Business is targeting net-zero but is it giving us a shot at a global net-zero by 2050?

In this weeks edition, we’ll be looking at the paths companies are taking in reaching net-zero and if it’s going to get us to a global net-zero by 2050.

Let’s start by looking at what net-zero actually means and how a company should get there. The first step for a company is to establish how much greenhouse gases they are emitting.

The good news is that there has been a huge amount of work that has gone into creating a robust system for calculating this across all industries called the Greenhouse Gas protocol. First launched in 1998 it has gone through multiple iterations and has established a corporate accounting and reporting standard covering every type of activity.

Which greenhouse gases are covered?

The GHG protocol covers the most significant greenhouse gases out there. These are CO2 (you know this one well), SF6 (sulphur hexafluoride), CH4 (methane), N2O (Nitrous Oxide), HFCs (hydrofluorocarbons) and PFC’s (Petrofluorocarbon).

The business world is complex though, who’s emissions are who’s?

The next question to answer is which of these emissions is actually caused by the company. For larger companies they must set-up what’s called organisational boundaries, to help decide what emissions are there’s. They can take one of two approaches where they have ownership in other companies or assets, either accounting for the equity share in the subsidiary company (e.g. I own 25% of the company so I will take 25% of their emissions) or if they have operational or financial control then taking 100% of the emissions (this could be a lease on a car for example).

This allows a company to determine which emissions are directly from them and which are indirectly from their activities. Everything that is directly from them goes into what’s called Scope 1 emissions. Under the GHG protocol, there are 3 emission scopes in total that are defined, Scope 1 is all your direct emissions and Scope 2 and 3 are indirect.

Scope 2 is all the GHG emissions from the generation of purchased electricity consumed by a company. And scope 3 emissions are a consequence of the activities of the company but occur from sources not owned or controlled by the company. Some examples of scope 3 activities are extraction and production of purchased materials; transportation of purchased fuels; and use of sold products and services.

What about the actual emission calculation? 

The actual calculation of emissions is typically done through what is called emission factors. For most small to medium-sized companies and for many larger companies, scope 1 GHG emissions will be calculated based on the purchased quantities of commercial fuels (such as natural gas and heating oil) using published emission factors. Scope 2 GHG emissions will primarily be calculated from metered electricity consumption and supplier-specific, local grid, or other published emission factors. Scope 3 GHG emissions will primarily be calculated from activity data such as fuel use or passenger miles and published or third-party emission factors.

The good news is that there is a range of peer-reviewed tools available for free on the GHG protocol site that are cross-sector and sector-specific.

Some of this can get quite complicated though depending on the size of the company. For large and complex companies you typically see the use of consultancy groups or individuals to guide them through the process. More on this in a later article.

Now to reduce your GHG emissions

If this is the first time a company has calculated their GHG emissions they now have a baseline to work from and they can set a target for themselves. That target typically will come down to the ambition of the company, global goals of net-zero by 2050 and the costs of doing so.

The ‘Science based Targets Initiative’ is the gold standard when it comes to target setting. It’s a good resource for companies to help in target setting, ensuring its ambitious enough to get us to net-zero by 2050 and it provides a platform for them to promote their commitments.

At this point, though the decision making for a company will inevitably come down to two key factors:

-       Availability of solutions

-       Cost of implementation

 The good news is that there are a growing number of solutions now that have become price competitive. The best example is Scope 2 emissions where the cost of renewable energy today is comparable to that of fossil fuel burning energy. So for a lot of companies today it is a no-brainer to move to renewable energy.

However, there are still a lot of areas where the economics just do not stack up yet for companies. And as a result, some tough decisions around how far companies are willing to go in reducing their emission need to be made whilst still remaining competitive. What’s more, making the call on more expensive net-zero solutions is all the harder when there are investors involved who require a return on capital in their investments over increasingly short time horizons. There is however a market-based solution that has created another option for businesses that can be more cost-effective. That is offsets.

Introducing offsetting

So a company has accounted for their emissions, they’ve switched their energy supplier (Scope 2 – tick) and have introduced a number of other initiatives to reduce down emissions in other areas. But they still have this large amount they can’t shift. These emissions could be due to materials sourced from other companies and the net-zero alternatives are just not mature or cost-competitive enough yet. What does the company do? Does there ambition stop there?

And this is one of the increasingly hot topics being discussed today due to another option for companies called offsetting.

Offsetting is the process by which a company can instead of reducing down their GHG emissions, fund projects that either sequester carbon from the air (such as forests) or reduce the amount of emissions being emitted somewhere else in the world (such as clean energy projects). Both of these solutions are not owned by the business, in fact, they have no ownership rights over them at all. However, in return for funding, they allow the company to receive what is known as an offset or carbon credit.

This offset provides a way for companies to move their net GHG emissions down to zero if they fund enough eligible projects that they receive credits for.

And since there inception offsetting has done a lot of good, the money goes to projects in emerging markets that would not have been funded otherwise.

What’s more, the process by which they are managed has improved dramatically over the years. There is now a whole range of projects available for funding, which are verified and administered by long-standing and credible programmes. For reference, if you are looking for a carbon offset make sure they are within one of these programmes:

- Clean Development Mechanism

- Climate Action Reserve

- Gold Standard

- Joint Implementation

- Verra’s Verified Carbon Standard

- American Carbon Registry

- Emissions Reduction Fund (ERF) of the Australian Government

There does remain some criticism around the legitimacy of certain offset projects but overall the integrity of the projects under the programs listed above is very high. The larger question however that must be asked is the process by which a company comes to the conclusion to offset and the opportunity cost of not using the money elsewhere.

To offset or not to offset, that is the question

To offer another viewpoint around offsets lets take a look at a recent approach taken by the largest regulated emission trading market, that of the European Emissions Trading Standard (ETS). First introduced back in 2005 the ETS market now limits emissions from more than 11,000 heavy energy-using installations (power stations & industrial plants) and airlines operating between European countries. It overs around 40% of the EU's greenhouse gas emissions.

The market has gone through numerous iterations and now operates as a best in class example of a regulated carbon market. Where this becomes relevant around offsets is the recent change made around the means by which these companies can purchase offsets. The market used to allow a percentage of the purchase of carbon credits from projects outside of the EU such as tree plantations and renewable energy projects. However, this has now been ceased completely, with the purchasing of offsets coming exclusively from the EU via an auction system. The proceeds instead are diverted to two funds, the EU Innovation fund and Modernisation fund. The Innovation fund will invest EUR10Bn into early-stage companies working on new carbon-neutral approaches within industries with significant carbon emissions. 

There have been a lot of discussions and probably politics around the EU’s decision to remove project-based carbon offsets from the EU ETS, with the EU blaming it for suppressing the price of carbon within the market through oversupply. However, research suggests it is not the case at all, with it actually being due to decreased energy production through the recession and a resulting excess of offsets.

However, the decision does bring the valid question; is the diversion of funds to emerging markets and established technologies at such low costs diverting focus away from some of the tougher challenges of decarbonising industries in the long run?

 The answer to this is incredibly difficult, as we need progress in so many areas to get us to global net zero. It really comes down to the way in which companies use the process of offsetting. The importance of organisations like the ‘Science Based Targets Initiative’ cannot be understated here. They help ensure offsets are being used in the correct way alongside other carbon-cutting targets, whilst embedding carbon pricing into an organisations inner working.

The importance of industry-wide collaboration must also happen alongside this with a real focus on innovation that is truly decarbonising existing processes. Government-funded innovations like the EU innovation fund cannot work without heavy engagement from the existing market. Companies should be looking to invest and collaborate around high-risk transformational technologies over the long run, whilst funding the more cost-effective projects in the emerging markets in the short.

At the Rethink Collective, we’ll be focusing on those innovations that are going to get us there. We’ll be looking at solutions that don’t yet exist, ones that are starting to scale and those that are ready for lift-off to help decarbonise our world and make offsets a thing of the past.

If you’d like to hear more about the innovators pushing to decarbonise our world then do sign up.