Why is net zero such a heavy lift for so many companies?

The idea of net zero is only about a decade old and followed the IPCC report which stated in 2013 that net anthropogenic emissions of CO2 would have to reach zero in order to eventually stop global warming. Between 2015 and 2020, countries like Sweden and the UK incorporated midcentury net zero targets into law. Today net zero pledges cover 91% of the global economy and 2050 is the universal target year by which all of these pledges must turn into actual net zero emissions (for a 1.5C temperature rise).

But getting to that endpoint or even to the near-term target of 20–40% reduction in the next decade is a heavy lift for many companies.

Going from planet-level to country-level net zero emissions

The IPCC report was referring to net emissions for the planet as a whole. Major greenhouse gasses such as CO2 and methane are well-mixed in the atmosphere, and thus a unit of emission reduction or carbon removal anywhere in the world contributes equally toward the net zero target. This was the logic behind the original Clean Development Mechanism, which allowed industrialized countries to meet their emission reduction targets by funding projects located in developing countries where the cost of carbon abatement might be lower.

The Paris Agreement includes a similar market mechanism in Article 6.4 that countries can use to trade emission reduction credits. A classic example is where one country benefits from switching to more abundant clean energy while another country gets credit for the emission reductions by financing that energy transition. The World Bank estimates that trading in carbon credits could reduce the cost of meeting national targets by more than 50% (provided of course that these reductions meet additionality and other criteria). A carbon trading regime creates a pool of countries with a larger menu of emission reduction options compared to individual countries.

How the corporate net zero problem is framed today

The economics of emission reductions are well understood and have been a part of international climate agreements for decades. But this logic hasn’t extended to companies and organizations.

Lacking a universal cap-and-trade scheme, many companies are now setting emission reduction targets in a silo using the net-zero standard from the Science Based Targets initiative (SBTi) with no clear path to achieving those reductions. As much smaller entities than countries, companies naturally have fewer ways of reducing emissions and a significantly reduced ability to finance those reductions. Since the standard requires emission reductions to occur within a company and its value chain — with carbon credits used only to neutralize residual emissions of 5–10% — there is no pooling effect here analogous to what we might have at the county level.

So, what can companies do to meet this target? They can of course switch to renewable electricity, electrify heating and transportation, etc., within their own corporate boundaries. These steps could address their scope 1 and scope 2 emissions, which are typically not more than 10–15% of total emissions.

Scope 3 emissions dominate the greenhouse gas inventories for companies that depend on supply chains to produce and distribute their products. Scope 3 reductions will have every company looking up and down its value chain and often finding very few ways to make big cuts. Companies generally use secondary data to model purchased materials in their emissions inventories because primary data from suppliers is hard to come by. This use of industry-average or typical data makes it difficult to choose between different suppliers with any confidence that scope 3 emissions would actually decline as a result.

Can companies work with existing suppliers to reduce upstream emissions? Actual experience with consumer product companies of all sizes suggests that it is challenging to even identify the exact source and production methods associated with most of the raw materials and ingredients sourced by these companies, let alone reduce the emissions associated with sourcing.

A case in point is the effort by some of the world’s largest food and beverage companies to reach net-zero deforestation in their supply chains by 2020, which produced decidedly mixed results. Mars, one of the largest users of cocoa, was able to trace only 43% of its cocoa to specific farms after a decade of effort. In the meantime, agriculture-driven deforestation continues in the tropics with a 12% year-over-year increase in 2020.

For companies in the retail sector that source most of their non-food merchandise from countries like China, greening the supply chain depends so much on the climate and energy policies of those countries. Scope 3 emission reductions are largely dependent on how fast those countries transition to renewable energy and electrification. Downstream emissions in the distribution and use of a company’s products are generally not actionable at all except by radically redesigning those products to minimize energy consumption in refrigeration, cooking, and other product use.

The final barrier for most companies embarking on the net zero journey is cost. Emission reductions, like anything else in business, are not free and will require investment. While carbon credits play only a minor role in the SBTi net zero standard, companies — at least in the near term — are scouring the offsets market to find good quality credits at an affordable price. This is an indicator that their internal cost of carbon abatement is higher than the market price of offsets at the present time, and therefore the cost of making a company carbon neutral through offsets can be seen as a floor for the cost of net zero.

At a modest price of $15 per tonne of CO2 equivalents, the cost of full carbon neutrality ranges anywhere from 0.5% to 3% of gross revenue for companies in consumer sectors such as food, clothing, and personal care products. This will only increase as the demand for carbon credits grows and buyers chase a limited supply of high-quality credits. The cost of carbon neutrality — and net zero in the long run — will be a non-trivial impact to a company’s bottom line and a significant business risk if it is not proactively addressed.

Is there a viable path for companies to reach net zero emissions?

Given 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, it is fair to ask if there is a viable path for most companies to get to a sizable emission reduction in the next decade and reach net zero by 2050.

To answer that question, we should revisit the logic of emission reduction pools. That is the topic for part 2 of this discussion.