When you’re preparing your CDP disclosure, one crucial decision awaits you. How will you report your Scope 2 emissions? You have two main options: location-based or market-based reporting. Each method tells a different story about your company’s environmental impact. Choosing the right approach can significantly affect your CDP score and stakeholder perception.
The Carbon Disclosure Project (CDP) has become widely regarded as the gold standard for corporate environmental disclosure. Investors managing trillions in assets use CDP data to make informed decisions about climate-related financial risks. Understanding these two reporting methodologies isn’t just about compliance—it’s about strategically positioning your organisation’s sustainability narrative.
Let’s examine what each approach entails. We’ll explore when to use them and how they’ll impact your CDP performance. To make informed decisions about these methodologies, we first need to establish a solid foundation in the fundamentals.
Understanding the basics of Scope 2 emissions accounting
Before examining the reporting methods, let’s clarify what Scope 2 emissions actually represent. These are the indirect emissions from purchased electricity, steam, heating, and cooling that your company consumes.
The three emission scopes work together to provide a comprehensive picture of your carbon footprint:
- Scope 1: Direct emissions from sources you own or control, such as company vehicles and on-site fuel combustion
- Scope 2: Indirect emissions from purchased energy consumption
- Scope 3: All other indirect emissions in your value chain, including business travel, supplier emissions, and product lifecycle impacts
For many organisations, particularly office-based businesses and service companies, Scope 2 represents the largest share of their carbon footprint. This makes your reporting methodology choice particularly impactful for your overall emissions profile.
Here’s where it becomes complex. The same kilowatt-hour of electricity can have vastly different carbon implications depending on how you account for it. A company in Norway purchasing renewable energy certificates might report zero Scope 2 emissions using one method, while using another method might show significant emissions based on their physical location’s grid mix.
This is precisely why CDP requires companies to understand both methodologies. The choice between location-based and market-based reporting reflects two different perspectives on environmental accountability. Are you demonstrating the environmental reality of your physical location’s energy infrastructure? Or are you demonstrating the impact of your strategic procurement decisions? Let’s start by examining the more straightforward of these two approaches.
What is location-based emissions reporting and when should you use it?
Location-based reporting takes a straightforward approach to emissions calculation. It determines your emissions based on the average emissions intensity of the electricity grid where you’re physically located. Think of it as the “regional reality” method that reflects the actual energy infrastructure serving your operations.
If your office operates in Germany, you’ll use Germany’s national grid emission factor, which reflects the country’s energy mix of renewable sources, coal, natural gas, and nuclear power. This calculation applies regardless of whether you’ve purchased renewable energy certificates, signed green energy contracts, or made other sustainability investments. The methodology simply multiplies your electricity consumption by the regional grid’s average carbon intensity.
This method offers several advantages for CDP reporting:
- Relatively straightforward calculation process with readily available data
- Requires minimal documentation and third-party verification
- Provides a consistent baseline that’s easily verifiable by CDP assessors
- Gives stakeholders a clear picture of your physical operations’ environmental impact on regional energy systems
- Enables meaningful comparisons between companies operating in similar geographic regions
However, location-based reporting has significant limitations that can frustrate companies making substantial sustainability investments. If you’ve allocated considerable resources toward renewable energy procurement, power purchase agreements, or green energy contracts, this method won’t reflect those strategic efforts in your reported emissions.
For CDP purposes, location-based reporting serves as an important baseline that demonstrates your understanding of fundamental emissions accounting principles. However, it’s increasingly considered incomplete on its own for companies with active sustainability programmes. This limitation is precisely where the alternative methodology becomes strategically valuable.
How market-based emissions reporting works
Market-based reporting fundamentally shifts the focus from geographic location to contractual arrangements and purchasing decisions. Instead of concentrating on where your operations are physically located, it emphasises what energy products you’ve actually purchased through specific contractual instruments.
Under this approach, your emissions calculation directly reflects your energy purchasing decisions and sustainability investments. If you’ve purchased renewable energy certificates (RECs), signed power purchase agreements (PPAs), obtained guarantees of origin, or chosen a green energy supplier with specific renewable energy contracts, these strategic choices directly impact your reported emissions. Purchase enough certified renewable energy to cover your consumption, and your market-based Scope 2 emissions could theoretically drop to zero.
The methodology recognises various contractual instruments that companies commonly use for renewable energy procurement:
- Renewable energy certificates and guarantees of origin in European markets
- Direct power purchase agreements with renewable energy generators
- Supplier-specific contracts that provide access to renewable energy attributes
- Green energy tariffs with verified renewable energy content
For companies with ambitious science-based targets or comprehensive sustainability strategies, market-based reporting provides a clear pathway to demonstrate measurable progress. It creates direct financial incentives for continued investment in clean energy infrastructure and rewards organisations that make substantial commitments to renewable energy procurement.
The trade-off is significantly increased complexity in data management and documentation requirements. Market-based reporting demands meticulous documentation of all energy contracts, renewable energy certificates, and contractual agreements. You’ll need to track certificate vintages, ensure geographic and temporal matching between certificates and consumption, and prevent double-counting across multiple reporting frameworks. You must maintain detailed records that can withstand rigorous scrutiny during CDP assessment processes.
Understanding these methodologies provides the foundation, but knowing how they’ll affect your actual CDP performance is where strategic decision-making becomes crucial for your organisation’s sustainability reporting strategy.
Key differences that impact your CDP score
The choice between these methodologies can dramatically affect your CDP performance across multiple scoring dimensions. Here’s the crucial point: CDP scoring evaluates the quality and completeness of your disclosure practices, governance structures, and strategic approach to climate management—not just your absolute environmental performance numbers.
Companies reporting both location-based and market-based figures typically achieve higher scores than those providing only one methodology. This dual reporting approach demonstrates sophisticated understanding of emissions accounting principles and provides stakeholders with a comprehensive picture of your environmental impact from multiple perspectives.
The scoring implications extend far beyond the numerical emissions values themselves. Key areas where methodology choice impacts your CDP performance include:
- Governance and strategy demonstration: Market-based reporting requires robust governance structures around renewable energy procurement processes
- Data quality and verification: Both methodologies demand different levels of documentation and third-party verification
- Strategic alignment: CDP assessors evaluate whether reporting approaches represent genuine business decisions aligned with comprehensive climate strategy
- Stakeholder communication: The ability to explain methodology differences and their strategic implications demonstrates reporting maturity
From an investor and stakeholder perspective, market-based reporting often carries more strategic weight because it demonstrates proactive environmental management and strategic decision-making capabilities. Investors want to see evidence that companies are making informed, strategic decisions about energy procurement rather than simply accepting whatever energy mix the local grid provides by default.
Many high-scoring companies present both methodologies in their CDP submissions, providing detailed explanations of the differences and outlining how each metric informs different aspects of their sustainability strategy. This approach demonstrates maturity in emissions management and provides stakeholders with the contextual information they need to understand your environmental performance within broader market and regional conditions.
With this understanding of how each methodology affects your CDP score across multiple evaluation criteria, the question becomes: how do you determine which approach aligns with your specific organisational circumstances and strategic objectives?
Choosing the right approach for your organisation
The reality is that most organisations with mature sustainability programmes benefit from implementing both methodologies to provide comprehensive emissions reporting. However, your starting point should align with your current sustainability maturity level, available resources, and strategic priorities.
If you’re new to CDP reporting or have limited sustainability expertise within your organisation, location-based reporting provides a solid foundation for building emissions management capabilities. It’s significantly easier to implement, requires less extensive documentation, and provides reliable baseline data for establishing future reduction targets and tracking progress over time.
For organisations with established sustainability programmes, ambitious climate commitments, or science-based targets, market-based reporting becomes strategically essential. It’s the only methodology that can effectively demonstrate the measurable impact of your renewable energy investments and show concrete progress towards comprehensive climate goals.
Key considerations when determining your optimal approach:
- Data requirements and systems: Location-based methodology needs electricity consumption data and regional grid emission factors; market-based requires detailed energy contract records, certificate tracking systems, and supplier-specific emissions data
- Stakeholder expectations and industry context: Companies in sustainability-focused industries or with environmentally conscious investor bases benefit more significantly from market-based reporting capabilities
- Internal resources and expertise: Market-based reporting demands more sophisticated tracking systems, documentation processes, and specialised knowledge of renewable energy markets
- Strategic value and decision-making: Both approaches create valuable opportunities for internal dialogue about energy procurement strategy and help identify additional opportunities for emissions reductions
Many organisations discover that implementing both methodologies creates valuable internal dialogue about energy procurement strategy, helps identify opportunities for further emissions reductions, and strengthens overall sustainability governance. However, developing these comprehensive reporting capabilities often requires specialised expertise that many companies don’t have readily available within their existing teams.
Getting the expertise you need
Navigating CDP reporting requirements effectively requires specialised knowledge of emissions accounting standards, renewable energy markets, and CDP scoring methodologies. The nuances between location-based and market-based emissions accounting are complex, and many organisations don’t have this expertise readily available in-house. The good news is that you don’t need to build this expertise from scratch or wait months for traditional consultancy engagement processes.
At Dazzle, we connect you with pre-screened CDP reporting specialists who understand these methodologies comprehensively. These experts possess deep knowledge of emissions accounting standards, renewable energy procurement strategies, and CDP scoring criteria. Whether you need assistance preparing your first CDP submission or want to optimise your scoring through more sophisticated emissions reporting approaches, we can provide the right expertise. We can match you with qualified specialists within 48 hours.
Our flexible engagement approach means you can access specialised knowledge exactly when you need it, without the overhead of long-term consulting contracts or extensive procurement processes. Ready to strengthen your CDP reporting strategy? Connect with our team of sustainability experts who can guide you through both location-based and market-based reporting approaches tailored to your organisation’s specific needs.
