Net-Zero vs. Carbon Neutrality

What does ‘Net-Zero’ mean for corporates, and how does it differ from ‘Carbon Neutrality’? Agendi explains the key concepts and trends in setting and reaching net-zero goals.
November 2020

Net-zero pledges are on the rise

In recent years, national and corporate ‘net-zero’ emissions pledges have grown in record numbers in response to the call for global action on climate change. As of July 2020, ¼ of global emissions and over ½ of the global economy had set or committed to set targets for net-zero by 2050. As of October 2020, over 300 private companies with a combined market cap of $3.6 trillion had committed to net-zero by 2050, or to align their emission reduction targets with 1.5°C warming scenarios. At the same time around 200 companies had set targets consistent with 1.5°C warming scenarios, using a leading framework from the Science-Based Target initiative. 

Despite growing climate ambition, corporate net-zero inconsistencies are materializing

The science published by the IPCC offers us a clear understanding of what ‘net-zero’ means at the global level, but how does it translate to the corporate level for those companies looking to take climate action? To date, we lack a standard definition for corporate net-zero. This is resulting in inconsistent emissions targets creeping in, misunderstandings of how offsets interact with net-zero targets, and confusions between ‘net-zero’ and ‘carbon neutrality’. These issues have been recognized by climate leaders, and an upcoming Science-Based Target initiative framework aiming to set a clear standard for corporate net-zero could soon offer a solution. 

Net-zero: the context

In order to achieve a 50% probability of limiting global warming to 1.5°C by the end of the century, thus avoiding the worst effects of climate change, we must ensure that the concentration of greenhouse gases in the atmosphere does not exceed a threshold of 478 parts per million CO2e. IPCC publications show that in order to avoid exceeding this threshold, global emissions must reach a state of ‘net-zero’ by 2050. Global net-zero by 2050 requires that we achieve two key criteria:

  • Near complete elimination of all sources of GHG emissions.
  • Removal of an equivalent amount of carbon from the atmosphere as the amount of GHG we are unable to eliminate from emission sources.

Net-zero: the details

In 1.5°C aligned global emissions pathways, which by definition achieve net-zero by 2050, different sectors decarbonize at different paces due to their varied technological capabilities. This means that the level of emissions remaining from different sources at different times, varies between sectors and industries up to 2050. Due to technical and financial constraints faced by society, achieving global ‘gross-zero’ (i.e. reducing emissions from all sources to zero) by 2050 is deemed unrealistic – though it would be ideal –, the science suggests that some sources of emissions will still be unavoidable by 2050. We therefore need to balance the unavoidable or ‘residual’ global emissions by actively removing an equivalent amount of carbon from the atmosphere, to achieve overall ‘net-zero’ emissions. Balancing these residual emissions is where we need carbon removals solutions, such as the types which are funded by certain carbon credits.

Image Source: WRI

Carbon neutrality vs. net-zero

Carbon neutrality implies that a company is taking measures to avoid or remove an equivalent amount of emissions from the atmosphere as that which they produce in the same amount of time, also known as ‘offsetting’. Companies offset their emissions footprint by purchasing enough carbon credits each year to cover their absolute annual greenhouse gas emissions. Corporate carbon neutrality status can then be recognized via credible 3rd party carbon neutrality verification schemes. Achieving corporate carbon neutrality is admirable, and can help contribute to global net-zero, but carbon neutrality alone is distinct from corporate net-zero.

Corporate net-zero implies that a company’s different value chain emissions, spanning different sectors, are reduced in absolute terms at the same pace and scale as those reductions set out in 1.5°C aligned global emissions pathways.

So, whilst ‘carbon neutrality’ implies that a company is taking measures to remove and store at least the same amount of emissions as it produces in a given timeframe, carbon neutrality does not necessarily imply ‘net-zero’. Consequently, net-zero interpretation has prevailed inconsistently between ambitious companies around the world seeking to align their emissions with global net-zero. Whilst some companies are successfully achieving carbon neutrality, they may not be reducing value chain emissions in absolute terms according to global net-zero requirements.

The SBTi corporate net-zero target framework could harmonize net-zero targets

The SBTi is responding to net-zero target inconsistencies by developing a standard, science-based framework for setting corporate net-zero targets. The framework, due for release in November 2021, will define different criteria for emissions reductions required from different sectoral sources across corporate value chains to 2050. To ensure alignment of corporate efforts with global net-zero, companies will need to determine the permissible levels of emissions across different activities within their value chain at different points in time – with emissions reductions occurring at pace and scale consistent with mitigation pathways limiting warming to 1.5°C with no or limited overshoot.

The SBTi have also outlined the roles that can be played by carbon removals in net-zero target setting. The purchase of carbon credits may supplement, but not substitute, absolute reductions in corporate value chain emissions, and companies will need to use carbon removal methods to neutralize residual levels of emissions permitted within their value chains at different points in time.

The upcoming SBTi net-zero framework is likely to be vital in aligning corporate net-zero efforts, ensuring we get on track for 1.5°C. Whilst the pending framework is likely to prompt companies to step up their ambitions, it should not dissuade companies from taking firm science-based climate action today. Pursuing the most ambitious corporate climate strategy now, which considers absolute emissions reductions, calculated use of offsets for compensation outside the value chain, and carbon removal strategies to tackle residual emissions, will ensure that companies contribute to global net-zero and are well positioned for alignment with the upcoming SBTi corporate net-zero framework.

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