How emission reduction pools could smooth the path to corporate net zero targets

Now that net zero pledges cover 91% of the global economy, the focus must shift to finding cost-effective pathways that can convert these commitments into real, quantifiable emission reductions. More than a third of the world’s largest publicly traded companies now have net zero targets, but largely without concrete plans for getting there.

Unless companies can fundamentally restructure and reinvent themselves, corporate emission reductions in line with net-zero targets as they are currently structured will remain difficult for most companies (see part 1 of this discussion). The primary reasons for this are the intractability of reducing scope 3 emissions — which typically make up upwards of 85% of total emissions for many companies — and the fact that emission reductions will require real investments. Is there a viable path for companies to reach net zero?

Companies could always benefit from larger changes in the economy. Depending on the implementation of the new climate and energy bill, the US as a whole could see a 40% reduction in emissions by 2030 through incentives in areas like cleaner electricity, electrification of transportation and heating, carbon capture technologies, and hydrogen fuels. These incentives could help pay for a part of the scope 1 and scope 2 reductions for many US-based companies as well as some scope 3 reductions if suppliers are located within the US.

But supply chains are global in many cases and companies that are serious about their net zero targets will need more definitive tools to help them get there.

Collaboration could be key to reaching net zero targets

One way to find a path forward is to discard the model of companies working on emission reductions in silos of their own and revisit the proven logic of creating large pools of participants. Companies could form consortiums in order to create and expand emission-reduction pools, with standards-based commitments to reduction targets for 2030 and 2050. Consortiums could be regional, national, or even international — the geographic locations of member companies would not matter.

Member companies would cap their total emissions in alignment with consortium-level targets and then trade verified emission reduction credits amongst themselves, effectively seeking the lowest-cost emission reduction pathways within the consortium. Companies that are able to exceed their reduction targets could monetize the excess reductions by making those opportunities available to fellow members. Other companies could buy these credits if they are unable to cut emissions on their own at a lower cost.

Companies would also be able to use insetting projects within their organizations or supply chains to both meet their own reduction targets as well as generate credits for sale to other members. If companies across the supply chain join a consortium, that would enable sharing of primary data between companies and potential supply-chain optimizations that would otherwise be difficult to undertake.

Ideally all annual company-level emissions inventories and emission reduction calculations within the consortium would be done using a common set of tools and protocols. The same group of internal or external experts would run the calculations for all companies, and another independent group would conduct peer reviews. This would increase standardization and transparency while alleviating the reporting burdens on member companies.

What if a consortium needs an infusion of lower-cost credits to help members meet their targets? The combined purchasing power of the consortium could be used to fund vetted carbon removal projects in parts of the world where it makes economic sense. Member companies would simply buy into these projects and pay for verified carbon credits. This also means that net-zero standards would need to provide more flexibility around the use of carbon removal credits for meeting targets.

Consortiums could also address the procurement of renewable electricity, which is often a poorly understood tool. Purchase of renewable energy certificates is easy but does not provide any guarantees of additionality. Consortiums could use their size and purchasing power to directly negotiate power purchase agreements for procuring renewable energy in bulk, which would allow member companies to address their scope 2 emissions with more confidence.

In addition, consortiums could trade verified carbon credits with other similar groups, dramatically scaling up the effective size of the pools and the available emission reduction opportunities. Management and governance of the consortiums would of course need care and attention.

How much of a paradigm shift is this?

The paradigm shift I am proposing here is that most companies would no longer work toward net zero on their own but would collaborate with other companies — big and small, in the same or different industries — to tackle a huge, common, and previously intractable problem. This is not a new paradigm for reducing emissions — it has been tested and proven at the country level dating back to the Kyoto Protocol. Adapting this model to create large pools of companies working together to achieve net zero could be a viable solution, but one that has been overlooked so far.