Net zero targets

What Are Net Zero Targets?

Net zero targets represent a commitment to balance the amount of greenhouse gas (GHG) emissions released into the atmosphere with the amount removed from it. This means that any emissions produced are offset by an equivalent amount taken out, resulting in no net addition of greenhouse gases. The concept is a core component of sustainable finance, guiding efforts to mitigate climate change by achieving a global equilibrium between anthropogenic emissions and their removal.

Organizations and governments setting net zero targets aim to drastically reduce their emissions first, then neutralize any remaining, unavoidable emissions through various removal methods. Achieving net zero targets is crucial for limiting global warming and stabilizing the Earth's climate system.

History and Origin

The concept of balancing emissions with removals gained significant traction in climate science discussions in the late 2000s, as research indicated that global warming would only cease when carbon dioxide (CO2) emissions reached net zero. This scientific understanding provided a crucial foundation for international climate policy.

A pivotal moment in the formal adoption of net zero targets occurred with the Paris Agreement in 2015. This legally binding international treaty called upon all nations to "achieve a balance between anthropogenic emissions by sources and removals by sinks of greenhouse gases in the second half of this century."⁴ Subsequently, the Intergovernmental Panel on Climate Change (IPCC) further emphasized the urgency, stating in its Special Report on Global Warming of 1.5°C that achieving global net zero CO2 emissions by mid-century is necessary to limit global temperature rise to 1.5°C above pre-industrial levels. This scientific consensus and political commitment have driven widespread adoption of net zero targets by countries, corporations, and other entities globally.

Key Takeaways

• Net zero targets aim for a balance where greenhouse gas emissions are matched by removals from the atmosphere.
• Achieving net zero is considered essential to limit global warming to 1.5°C above pre-industrial levels, as articulated in the Paris Agreement.
• The primary focus of a net zero strategy is deep and rapid emissions reduction, with carbon removals used for residual, hard-to-abate emissions.
• Many countries and corporations have established net zero targets, often by 2050, influencing corporate governance and investment strategies.
• Credible net zero targets require transparent reporting, interim milestones, and a comprehensive approach to all greenhouse gases across the value chain.

Formula and Calculation

While there isn't a single universal "formula" for net zero targets, the core principle involves balancing total emissions with total removals over a specified period. Conceptually, it can be represented as:

Organizations aiming for net zero primarily focus on reducing their direct and indirect greenhouse gas emissions. These emissions are typically categorized into:

• Scope 1 emissions: Direct emissions from sources owned or controlled by the entity (e.g., fuel combustion in company vehicles or facilities).
• Scope 2 emissions: Indirect emissions from the generation of purchased electricity, heating, or cooling.
• Scope 3 emissions: All other indirect emissions that occur in a company's value chain, both upstream and downstream (e.g., emissions from purchased goods and services, employee commuting, or the use of sold products).

The "removal" component typically involves methods that actively take carbon dioxide out of the atmosphere, such as afforestation, reforestation, or carbon capture and storage technologies. The emphasis for credible net zero targets is on minimizing emissions first, then neutralizing only the unavoidable residual emissions.

Interpreting Net Zero Targets

Interpreting net zero targets requires an understanding of their scope, ambition, and the underlying plan for achievement. A robust net zero target implies a fundamental transformation, prioritizing deep decarbonization across all emission scopes. It is not merely an accounting exercise that relies heavily on offsetting activities without significant emission reductions.

When evaluating a net zero target, it's important to consider:

• Target Year: The year by which net zero is to be achieved (e.g., 2030, 2050).
• Coverage: Whether the target covers all greenhouse gases (not just CO2) and all relevant emission scopes (Scope 1 emissions, Scope 2 emissions, and Scope 3 emissions).
• Interim Targets: The presence of clear, ambitious short- and medium-term milestones that demonstrate a pathway to the long-term goal.
• Reduction vs. Removal: The balance between planned emissions reductions and the reliance on carbon removals. Credible targets emphasize at least 90-95% reduction before relying on removals.

A credible net zero target signals an entity's commitment to address its full climate impact and align with global efforts to limit warming. Investors often assess the integrity of these targets as part of their ESG factors analysis.

Hypothetical Example

Consider "Eco-Corp," a fictional manufacturing company announcing a net zero target by 2045. To make this target credible, Eco-Corp would first conduct a comprehensive assessment of its current greenhouse gas emissions across all its operations and value chain.

1. Baseline Assessment: Eco-Corp determines its total annual emissions in 2023 (its base year) are 100,000 tons of CO2 equivalent (tCO2e), composed of 30,000 tCO2e from Scope 1 emissions (e.g., on-site fuel consumption), 20,000 tCO2e from Scope 2 emissions (purchased electricity), and 50,000 tCO2e from Scope 3 emissions (e.g., raw material production, transportation, use of sold products).
2. Reduction Strategy: Eco-Corp sets interim targets: a 40% reduction by 2030 and an 80% reduction by 2040. Their plan includes:
   • Investing in renewable energy sources for their facilities (reducing Scope 2).
   • Upgrading machinery for greater energy efficiency and switching to lower-emission fuels (reducing Scope 1).
   • Collaborating with suppliers to reduce emissions in their supply chain and designing more sustainable products (reducing Scope 3).
3. Residual Emissions Neutralization: By 2045, Eco-Corp aims to have reduced emissions by over 95%, leaving a small percentage of residual emissions that are currently unavoidable (e.g., from certain industrial processes or employee air travel). These remaining emissions would then be neutralized through high-quality carbon credits from verified carbon removal projects, such as direct air capture or afforestation.

This step-by-step approach demonstrates a structured path towards achieving net zero, focusing on internal reductions before relying on external offsets.

Practical Applications

Net zero targets are increasingly integrated into global economic and financial systems. Their practical applications extend across various sectors:

• Corporate Strategy: Companies are setting net zero targets to manage climate risk, enhance brand reputation, attract sustainable investing capital, and prepare for future regulations. Many leverage frameworks like the Science Based Targets initiative (SBTi) to ensure their targets align with climate science.
• ³ Investment Decisions: Investors are incorporating net zero commitments into their due diligence, favoring companies with credible pathways to decarbonization. This has spurred growth in financial products like green bonds and climate-focused funds designed to support the transition.
• Government Policy: Governments are enacting legislation and setting national net zero targets to guide economic transformation, incentivize green innovation, and meet international climate commitments. These targets often shape energy policy, infrastructure development, and financial reporting requirements.
• Financial Institutions: Banks, asset managers, and insurers are developing their own net zero commitments, influencing their lending, investment, and underwriting practices to align portfolios with a low-carbon economy. This involves a shift towards transition finance to support companies in their decarbonization journeys.

Limitations and Criticisms

Despite their widespread adoption and importance, net zero targets face several limitations and criticisms:

• Greenwashing Concerns: A significant critique is the potential for "greenwashing," where entities announce ambitious net zero targets without credible plans for deep emissions reductions, relying instead on vague promises or an overreliance on carbon offsets. The World Resources Institute highlights concerns that the "net" aspect could dampen efforts for rapid gross emission cuts. Th²e United Nations has also issued reports, such as "Integrity Matters," to provide guidance and call for stronger standards to prevent greenwashing.
• ¹ Overreliance on Future Technologies: Some targets assume the widespread availability and scalability of future carbon removal technologies that are currently nascent or expensive. If these technologies do not materialize as expected, achieving the targets becomes significantly more challenging.
• Scope 3 Emission Challenges: Measuring and managing Scope 3 emissions across complex global value chains is a significant hurdle for many organizations, often leading to incomplete or less robust targets.
• Lack of Immediate Action: Critics argue that distant 2050 targets can allow for a "kick the can down the road" mentality, delaying urgent short-term emission reductions in favor of future, unproven solutions.
• Quality of Offsets: The integrity and permanence of some carbon credits used for offsetting residual emissions vary widely, raising questions about whether they genuinely achieve the promised carbon removal or reduction.

These criticisms underscore the need for rigorous standards, transparency, and accountability to ensure that net zero targets drive meaningful climate action rather than merely symbolic commitments.

Net Zero Targets vs. Carbon Neutrality

While often used interchangeably, "net zero targets" and "carbon neutrality" have distinct nuances, particularly in the context of ambition and scope.

Carbon neutrality typically refers to balancing the amount of carbon dioxide (CO2) released with an equivalent amount removed or offset. This can be achieved by reducing CO2 emissions as much as possible and then purchasing carbon credits to compensate for the remaining emissions. Carbon neutrality often focuses primarily on CO2 and may allow for a greater reliance on offsetting to achieve the balance.

Net zero targets, on the other hand, represent a more comprehensive and ambitious goal. They generally encompass all greenhouse gases (not just CO2) and emphasize a deep, absolute reduction of emissions across all scopes (Scope 1, 2, and 3) as the primary strategy. Carbon removals are used only for the very small fraction of emissions that are truly unavoidable after extensive reduction efforts. The focus of net zero is on transforming operations and value chains to eliminate emissions, rather than solely offsetting them. This distinction reflects a progression in climate ambition, with net zero targets typically seen as more aligned with limiting global warming to 1.5°C.

FAQs

What is the primary difference between net zero targets and simply reducing emissions?

The primary difference is that net zero targets aim for a balance where any remaining emissions are removed from the atmosphere, effectively resulting in no net addition of greenhouse gases. Simply reducing emissions means cutting down on output but doesn't necessarily imply reaching a state of equilibrium or offsetting all remaining output.

Do net zero targets only apply to carbon dioxide?

No, while historically the focus was often on carbon dioxide (CO2), credible net zero targets increasingly encompass all greenhouse gases (GHGs) that contribute to global warming, such as methane (CH4) and nitrous oxide (N2O). This comprehensive approach is necessary to address the full scope of climate risk.

How are Scope 3 emissions relevant to net zero targets?

Scope 3 emissions are crucial because they often represent the largest portion of a company's carbon footprint, arising from its value chain, both upstream and downstream. A robust net zero target requires addressing and reducing these indirect emissions, even though they are not directly controlled by the company.

Can carbon offsets be used to achieve net zero?

Carbon offsets can be used to neutralize residual emissions—those that cannot be eliminated through deep emission reductions—to achieve net zero. However, the integrity of a net zero target relies heavily on prioritizing actual emissions reductions (typically 90-95%) and using high-quality carbon credits only for the very last, unavoidable portion. Overreliance on offsets without significant internal reductions is a common criticism.

What role do financial institutions play in achieving net zero targets?

Financial institutions play a critical role through impact investing and by aligning their lending, investment, and underwriting portfolios with net zero pathways. They can provide transition finance to support companies in their decarbonization efforts, while also managing their own financed emissions.