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How to understand Net Zero and its implications?

Published on 14/06/2022
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Climate change is one of the hottest topics of this century, one of the biggest and most important challenges worldwide economies have to tackle. These last few years, the European Union has settled on an ambitious objective: being climate-neutral by 2050 or, in other words, being an economy with net-zero greenhouse gas emissions. 

There is a lot of work that needs to be achieved and this is the reason why so many companies across all industries are striving to become Net Zero. And it is not a small thing to say: the main natural carbon sinks: the soil, forests, and oceans, are estimated to sequester 9.5 to 11 Gt of CO² per year. In 2019, the annual emissions worldwide reached 38 Gt.

But what does it mean concretely? What is at stake? How can companies find their way in a constantly evolving context, where new standards, labels and certifications appear, and where the confusion between certain terminologies like Net Zero, Carbon Neutral or Carbon Free is present? 

Let’s discover more about this topic!

The key concepts you need to understand

Before going further, it’s important to understand what is behind the terminologies of Carbon Neutrality and Net Zero

According to the European Parliament, “carbon neutrality means having a balance between emitting carbon and absorbing carbon from the atmosphere in carbon sinks. Removing carbon dioxide from the atmosphere and then storing it is known as carbon sequestration. In order to achieve this neutrality, all worldwide CO² emissions will have to be counterbalanced by carbon sequestration[3].

In this regard, entities (both public and private) are more and more calculating their CO² emissions for specific processes, products, entities, and can compensate for these amounts with carbon offsetting projects. This mechanism leads to a balance, enabling to claim Carbon Neutrality. 

The term Carbon Neutral is not to be confused with Climate Neutral, the latter referring to a broader consideration of emissions, including other greenhouse gasses (GHG) than CO². Having a product, a service, or a company carbon free would mean there are no CO² emissions produced across the life cycle, through all the value chain. There is no such example yet. The Neutrality doesn’t oblige companies to reduce their actual CO² or GHG emissions, but “only” to neutralize them with offsetting projects.

In October 2021, the Science Based Target initiative (SBTi) published a standard to define Net Zero, by setting a frame for companies to sustain activities "consistently with societal climate and sustainability goals, and within the biophysical limits of the planet". Many companies and entities didn’t wait until that date to already claim a Net Zero objective and this may lead to some discrepancies between the definitions. For clarity, we will exclusively consider the definition made by the SBTi in this article. 

There are three main differences between Neutrality and Net Zero.

First of all, the standard sets the necessity for entities to cut their emissions, with a rapid and a deep decrease of 90 to 95% versus the chosen base year. These emissions decreases must follow near- and long-term targets, with clear, ambitious but achievable milestones, whereas there is no obligation for Carbon Neutrality. 

Secondly, while the Carbon Neutrality might only cover part of an entity, the Net Zero is only applicable on the overall entity’s emissions, including the full scopes 1, 2, and 3 from the Greenhouse Gas Protocol Corporate Standard (these scopes are detailed further in the article).

Finally, on the one hand, the Net Zero Standard allows offsetting for the residual emissions that are unavoidable (the 5 to 10% remaining CO² emissions). The offsetting requirements differ between the Carbon/climate neutrality and the Net Zero Standard. Indeed, the SBTi considers only the carbon removal projects, through technology or matured reforestation projects (>10 years). Whereas on the other hand, the Carbon/climate neutrality allows the compensation via carbon avoidance projects. These are projects that are not absorbing and sequestering emitted GHG, but enable to avoid additional emissions of GHG.

Reaching net zero on the macro level

You now get that, to fight climate change, it is essential to reduce CO² emissions and to achieve Net Zero on a global scale. In order to stay aligned with the 1.5 °C temperature target set by the Paris Agreement, countries and government entities all around the world have to leapfrog to cleaner, more resilient economies. The most effective way to reach the Net Zero goal is to rapidly cut down value-chains emissions.

Drastically reducing CO² levels in the atmosphere requires willingness to act and concrete actions from both States and private companies. As the sector of energy production accounts for more than 50% of total emissions from existing assets, nations must play a key role in this transition and invest largely in clean energy production. In the context of war between Ukraine and Russia, one can see countless actions taken by the EU to become independent in its energy production and to invest money in more ecological projects towards this transition. This will certainly help our continent to boost the achievement of its objectives. 

Of course, other sectors need to be taken into consideration. For instance, the industry sector – especially chemicals, steel and cement – is also responsible for a third of the global emissions and will need to implement deep changes in its infrastructures and assets to lower impact.

Indubitably, it is not only a matter of industry-sectors. Being able to lead to a durable transformation of the global economy requires that all countries from all over the world are involved in this transition toward Net Zero, which is quite challenging. As a matter of fact, according to the report of the International Energy Agency “Net Zero by 2050 – A Roadmap for the Global Energy sector”, the Net Zero transition will not happen at the same pace everywhere on the globe. The group of experts states that developed countries must reach net zero first and then must assist developing countries in reaching that goal too.

Almost every country in the world has joined the legally binding Paris Agreement, which sets a framework to limit global warming and supports States’ abilities in that matter. Even large CO² emitters like China or the US have agreed to make an effort in that direction. More than 400 companies in the Forbes Global 2000 ranking have also taken steps towards Net Zero. In the European Union, the Emissions Trading System encourages private actors to lower their emission by imposing a maximum amount of greenhouse gas that can be emitted by certain types of industries or by the energy sector. If a company exceeds that pollution limit, it will have to buy emission allowances from companies that stayed under the allowed gas amount.

Unfortunately, we can deplore that, today, Net Zero remains in most contexts a voluntary initiative from entities who set themselves their own targets. For instance, parties to the Paris Agreement are free to determine how they will contribute to Net Zero. The high cost of the transition and the riskiness of the investments needed are also slowing down the will of stakeholders to undertake the necessary changes.

However, what the Net Zero transition needs to be achieved is momentum. Part of it is already there with regulations or treaties like the Paris Agreement, but the real game changer is that the net zero challenge comes with enormous opportunities for our economies. Fostering technologies development, promoting effective resource use and inventing new low-carbon processes will lead to the creation of millions of jobs. All it takes is the common will and coordination to move forward.

Reaching Net Zero on the Micro-level

From a microeconomic point of view, companies obviously have a role to play and as stated in the Net Zero standard from the STBi, they should act on each of the three scopes settled by the Greenhouse Gas Protocol Corporate Standard to reduce their GHG emissions. 

The first scope covers emissions from sources owned or controlled by the company. For a lot of companies, mobility is a challenge and an important source of emissions. Company cars are widely spread and it will be necessary to rethink the mobility, for example by promoting alternatives to the car, such as public transport, or by allowing teleworking to reduce the commuting. Companies will have to switch their thermic cars to electric cars.

The second scope encompasses the indirect emissions from purchased energy; in other words: electricity, steam, heat and cooling. To reduce these types of emissions, companies can use renewable electricity through its owned production (onsite installations), or optimize the electricity usage by adopting energy efficient equipment and buildings or technologies to optimize the systems (sensors, smart meters…).

Finally, the third scope refers to all the indirect emissions that are not included in the second scope and that are not produced by the organization itself but occurring up and down in its value chain (i.e.: emissions of products from suppliers). To reduce these emissions, companies can collaborate with their suppliers and their customers on different solutions. For example, they can promote Net Zero in their supply chain to encourage their suppliers. This will mechanically decrease the emissions from the purchased product or service, as the supplier would have engaged in decreasing its scope 1, 2 & 3 emissions to adopt greener sources of energy. They can also adopt circular economy principles to reduce consumption and waste, or make conscious decisions based on CO² footprint. This scope is usually the most complicated one to reduce, as it is difficult to measure the impact of the entire value chain and the impact of the leverages. Reducing this scope requires a lot of time and substantial assumptions.  

It is essential that companies from all over the world put as many efforts as possible to simultaneously reduce their GHG emissions included in those three scopes. Of course, it would be naïve to think that all emissions can be avoided. For the remaining ones, it is possible for companies to go one step further thanks to technologies that capture, use and store the carbon (CGUS) in order to reach their Net Zero objectives. 

The goal of decarbonization technologies is quite clear: to avoid CO² being released into the atmosphere. Carbon can be: 

  • Captured when emitted, with membranes or solvents and then reused as an input for other processes. For example, on industrial sites, it is possible to capture CO² rejected during the production;
  • Permanently stored in geological formations underground (i.e.: saline aquifers, oil reservoirs). After being captured, carbon can also be used for example as input for material, like cement or concrete, meaning CO² could be stored in buildings or roads; 
  • Reused to create synthetic fuels thanks to the combination of hydrogen. 

So many possibilities companies could integrate in their production process as these CGUS play an important role in the transition to a prosperous Net Zero economy. According to the International Energy Agency, the potential carbon captured could reach 840Mt in 2030.

Conclusion

To conclude, the objective of the European Union is a far-reaching one that involves all Member States, all governments and all companies. The impact of these measures is far greater than any of us and so important for generations to come. Let's use the technological advances we can benefit from today to tackle this massive problem and work together towards a better world tomorrow.  

Let's address this issue together to raise awareness and make it even more accessible to everyone. Let's work and improve tomorrow's business at our level, because every step is a step in the right direction.

Sources

[1] https://ec.europa.eu/clima/eu-action/climate-strategies-targets/2050-long-term-strategy_fr

[2]https://www.europarl.europa.eu/news/en/headlines/society/20190926STO62270/what-is-carbon-neutrality-and-how-can-it-be-achieved-by-2050

[3] https://web.archive.org/web/20200505095043/https://www.europarl.europa.eu/news/en/headlines/society/20190926STO62270/what-is-carbon-neutrality-and-how-can-it-be-achieved-by-2050

[4] https://sciencebasedtargets.org/net-zero

[5] https://sciencebasedtargets.org/resources/files/Net-Zero-Standard.pdf

[6] https://www.nature.com/articles/s41558-021-01245-w ; https://sciencebasedtargets.org/how-it-works

[7] https://sciencebasedtargets.org/net-zero

[8] https://iea.blob.core.windows.net/assets/deebef5d-0c34-4539-9d0c-10b13d840027/NetZeroby2050-ARoadmapfortheGlobalEnergySector_CORR.pdf

[9] https://iea.blob.core.windows.net/assets/deebef5d-0c34-4539-9d0c-10b13d840027/NetZeroby2050-ARoadmapfortheGlobalEnergySector_CORR.pdf ;https://www.marshmclennan.com/insights/publications/2021/february/how-to-finance-industrys-net-zero-transition.html

[10] https://www.mckinsey.com/business-functions/sustainability/our-insights/six-characteristics-define-the-net-zero-transition

[11] https://ec.europa.eu/clima/eu-action/international-action-climate-change/climate-negotiations/paris-agreement_en

[12] https://www.nature.com/articles/s41558-021-01245-w

[12] https://www.nature.com/articles/s41558-021-01245-w

[14] https://iea.blob.core.windows.net/assets/deebef5d-0c34-4539-9d0c-10b13d840027/NetZeroby2050-ARoadmapfortheGlobalEnergySector_CORR.pdf p3

[15] https://ghgprotocol.org/sites/default/files/standards_supporting/FAQ.pdf

[16] What is the Difference Between Scope 1, 2 and 3 Emissions? - Compare Your Footprint

[17] Driving CO2 emissions to zero (and beyond) with carbon capture, use, and storage | McKinsey

[18] CCUS in the transition to net-zero emissions – CCUS in Clean Energy Transitions – Analysis - IEA

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