What Are Scope 2 Emissions?
Scope 2 emissions are the indirect greenhouse gas (GHG) emissions produced from the generation of electricity, steam, heating, and cooling that a company purchases and consumes. Although Scope 2 emissions physically occur at the power plant or facility where they are generated, they are accounted for in an organization’s GHG inventory because they result from the organization’s energy use and demand.
What are Common Sources of Scope 2 Emissions?
Common sources of Scope 2 emissions include:
- Purchased electricity: Purchased electricity is often the largest contributor to a company’s Scope 2 emissions. It is the power supplied by the local grid or an energy provider to power offices, warehouses, retail locations, and data centers.
- Purchased steam: Steam produced by an external supplier, used in large-scale industrial processes, manufacturing, sterilization, or cleaning.
- Purchased heat: Heat generated from a central plant and distributed to buildings for heating and hot water.
For many office- and service-based businesses, Scope 2 emissions make up the largest share of their carbon footprint and provide one of the most significant emission reduction opportunities companies can directly act on.
This guide explains how Scope 2 is measured, the key differences between market-based and location-based accounting, and practical strategies to reduce Scope 2 emissions.
Why Scope 2 Emissions Matter for Investors and Businesses
With the global energy system being the largest source of CO2 emissions, managing Scope 2 emissions is an impactful way companies can reduce their carbon footprint and accelerate their decarbonization goals. Efforts such as improvements in energy efficiency or investments in renewable energy can translate into measurable reductions over time.
Unlike Scope 3 emissions, where data availability is reliant on external suppliers and value chain engagement, organizations have direct control over the energy they purchase and consume.
Scope 2 emissions also support several broader business objectives: disclosure is mandatory in most global regulatory regimes, measurement is critical for tracking progress toward net-zero targets, and they are used to demonstrate climate action commitments to investors and customers.
Calculating Scope 2 Emissions: Market-Based vs. Location-Based Methods
The GHG Protocol requires most organizations to report Scope 2 emissions using both the location-based and market-based methods, a practice known as dual reporting.
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Method
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What It Reflects
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Emissions Factor Used
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Use It To...
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Location-based
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The average emissions of the grid where the company operates and consumes energy from
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Regional or national grid-average factor
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Show exposure to the local grid
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Market-based
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The emissions of the electricity a company has contractually chosen to buy
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Supplier-specific factors, residual mix → grid-average (in that order), via instruments like RECs, GOs, PPAs, and green tariffs
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Reflect procurement and clean-energy choices
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Although both categories measure emissions from the same energy consumption pool, they are useful for different purposes, providing a more complete picture of operational emissions and enabling businesses to assess energy procurement strategies, risks, and opportunities.
Location-based method
The location-based method relies on the average emissions factor defined at a national or regional level, which enables companies to understand the physical impacts of their operations without being affected by market influences. However, organizations may have limited control over their reported emissions due to this, as this method does not consider a company’s renewable energy commitments.
Market-based method
The market-based method reflects the emissions associated with an organization’s electricity purchasing decisions. It follows a hierarchy of contractual data: Using product- or supplier-specific emission factors where available, followed by qualifying contractual instruments such as Energy Attribute Certificates (EACs) like Renewable Energy Credits (RECs) or Guarantees of Origin (GOs), then a residual-mix factor. The method falls back to the average grid factor if no contractual information exists.
This method allows companies to demonstrate the impact of renewable energy procurement and other clean energy commitments in their Scope 2 reporting. If an organization retires enough EACs to cover all its energy consumption, its market-based Scope 2 emissions may be reported as zero, even when its location-based emissions remain unchanged because the underlying electricity grid has not changed.
Both calculation methods are complementary. The location-based method indicates a company’s physical exposure to the grid and the market-based method shows the impact of procurement decisions in supporting the transition to a low-carbon energy system.
Key Terms
- Power Purchase Agreement (PPA): A long-term contract to purchase electricity from a specific renewable energy project.
- Energy Attribute Certificate (EAC): Certificates that verify the right to claim renewable energy attributes and are the digital proof that 1MWh of electricity has been produced from a renewable source.
- Renewable Energy Credits (REC): A US market instrument certifying that 1 MWh of renewable energy was delivered to the grid. RECs help offset the environmental impact of traditional energy sources.
- Guarantee of Origin (GO): The EU equivalent of a REC, tracking the source of energy generation.
How to Measure Scope 2 Emissions
Compared to Scope 3 emissions, Scope 2 emissions are grounded in data you have as it starts from energy you already pay for and meter. The calculation for Scope 2 emissions is the same formula, applied twice—once with a grid-average factor and the other with a contractual one:
Greenhouse gas emissions = Quantity of energy consumed (kWh) X Emission factor (kg CO2e/kWh)
Calculating Scope 2 emissions generally follows these steps:
- Gather consumption data. Pull electricity, steam, heating, and cooling use (in kWh) from utility bills or meters across all operational sites and time periods.
- Apply location-based and market-based factors.
- For location-based, multiply consumption by the grid-average emissions factor for each region in which you operate.
- For market-based, use your contractual instruments and supplier-specific factors; fall back to residual-mix or grid-average factors only where none exist.
- Report both totals. Disclose the location-based and market-based figures together, with your boundaries and assumptions documented for assurance.
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How to Reduce Scope 2 Emissions
As Scope 2 emissions are a result of purchased energy, organizations can reduce them by improving energy efficiency, optimizing energy procurement strategies, and transitioning to low-carbon or renewable energy sources. Here are a few ways companies can lower both their emissions and operational costs:
- Reducing energy consumption: Investing in energy-efficient equipment, such as LED lightings and optimized HVAC systems, as well as implementing smarter building energy monitoring and management solutions, can help companies optimize energy use and identify high-consumption sites while keeping operational costs and emissions low.
- Generation of on-site renewable energy: Installing on-site renewable energy generation systems, including solar panels and wind turbines, reduces reliance on grid electricity and enhances an organization’s energy resilience. This option reduces both location- and marked-based emissions.
- Green tariffs: Many utilities offer green power purchasing options that enable businesses to purchase renewable energy through their electricity provider. This allows organizations to reduce their market-based Scope 2 emissions without entering into separate energy contracts.
- Building a long-term energy transition strategy: Reducing Scope 2 emissions effectively rarely occurs through a single initiative. Holistic low-carbon strategies, such as renewable energy procurements, facility upgrades, and ongoing improvements, support long-term decarbonization goals while preparing organizations for evolving stakeholder and regulatory disclosure requirements.
Common Scope 2 Reporting Challenges
Although Scope 2 emissions are generally easier to collect and measure than Scope 3, organizations may encounter these common challenges while preparing for carbon reporting:
- Collecting inconsistent emissions data: Organizations operating across multiple regions, facilities, or portfolio companies will need to gather utility data from numerous providers. Lack of standardization with how each source submits consumption data can lead to quality issues, inconsistencies, and reporting errors that make it difficult to accurately calculate and compare Scope 2 emissions.
- Reporting using only one calculation method: The GHG Protocol requires organizations to report both location-based and market-based Scope 2 emissions. Omitting either method not only creates compliance challenges with regulatory reporting expectations, but it also reflects an incomplete picture of an organization’s true emissions profile, which reduces the credibility of its reported data and decarbonization efforts.
- Using inaccurate emissions factors: Grid-average factors are updated annually and can vary by country. Applying outdated emissions factors can affect reporting accuracy and create inconsistencies in the reported data.
- Not accounting for steam, heat, or cooling: Most organizations track electricity usage closely, but leave out purchased heat, steam, or cooling from Scope 2 calculations. These energy sources are within scope and can represent a meaningful share of energy consumption at facilities.
- Misclassifying Scope 1 and 2 emissions: Reporting teams may conflate Scope 1 emissions (direct emissions from owned or controlled sources, such as an on-site generator) with Scope 2 emissions. Misclassifying emissions can lead to inaccurate carbon inventories, double counting, and reporting errors.
Why Reducing Scope 2 Emissions Is Important for Companies and Investors
There is tangible financial and operational value for organizations that prioritize reporting and reducing their Scope 2 emissions. Not only is it a practical starting point for reducing costs, but it is also table stakes for regulatory compliance, meeting investor and stakeholder expectations, and building business resilience.
- Cost savings: Every initiative that lowers Scope 2 emissions, such as efficiency upgrades, on-site renewable energy generation, and a well-structured PPA, leads to lower energy bills that will make a difference in the bottom line.
- Regulatory compliance: Most major global sustainability regulations require Scope 2 emissions reporting, and accurate disclosures are a must to support compliance.
- Competitive advantage: Investors, stakeholders, and customers increasingly consider climate action efforts when making purchasing and investment decisions. Demonstrating clear Scope 2 emission reductions can strengthen brand reputation, improve access to capital, and differentiate organizations from competitors.
- Reduces exposure to energy risks: Diversifying energy procurement sources and increasing energy efficiencies through on-site or renewable energy generation reduces exposure to grid price volatility, improves energy security, and enables companies to be better prepared for future market and regulatory changes.
- Progress toward net-zero targets: Reporting and reducing Scope 2 emissions can help organizations track progress toward net-zero and science-based targets more accurately.
- Strengthen stakeholder trust: Transparent, accurate Scope 2 reporting is indicative of strong environmental governance and credible climate action, giving stakeholders greater confidence in an organization’s sustainability performance and strategy.
The Regulatory Picture for Scope 2 Emissions
Reporting on Scope 2 emissions is a core, mandatory part of disclosure in essentially every sustainability regulation, with the EU’s CSRD, the ISSB’s IFRS S2, California’s climate laws, and the UK’s SECR among them. Requirements differ by jurisdiction and are still evolving.
For more insight on what regulations your organization is in scope for and the latest deadlines, get started with the Novata Regulatory Navigator today.
Streamlining Scope 2 Emissions Reporting for Investors
For private market investors, Scope 2 is usually the most consistent and comparable emissions data to collect across a portfolio. Most portfolio companies can produce energy consumption figures even at an early reporting stage, making it easy to establish a portfolio-wide carbon baseline and performance benchmark before tackling more complex categories such as Scope 3’s financed emissions.
As reporting expectations grow, investors will need a scalable, streamlined way to collect, standardize, and verify large volumes of emissions data.
The Novata Carbon Navigator helps teams simplify carbon reporting by centralizing Scope 1, 2, and 3 emissions in a single, secure sustainability platform. With API integrations to pull data directly from energy and procurement systems, access to carbon experts through Novata Advisory, and investor-grade audit trails, teams can easily manage GHG data and set actionable climate targets without relying on manual reporting.
FAQs
Scope 2 emissions are the indirect greenhouse gas emissions from the electricity, steam, heating, and cooling a company purchases and consumes. The energy is generated elsewhere, but the company’s demand causes the emissions, so they count as its own under the GHG Protocol.
Location-based uses the average emissions of the grid where a company consumes energy. Market-based reflects the electricity an organization has contractually chosen, using supplier-specific or instrument-based factors. The two can differ significantly, which is why the GHG Protocol asks companies to report both.
Dual reporting is the GHG Protocol requirement to report Scope 2 using both the location-based and market-based methods where contractual instruments exist. It gives a complete picture: physical grid exposure and the impact of energy procurement choices.
Collect your energy consumption in kWh from bills or meters, then apply grid-average factors for the location-based total and your contractual or supplier-specific factors for the market-based total. Report both figures with your boundaries and assumptions.
Energy attribute certificates such as RECs can lower your market-based Scope 2 emissions to zero if you retire enough to cover all consumption, but they do not change your location-based figures. Both are reported, so certificates improve one number, not both.
In most sustainability regulatory obligations, yes. Scope 2 is a core part of disclosure under the EU’s CSRD, the ISSB’s IFRS S2, California’s climate laws, and the UK’s SECR. See our guide to ESG regulations for more on the regulatory landscape.
Cut energy use through efficiency, generate renewable power on site, and shift purchased energy to low-carbon sources via power purchase agreements, energy attribute certificates, or green tariffs. These choices are reflected in the market-based figures.
Scope 1 is direct emissions from sources you own or control; Scope 2 is indirect emissions from purchased energy; Scope 3 is all other indirect emissions across your value chain. See our carbon accounting guide for the full picture.
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