Part II: Why Companies Need Options

If you missed part I of our series, read it here .

By Dr Jennifer Jenkins , Chief Science Officer, Rubicon Carbon

Society must reach global net zero by 2050; the IPCC's 2018 report on the 1.5 ℃ pathway conveyed this message loud and clear.?

SBTi’s Corporate Net Zero Standard translates the IPCC’s global goal into bite-size chunks, guiding firms in setting their targets over time as they make voluntary emissions reductions in line with global net zero.

?There’s no magic in that really – a “science-based target” is simply a way to describe an emissions reduction trajectory for an individual firm that gradually reduces that firm’s emissions to a point where its remaining “residual” emissions can be counterbalanced in practice by permanent carbon removal activities(1).

At that point, presumably close to 2050, the firm is releasing no new net emissions to the atmosphere, and voila! It has reached net zero. Do the same thing for as many companies as you can (especially the largest and highest-emitting ones), get them all signed up to meet their voluntary targets in Scopes 1, 2, and 3, and you’ve got yourself a plan for reaching global net zero.

Easy, right??

Wrong.

It’s just not that simple. The first thing to remember is that the decision to create and meet a target itself is voluntary.?

In a world without a global enforceable price on carbon, any company that signs up for this process is voluntarily doing so at its own expense. Those expenses are real, and there must be a benefit to the firm for incurring them. Right now, unless a company has an executive leader who believes strongly in corporate climate action, that benefit is typically limited to marketing and public perception: companies seek to mitigate their emissions and to make public claims about these reductions because they have stakeholders – such as investors, consumers, and internal associates – who care about the impact of the firm on the environment. All fine, but the recent anti-ESG backlash shows how ephemeral and fleeting these voluntary commitments can be. There’s nothing to stop a firm with a voluntary commitment from walking that commitment back when finances get tough or when public perception shifts .?

Second, we need to remember that Scope 3 emissions – by definition – are emissions over which the firm has very little control. Sure, some firms – that have done the work to create a Scope 3 inventory(2) – can try to impose constraints on their suppliers to mitigate their emissions. Still, this process is complicated, labor-intensive, slow to implement, and difficult to enforce, especially given the long tail of suppliers whose behavior a company can’t directly control. Again, the truth is that we need to balance the requirement to mitigate emissions with the fact that all of this action is itself voluntary. If we make meeting these commitments too burdensome or expensive for companies, they will simply decide it’s too hard and abandon ship.?

Finally, we need to remember that internal decarbonization is labor-intensive, and it’s expensive, and it’s nowhere near as easy as it looks, especially for companies in the Global South where government incentives for decarbonization are particularly hard to find.?

As just one example, the aviation sector today makes up 2.5% of global emissions but has no viable alternative to low-cost jet fuels, and Sustainable Aviation Fuel (SAF) is not yet available in quantities that would encourage meaningful decarbonization. Even in 2050, SAF will enable only 65% of the emissions reductions required . Air New Zealand, for example, abandoned its SBTi target last month as a result of decarbonization solutions being too costly and scarce. To meet its aggressive decarbonization goals, the airline sector will need the flexibility the VCM offers.?

We must also remember that companies operate in an environment of uncertainty. Unexpected events (like COVID-19) might lead to delays in planned mitigation projects or supply chain disruptions. Other factors – such as a corporate merger or a new technology like AI – might even increase emissions. Corporate leaders don’t want to miss their targets, but they also know that things can go wrong, so having optionality to meet their targets is critical.

Addressing emissions embedded in the value chain is especially hard for manufacturing firms, many of which operate on thin profit margins in globally competitive industries. Let’s not forget that our entire economy is built on fossil fuels, and many of our manufacturing processes rely on fossil energy and petroleum-based feedstocks to function as usual. Innovative work is underway in many quarters to replace these fuels and feedstocks with non-fossil materials and processes that are fit to purpose, but those innovations are not always available.?

Where they do exist, many of the internal decarbonization options available today are simply value-destroying for companies because they are not accessible: they are not yet deployable at a scale that makes sense for companies whose climate action remains voluntary. This argument about the availability of decarbonization technologies for the manufacturing sector actually takes the need for flexibility one step further. To be comfortable with setting ambitious targets, the hardest-to-abate industries need to know they have options for meeting those targets in Scopes 1 and 2 as well, not just Scope 3.

So, as you think about how companies might deploy the VCM as they work to move society toward net zero, I implore you to put yourself in the shoes of the CEO. Many companies originally signed up for net zero targets because they felt pressure from external stakeholders to make a long-term emissions reduction commitment. The question they face now is:? How will they actually meet that commitment? Without the flexibility to tap the carbon market in case of unexpected events, to address Scope 3 emissions, or in the event internal decarbonization options fail to appear in a timely manner, we’ll likely see more and more firms drop their net zero commitments.?

And this makes sense from a practical perspective: it’s easy to understand why a Board of Directors might reconsider its investment in an emissions reduction commitment when that commitment is voluntary, very likely will involve the adoption of technologies that are expensive and unproven, is unpopular politically, may make them less competitive with peers not undertaking similar commitments, and may even depend on actions by entities over which the Board has very little direct control.?

Some dedicated firms may be willing to stay true to such a commitment if they have the flexibility to meet their targets using mitigation outside their value chain, such as by using carbon credits. But without that optionality, we’ll continue to see firms choosing not to set or stick to net zero commitments because they simply can’t meet those emissions reductions commitments within their value chains while also fulfilling their fiduciary responsibility to owners and shareholders.

No one is served if a few firms hit net zero emissions while the planet burns past the overall net zero target. In such a scenario, hitting net zero will be a virtue-signaling exercise for the few rather than an achievable goal for the many.?

Click through for the next installment in this series: Then why do we still hear objections to the VCM ?

(1) ?You don’t actually need SBTi to create your own science-based target, though SBTi is currently the best-known entity that creates and validates these targets for firms.

(2) ?Though Scope 3 inventories themselves are difficult and uncertain (Ballentine, R. 2023. The unusual suspects: are well-meaning environmental stakeholders and institutions undercutting the contributions that companies can make to fighting climate change? Oxford Open Climate Change 3(1): kgad009. (https://doi.org/10.1093/oxfclm/kgad009 )).