Net zero: How to make sense of it

a. Mechanism, objectives and challenges of carbon allowances to reduce CO2 emissions

b. On what basis does a company receive CO2 allowances?

The sectors of activity concerned by the quotas are energy and energy-intensive industries.  This included 16,400 companies in 2013.

Companies in the signatory countries are given targets to meet, also expressed in allowances. Some of the available allowances are also auctioned by the European Commission. In 2020, Europe collected 19 billion euros from this sale. This sum is redistributed to the Member States and 50% of this amount must be invested in sustainable development projects.

The aim of the carbon quota system is therefore to reduce CO2 emissions within the European Union.  A financial mechanism has been set up to force companies to reduce their emissions and to reward companies that reduce their emissions more quickly. 

The shortcomings of the 'carbon neutrality' offset mechanism are as follows:

• Large, highly profitable industries are less stimulated by this financial mechanism

• The trading mechanism negates the significant efforts of companies that reduce their emissions well beyond their allowances. In effect, the CO2 savings made are "consumed" by less willing companies.

• Pricing per tonne of CO2 allows a whole range of companies to green their image without changing the way they operate. The only thing that will really change the climate is the total reduction of CO2 in the atmosphere.
  

c. Carbon neutrality through offsetting

Some companies go further and buy allowances for a volume equivalent to their total CO2 emissions. They do not simply wish to comply with the limit imposed on them but seek to "offset" their emissions entirely. They therefore take on a greater financial burden which, through trading, will be used to finance or financially compensate companies that are below their limit.

The allowance market allows this mechanism, which is an incentive for some companies to improve, but it does not accelerate the transition and the overall reduction.

a. Mechanism and objectives

By 2050, we need to reach global net zero to mitigate the worst impacts of climate change. But why 'net zero'?  

Net zero is a state in which all the greenhouse gases emitted into the atmosphere over a period of time are cancelled out by the absorption or removal of an equivalent amount over the same period. 

The "net" in net zero indicates that absorption mechanisms are essential to compensate for the emissions of human activities. These can never be zero. The "zero" indicates the importance of massive and widespread reductions in CO2 emissions to stop global warming. 

Today, it is impossible to absorb all the CO2 emitted by human activity.  The IPCC (Intergovernmental Panel on Climate Change) has clearly demonstrated that two things must be done. On the one hand, reduce CO2 emissions as much as possible and on the other hand, increase the absorption of CO2 from the atmosphere to a level equivalent to the emission caused by human activity.

Many actors are setting up different absorption projects (see bottom of page) that companies can finance to help capture carbon from the atmosphere. 

For example, a company C currently emits 60 tonnes of CO2 per year.  With the help of internal emission reduction and process optimisation projects, it manages to reduce its emissions to 30 tonnes of CO2 per year.  In order to achieve Net Zero, it will have to initiate or finance projects that will remove 30 tonnes of CO2 from the atmosphere each year.

The overall Net impact of this company in terms of CO2 emissions is therefore Zero.

b. Scopes du Net Zéro

81% of global greenhouse gas emissions come from CO2, and companies are largely responsible for this. They therefore need to reduce their environmental impact. One of the most important ways to do this is to reduce their carbon footprint, and this starts with monitoring carbon emissions. To do this, companies need to categorise their carbon footprint into three areas.

According to the GHG (Greenhouse Gas) Protocol, a company's greenhouse gas emissions are classified into three scopes. Scopes 1 and 2 are mandatory to report, while the third is voluntary and more difficult to quantify. 

• Scope 1

When measuring a company's Scope 1 GHG emissions, only emissions from activities directly controlled by the company are considered (e.g. the emission produced by a gas-fired furnace). Emissions from the company's factories, buildings and facilities are taken into account. 

• Scope 2

Scope 2 includes all greenhouse gas emissions resulting from electricity, heat and steam consumption. Indeed, when a company consumes electricity, it does not emit GHGs directly. On the other hand, the production of this energy leads to greenhouse gas emissions at the place of production. By consuming electricity, the company therefore produces greenhouse gas emissions "indirectly". The objective of scope 2 is to measure these indirect emissions. 

• Scope 3

The third scope provides a very broad view of the greenhouse gas emissions generated by a company or the manufacture of a product, as it includes emissions throughout the product's life cycle, beyond the company's own activity. This includes emissions from the company's suppliers, employee and customer transport, supply chain management, recycling and the end-of-life of the company's products. It is therefore the most comprehensive view. When a company declares that it is "Net Zero", it should also specify on which perimeter it acts: scope 1&2 or scope 3. The difference is substantial. Today, most companies on the road to Net Zero are working on scope 1 and 2. 

The European Union has defined the different types of GHGs to be taken into account for quota compliance.

Annual emissions are measured within companies and verified by external auditors. Companies subject to quotas must report their emissions and submit the corresponding quotas.

Companies that want to reduce their environmental footprint on a voluntary basis use specialised companies to measure emissions, develop improvement programmes and monitor their implementation. Some of these companies have developed their own label attesting to the "carbon neutrality" of the companies that have put these systems in place.

Beyond these two standardised approaches, which can be complementary, there are various terms that are more or less ill-defined and that often hide very different realities. How can we navigate between carbon neutrality, negative carbon, low carbon, net zero, zero emissions, positive climate, etc.? Here are the keys to understanding them.

a. Carbon neutral 

It is quite clear: strictly speaking, all CO2 or GHG emissions are offset by CO2 capture actions. The activity of these companies therefore has no impact on climate change, neither negative nor positive.

However, many companies claim to be "carbon neutral" through the purchase of allowances. This means that they pay for allowances in line with their total emissions. This is a financial burden, of course, which allows the seller of the allowances to finance its own improvement projects, but it does not make our company "carbon neutral"... It continues to produce CO2, even on a net basis. 

b. Carbon negative

The principle is the same, but the company goes further in its capture projects to achieve a negative balance: in total, the company captures CO2 from the atmosphere.

This should be the basic ambition of all companies. It is no longer a question ( and has not been for a long time) of aiming for neutrality. We urgently need to restore a balance that was broken decades ago.

c. Net zero

This is the clearest and most unambiguous formulation of a company's carbon situation. The scopes taken into consideration need to be specified. There is also "Net negative", with the same rigorous calculation and measurement.

d. Low carbon

To be clear, this does not mean anything. It refers to the evaluation of a practice that is deemed to be less emitting than general practice ("business as usual"). It is often a marketing term that should immediately bring to mind greenwashing.

e. Zero emission

This is a term that should be clear. However, no human activity is zero emission in the strict sense. The term is often used to cover anything and everything. While some companies want to mention their efforts in this way, most are only trying to embellish their marketing image. The Greenwashing alert should go off automatically. It is necessary to dig into the details of the company's communication to understand the real efforts undertaken, if any. Beware, disappointment... 

f. Climate positive

Again a vague term, beware. The idea is to say that initiatives are being taken for climate protection, but without a clear framework. If it is vague it is often intentional, so be careful!

The list of terms used by marketers is endless. It is necessary to access the details to better appreciate the possible relevance of the actions undertaken and the veracity of the claims.