plan for reduction.
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