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A Corporate Perspective on Net-Zero Targets and the Use of Carbon Credits
This blog was coauthored by Boris Lagadinov, Managing Consultant at Guidehouse and Matthew Banks, Associate Director at Guidehouse
The Intergovernmental Panel on Climate Change’s (IPCC’s) 2018 Special Report on 1.5°C (SR15) confirmed that, to limit global warming to 1.5°C, we need to reach net-zero carbon dioxide emissions at the global level by mid-century. Aggressive reductions across countries, companies, and sectors are needed to reach this goal. A growing number of companies and countries are setting long-term goals to reach net-zero emissions. However, due to the lack of a clear framework and criteria for net-zero target setting, they often struggle to define the right ambition level and critical stakeholders frequently debate commitments.
Net-zero commitments are achievable through a combination of emission reductions within the company’s own value chain or by emission reductions or carbon removals beyond those boundaries. The latter approach ultimately relies on credits generated from various carbon crediting mechanisms and projects. Consequently, there is renewed interest in offsets as an alternative reduction option in addition to reducing the carbon footprint. This has reignited the debate on the use of these instruments to claim goal achievement. The discussion is particularly relevant since using offsets should not be a substitute for deep decarbonization of the company’s value chain.
Initiatives Push Forward Corporate Net-Zero Targets
Luckily, these issues are now widely recognized and being addressed by initiatives like the Science Based Targets initiative (SBTi) and the ongoing negotiations under the Paris Agreement to agree on a global accounting framework for international transfers of mitigation outcomes. The SBTi is the most prominent initiative for corporate emission reduction target setting and is developing a framework for setting science-based net-zero targets for companies. Its recently published Net-Zero Standard Criteria Draft for Public Consultation report defines two key conditions to reach a state of net-zero emissions for companies:
- To achieve a scale of value chain emission reductions consistent with the depth of abatement needed in pathways that limit warming to 1.5°C with no or limited overshoot
- To neutralize the impact of any source of residual emissions that remains unfeasible to eliminate by permanently removing an equivalent amount of atmospheric carbon dioxide
Next to the lack of consistent approach for making net-zero claims the lack of agreement on how to account for international credit transfers creates a risk of double counting, which leads to the risk of not reaching Paris Agreement goals. While the existing standards that issue off-sets have robust registry and certification systems, it is unclear how any of the standards consider individual country commitments under the Paris Agreement. It is also unclear how reductions claimed in one country will be reflected in the host country’s greenhouse gas inventory.
A much-needed robust system for carbon credit accounting will come from international negotiations, with results expected in November 2021 during the next UN Climate Change Conference of the Parties (COP26). Such a system will provide the foundation of a future international carbon market that countries can participate in. It will also give corporates and their clients the clarity needed to make claims consistent with global decarbonization goals.
Strategies Require More than Carbon Offsetting
Corporations should be cautious when using carbon offsets to reach climate-related goals. Any sound climate strategy needs to start with deep decarbonization of a company’s carbon footprint in line with 1.5°C pathways. This decarbonization can be complemented with offsets for going beyond these or for neutralizing any remaining emissions at any given point in time.
When sourcing offsets, companies should focus on the environmental integrity of the various crediting schemes. There are approaches to assess the quality of carbon credits, for example, by determining if the project provides (additional) emission reductions by improving the project’s business case. One relevant example is the Carbon Credit Guidance for Buyers under development by WWF, EDF, and Oeko-Institut. The easiest or cheapest option is not always the most appropriate, it may not mitigate the risk of being perceived as not contributing to solving climate change. However, when offsetting complements an aggressive carbon abatement strategy, a company or country will be better able to stand the test of public scrutiny.
This blog is the first in a series on net-zero targets by Guidehouse’s decarbonization experts. Check out the second blog and look for upcoming blogs on residual emissions, carbon removals, the strategic advantages of net zero, the effect of net zero on value chains, and Guidehouse’s Supplier Leadership on Climate Transition platform in the coming weeks.