Managing Scope 2 Emissions: Burden or Opportunity?

With the right approach, solutions that reduce emissions can also result in improved performance, increased productivity and reduced costs overall.

• By P.J. Farrenkopf
• Jan 18, 2024

Scope 2 emissions—derived from heating, cooling and electricity—represent one of the largest sources of global greenhouse gas (GHG) emissions and account for at least a third of global GHG emissions. But for major players in the energy market, it may be valuable to view the problem of emissions reduction as a strategic puzzle that can be solved, something engineers are very familiar with.

With the right approach, solutions that reduce emissions can also result in improved performance, increased productivity and reduced costs overall. Many business opportunities are discoverable upon close examination of energy use across operations, production and supply chain management.

One strategy to consider is based on three simple pillars: reduce, produce and procure. The idea behind this approach is reducing the amount of electricity used to manufacture products via operational and energy efficiency, producing on-site power where necessary and procuring power on the open market in ways that both save money and generate a carbon deficit.

Companies today have three effective ways to mitigate emissions:

1. Increased Energy Efficiency

After accurately measuring their carbon footprint, companies can begin implementing emission-reduction strategies. Areas ripe for improvement include upgrading equipment, streamlining processes and, if possible, producing renewable energy on-site. Assessing and replacing capital equipment to increase energy efficiency is a valuable investment in reducing emissions with an added bonus. By decreasing energy consumption inside their four walls, the amount of outside electricity companies need to purchase will decline.

2. Strategic Power Purchase Agreements (PPAs)

Where possible, engage with utility companies to procure the company’s energy from clean power sources. Tools like direct PPAs—where energy is delivered to the site from a renewable source—are an effective method for procuring clean energy. Some utility companies also offer solar, hydro and wind power options. This approach enables you to make strategic decisions about how and from whom to procure electricity.

3. Renewable Energy Certificates (RECs)

Certificates (also known as EACs, guarantees of origin or GOs) represent a specific amount of green energy, which is meant to offset an organization’s emissions. It has become common for organizations to rely on RECs to reduce their carbon footprint. However, this strategy involves little more from the company itself than signing a check. While this does reduce the emissions a company is reporting, it does not effectively address the need for all organizations to reduce their actual GHG emissions, which has a more direct effect on the climate.

The answer to reducing Scope 2 emissions isn't a one-size-fits-all solution. Companies must navigate the unique situation in their respective energy markets, where factors such as regulatory frameworks, energy policies and geopolitical tensions influence electricity prices and energy generation mixes. Differences in electricity prices between countries can be influenced by the energy generation mix (renewable vs. fossil fuels), geographical resources, market competition and interconnection capacity.

Operating globally means understanding a wide variety of energy markets locally and globally. Management solutions will depend on specific factors and circumstances in each region or country. In Mexico, a company can take advantage of a private wholesale energy market (MEM), which helps organizations acquire energy more efficiently and at lower costs than other utilities. Europe is challenged because they are facing an 80 percent loss of regular gas flow and rising prices due to the war in Ukraine.

In Asia, China has a very complex energy market. It features a dual track, where electricity and carbon are sold by the government or through locally operated market providers. The local market providers have a fluctuating price swing of 20 percent within market rates, but they usually come in lower than national government prices. Understanding each energy market in the regions the company operates is key for improving cost and consumption.

Of course, while reducing emissions, companies still need to serve their customers and turn a profit. To ensure they’re less affected by geopolitical shocks, it’s wise to determine the behind-the-meter investments inside their business. Reducing their consumption is the first line of action to lower Scope 2 emissions, and it results in lower demand for energy from outside sources and utilities. The first step should be focusing on energy usage to control operationally or with capital investments in more efficient machinery and processes.

Reducing Scope 2 emissions will require support and input from across the business. After identifying and gaming out particular solutions, put together an emission reduction strategy with internal and external solutions. After executing that strategy, be sure to set up a team that monitors performance and works to continually improve, remediate or upgrade as appropriate.

None of this is easy, but there’s no doubt it’s the right thing to do. And the market has spoken. As Harvard Business Review reports, “We’re fast approaching this tipping point where sustainability will be considered a baseline requirement for purchase, and companies should prepare now.” Studies like these make it clear that emission reductions are all but required in today’s market. So take advantage of this effort to identify improvements across day-to-day operations and build trust with customers.

The majority of greenhouse gas emissions come from industry, and much of that is from Scope 2. Consumers are demanding that brands help mitigate climate change with transparency and real-world action. To be responsible corporate citizens and serve customers, it’s critical to account for, report and reduce Scope 2 emissions. Implementing sustainable business practices can be challenging, but this “burden” can spur creative ideas that result in business advantages beyond sustainability like cost savings, improved efficiency and better performance overall.