Climate change has threatened the future of humanity. After recent international summits, many countries have established policies on carbon emissions and carbon taxes, escalating carbon reduction issues from a previously moral issue to a current economic issue, hence directly impacting the operations of corporations, with carbon neutrality becoming one of these popular terms. This article will define carbon neutrality, its importance to corporations and the world, as well as how corporations can achieve carbon neutrality.
What is Carbon neutral?
Amidst this trend of carbon reduction, carbon neutrality has become one of the objectives in controlling rising global temperature. The initial definition of carbon neutrality is the reaching of a balance between carbon emissions and carbon sinks (systems with higher carbon dioxide absorption than carbon emissions, such as forests, soil, and oceans) during a particular period, thereby removing the additional carbon dioxide emissions produced by humans.
On a smaller scale, when carbon neutrality is set out as a goal for countries and corporations, it is mainly achieved through source carbon reduction and end offset. Carbon emissions are first reduced to the minimum, then carbon offsets such as afforestation, soil carbon enhancement, peatland restoration, and direct air carbon capture and storage (DACCS) are implemented to artificially create carbon sinks and hence achieve carbon neutrality. For example, airlines offer carbon neutral flights and oil firms offer carbon neutral trips. Such business activities still produce carbon emissions, but carbon neutrality is achieved through carbon offsets.
Why is the world working on carbon neutrality? How does it help to achieve climate change?
The IPCC has pointed out that the average temperature between 2006-2015 is 0.87°C higher than that between 1850-1990, meaning artificial greenhouse gases have greatly increased the temperature by 0.2°C per decade.
The global temperature rise leads to rising sea levels, extreme temperatures, and the increase of the frequency and intensity of rainfalls and droughts. For example, in 2022, Europe had the hottest June to August in history, with resulting heat and wildfires causing more than a thousand deaths. The U.S. also had the coldest Christmas eve in 40 years with a storm that caused more than 50 deaths. Controlling greenhouse gas emissions, therefore, has become an urgent issue.
To prevent climate change inflicting catastrophic impact on humanity, the IPCC proposed a plan to control the temperature rise to 1.5-2°C since the Industrial Revolution. To keep the temperature rise at 1.5°C, global greenhouse gas emissions must be reduced by 45% by 2030 and net zero (the total greenhouse gas emission equaling the carbon sink) must be achieve before 2050. Carbon neutrality is the first step in carbon reduction as it helps remove the carbon emissions of individuals, activities, corporations, or even countries.
Global governments achieving carbon neutrality by 2050 and the status quo
Cap and Trade
Carbon caps and trading would first be regulated by a country as it assigns total emission allowances to industries based on the carbon reduction goal. The allowed emission cap a corporation receives is based on the total allowance, and the assignment formula is called the “carbon allowances.” Each year, when a corporation produces spare carbon credits by carbon reduction or other means, the corporation can trade these carbon credits with corporations which are short of carbon allowances on the market. Carbon credit markets have emerged in the EU, South Korea, Japan, the U.S., and China.
Carbon Border Adjustment Mechanism
Besides domestic regulations on carbon reduction, carbon emission is also seen as part of the international fair-trade competencies as carbon reduction requires equipment upgrades and green energy, which incur higher costs. The EU and the U.S. would soon propose carbon border taxes and determine the carbon intensities (the carbon dioxide emission per GDP, the formula being the carbon emission divided by the total revenue) of domestic industries. If the desired imported products have higher carbon intensities than the domestic ones, taxes will be imposed on the difference in carbon intensities. This is estimated to be implemented in 2023-2024, and will impact industries with high carbon intensities such as the steel, concrete, and fertilizer industries.
Why should corporations achieve carbon neutrality? How does it benefit them?
Compliance with national policies
According to the World Bank, by April 2022, there are 47 countries in the world with fuel carbon taxes, carbon emission controls, and domestic carbon credit markets which might raise the costs of fossil fuel energies for the retail electric industry and thus impact corporations. Various countries are also proposing carbon border taxes. If the carbon intensities are higher than the average carbon intensities of the industries in the desired export destination, manufacturers for importing goods would have to face additional costs.
Exceeding carbon allowances issued by the country will lead to a fine multiple times higher than the average price on the carbon credit market. Besides, certain countries have energy consumption limits for certain products. For example, the EU has set an automobile emission control goal (Euro 7 in 2022) which requires car manufacturers to keep the average fuel economy lower than a set figure or face a massive fines if otherwise. In one case, Ford faced a 100 million fine in 2020.
Developing business resilience and sustainability
The UNFCC Conference of the Parties 26 (COP26) has officially proposed the goal of gradually replacing fossil fuels. Moreover, in recent years, elements such as the pandemic and war have disrupted the global supply chain, destabilizing the fossil energy market. Reducing the dependency on fossil energies and materials can help corporations respond to the changes in energy prices, energy transformation, and regulations.
Climate Neutral’s simulated market study revealed that 87% of the Americans prefer carbon-neutral labeled product while 92% of them perceive carbon-neutral labeled products to be of higher quality. Offering carbon neutral products and services to become a carbon neutral corporation helps improve their image and meet consumers’ expectation of sustainable consumption.
If the sales target is other companies, there are many corporations with net zero plans, which rely on the entire supply chain to reduce carbon emissions. Therefore, some sales terminal brands, such as Apple, have requested their supply chains to reduce emissions or even achieve carbon neutrality. If carbon neutrality can be achieved, it would help meet their clients’ needs and improve product competitiveness.
According to the 2020 biennial Global Sustainable Investment Alliance report, amongst all professional investments, ESG investments have reached 36.1% in 2020 with the potential of reaching 50% in 2024. If carbon neutrality can be reached, it would greatly benefit a corporation’s ESG evaluation as it meets the value of sustainable operations. Various banks have proposed concessional loans and investment portfolios for carbon neutral corporates while decreasing lending to corporates that underperform in carbon neutrality.
Ways for corporation carbon neutrality – carbon offsets
Carbon offset is a way to offset the remaining carbon emissions after reducing carbon emissions by purchasing carbon credits. Carbon credits are generated from carbon sinks, such as afforestation. Currently, many institutions offer carbon credits that are generated from projects for corporate purchase. For example, Certified Emission Reductions (CERs) from the Clean Development Mechanism (CDM) can be purchased on the UN’s carbon offset platform, the procedure is very simple. One selects the desired project, adds it to the cart, and check out directly to transfer payment to the project. The UN’s official website will send a digital offset certificate to the purchaser, who should select “I am offsetting greenhouse gas emissions for my company.” as its use. After getting the digital certificate, they may use it for carbon offsetting for a corporate.
Differences between carbon neutral vs. net zero
Carbon neutrality and net zero both mean offsetting artificial greenhouse gases through emission reduction and creating carbon sinks (in natural ways such as reforestation or artificial ways such as carbon capture). However, carbon neutrality only requires the neutralization of carbon dioxide emissions in certain scopes: one being greenhouse gas emissions from sources owned or controlled by the organization, and another being greenhouse gas emissions from energy providers that an organization purchases energy from, such as indirect emissions from purchased electricity for manufacturing plan fiber cutlery or direct emissions from the combustion engines of logistical vehicles. Net zero on the other hand is comprehensive and full spectrum. Besides evaluating all impacts from greenhouse gas emissions, a third area (indirect greenhouse gas emissions from downstream or upstream activities of the value chain that are not directly from the organization or purchased energy) must be included as well. Using the aforementioned plant fiber cutlery for example, the third area would include greenhouse gases from upstream or downstream transportation, carbon emissions converted from water use for cutlery washing, and emissions from product disposal.
Differences between carbon neutral, carbon positive and carbon negative
Carbon neutral refers to the balance between the CO2 emissions of the activities of individuals, organizations, corporations, and countries within a specific period, and the carbon sinks built by them, namely that all carbon emissions are offset.
Carbon positive was first implemented in the architecture industry and a hamburger company in Sweden. They stated that the benefits from their carbon reduction actions would surpass those of carbon neutral since they had removed more CO2 from the atmosphere. However, when carbon positive was reviewed along with carbon negative, its definition was easily confused as having positive carbon emissions after carbon offsetting. Hence, many people now describe this kind of action as “climate positive.”
Carbon negative means that the CO2 emissions of individuals, organizations, corporations or countries within a specific period are less than zero. This can be achieved through carbon negative technologies (such as using materials that absorb CO2 and storing it by burying them) as well as carbon offsets that exceed carbon emissions.
Carbon negative and climate positive mean that the CO2 removed surpasses the self-generated emissions. Carbon neutral, on the other hand, refers to them being exactly offset.
How can we achieve carbon neutrality
Step one: Establish promises and plans against climate change
Climate change has become an issue every citizen on Earth has to face and address. It is crucial for corporates to promise carbon neutrality and even net zero. Many corporations have set the goal of carbon neutrality or net zero between 2030-2050. A long term goal must have short- or mid-term goals to be practical. To follow international trends, one can join the Science Based Target initiative (SBTi) to set a science-based reduction target according to the SBTi and submit it to be reviewed and published by the SBTi.
Step two: Define projects to start carbon neutrality with
Corporates produce carbon emissions in many ways. One shall define projects they wish to achieve carbon neutrality with according to their reduction targets. One can start with a single business activity, such as carbon neutralize a certain product, and improve gradually until the entire organization achieves net zero.
Step three: Verify project carbon emissions and reduce emissions
When the project for carbon neutrality has been decided, the corporation should verify the carbon emissions to see which parts have higher emissions or room for improvement to implement improvement measures such as introducing energy-saving equipment, electric cars and scooters, reducing package materials, or using recycled materials or adopt the ISO 50001 standard to systemically improve energy use.
Step four: Compensate necessary emissions with carbon offsets
When carbon emissions cannot be further lowered, corporations can purchase carbon credits from agencies or organizations to achieve carbon neutrality. Note that if carbon neutrality is needed for a certain purpose, such as complying authority regulations or investor policies, corporates should select carbon credits certified by standards approved by the certain companies. For example, Carbon Offsetting and Reduction Scheme for International Aviation only approves 9 units including ACR, ART, CDM, CAR and others (as of 2022/11/25). If international credibility is needed, a corporate can seek third-party corporations such as SGS or BSI for certification of its carbon neutrality declaration according to the PAS2060 standard with the ISO14064, 14067 carbon footprint verification.
Step five: Clear disclosures to stakeholders
When a corporate achieves carbon neutrality, it can disclose its results to stakeholders such as consumers, supply chain, investors, and authorities. Besides corporate press releases or announcements, corporations can utilize the TCFD or other structures to include it in its ESG report so its carbon neutrality case can be reviewed and exchanged with other corporates in the industry.
The implementation of carbon neutral has become the trend of the future, and multiple countries have set goals to reach it. Take some of the G20 countries, which are major carbon emitters, for instance: Germany aims to reach carbon neutral by 2045, while the rest of the EU, the US, Japan, Argentina, and Australia are targeting 2050. Developing countries such as China and Russia set the target in 2060, and India has to wait until 2070. Nevertheless, they have established relevant goals and measures for each term. The US, the largest economy in the world, plans to impose a carbon tax in 2024, and the EU, the third largest economy, will impose one in 2026 (and has required disclosures starting from 2023). In addition, companies that have laid out carbon neutral goals such as Apple also require suppliers to reduce carbon emissions.