Climate Clarity: Understanding the difference between Net-Zero, Carbon Neutrality, and Science-based Targets

By Niki Bey

You might find yourself a bit overwhelmed or puzzled by the sustainability terms that a growing number of companies put up as part of their targets for sustainable change. And maybe you are not even sure how to interpret your own company’s ambitions or unable to ask the right questions.

Either way, this article is here to help as we uncover the most common terms while also briefly touching upon types of emissions and types of scope to ease the understanding and help you make informed decisions.

In the decade of action, The Paris Agreement objectives can only be met if substantial reductions of Greenhouse Gas (GHG) emissions are undertaken by all economic sectors, companies amongst others.

There are many initiatives driving companies to reduce their climate impact. Last year, for instance, 100+ global financial institutions urged companies to set 1.5°C aligned science-based targets through the Science Based Targets initiative (SBTi). Since then, more companies are committing to reduce their emissions, including an increasing number of small and medium-sized enterprises.

Companies and public entities typically set reduction targets to address this commitment, and in recent years different terms are used and intertwined. Some examples are:

• The European Union aims to be ‘climate neutral’ by 2050 and have a ‘net-zero’ economy
• The UK has set a ‘net zero’ target by 2050
• Many large multinational companies such as Microsoft, Ørsted, Vestas, Walmart, and Siemens have committed to ‘science-based abatement targets which are consistent with reductions required to keep the world warming up to 1.5°C
• 73 asset managers across the globe have signed an international agreement to commit to ‘net zero’ GHG emissions by 2050
• 31 companies have signed the Amazon-led Climate Pledge, committing to become ‘carbon-neutral’ by 2040

Because of the mix of terminologies, recent initiatives have set clear guidelines and frameworks, e.g. PAS 2060, DNV GL’ Carbon Neutrality Protocol, Natural Climate Partners’ Carbon Neutral Protocol, SBTi’s Net-Zero criteria. Yet, it is important to remain vigilant because still today these terms are often used quite differently.

When considering which approach one should take (Net Zero, Carbon Neutrality and/or Science-based Targets), it is important to have a clear understanding of the scope of the activities and the scope of greenhouse gases.

The scope of activities indicates which activities are considered when measuring the company’s emissions. These can be limited to the company’s own activities or extend to activities in the company’s value chain. The GHG Protocol - which is the most widely recognized globally for establishing reduction targets and GHG quantifications - splits the scope of activities into three groups:

• Scope 1 emissions originate from the activities owned by the company, e.g. transportation, fuel combustion in production.
• Scope 2 emissions originate from the production of electricity, heat and steam purchased by the company.
• Scope 3 emissions include all other emissions originating from activities in the company’s value chain, e.g. emissions to produce raw materials, to use and to dispose of the company’s products.

There are 25 gases with greenhouse gas effect defined by the Intergovernmental Panel on Climate Change (IPCC). They are called “Greenhouse Gases” or “GHGs”. CO2 is only one of these gases. Some key greenhouse gases are presented below.

For many organisations and enterprises, GHG emissions are primarily driven by energy use, with CO2 emissions representing the vast majority. However, other GHGs can be very important in other sectors, for instance, methane and nitrous oxide emissions in the agricultural sector, and HFC gases for logistics companies performing refrigerated transport.

Companies typically focus either on CO2 only or on all GHG emissions, the latter being expressed as “carbon dioxide equivalent” or “CO2-eq.” Carbon dioxide equivalent allows to aggregate all GHG emissions and account for their different degree of impact on the climate.

Currently, on the market, we find ‘Carbon Neutrality’ targets mixed up with ‘Net Zero targets’. Moreover, the reach of ‘Science-based targets’ is expanding, which adds confusion on their differences and validity.

These terms do not mean the same. They differ in their scope (GHGs and activities) and in the mitigation approaches they allow, i.e. abatement of own emissions as opposed to compensation measures. Even though there are guidelines that can inform you on how to use these terms when committing to targets, they are still rather extensive and confusing, and they lack alignment so guidance can be contradictory and unclear.

There are three main types of commitment that are used rather extensively today:

Guidelines for carbon neutrality claims have recently been developed, for instance by the Natural Climate Partners’ Carbon Neutral Protocol. However, this is not widespread and many carbon neutrality claims do not refer to any existing standards.

Typically, carbon neutrality targets cover CO2 emissions only, are flexible regarding the scope of activities, and use a mix of abatement and compensation activities, as long as compensation measures balance towards neutrality. Compensation is achieved by the purchase of carbon offsets/credits and/or investment in carbon removal projects.

Ensuring the validity of such credits/projects often remains a challenge which is why there are guidelines under development. For instance, the European Commission is currently looking to establish a certification mechanism for carbon removal projects to ensure the validity and robustness of these projects (Ramboll is participating in this project).

However, since there are no rules to include compensation in carbon neutrality targets, compensation may be used extensively, to the detriment of abatement.

This can be addressed by combining carbon neutrality and science-based targets, which is an approach adopted by some companies. The current trend indicates that more companies will turn to net-zero rather than carbon neutrality, especially if they want to communicate a more robust commitment.

Beyond these three terms, other companies commit to becoming ‘climate neutral’ or even ‘climate positive/negative’, meaning that compensation credits or investments in removal projects are higher than the company’s unabated GHG emissions. Unlike carbon neutrality, climate neutrality encompasses all types of emissions, not just carbon.

Given the current popularity of carbon neutrality/positivity/negativity targets, it is expected that companies will increasingly invest in compensation and neutralization mitigation strategies. This requires, though, a higher level of consistency and reliability of the compensation and removal solutions found on the market today.

Net-zero targets cover all GHG emissions, and they allow compensation activities too but typically under given time horizons and specifications. Also, some companies committing to these targets include (partially) scope 3. Net-zero targets are being approached highly inconsistently by companies.

The ‘Science-based targets’ is currently developing specific guidelines to define these type of reduction targets, allowing only for a small share of emissions to be compensated or neutralised under a given timeline, keeping the focus on abatement.

However, other initiatives such as the Net Zero Asset Managers Initiative allows compensation to be used more freely but still setting specific rules for Scope 1 and 2 GHG emissions abatement. Due to current trends, it is likely that companies will have to follow specific guidelines if the ambition is set to net zero.

The last set of targets in focus here is science-based targets. They focus on abatement of emissions, which means reducing GHG emissions associated with the company’s activities.

The Science-based Target Initiative - a global partnership initiative - has clear guidelines on how to define these targets. They require companies to include all relevant GHG emissions, to set targets in line with reduction scenarios compatible with the Paris Agreement, and to include their Scope 3 GHG emissions if these represent more than 40% of their total GHG emissions.

Since they focus on abatement, overall compensation is not allowed with SBTs, unless companies and public entities also commit to science-based ‘net-zero’ targets where compensation is allowed to a limited extent. Currently, there is a SBTi draft criteria for establishing net-zero targets which closed for public consultation on the 12th of March.

Due to large interest, it is expected that some of the companies that have committed to science-based abatement targets will also commit to science-based net-zero targets.

So, all the above probably begs the questions; how ambitious should one be? For instance in your own organisation? Here are a handful of points that an ambitious organisation should be able to checkmark. The organisation must be:

• Setting emissions reduction targets including all significant GHG emissions originating from your activities,
• Identifying where the largest emission reduction potential lies in your value chain, e.g. including Scope 3 activities, and include these emission sources in your target,
• Planning and implementing emissions abatement measures in accordance with available decarbonization pathways in your value chain (e.g. using the SBTi methods),
• Investing in compensation and neutralisation measures with a high degree of validity, as this provides crucial financial support for realising the global climate agenda.

And naturally, the organisation must be committing to a deadline in a not too distant future and assign both funding and senior management attention to meet the deadline. This will naturally depend on your industry and the complexity ahead, but if 2050 is your first milestone, then you are likely not leading the pack.

Ultimately, the level of ambition of individual organisations depends on many factors, such as strategic drivers, investor demands, timeline, availability and cost of technologies, transition risks, available resources, and access to financing.

Independently from the type of commitment you choose, it is crucial to communicate a clear message to your clients and stakeholders. This is obviously key if you are a senior leader driving the change but even for middle managers or organisational opinion leader, you will need a solid understanding of what you are committing to.

This way, you can explain it clearly and the employees or other stakeholders will value your level of commitment and will better understand the pros and cons of the chosen route forward.