The COP 26 UN Climate Change Conference will take place from 31 October to 12 November this year in Glasgow, UK. At COP 26 net zero commitments generally, the latest IPCC Report and carbon markets will be key topics of discussion.
Distilled to a simple equation, "net zero" is achieved when the amount of emissions removed from the atmosphere completely cancels out the amount of emissions released:
Many companies around the world have voluntarily committed themselves to reaching net zero emissions, generally by 2050. Exactly what form these pledges take, and the type and scope of emissions they cover, changes from company to company. Some net zero pledges deal with a company's direct greenhouse gas (GHG) emissions from their activities (scope 1) and consumption of electricity (scope 2). Others are more all-encompassing and deal with scope 3 emissions generated by the consumption of a company's product (e.g. oil, gas or coal).
Many net zero pledges and commitments made by companies have been criticised for being delay tactics that allow companies to defer their environmental responsibilities to a future date while they continue operating their business as usual. As the risks of climate change become more widely understood (and felt), however, more sophisticated and effective responses to reducing emissions and global warming are being expected of companies - by shareholders, investors, governments, courts and society more broadly.
Exactly what decarbonisation strategy a company should adopt (and commit to through a net zero pledge) will depend on that company's particular impacts and buy-in from its Board, shareholders and other stakeholders such as its financial and insurance service providers. The table below summarises some of the key issues a company should consider when formulating a net zero pledge, to ensure that it is considered to be legitimate, robust and effective.
What baseline are you using?
Net zero climate pledges often adopt the following formulation:
“X company commits to achieving net zero planet-warming emissions by Y decades.”
The most common form of net zero pledge commits to cancelling out emissions; however, this is often calculated only in relation to current and future emissions.
Environmental scientists argue that a robust pledge cannot ignore a company's historical pollution, which science has shown, after being released, lingers in the atmosphere and continues to contribute to climate change for up to hundreds of thousands of years. The concept of removing all emissions, including cumulative historical emissions, is known as "historic zero".
Net zero pledges that do not address historic emissions are therefore open to criticism as inadequate in responding to the causes of climate change.
To take the United Kingdom as an example, in 2019 it emitted approximately 350 million tonnes of CO2, or just under 1% of the global total (Kruger, After net zero, we will need to go much further and clean up historic emissions, 10 June 2021). However, taking into account all historic emissions, the UK is responsible for approximately 78 billion tonnes of CO2, or about 5% of the global total of 1.5 trillion tonnes. Even if the UK achieves its goal of net zero by 2050, it will still have accumulated a “carbon hangover” of over 80 billion tonnes.
In comparison, Microsoft has pledged, by 2050, to remove from the environment all the carbon it has emitted either directly or by electrical consumption since it was founded in 1975. It aims to do so through a portfolio of negative emission technologies, potentially including afforestation and reforestation, soil carbon sequestration, bioenergy with carbon capture and storage, and direct air capture.
What targets are you using?
Of course, a more robust pledge is one that adopts science-based emissions targets. This means that the emissions reduction aligns with what the latest climate science deems necessary to meet the goals of the Paris Agreement – limiting global warming to well-below 2°C above pre-industrial levels and pursuing efforts to limit warming to 1.5°C.
Over 1,000 corporations worldwide are working with the Science Based Targets initiative (SBTi) and setting science-based emissions reduction targets for either under 1.5°C or 2°C. These targets are then validated against science-based criteria including (but not limited to) the following criterion:
- targets must cover company-wide scope 1 and scope 2 emissions and all relevant greenhouse gasses as defined by the GHG Protocol Corporate Standard;
- targets must cover a minimum of 5 years and a maximum of 15 years and cannot have already been achieved;
- at a minimum, scope 1 and scope 2 targets must be consistent with the level of decarbonization required to keep global temperature increase to well-below 2°C compared to preindustrial temperatures; and
- targets must be modelled using the latest version of methods and tools approved by the initiative.
There are also a number criteria specifically for assessing Scope 2 and 3 emissions, as well as sector-specific, reporting and calculations requirements.
Given the recent IPCC Report's finding that the global temperature could exceed 1.5°C of warming by 2030, scientific targets are becoming increasingly necessary to improve the efficacy of climate pledges.
How are you measuring your impacts?
At its most basic, a net-zero pledge requires a calculation of the amount of emissions released into the atmosphere directly or indirectly by a company. These emissions are separated into the following scopes:
- Scope 1 emissions, being emissions released as a direct result of activity at a facility level, such as emissions from manufacturing;
- Scope 2 emissions, being emissions released from the indirect consumption of energy; and
- Scope 3 emissions, being indirect emissions other than scope 2 emissions which are generated in the wider economy. This may include a number of things, like emissions generated by different products used in the supply chain (such as the manufacture of cement or steel) or by end-users of fuels such as coal, oil or gas.
Pledges that take into consideration scope 1 to 3 emissions undeniably paint a more realistic picture of a company's overall contribution to emissions. Conversely, fossil fuel companies often argue that taking scope 3 emissions into account could lead to double-counting if the country where the scope 3 emissions are generated already accounts for them as part of its Paris Agreement commitments or through an energy intensive emissions trading scheme.
In the Royal Dutch Shell Case, Shell was found to be responsible for the indirect emissions of the end-users of its products. The Court endorsed the need for companies to genuinely take responsibility for Scope 3 emissions, "where these emissions form the majority of a company’s CO2 emissions, as is the case for companies that produce and sell fossil fuels." In Shell's case, approximately 85% of its emissions were Scope 3 emissions.
Shell is only one of many companies who have not included Scope 3 emissions in their net-zero calculations and targets. According to Corporate Accountability's report The Big Con (June 2021), Walmart’s climate plan also overlooks Scope 3 emissions, which count for an estimated 95% of its carbon footprint. Companies making net-zero pledges therefore need to be clear whether the measurement of their business impacts includes indirect Scope 3 emissions.
How are you reporting?
For companies, a key issue is how you are reporting on your emissions as well as your progress in reaching your targets.
The Royal Dutch Shell case exemplifies that pledges with faraway goals and without a clear roadmap on how those goals will be achieved will not be considered sufficiently robust and effective. A company making net zero pledges that are vague and unsupported, may be considered to lack accountability and transparency. More significantly, committing to net zero without reasonable grounds to support the express and implied representations contained within the commitment may amount to misleading or deceptive conduct under Australian laws and directors could be personally liable if they are found to have breached their duties of care. "Greenwashing" claims could also become a source of risk for companies who lack the reporting and data to justify their pledges.
An effective net zero pledge must be supported by interim, short-term and medium targets as well as long-term goals. Companies making net zero pledges should consider the need to have annual progress reports or periodic audits in place. This would allow for companies to ensure they are on track to meet their short- medium- and long-term targets as well as remain adaptable and responsive, if amendments or updates to the commitment(s) are required (eg. if further scientific data requires more extensive commitments in the short-term).
In their Further Supplementary Memorandum of Opinion (dated 23 April 2021) to their Memorandum on "Climate Change and Directors' Duties", barristers, Noel Hutley SC and Sebastian Hartford-Davis, opined that "if a company’s net zero strategy is amended, not suitably fulfilled, affected by supervening circumstances, or otherwise untenable, this information should be disclosed promptly". To not disclose, they suggested, may constitute misleading or deceptive conduct through silence. On this basis, if a net zero commitment is premised on technological advancements or certain circumstances that do not materialise, then disclosure of these change in circumstances would be required.
How are you actually going to meet your net zero commitments?
In light of the fact that commitments without a reasonable basis can constitute misleading and deceptive conduct, it is important for a company to consider seriously what targets, and reduction options, can actually be implemented.
Hutley SC and Hartford-Davis suggest that companies should develop net zero strategies that are consistent with their operational strategies:
"An internally integrated decarbonisation strategy is likely to provide a surer footing for directors than a decarbonisation strategy contingent on unknown contingencies: such as the emergence of new technologies, or different carbon offsets, or other businesses in the company's supply chain reducing their emissions".
Offsets
Many companies rely on offsetting to fulfil their net zero pledges, at least in part. Offsetting has been acknowledged to be a legitimate and necessary tool in reaching net zero for many companies and industries. For some businesses in what are called the "hard to abate sectors" (such as the concrete and aluminium industries), the state of current technologies means that reducing their emissions through other options within the time required are more challenging.
Many countries, as part of their Nationally Determined Contributions or NDCs submitted under the Paris Agreement, have also signalled their intention to use offsets to meet part of their emissions reduction targets, including the mechanisms under Article 6 which contemplate international emission mitigation transfers.
The use of offsets has been criticised (particularly if offsets are being used exclusively) as a way of companies re-assigning their environmental obligations and continuing to emit-as-usual. Countries, such as Sweden, and some companies are adopting offset caps for achieving their net zero pledges.
The current global voluntary carbon market comprises a patchwork of different State sponsored or private schemes, each adopting different frameworks. This has resulted in some offset credits and the market for them being criticised as lacking transparency and legitimacy, resulting in a wide disparity in prices depending on the provenance and quality of the offset. Nevertheless, the demand for carbon credits continues to increase. In Australia, the price of Australian Carbon Credit Units (ACCUs), generated from projects registered under the Emissions Reduction Fund which is widely regarded as one of the most robust and credible domestic offset schemes in the world, could "more than double" by 2030 (Hutley SC and Hartford-Davis). Last week, a new record-price carbon credit transaction occurred, involving 5,000 ACCUs traded at $22.35 each. Last financial year also saw a 45% increase in the number of voluntary offset credit cancellations made by the Clean Energy Regulator, as many businesses sought to make good their carbon neutrality commitments. Companies making net zero pledges which rely heavily on the use of offsets should keep in mind the risk of a significant increase in the price of offsets and potential availability issues in the future.
The concept of social co-benefits with offsets is also rapidly taking off with "gold standard" offsets delivering not only verifiable carbon reductions but also co-benefits to the local community such as local employment opportunities and/or keeping cultural practices alive. For example, Santos has supported the West Arnhem Land Fire Abatement project (WALFA), in which Indigenous rangers conduct strategic fire management to lessen the impact of bigger hotter fires in Arnhem Land. According to Santos most recent sustainability report WALFA has reduced greenhouse gas emissions by more than two million tonnes of CO2-e, making it one of Australia’s biggest offset projects.
In addition to co-benefits, there is increasing recognition that carbon offsets can have a role to play in social and environmental justice if appropriate technology transfers or environmental projects are redirected to less developed parts of the world such as Pacific Island nations that are most vulnerable to the impacts of climate change.
Lastly, companies should ensure they are doing their due diligence into the offset providers they are using so that they can demonstrate that they are genuinely meeting their net zero commitments.