The journey toward net-zero emissions – how can carbon credits contribute to climate action?

In the summer of 2021, the United Nation’s Intergovernmental Panel on Climate Change (IPCC) published part one of a six-part assessment report stating that global temperatures will rise 1.5 degrees Celsius by the early 2030s and continue to do so if no action is taken, which will lead to more severe weather and unprecedented climate activity.

Achieving net-zero CO2 and other greenhouse gas (GHG) emissions globally will help curb this warming significantly. Especially in the context of the Paris Agreement’s goal to keep global temperatures from rising more than 1.5 degrees Celsius, reaching net-zero is a goal that companies globally are aiming to achieve.

However, the journey to net-zero requires considerable time, work, resources, and dedication on the part of internal and external players along value chains. If companies commit to net-zero emissions, they should understand how net-zero is defined in scientific terms, and how to turn this decarbonization ambition into action.

The pathway to net-zero emissions – taking cues from the Science Based Targets initiative (SBTi)

Before taking the first steps on the journey to net-zero emissions, it is important to define ambition, ensure it is grounded in science, and learn the frameworks and standards.

Having a robust framework based on science is crucial, given the urgency surrounding climate action. As stated at COP26 in Glasgow, the Climate Action Tracker has calculated that by 2100, warming may reach 2.4 degrees Celsius. Companies play a critical role in delivering emissions reductions, and they should set targets to decarbonize their full value chain emissions in line with the 1.5 degrees Celsius pathway.

To make this achievable, the SBTi released the Net-Zero Standard in October 2021. This standard gives corporates valid frameworks and scientific guidance, providing accurate benchmarking and goal-setting tools for setting and achieving corporate net-zero emissions targets.

While the pathway to net-zero emissions is complex, the SBTi’s standard breaks it down into a few key pillars.

• Set near-term science-based targets: 5-10 year emission reduction targets in line with limiting warming to 1.5°C.
• Set long-term science-based targets: Most companies will reduce emissions by at least 90% by no later than 2050 (companies in the forest, land, and agriculture sectors will need to reduce emissions by at least 80%).
• Move beyond value chain mitigation: Companies are expected to take action to mitigate emissions beyond their value chains; for example, by purchasing high-quality, REDD+ credits or investing in direct air capture.
• Neutralize residual emissions: Any remaining emissions must be neutralized with permanent carbon removals.[1]

The SBTi standard also permits companies to purchase carbon credits to neutralize residual emissions or to finance climate mitigation beyond their reduction targets. However, the standard clearly says that carbon credits must not be counted toward near-term and long-term targets as emission reductions.

Transforming commitment into strategy

The first real step in transforming decarbonization ambition into action is to clearly define goals in line with the Paris Agreement and Net-Zero Standard.

To define an effective goal and start setting targets, companies need to understand their emissions and where they fit within the three GHG Protocol scopes. Understanding Scopes 1, 2, and 3 emissions helps define and manage the measures to reduce emissions.

For instance, companies can commit to near-term, five to 10-year emission reduction targets in line with 1.5 degrees pathways. With this concrete goal set in stone, companies will be able to create a trajectory with strategic decision-making and move on to longer-term targets.

The most comprehensive way to designate goals is to set science-based targets (SBTs). This gives companies the right sector-relevant guidance and frames their targets under a common goal shared by more than 1030 companies to date.

From strategy to first steps

When companies have a robust understanding of their emissions sources, they can start taking actions to reduce and eliminate them.

One viable option is to switch electricity consumption from generic electricity to renewable sources, reducing Scope 2. Investing in energy efficiency initiatives that conserve energy helps lower Scope 1, while encouraging suppliers to abate their emissions results in Scope 3 reductions.

The Net-Zero Standard includes guidance on reducing Scope 3, which historically has been challenging, as companies must deal with both upstream and downstream activities outside their immediate ownership.

Financing carbon removal projects cannot lead a company to be net-zero. However, such measures can help the global transition towards a 1.5 degree Celsius-aligned economy, so long as they verifiably reduce or sequester carbon.

Projects that generate removal credits, as well as reduction and avoidance credits, do drive real change. Driving finance toward these projects on the ground leads to climate initiatives that would not have occurred otherwise.

The closer companies get to achieving their long-term targets to fully decarbonize, carbon removals are likely to be phased in to eliminate at most five to 10 percent of residual emissions.

How carbon credits complement your journey to net-zero emissions

While carbon credits cannot officially be used for emissions abatement through the SBTi, they are useful supplementary tools that support climate action. Carbon removal credits finance CO2 and GHG removal projects, while avoidance and reduction credits represent GHG emissions abatement compared to business-as-usual scenarios.

As carbon credits mobilize finance for climate action projects, purchasing them is a way to go beyond set ambitions. Carbon removal credits, for instance, support nature-based removal initiatives like afforestation, soil carbon sequestration, and wetland restoration. They also bolster technology-based projects like carbon capture and storage (BECCS) and Direct Air Capture with Carbon Storage (DACCS).

To reiterate, companies cannot use carbon credits then return to business as usual. Taking meaningful action means making tangible changes to directly reduce value chain emissions. When internal reduction initiatives and private sector climate finance combine, though, that is where you get lasting contributions to the shared global ambition of solving the climate crisis.

Market-based tools on the path to net-zero - Join ACT and CDP’s webinar

To learn more about market-based solutions - like high-impact climate action projects for carbon removals, reductions, and avoidance - that complement the net-zero journey, sign up for ACT Sustainability and CDP’s webinar, Market-based Tools on the Path to Net Zero, on December 2^nd at 16:00 CEST.