Location-Based vs Market-Based Scope 2: Which Method Should Australian Companies Use?

Here's a mistake that happens more often than you'd think. A company signs a GreenPower contract covering 100% of their electricity across three sites. Their sustainability team reports zero Scope 2 emissions in an internal board update. Zero. As if the grid stopped burning coal because they ticked a box on their energy contract.

That's not how it works. And under AASB S2, that approach to scope 2 location vs market based reporting in Australia would get them into real trouble — because the standard requires location-based emissions regardless of what contracts you've signed. Their actual location-based Scope 2 was north of 4,200 tonnes CO2-e. The board had been told it was zero.

This confusion between location-based and market-based Scope 2 is one of the most common errors we see. It isn't trivial. Getting it wrong means your mandatory disclosure is wrong. And with Scope 1 and 2 emissions carrying full liability from day one under ASRS — no safe harbour, no modified liability protection — your numbers need to stand up to assurance.

So here's the full technical breakdown: how each method works, what AASB S2 actually requires, what the CER's August 2025 guideline changed, and which method you should prioritise. With real NGA Factors 2025 numbers, not theory.

Two Methods, Same Electricity, Different Stories

Both methods measure the same thing — greenhouse gas emissions from electricity your organisation consumes. But they answer different questions.

Location-based asks: what's the average emissions intensity of the grid where you consumed electricity? It uses state-based grid emission factors from the NGA Factors workbook. Every business on the same grid gets the same factor per kWh, regardless of what contracts they've signed or certificates they've bought.

Market-based asks: what emissions are attributable to the specific electricity products you've chosen to buy? If you've purchased GreenPower, surrendered Large-scale Generation Certificates (LGCs), or signed a renewable Power Purchase Agreement (PPA), your market-based figure reflects those choices. The electricity you haven't covered with a contractual instrument gets assigned a residual mix factor — which is actually dirtier than the grid average.

Same electricity. Same period. Two different numbers. And depending on your circumstances, those numbers can diverge significantly.

A Melbourne office consuming 500,000 kWh per year with no renewable contracts would have a location-based Scope 2 of 390 tonnes CO2-e (using Victoria's factor of 0.78). Their market-based Scope 2 would be higher — because the national residual mix factor is 0.81 kg CO2-e/kWh, pushing their market-based number to 405 tonnes. That same office with a 100% GreenPower contract? Location-based stays at 390 tonnes. Market-based drops toward zero for the GreenPower-covered portion.

That divergence is the entire point. Location-based shows what physically happened on the grid. Market-based shows what you chose to fund.

What AASB S2 Actually Requires

This is where people get tripped up, so we'll be blunt about it.

AASB S2 paragraph 29(a)(v) requires entities to disclose location-based Scope 2 greenhouse gas emissions. Full stop. That's the mandatory number. You must report it. There's no option to substitute market-based for location-based under the standard.

But the same paragraph also says you need to "provide information about any contractual instruments the entity has entered into that could inform users' understanding of the entity's Scope 2 greenhouse gas emissions." That's the door for market-based reporting — it's supplementary. You can disclose your market-based figure alongside location-based, and if you've set emissions reduction targets based on your renewable energy procurement, paragraph 33(a) lets you track progress using market-based metrics.

The key word is "alongside." Not instead of. Not as a replacement.

This mirrors the GHG Protocol's dual reporting requirement — report both if you have contractual instruments, but location-based is the baseline. The GHG Protocol is currently revising its Scope 2 guidance (a 60-day consultation closed in January 2026), and the proposed changes actually tighten market-based requirements by introducing hourly matching and deliverability criteria. More on that later.

For NGER reporting, the default has always been location-based. Since 2023-24, reporters can choose to additionally report market-based Scope 2 under section 7.4 of the NGER Measurement Determination. The CER published an updated Voluntary market-based scope 2 emissions guideline in August 2025. One major change: from the 2025-26 reporting year, if you opt to use the market-based method, you must report market-based emissions for all facilities under your corporate structure. You can't cherry-pick — reporting market-based for your GreenPower sites and staying silent on the rest.

That "all or nothing" rule matters. It prevents companies from selectively disclosing market-based numbers only where they look good.

The Residual Mix Factor: Why Market-Based Can Be Higher Than Location-Based

This is the part that surprises people. If you haven't bought any renewable energy instruments, your market-based Scope 2 is worse than your location-based figure.

The NGA Factors 2025 workbook (Table 2) provides the Residual Mix Factor (RMF). The national RMF is 0.81 kg CO2-e per kWh. Compare that to the national location-based average of 0.62.

Why the gap? The residual mix factor strips out the zero-emissions electricity that's already been "claimed" by someone else through LGCs, GreenPower purchases, or the Renewable Energy Target. What's left — the residual — is the unclaimed grid mix. And because the renewable portion has been removed, that residual is more carbon-intensive than the grid average.

Think of it like a bar tab. The grid's total emissions bill gets divided up. Companies that bought renewable energy instruments get to claim the clean portion. Everyone else shares the remainder — and the remainder is dirtier than the average. The RMF of 0.81 reflects that dirtier remainder.

For 2025-26, the NGER scheme introduced state-level RMFs for the first time, replacing the single national figure. This is a significant change. A Tasmanian facility's residual mix is going to be very different from a Victorian one, because Tasmania's grid is overwhelmingly hydro while Victoria still relies heavily on brown coal. We're still waiting to see the full state-by-state RMF values in the final 2025-26 determination — the NGA Factors 2025 workbook includes the national RMF and the framework for jurisdictional calculations, but the state-level figures will be a welcome improvement over applying 0.81 nationally.

We're genuinely not sure how many reporters will use the state-level RMFs in their first year. The CER's Q3 2025 data showed only 47 of 961 registered NGER controlling corporations had made voluntary LGC cancellations. That's fewer than 5% of reporters actively using the market-based method at all. For the other 95%, the residual mix factor is academic — they'll report location-based only.

How GreenPower and LGCs Work in Market-Based Calculations

Here's how the maths actually works.

Under the market-based method in NGER, your emissions are calculated roughly as:

Market-based Scope 2 = (Residual electricity x RMF) + (Renewable electricity x 0)

The renewable portion — electricity covered by surrendered LGCs or GreenPower purchases — gets an emission factor of zero. The uncovered portion gets hit with the residual mix factor instead of the grid average.

One LGC represents one MWh of renewable electricity generation. If you purchase and surrender (or cancel) LGCs equivalent to your consumption, your market-based Scope 2 drops. If you cover 100% of consumption, it approaches zero.

GreenPower works similarly, but through a retail product. When you buy a GreenPower percentage on your electricity plan, your retailer purchases and surrenders LGCs on your behalf. From 1 January 2025, GreenPower product percentages include the LRET's Renewable Power Percentage (RPP) — which was 17.91% for 2025 and 16.67% for 2026. That means a "100% GreenPower" product now explicitly includes the mandatory LRET component plus additional voluntary LGC surrenders to reach 100%.

This matters for accounting. When reporting in the CER's EERS system, GreenPower purchases and LGC surrenders are reported separately. You need documentation — the retailer confirmation of GreenPower percentage, or REC Registry records of LGC cancellations — as evidence for your market-based claim.

PPAs (Power Purchase Agreements) are trickier. A bundled PPA where you purchase both electricity and the associated LGCs from a renewable generator is the cleanest claim. An unbundled PPA, or one where the LGCs are retained by the generator, doesn't reduce your market-based emissions at all. The contractual instrument needs to include the transfer of the zero-emissions attribute, not just a price agreement.

We've seen companies assume their PPA automatically reduces their Scope 2 without checking whether the LGCs are actually included and surrendered. Don't make that assumption. Check the contract. Check the surrender records.

A Worked Example

Let's make this concrete. Consider a mid-size company with three sites.

Site A — Sydney office: 200,000 kWh/year, NSW grid, 100% GreenPower contract.

Site B — Melbourne warehouse: 800,000 kWh/year, Victorian grid, no renewable contracts.

Site C — Adelaide distribution centre: 300,000 kWh/year, SA grid, 50% LGC coverage (150 MWh of surrendered LGCs).

Location-based Scope 2:

Site A: 200,000 x 0.64 / 1,000 = 128.0 t CO2-e
Site B: 800,000 x 0.78 / 1,000 = 624.0 t CO2-e
Site C: 300,000 x 0.22 / 1,000 = 66.0 t CO2-e
Total location-based: 818.0 t CO2-e

The GreenPower contract on the Sydney office doesn't change the location-based figure at all. That's the point — location-based reflects the grid, not your contracts.

Market-based Scope 2 (using national RMF of 0.81):

Site A: 200,000 kWh covered by GreenPower, so 200 MWh x 0 = 0 t CO2-e. Residual electricity = 0. Market-based = 0 t CO2-e
Site B: No renewable instruments. 800,000 kWh x 0.81 / 1,000 = 648.0 t CO2-e
Site C: 150 MWh covered by LGCs = 0. Remaining 150,000 kWh x 0.81 / 1,000 = 121.5 t CO2-e. Market-based = 121.5 t CO2-e
Total market-based: 769.5 t CO2-e

Notice what happened. The Melbourne warehouse's market-based figure (648 t) is higher than its location-based figure (624 t). Because they have no renewable contracts, they get the full RMF penalty. The GreenPower sites pull the overall total down, but the uncovered sites are penalised relative to the grid average.

Under AASB S2, this company must disclose the 818.0 t location-based figure. They may disclose the 769.5 t market-based figure alongside it, noting the GreenPower and LGC arrangements as contractual instruments informing users' understanding of their Scope 2 position.

The GHG Protocol Is Tightening Market-Based Rules

Keep an eye on this. The GHG Protocol — the global standard that AASB S2 and ISSB are built on — opened a public consultation on Scope 2 guidance revisions in October 2025. The consultation closed January 2026, and finalised requirements are expected around mid-2026 with implementation phased through 2027-28.

The big proposed changes to the market-based method are hourly matching and deliverability.

Hourly matching means your renewable energy certificates would need to match the hour of consumption, not just the annual total. Buying 8,760 MWh of LGCs to match your annual consumption won't be enough if those certificates were generated during summer daylight hours and your warehouse consumes most of its electricity at night. This is a major shift.

Deliverability means the renewable generation must be physically deliverable to the grid where you consume electricity. An LGC from a Queensland solar farm can't be used to green your Victorian warehouse's electricity if there's no plausible transmission path.

These changes aren't law yet. But the direction is clear — the bar for what counts as a legitimate market-based claim is going up. And if Australia's ASRS framework follows the GHG Protocol updates (as it has historically), companies investing heavily in renewable procurement should be thinking about whether their current arrangements will still qualify in 2028.

We're watching this closely because it affects how we handle market-based calculations in Carbonly. If hourly matching becomes the standard, the data infrastructure required to support market-based claims gets significantly more involved — you'd need hourly consumption data matched against certificate generation timestamps. That's a different problem than matching annual MWh figures.

So Which Method Should You Prioritise?

Here's our take, and not everyone will agree.

For mandatory compliance — report location-based. That's not a choice; it's the requirement under AASB S2. Build your data collection, calculation engine, and audit trail around location-based Scope 2 first. Get the state-based emission factors right, match them to each site, and make sure your numbers tie back to NGA Factors 2025. That's what your auditor will check. That's what carries full liability.

If you're buying GreenPower or surrendering LGCs, also report market-based as a supplementary disclosure. It tells an important part of your story — that you're investing in renewable energy procurement, not just sitting on the grid average. Investors and customers care about this. CDP specifically asks for both methods.

But don't let market-based numbers become the headline in your board reporting while location-based sits in an appendix. That's how the company we mentioned at the top ended up telling their board that Scope 2 was zero. Location-based is the anchor. Market-based is context.

If you're not yet buying renewable energy instruments, your market-based Scope 2 will actually be higher than your location-based figure because of the RMF. In that case, there's no benefit to dual reporting — it just makes your numbers look worse. Focus your effort on location-based accuracy instead. The other 95% of NGER reporters are doing exactly this.

And if you are investing in PPAs or GreenPower specifically to reduce your market-based emissions, verify three things: the LGCs are actually being surrendered (not just promised), the contractual instrument covers the transfer of the zero-emissions attribute, and you're documenting everything for the audit trail. The ACCC's greenwashing enforcement has hit $42.95 million in penalties across four major cases in the past year. Claiming renewable electricity that you can't evidence is exactly the kind of thing that draws attention.

One more thing. If you're a Group 2 entity reporting from July 2026, get location-based right first. There's plenty of time to add market-based reporting in year two or three. Trying to build both methods simultaneously, when you're also figuring out Scope 3 and climate risk disclosures, is a recipe for getting none of it right.

Start with what's mandatory. Get it solid. Then layer on the supplementary disclosures when you have the data infrastructure to support them. That's the order we'd do it — and it's the order we built Carbonly's emission factor engine to handle.

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