Corporate greenhouse gas emissions are classified into Scope 1, Scope 2, and Scope 3 depending on where the emissions originate. Among these categories, Scope 2—indirect emissions from purchased electricity—is the area where companies can most quickly reduce their emissions and is the core of any renewable electricity procurement strategy.

In particular, Corporate PPAs (Power Purchase Agreements), which are increasingly adopted by companies in Japan, are a central tool for reducing Scope 2 emissions.

This article summarizes the essential concepts behind Scope 2—its definition, calculation methods, and the difference between the location-based and market-based approaches—based on the GHG Protocol Scope 2 Guidance and the Corporate Accounting and Reporting Standard. These concepts form a necessary foundation for understanding how Corporate PPAs work.

If you want to learn more about PPAs and the increasingly popular corporate PPAs, check out this article.
👉 What Is a Corporate PPA? Japan Market Guide with Price, Structure & Case Studies

Contents

1. What Is Scope 2? (Definition and Differences from Scope 1 & Scope 3)

The GHG Protocol defines Scope 2 as follows:

Indirect greenhouse gas emissions from the generation of purchased or acquired electricity, steam, heating, or cooling consumed by the reporting company.

In other words, while the emissions physically occur at the power plant, they are considered the company’s responsibility because the company uses that electricity.

■ Overview of the Three Scopes

Scope	Source of Emissions	Examples
Scope 1	Direct emissions from owned or controlled sources	Boilers, company vehicles
Scope 2	Indirect emissions from purchased electricity	Office lighting, factory electricity use
Scope 3	All other indirect emissions in the value chain	Supply chain, transportation, waste

Scope 2 is particularly important because emissions can be reduced simply by changing how electricity is procured. This is why it is heavily emphasized in international frameworks such as RE100, SBTi, and CDP.

2. Scope 2 Examples (What Counts as Scope 2?)

Typical activities categorized under Scope 2 include:

Electricity for office lighting and HVAC
Electricity for factory lines and manufacturing equipment
Electricity for server rooms and data centers
Electricity used in commercial buildings
Purchased steam or heating
Electricity purchased for EV charging

In short, any activity that uses purchased electricity falls under Scope 2.

3. How to Calculate Scope 2 Emissions (Formula & Example)

Scope 2 emissions are calculated using the following formula:

Scope 2 emissions (t-CO₂) = Electricity consumption (kWh) × Emission factor (kg-CO₂/kWh)

This calculation method is defined in the GHG Protocol Scope 2 Guidance (Chapter 6).

■ Example

For a factory that uses 1,000,000 kWh per year:

Location-based emission factor: 0.00045 t-CO₂/kWh → 450 t-CO₂
Market-based emission factor (with tracked certificates): 0 → 0 t-CO₂

The results differ significantly depending on the emission factor used.

4. Companies Must Report Both Methods (Dual Reporting)

Under the GHG Protocol, companies must report Scope 2 emissions using both the location-based (LB) and market-based (MB) approaches.

5. What Is the Location-Based Method?

The location-based method measures Scope 2 emissions using:

Average emission factors for the electricity grid in the region where electricity is consumed.

■ Key Characteristics

Uses regionally published average emission factors
Does not reflect the company’s electricity procurement choices
Represents the “physical reality” of the grid

6. What Is the Market-Based Method?

The market-based method uses:

Emission factors derived from contractual instruments for purchased electricity.

This method reflects a company’s renewable electricity procurement decisions.

■ Acceptable Contractual Instruments

Offsite PPA
Onsite PPA (self-consumption)
Supplier-specific emission factors from electricity retailers
Tracked Non-Fossil Certificates (NFC/TNFC)
Guarantees of Origin (GO), Renewable Energy Certificates (REC)

■ Essence of the Market-Based Approach

Because it uses contract-based emission factors, renewable electricity contracts can result in Scope 2 emissions of zero.

7. Differences Between Location-Based and Market-Based Methods

Based on the official comparison table (Table 4.1) in the GHG Protocol:

Category	Location-Based	Market-Based
Emission factor	Average grid emission factor	Contract-based emission factor
Reflects	Actual grid mix	Corporate procurement efforts
Applicable scope	All electricity grids	Markets with supplier choice
Role	Shows physical reality	Shows renewable procurement performance

8. Relationship Between Scope 2 and Renewable Electricity Procurement

Scope 2 is closely linked with corporate renewable energy strategies:

PPAs → Reduce market-based emissions to zero
Tracked Non-Fossil Certificates → Same effect as PPAs
Green electricity retail plans → Use supplier-specific factors

In other words, Scope 2 reduction is essentially electricity procurement optimization.

Conclusion

Scope 2 emissions vary significantly depending on how electricity is procured. The location-based method shows the “real-world grid emissions,” while the market-based method reflects a company’s procurement strategy and renewable electricity efforts. PPAs and tracked certificates directly influence the market-based metric, making them the most effective tools for Scope 2 reduction.

Understanding Scope 2 is the starting point for designing a corporate renewable electricity strategy. Deciding which type of Corporate PPA to adopt—and how to enhance corporate value through renewable procurement—begins with a proper grasp of the Scope 2 framework.

If you want to know comprehensivIe overview of PPAs and Corporate PPAs, including basic concepts, contract schemes, institutional frameworks in Japan, recent case studies, and key challenges and prospects for the future, check out this article.
👉 What Is a Corporate PPA? Japan Market Guide with Price, Structure & Case Studies

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