A net zero strategy in a nutshell

Friday, September 2, 2022

More and more companies are committing themselves to a net zero target. Most are aiming to reach net zero emissions by 2050, which is also the target year for global emissions to reach net zero if we are to limit global warming to the 1.5 degree goal set in the Paris Agreement. Net zero targets set by countries, regions or cities, already cover 88% of total global emissions, 90% of global GDP, and 85% of the world's population. According to Net Zero Tracker, 699 companies, out of the 2,000 largest publicly-traded companies in the world by revenue, have made net zero commitments. But what does the road to net zero look like? In this article, we will go through five questions that companies should answer when starting to plan their pathway to net zero and using carbon offsets aside with emission reductions:

1 Setting the correct time frame

Although the typical target year for net zero targets in 2050 is rooted in the 1.5 degree IPCC report published in 2018, in practice the target years set by companies vary depending on, among other things, the industry. 

According to the Science Based Targets criteria, net zero must be reached by 2050 at the latest, although electricity generation will have to reach net zero by 2040. Climate Action 100+ , which represents investors in climate action, has also announced that it expects electricity companies to set a net zero target by 2040. Similarly the Race to Zero sets 2050 as the latest date when net zero has to be reached.

Companies also need to establish a base year to track emissions performance consistently and meaningfully over the target period. According to SBTi, the following considerations are important for selecting a base year:

  • Scope 1, 2, and 3 emissions data should be accurate and verifiable.

  • Base year emissions should be representative of a company’s typical GHG profile

  • The base year should be chosen such that targets have sufficient forward-looking ambition.

  • The base year must be no earlier than 2015.

Setting intermediate targets are essential for the net zero target to have a direct impact on emissions. Science Based Targets requires that corporations aiming at reaching net zero emissions by 2050 at the latest, must also commit to short term measures that reduce emissions by 50% by 2030. The same baseline year should be used for the net zero target year and for the short term target.

2 What emissions should be included?

According to the Science Based Targets initiative, the net zero target should cover not only just CO2 emissions, but all six greenhouse gasses covered by the Kyoto Protocol: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PCFs), and sulphur hexafluoride (SF6). Additionally nitrogen trifluoride (NF3) emissions should also be included.

It is also very important to define which emissions fall within the target. In the case of corporate emissions, scope 1, 2 and 3 emissions under the so-called GHG protocol are typically referred to. Scope 1 covers direct emissions from company-owned or controlled sources, Scope 2 indirect emissions from the generation of purchased energy, and Scope 3 all other indirect emissions from the company’s value chain.

GHG Protocol

Scope 3 is further subdivided into so-called upstream and downstream emissions, depending on whether the emissions are related to the companies' own purchases or are only generated during the use or decommissioning phase of the products. How emissions are distributed at different stages of the value chain depends largely on the industry.

A company's own acquisition and investment decisions and other choices directly affect its scope 1 and 2 emissions and scope 3's upstream emissions. Through product development, it also has the opportunity to influence the downstream emissions of scope 3. When net zero targets are typically set quite far away, even decades away, emissions throughout the value chain can be considered to be under the control of the company.

Scope 3 emissions must be included in the Science Based Targets net zero claim. However, full coverage of all scope 3 emissions is not required even in the Science Based Targets criteria, where the long-term net reduction target should cover 90% of scope 3 emissions.

It is important to note that the SBTi emphasizes that no net zero claim can be made until emission reductions reach a certain level. In the case of SBTi that means reaching “deep decarbonization of 90-95% before 2050”. When that point is achieved, companies need to reach net zero by “neutralizing” the remaining unabatable emissions through carbon removal.

Even though the net zero claim cannot be made until companies have reached deep decarbonization, companies can and should take responsibility for their current emissions. In most cases, this means offsetting those emissions that cannot be avoided. Offsetting must be done with carbon projects that have a true climate impact.

3 Mitigation hierarchy

Net zero is not the same as absolute zero, where no emissions occur. In the net zero context some emissions still occur but they are offset by measures that counterbalance them, thus resulting in a net zero impact on the climate. 

Race to Zero states that in a net zero framework, emissions reductions should follow “science-based pathways”. SBTi goes further in defining what these pathways should be, by stating that emissions should be reduced to a “residual level in line with 1.5°C scenarios by no later than 2050”. In practice the SBTi approach means that most companies will have to reduce emissions by at least 90-95%. 

It is important to note that both Race to Zero and SBTi emphasize that no net zero claim can be made until emission reductions reach a certain level.

Net zero

In the case of SBTi that means reaching “deep decarbonisation of 90-95% before 2050”. When that point is achieved, companies need to reach net zero by “neutralizing” the remaining unabatable emissions through carbon removal.

It is thus clear that these leading net zero standards strongly emphasize the primary role of emissions reduction in achieving net zero. Aligning emission reductions with climate science and the 1.5 degree goal set in the Paris Agreement is the most important step in reaching net zero. Compensation, or neutralization in the case of SBTi, is meant for only a very small amount of unabatable emissions. 

Even though compensating does not play a key role in reaching net zero it doesn’t mean that companies shouldn’t use the voluntary carbon market to support further climate action. SBTi strongly recommends that companies invest in climate mitigation beyond their value chains on the road to net zero, but this must be in addition to, not instead of, deep emission cuts in line with science.

4 Type of compensation used

Any type of compensation is generally valid for a carbon neutrality claim, but the net zero target is generally considered to require compensation based on the removal of carbon from the atmosphere by human activities. 

The SBTi Net-Zero Standard states that remaining emissions must be “neutralized by removing carbon from the atmosphere into permanent storage.” Even though SBTi uses the term “permanent”, at the moment it approves many nature-based removal methods like afforestation or planting mangroves, that are not considered as permanent as many engineered approaches to carbon removals.

The Oxford Principles on Net Zero Aligned Offsetting has taken a similar approach. According to the principles companies should:

  • shift offsetting towards carbon removal, where offsets directly remove carbon from the atmosphere; 

  • shift offsetting towards long-lived storage, which removes carbon from the atmosphere permanently or almost permanently; and

  • support for the development of a market for net zero aligned offsets.

The required shift to longer lived storage of carbon can be illustrated by this graph:

Oxford principles

In practice, what kind of compensation is available to reach the net zero target depends largely on the target year.

Compensation based on, for example, carbon capture directly from the air and geological storage is unlikely to be widely available in 2030, making it difficult to avoid worse alternatives such as increasing carbon stocks in forests. Instead, the net zero targets for 2050 should aim at long-term storage of carbon sequestered from the atmosphere.

5 How to ensure the quality of carbon credits?

The net zero claim needs to be constructed with high quality carbon credits regardless of whether it is based on avoided emissions or carbon removals.

Compensate’s previous white paper “Reforming the Voluntary Carbon Market” highlighted worrying quality issues that the current market has. It also introduced Compensate’s unique approach to navigate a fundamentally flawed market. The white paper received a lot of attention and has been featured in several respected media outlets, including Bloomberg, Quartz, Carbon Pulse, Nikkei, Business Green, Business Insider and Sifted.

In early 2020 Compensate, together with its independent Scientific Advisory Panel, created a sustainability criteria to screen and evaluate forest-based carbon projects. The criteria helps Compensate choose projects that have a positive impact on the climate, but also on biodiversity, human rights, and for local communities.

Over the past two years, Compensate has screened and evaluated over 150 carbon projects. We have seen that over 90% of projects fail basic sustainability checks. Almost all evaluated projects are verified under international carbon standards like Verra, Gold Standard or Plan Vivo. The vast majority of evaluated projects have been nature-based, mostly either forest protection or afforestation/reforestation projects.

Both net zero and carbon neutrality claims need to be constructed with high quality carbon credits regardless of if they are based on avoided emissions or carbon removals. The reasons why projects fail vary, but are all equally alarming. Some projects cannot be considered additional, others have serious permanence risks.

Read more: Our comprehensive white paper helps to understand terms such as carbon neutrality, climate neutrality, and net zero. It also gives guidance on how to make credible and transparent net zero or carbon neutrality claims. Download your free copy.

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