Location-based vs Market-based Emissions Thumbnail Image
Location-based vs Market-based Emissions (What’s the Difference?)
Confused about the difference between location-based and market-based emissions? This article breaks down the distinctions between the two and helps you understand their impact on the environment.
Published:
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Location-based vs Market-based Emissions Thumbnail Image
Location-based vs Market-based Emissions (What’s the Difference?)
Confused about the difference between location-based and market-based emissions? This article breaks down the distinctions between the two and helps you understand their impact on the environment.
Published:
Loading reading time...
Location-based vs Market-based Emissions Thumbnail Image
Location-based vs Market-based Emissions (What’s the Difference?)
Confused about the difference between location-based and market-based emissions? This article breaks down the distinctions between the two and helps you understand their impact on the environment.
Reviewed by Rob Boyle
Published:
Loading reading time...

Navigating emissions metrics using location-based and market-based approaches

Understanding emissions data is essential for enterprises and regulators in pursuing sustainability.

Two main approaches, namely Location-Based and Market-Based, provide different viewpoints on carbon emissions.

  • Location-based emissions refer to greenhouse gases emitted within a specific geographic boundary, typically accounting for direct emissions from sources within the area.
  • Market-based emissions include greenhouse gases generated by the electricity a company purchases, adjusted based on procurement choices like buying renewable energy credits or using low-carbon energy sources.

Now, let’s explore their differences, the methods used to measure them, their most suitable uses, and their consequences for policies and businesses.

A city skyline with smokestacks emitting pollution (location-based) and a graph showing emissions trading (market-based)

A quick comparison

AspectLocation-based emissionsMarket-based emissions
ScopeDirect emissions within a specific geographical area.Total lifecycle emissions associated with consumption patterns and supply chain dynamics.
BoundariesConfined to the geographical boundaries of a specific locationExtend beyond geographical boundaries to capture emissions from all supply chain stages.
PerspectiveLocal perspective, focusing on emissions within a defined areaGlobal perspective, considering emissions associated with consumption patterns across multiple locations
ApplicationLocal emissions inventories, compliance reporting, and policy developmentCorporate carbon footprinting, supply chain management, carbon pricing mechanisms, and carbon offsetting initiatives

The Greenhouse Gas Protocol (GHG Protocol)

Quantifying emissions depending on geography entails using established protocols, such as the ones specified by the Greenhouse Gas Protocol (GHG Protocol).

This protocol encompasses:

  • Determination of organisational boundaries: which emissions are owned or controlled by the company.
  • Calculation of emissions using established emission factors: coefficients that relate the amount of emissions to a unit of activity.

GHG Protocol’s Scope 2 covers indirect emissions from purchased energy generation. Two methods are used to calculate emissions: market-based and location-based. Market-based calculations ensure accuracy through specific quality criteria. The protocols provide sector-specific procedures for measuring emissions.

A scale balancing two sides, one labeled "location-based emissions" and the other "market-based emissions." Each side has a different weight, symbolizing the difference between the two accounting principles

Location-based emissions

Location-based emissions are the greenhouse gas (GHG) emissions directly produced and consumed at your operations site or business facility. These emissions are usually computed using data from the specific activities and processes inside that area’s boundaries.

The location-based approach emphasises direct regulation at the point of emission. It involves:

  • Uniform standards: requiring the same control measures across all emission sources.
  • Site specificity: focusing on controlling emissions at each site.

The objective is to measure the amount of carbon emissions from specific sources, including industrial facilities, transport, energy production, and waste disposal within a specific area.

For example

  • Power plant emissions are situated within the boundaries of a city.
  • Emissions of carbon dioxide from automobiles operating within a particular municipality.
  • Emissions of greenhouse gases by a manufacturing facility located in a specific area.
  • Emissions of methane from landfills under the management of a municipal authority.

Market-based emissions

Market-based emissions refer to direct and indirect emissions from consuming products and services. These emissions might extend beyond the physical borders of a single region.

Contrary to emissions tied to a specific place, the market-based method takes a more flexible economic approach. Market-based emissions consider the carbon footprint of the entire supply chain, including activities that occur before and after the primary process.

Key elements include:

  • Emissions trading: allowing companies to buy and sell emission allowances.
  • Emission taxes: imposing taxes on the volume of pollutants released.
  • Hybrid instruments: sometimes combining elements of trading and taxes to mitigate emissions.

They leverage economic incentives to encourage compliance and innovation among emitters, aiming for cost-effectiveness in achieving environmental goals.

Some examples of market-based emissions are:

  • These emissions result from creating, moving, and disposing of goods and services used within a specific area, regardless of where they were made.
  • Carbon emissions are linked to imported goods and services, indicating the ecological consequences of consumer habits.
  • Consumers are responsible for emissions outside their immediate location due to the energy and heat they purchase.

Differentiating location and market-based emissions

Understanding the differences between location-based and market-based accounting is vital. These methods offer diverse insights into an entity’s environmental impact.

Accounting for emissions: Scope 1, 2, and 3

Accounting for emissions is categorised by three scopes:

  • Scope 1 refers to direct emissions from owned or controlled sources.
  • Scope 2 covers indirect emissions from the generation of purchased electricity.
  • Scope 3 includes all other indirect emissions in a company’s value chain.

Understanding the distinction between direct and indirect emissions alongside the geographical and market-based considerations of energy consumption and generation is crucial for accurate carbon accounting.

Image explaining the terminology for scope 1, 2, and 3 emissions. Icons show factories, energy and trains with pollution trails. Text says “Scope 1: Emissions from resources the company owns and operates directly. Scope 2: Emissions that are indirectly caused from the energy purchased from utility providers. Scope 3: Emissions that a company is indirectly responsible for through their supply chain”

Scope

Location-based emissions focus on direct greenhouse gas emissions within a specific geographical area, such as a city, region, or municipality, measured by physical activities.

Market-based emissions encompass both direct and indirect emissions from consumption patterns and supply chain dynamics, including emissions from upstream and downstream activities across multiple locations, extending beyond the physical boundaries of a specific location.

Boundaries

Location-based emissions are limited to the geographical boundaries of a specific location, focusing only on emissions within that area.

Market-based emissions extend beyond geographical boundaries, considering all stages of the supply chain, including production, transportation, distribution, use, and disposal, regardless of where these activities occur.

Perspective

Location-based accounting quantifies and evaluates the amount of greenhouse gas emissions produced within a particular geographic region. This analysis helps to understand the environmental consequences and aids in developing strategies to reduce emissions.

Market-based reporting accounts for emissions resulting from consumer patterns and supply chain dynamics in many regions, acknowledging the interconnectedness of economic activities.

Both viewpoints contribute to evaluating the carbon emissions caused by items and services used in a specific area, allowing for focused policy responses.

Application

Location-based emissions are used for inventories of emissions at a local level, reporting compliance with regulations, and developing policies.

On the other hand, market-based emissions are employed in calculating corporations’ carbon footprint, managing supply chains, implementing carbon pricing systems, and participating in carbon offsetting programs.

These indicators provide data for climate action plans, strategies to reduce emissions, and initiatives for environmental management.

Electricity consumption and carbon intensity

Location-based emissions consider the emissions intensity of the region’s energy supply where the electricity is consumed.

For instance, if a company operates in an area mostly powered by coal plants, their location-based emissions reflect the high carbon intensity of their electricity consumption.

In contrast, market-based emissions account for the choice of energy purchasing decisions and any renewable energy certificates (RECs).

Understanding contractual instruments

Renewable Energy Certificates (RECs) and Guarantees of Origin (GOs) operate as tradable certificates. They attest that a certain amount of energy is generated from renewable resources.

  • RECs are primarily used in the United States. They prove that one megawatt-hour (MWh) of electricity was produced sustainably.
  • GOs are the European counterpart to RECs. They hold a similar purpose but adhere to the specific tracking systems and standards within the EU framework.

These instruments are fundamental for reporting requirements. They provide evidence for renewable energy use, supporting claims of sustainability.

Companies often buy RECs as part of their market-based strategy to lower their carbon footprint.

A REC represents the environmental benefits of 1 megawatt-hour (MWh) of renewable energy. When businesses purchase RECs, they can claim the reduction of emissions as part of their environmental efforts despite the physical location remaining unchanged.

When should location-based emissions be applied?

Location-based emissions are crucial for understanding and addressing direct emissions from a specific geographic region.

They are essential for local policy development, regulatory compliance, impact evaluation, and community engagement.

  • Local policymakers can use location-specific emissions data to create targeted climate mitigation plans and establish emission reduction targets based on regional conditions.
  • Regulatory compliance is achieved by companies disclosing their emissions to authorities, while impact evaluation helps stakeholders predict future environmental impacts and reduce negative impacts through efficient planning and mitigation methods.
  • Community engagement is also fostered by using location-specific emissions data to involve local communities in climate change efforts and promote public awareness.
  • Governments and organisations can encourage community support and collaboration by sharing emissions data and emphasising local emission reduction measures.

When should market-based emissions be applied?

Market-based emissions are most effective when used to measure and account for the overall carbon impact of consumption patterns and supply chain dynamics that extend beyond specific geographical boundaries.

  • Market-based emissions assessments are essential for companies to understand and control their carbon impact in supply chain management.
  • They help identify opportunities for reducing emissions, optimising supply chains, and improving sustainability by tracking emissions from manufacturing, transportation, and delivery.
  • These assessments also quantify the carbon footprint of goods, services, and organisations, allowing businesses to communicate their ecological consequences to consumers and investors
  • Market-based emissions data shapes carbon pricing systems and regulatory policies encouraging emission reductions and sustainable consumption patterns.
  • Additionally, market-based emissions assessments enable carbon offsetting initiatives by measuring emissions reductions achieved through investments in emission reduction projects or carbon credits.
Image showing the comparison between location-based and market-based emissions
Image source: Wattcarbon

Benefits of location-based measurement

The location-based method quantifies direct greenhouse gas emissions within a specific geographic region. They comprehensively understand emissions from various sources, including industry, transportation, energy production, and waste management.

  1. These emissions are particularly effective at measuring pollutants at specific geographical locations. They help identify emissions hotspots and trends, enabling the development of tailored mitigation plans and policy interventions.
  2. These assessments also provide insights into the environmental consequences of activities and developments within a community or region, enabling decision-makers to choose the most important steps to address environmental issues.
  3. Additionally, location-based emissions inventories facilitate regulatory compliance and accountability by establishing a uniform framework for quantifying and disclosing emissions from fixed sources. This establishes a framework for demonstrating adherence to emission limits and regulatory mandates set by environmental authorities.

Benefits of the market-based approach

Market-based emissions accurately quantify the whole carbon footprint linked to electricity consumers and supply chain patterns across various locations and stages.

They offer a comprehensive perspective on the emissions linked to the manufacturing, distribution, and utilisation of goods and services without respect to geographical limits.

Market-based emissions are particularly good at measuring the following:

  1. Supply chain emissions
  2. Indirect consumption from emissions
  3. Carbon intensity of products
  4. Carbon pricing and offsetting

Implications for policies and businesses

The consequences of emissions that are based on location and market are substantial, impacting the decision-making process, regulatory structures, sustainability initiatives, and engagement with stakeholders for both policies and businesses. 

Policy Development

Using emissions data based on location helps create local and regional climate policies.

This allows policymakers to determine regions that need immediate attention to reduce emissions and establish ambitious goals that are customised according to the community’s specific requirements and difficulties.

Adherence to regulations

Location-based metrics facilitate regulatory compliance by offering uniform approaches to measure and report emissions from fixed sources.

Regulatory bodies can utilise this data to enforce emission limits and execute focused regulatory measures to tackle specific local environmental concerns.

Company carbon reduction strategy

The choice between market-based or location-based emissions can shape a company’s carbon reduction strategy.

Market-based methods are like a lens focusing on company-specific actions, while location-based emissions are akin to a mirror reflecting regional GHG intensity.

Each accounting method guides businesses differently, potentially affecting the efficacy and direction of their carbon reduction efforts.

A wind turbine and solar panels stand in a field

Businesses can enhance operational efficiency through location-based emissions data

This data can help identify areas where improvements can be made to reduce emissions from facilities and operations.

This includes

  • Implementation of energy-saving measures
  • Optimisation of transport routes
  • Investment in clean energy and technologies

Stakeholder involvement

Using location-based emissions measurements enables effective stakeholder involvement by offering clear and transparent information regarding the environmental consequences of corporate operations.

Businesses can interact with local communities, authorities, and investors to showcase their dedication to sustainability and tackle any concerns related to local environmental matters.

Carbon pricing schemes

Cap-and-trade systems or carbon taxes, are designed and implemented based on market-based emissions data.

Policymakers can utilise market-based indicators to build carbon pricing schemes that incorporate the societal cost of carbon and incentivise reducing emissions across various industries.

646b92caf6c2116b0658f9c9 Carbon Pricing 01 2

Sustainable consumption patterns

Market-based emissions assessments offer incentives to companies to adopt responsible sourcing practices by implementing policies that reduce their carbon footprint. These assessments enable organisations to comprehend and control the carbon impact of their supplier chains.

By identifying areas with high emissions, businesses can enhance the resilience and sustainability of their supply chains and work with suppliers to reduce emissions.

Market-based emissions data aids in business reporting and disclosure activities, such as sustainability reporting and carbon disclosure frameworks.

Businesses can use market-oriented measures to effectively communicate their environmental performance to stakeholders and demonstrate progress towards achieving emission reduction goals.

Photo of author

Author

Muhammad Mahad Malik
Muhammad is pursuing a Ph.D. in electrical power engineering. His research interests include smart grids, power systems, RES, and computational coding in energy systems.

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