When is net-zero really net-zero?
Even in the midst of an ongoing global pandemic, the list of companies, investors, universities, and cities leading the Race to Zero continues to grow. For some, this translates to setting ambitious carbon reduction targets, while others opt for a net-zero target. But how can a net-zero claim based on offsets move the needle on climate change? What criteria does it have to meet?
Last week the Science Based Targets initiative (SBTi) published a report to answer these questions.
Here is my summary of the over 50-page long document: “Foundations for Science-Based Net-Zero Target Setting in the Corporate Sector”.
Five years after launching the framework for emission reduction targets based on science, SBTi have now launched the process to set a global standard for science-based corporate net-zero targets. It is the result of an extensive consultation process with stakeholders from science, business, conservation, and finance sectors.
With a view to ensure net-zero targets translate into meaningful climate action, the paper puts forth key principles, recommendations, and possible strategies for companies to achieve a science-based net-zero status.
Three guiding principles
Companies need to follow three guiding principles to translate their net-zero visions into tangible action:
- Include emissions of the company and their suppliers and customers (value chain) in net-zero target
- Reduce emissions consistent with limiting warming to 1.5°C (Paris Agreement)
- Consider climate-related transition risks and ensure the company will continue to be viable in a net-zero economy
What does net-zero mean in the corporate sector?
Net-zero generally refers to balancing your corporate emissions by permanently removing the equivalent amount of carbon from the atmosphere. Technically this means one can be net-zero without taking any action to reduce emissions by simply purchasing carbon credits. However, this would not be sufficient to achieve the goal of the Paris Agreement to limit warming to 1.5°C. This can only be done by also reducing emissions.
In other words, being net-zero is only good enough if it is coupled with a reduction target in line with science to set you on the path to 1.5°C. It is not a case of choosing one or the other — neutralising and reducing must go hand in hand.
The role of offsetting
Carbon credits for offsetting can be generated either through the neutralisation of greenhouse gas (GHG) emissions by removing carbon from the atmosphere (e.g. growing forests) or through compensation by financing initiatives such as low carbon or clean energy projects. In both cases, the activities need to take additional carbon out of the atmosphere. For example, a windfarm can only generate carbon credits if it clearly replaces electricity generated from fossil fuels, e.g. coal, but not if it is built to satisfy growing demand.
Offsetting can play two roles in a zero-carbon journey. Firstly, in the transition to net-zero and secondly in the neutralisation of all unavoidable remaining emissions. Offsetting in the transition period means to neutralise emissions that are in the reduction plan but not yet eliminated. Once the emission reduction target is achieved, all remaining emissions that cannot be avoided can be offset.
The value chain matters
The paper clearly states that a company on a net-zero journey needs to take a holistic view of their emissions. All material sources of greenhouse gas emissions within the value chain need to be included.
It is not enough for a company to make its own operations more efficient and switch to renewable energy for their own emission reduction. It must also take into account and mitigate the emissions created by suppliers and customers or related to investments. This means if you manufacture or sell products that use energy, e.g. electrical appliances, it is in your interest, and not only the buyer’s interest, for those appliances to be as energy efficient as possible. At the same time, you would want to avoid carbon intensive materials in your supply chain. For investors or financial institutions, the implication is that it is harder to become net-zero if you invest in carbon intensive processes or businesses.
Not all net-zero targets are created equal
Currently about a quarter of global carbon emissions are already covered by net-zero goals. This sounds encouraging, but are these “net-zero” targets in line with science? The SBTi paper finds that “corporate net-zero targets are being approached inconsistently, making it difficult to assess these targets’ contribution to the global net-zero goal”. A close examination shows that corporate net-zero targets to date differ across three important dimensions: (1) the range of emission sources and activities included; (2) the timeline, and most importantly; (3) how companies are planning to achieve their target.
That’s why a standardised approach addressing these three dimensions is important:
- Scope: All material emissions of the value chain need to be included.
- Timeline: There is agreement that we need to be net-zero by 2050. However, shorter term net-zero targets coupled with ambitious reduction targets are becoming increasingly common with increased pressure from a wide range of stakeholders.
- Pathway: Emissions reduction can be combined with either the neutralisation of GHG emissions or through compensation outside the value chain. A combination of all three tactics is also possible, as long as reduction is included.
What’s the difference between net-zero, carbon neutral and climate neutral?
Carbon neutral and net-zero are both about balancing emissions and removals. However, carbon neutral often only refers to carbon emissions, whereas net-zero includes all greenhouse gas emissions. Climate neutral goes a step further and includes all human activities influencing the climate system. This includes emissions and removals, but also the changes in the surface cover. These changes can lead to less reflection of sunlight and heat and impact the climate in that way. For example, a dark sealed road absorbs more heat than an area covered with trees. At a large scale, these changes in the surface can also impact climate change.
Beyond net-zero with climate positive
It’s an opportunity to move on from ‘doing no harm’ to ‘doing good’. “Climate positive” essentially means a company has done three things:
- Reduced their emissions in line with the Paris Agreement
- Neutralised its remaining emissions to be net-zero
- Compensates emissions outside their own value chain
It’s an opportunity for companies to not only close their own emissions gap, but to do more by financing the development of low carbon or clean energy projects. However, the SBTi paper admits that further discussion is needed for a clear definition of ‘climate positive’.
Prepare your business for net-zero
Beyond reducing and neutralising remaining emissions, companies need to shift to a business model that is compatible with a net-zero economy. A well-rounded understanding of climate related financial risk is a key prerequisite. Disclosures such as the Task Force on Climate-related Financial Disclosure (TCFD) help to both focus on long term strategies and to prepare for a viable business model.
New Zealand is well set up
All pieces of the net-zero puzzle in line with science already exist in New Zealand. The businesses that have signed up to the Climate Leaders Coalition or have an approved science-based target like NZ Post, Contact Energy, Auckland Airport, SkyCity, Fletcher Building, Fisher & Paykel Healthcare, Toitū Envirocare and ourselves at thinkstep-anz are already in a good place because they have set the right level for a reduction target. Some of these companies including New Zealand Post, Toitū Envirocare and thinkstep-anz have gone one step further by setting a net-zero target or already offset remaining emissions through Ekos or Toitū Envirocare.
10 Recommendations for science-based corporate net-zero targets
The paper concludes with 10 initial recommendations for companies seeking to set and implement robust net-zero targets. Here’s a quick look at SBTi’s recommendations:
Boundary: Include all material sources of GHG emissions within the value chain.
Transparency: Clearly communicate included emissions, timeframe and the amount of reduction and offsetting.
Abatement: First reduce emissions with an ambition to limit warming to 1.5°C and then neutralise residual emissions.
Timeframe: Reach net-zero GHG emissions by no later than 2050.
Accountability: Set interim science-based emission reduction targets to drive action within corporate planning and investment cycles
Neutralization: Neutralise residual GHG emissions with an equivalent amount of carbon removals.
Compensation: Consider compensating remaining emissions in the transition to net-zero as a way to contribute to the global transition to net-zero.
Mitigation hierarchy: Prioritise emission reduction over compensation or neutralisation measures. Prioritise land-based climate strategies that preserving and enhancing existing carbon stocks.
Environmental and social safeguards: Implement mitigation strategies that adhere to robust social and environmental principles
Robustness: Ensure compensation and neutralisation measures: (a) ensure additionality, (b) are permanent, (c) address leakage and (d) avoid double-counting.