Too much net and not enough zero? Ensuring net zero targets have the right balance

Corporate net zero decarbonisation commitments are increasingly becoming the norm, but the lack of a clear definition at a company level means interpretations of how and when this is achieved vary.

Today, the Science-Based Targets initiative (SBTi) is launching the Net-Zero Standard, a framework for setting long term net zero targets, which aims to address this inconsistency.

SBTi defines ‘science based’ as targets aligned with decarbonation rates necessary to achieve the Paris goals of well below 2 degrees of global warming aiming for 1.5. SBTi is currently transitioning its methodologies towards the more ambitious 1.5 degree goal.

The International Panel on Climate Change (IPCC) has highlighted limiting global warming to the more ambitious Paris goal of 1.5 degrees requires a global state of ‘net zero’ greenhouse gas emissions by the middle of this century or sooner.

To support this, many companies and governments have set long term targets to achieve, at the latest, net zero by 2050. To ensure decarbonisation is not pushed into the future, and achieved at the necessary rate, these long-term commitments should be supported by appropriate ‘interim’ emissions reduction targets that define an organisation’s path to the net zero goal in the short to medium term.

The SBTi’s new Net-Zero Standard (the Standard) supplements SBTi’s existing guidance, the most widely recognised global standard for setting corporate interim targets that demonstrate an appropriate level of emissions reduction rigour and ambition.

Company adoption of both long-term net zero and interim decarbonisation targets is accelerating both globally and in Australia. Research by the Australian Council of Superannuation Investors (ACSI) found that ASX200 companies with net zero commitments for 2050 or earlier almost tripled over 12 months up to March 2021, with half of the collective ASX200 market capitalisation now covered by net zero commitments.

A ‘good’ net zero commitment is one way companies can signal to shareholders and other important stakeholders that they are responsibly managing risks and opportunities presented by climate change and a decarbonising global economy. Having a benchmark of what ‘good’ looks like is crucial if companies are to formulate decarbonisation targets that will withstand scrutiny and send the right signal to the market.

In the absence of a globally accepted corporate definition, company net zero commitments can vary in terms of the scope of emissions included and crucially, the extent to which ‘offsetting’ a company’s emissions, through investment in third party carbon sequestration and avoidance initiatives, can be used to support a net zero claim.

The new SBTi Net-Zero Standard stipulates corporate net zero targets require:

  • Emissions reductions in line with limiting the global temperature increase to 1.5°C
  • Near-term targets and rapid action to reduce emissions over 5-10 years in line with 1.5°C
  • Long-term deep decarbonisation of 90-95 percent across all scopes before 2050
  • A limited dependence on carbon removals to neutralise emissions that cannot yet be eliminated (5-10 percent) e.g. carbon credits
  • External verification of corporate net-zero targets and annual progress reporting

The standard is clear that both near term interim and long-term net zero targets should address all three emissions ‘scopes’, defined as: direct emissions from company activities (scope 1), indirect emissions from generation of purchased energy (scope 2), and other indirect emissions from activities a company influences across their value chain, including material supplier and customer direct emissions (scope 3).

In terms of the balance of net versus zero, the Standard emphasises the need for companies to prioritise emissions reduction to eliminate emissions sources that can be avoided through adoption of available and viable alternatives. The Standard highlights that, even at global net zero, under Paris aligned decarbonisation pathways, many sectors will still have some residual emissions that cannot be abated. SBTi anticipates that for most companies, these residual emissions will equate to 5 to 10 percent of current emissions.

Under the Net-Zero Standard, companies must take steps to sequester these residual emissions, or an equivalent volume of carbon from the atmosphere, on an ongoing basis until they can be eliminated. In addition, the Standard encourages companies to make additional investments in mitigation activities above and beyond their value chain to increase the likelihood of limiting global warming below 1.5°C, although these investments do not count towards the 90 percent+ emissions reduction mandated.

In the light of increasing emphasis on net zero, organisations need advice on setting Paris aligned decarbonisation targets, and assistance identifying options and costs to reduce and offset emissions. Typically, and increasingly, companies are seeking SBTi compliance, with SBTi’s new Standard providing a globally accepted blueprint for corporate net zero transitions.

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