Preparing for the net zero economy - is business weathering the storm?

The transition to net zero promises to be the biggest change to our global economies since the industrial revolution. There has been an avalanche of net zero promises from corporates as they publicly commit to mitigate their GHG emissions to reach a

balance of net zero emissions

by 2050. However, these commitments have faced severe criticism. Mitigation plans are lacking teeth and are overly reliant on offsets - we simply don't have enough land on the planet to plant the trees needed to offset business as usual, nor would we want to!

But strengthening these net zero strategies is not enough. Behind all the noise of inadequate net zero targets is another issue - that of adaptation. Corporates need to adapt and develop more resilient business models that can weather the storm of the net zero economy transition. Having a net zero goal (even one that rigorously reduces and avoids emissions whilst only offsetting the small residual emissions) is not enough to prepare for the transition to net zero.

The term ‘net zero’ refers to the global reduction of carbon dioxide emissions to net zero by 2050. The concept was developed to try and avoid the worst impacts of climate change by limiting global warming to 1.5 degrees. In order to do this, the Intergovernmental Panel on Climate Change (IPCC) stated that carbon dioxide emissions need to fall to ‘net zero’ by around 2050 (with a reduction of 45% by 2030) when compared to 2010 levels. A host of countries including the UK; EU; Japan; New Zealand, Canada, South Korea etc. have now legally committed to achieving net zero by 2050 at the latest. 

The ‘net’ in net zero is important. It does not mean reducing all emissions to absolute zero -  this will be very difficult to achieve in the timescale needed. So, as well as rapid and far-reaching cuts in emissions, we will need to scale up GHG removals through, for example, reforestation or afforestation projects.

We reach net zero when the amount we add is no more than the amount taken away

This move to

net zer

o promises to elicit the biggest change to the global economy since the industrial revolution. Companies will need to adapt, either to severe physical changes to the climate (if we fail to meet the 1.5 degree target) or to extreme transitions in regulation and markets (in order to meet this target). Mostly likely they will need to adapt to both, and to be resilient to a disorderly transition to a net zero economy.

In recognition of this, over a fifth of the world's largest companies have set net zero goals - committing to halve their emissions by 2030, and reach net zero by 2050. For an organisation to go ‘net zero’ it means reducing their greenhouse gas (GHG) emissions as far as possible, whilst ensuring that any ongoing emissions are balanced by removals. However, given the scale of the challenge, setting a net zero goal is not enough. It will not, in itself, prepare companies for the transition to a net zero economy.

Setting a net zero goal is not enough to prepare for a net zero economy

Whilst the maths around net zero sounds straightforward, methods for emissions calculations, scoping which emissions to include and the thorny issue of absolute reductions versus offsets is a complex and contentious area. This is demonstrated by the proliferation of studies and articles accusing corporations and countries of communicating at best ‘white noise’ and at worst ‘greenwash’ on climate change.

The

Science Based Targets initiative (SBTi) Net-Zero Standard

has attempted to provide some clarity on what a ‘good target’ and a robust implementation strategy looks like. Whilst the guidance on target setting is timely (companies should set both near- (5-10 year) and long-term targets, aligned with a 1.5 degree future, addressing emissions across their value chain) it is the implementation strategy that feels critical to address broader concerns around achieving net zero.

The ‘mitigation hierarchy’ is fundamental to a robust implementation strategy. This isn’t a new or radical concept. It sets out how actions towards net zero should be prioritised (see

figure 1

). Companies should implement strategies to achieve net zero targets by eliminating and reducing emissions prior to compensating for emissions through, for example, offsetting.

However, it is vital that we avoid ‘carbon tunnel vision’. In an era where we are experiencing the triple crises of climate change, biodiversity loss and social inequality businesses must think beyond carbon and take the opportunity to invest in nature projects that also deliver on biodiversity and social benefits.  This includes ecosystems like forests, mangroves and peatlands that are carbon strongholds, in many cases holding irrecoverable carbon that, if lost, will not be able to be restored by 2050. Climate change is intrinsically linked with biodiversity and social issues, so protecting intact ecosystems, for example, are not only designed to deliver multiple benefits, but are likely to be more resilient in the long term and, according to research, are the most cost-effective option when offsetting.

The mitigation hierarchy is fundamental to robust implementation of a net zero target

Carbon offsetting

means buying carbon credits from projects that reduce, avoid or even remove GHG emissions from the atmosphere, in order to compensate for emissions made elsewhere. This happens through the voluntary

carbon market

(VCM). It is generally agreed that we can’t reach absolute zero emissions within the timescales needed, and so they represent a valuable tool within a net zero strategy. However, offsetting has been plagued by concerns over quality and integrity. Offsets are an unregulated market, and have been cheap, opaque and therefore ripe for greenwash, earning themselves a bad name as a ‘license to pollute’ due to mis-use.  

A

recent study

by the New Climate Institute and Carbon Market Watch found that of 25 big companies with net zero targets only three had deep

decarbonisation plans,

with the majority relying on last-minute offsetting of more than half their supply chain emissions using technologies and processes that may not exist commercially yet. This feels a long way from robust application of the mitigation hierarchy to offset only the residue of unavoidable emissions. It is not surprising to hear Mike Berners-Lee, a university professor and carbon emissions consultant, said that even talking about offsetting “has a tendency to take away some of the energy from the carbon-cutting side of the equation”.

However, when considering that high integrity offsets have the capacity to provide significant 

cash injections into underfunded climate solutions, as well as co-benefits such as tackling biodiversity loss and social inequalities, are they all bad?

The question is not whether offsets are good or bad, but which ones are good.

Mukti Kumar Mitchell

Director, Carbon Savvy

Determining good versus bad offsets is easier said than done, with a vast array of projects available and each one having its own unique context and risks. A first attempt at formalising this is being undertaken by the

Integrity Council for Voluntary Carbon Markets

, who will release guidelines for determining a “good” carbon offset in the latter part of this year. As they say, ‘the proof of the pudding will be in the eating’. In the meantime, there are a few key points to bear in mind: certified carbon emissions reductions are not a guarantee of high integrity offsets; additionality of the project is critical to its integrity (could it have been viable in the absence of an offsets market?); offsets must be permanent; climate is not the sole lens to use when looking at offsets - there has been increasing recognition of the importance of biodiversity and social benefits through nature-based solutions (NbS). 

NbS are “actions to protect, sustainably manage, and restore natural or modified ecosystems, that address societal challenges effectively and adaptively, simultaneously providing human well-being and biodiversity benefits”. [IUCN]

A recent UCL study found that over the next 10 years nature-based solutions protecting existing forests and restoring degraded land will be the most cost-effective option when offsetting. Companies can also align these investments with their values - such as supporting global health, inequality or decent work. In addition, the

time to invest in nature is now

, as if nature restoration is scaled up rapidly, these ecosystems will be able to help cool the planet in the second half of this century. 

A key issue in the VCM is that offsets are unsustainably cheap ($3-5/tCO2e). Prices need to rise significantly if they are to have high environmental integrity. With net zero targets being on an upward trend, demand and prices are set to increase over the next decade. Whilst it is unclear exactly how high prices will go, the recent UCL study showed they are likely to grow 5 - 10x the current price over the next 10 years. This price increase is a catalyst for change. It suddenly makes investment in the carbon-cutting side of the equation more attractive, and will hopefully drive a reassessment of net zero strategies in those organisations currently looking to offset the majority of their emissions.

Increases in the price of offsets will be a catalyst for change

Having a net zero target may be fashionable, but the target alone (even one with integrity) won’t prepare companies for a net zero economy. Whilst it is critical that business gets these targets right, behind all the controversial press coverage is another issue - that of adaptation.

Climate change adaptation refers to adjustments of strategies and actions in response to the effects and future risks of climate change. These risks may be linked to the physical impacts of climate change; but also the economic impact of a transition towards net zero (these include risks associated with changing markets, policies and regulation, technology, legal landscape etc.). Identifying, managing and adapting to these risks is key for the development of a resilient business that can survive, and even thrive in the unprecedented physical and transitional changes ahead.

Extreme weather events already mean that wherever you are, it is not business as usual

The Task Force on Climate Related Financial Disclosures (TCFD) is a key framework providing guidance on how to map climate related risks and opportunities. Whilst TCFD reporting requirements currently only cover larger organisations in certain jurisdictions, their

Risk Management Guidance

can be used at a high level to identify, assess and manage climate-related risks and opportunities (without the need for a full-blown, data-driven assessment). 

However, we are yet to see widespread, robust adoption of this guidance driving meaningful corporate insights; and we are starting to see similar reports on the poor state of play of corporate adaptation as we have for net zero targets. A recent article in the

Financial Times

highlights how the European Central Bank has accused banks of publishing “a lot of white noise and no real substance” when it comes to disclosures of climate risk. Understanding the risks and opportunities that climate change poses to a business is central to understanding how a business needs to adapt its strategy. 

A key barrier is that most companies lack the internal capability to understand their exposure to physical and transition risks and opportunities, and to subsequently adapt their strategies and actions. The speculative nature of long-term climate change means that formulating a strategic business response is new and challenging territory for most corporates. This means it could be an even harder nut to crack than the net zero targets one. 

The risks associated with the transition to net zero are getting increasing attention. Business needs to adapt and develop more resilient business models that can weather the storm of the net zero economy transition.

We can already see a suite of rules and task-forces trying to drive a smooth transition by increasing the integrity around mitigation measures such as net zero targets e.g. the SBTi Net Zero Standard; the Integrity Council for Voluntary Carbon Markets. However, driving robust adaptation seems harder to distil down to a set of rules or standards. The whole adaptation process is so unique to the context of each business. It is clear that organisations need to upskill their workforce, so they have the capability to understand climate-related risks and opportunities and apply them to adapt their strategies accordingly. However, with promising signs on the horizon for the integrity of mitigation, adaptation is lagging behind.

Climate adaptation cannot be an afterthought

Rosie Dunscombe is an independent consultant and a member of the Earthly Scientific Board. She combines nearly 20 years’ experience of chartered accountancy and environmental economics to advise and train business on sustainable business strategy.

Olivia Crowe is a research associate at Earthly. She is exploring strategies to scale investment in nature protection & regeneration, reducing social inequality and avoiding the worst impacts of climate change.