What’s the Difference Between Carbon Neutral and Net-Zero?

October 28, 2021

The COP26 UN climate change conference begins on October 31st and runs through November 12th. At this 2-week meeting, world leaders and representatives from some of the largest organizations in the world are coming together to mobilize climate action to protect communities and the environment from the worst effects of climate change. The number one goal set out for this conference is to secure country and company commitments that will allow the world to reach net-zero emissions by mid-century and keep the 1.5°C warming threshold within reach. The need to achieve this goal of net-zero emissions is urgent, but among many organizations, the exact meaning of a net-zero commitment in a corporate context is still unclear.

Often used interchangeably, the terms carbon neutral and net-zero represent very different approaches to decarbonization and combatting climate change. With the rapid rise in companies and governments announcing various forms of decarbonization goals, you may be thinking, which one is better? And how do I choose the right decarbonization path for my company?

Let’s start with carbon neutral

Companies that commit to carbon neutrality ensure that emissions produced by their activities (most commonly across Scopes 1 and 2) will be balanced by an equivalent volume of emissions being removed from the atmosphere through an array of market mechanisms, such as carbon offsets.

Carbon neutral goals generally don’t include a level of decarbonization that must be achieved prior to the application of offsets for a company to be verified as carbon neutral (i.e. a 50% reduction by 2030). Indeed, it is possible – though rare – for a company to do little actual reduction of emissions and simply purchase carbon offsets to claim carbon neutrality. Furthermore, there is minimal criteria regarding what types of carbon offsets should be applied.

While some carbon neutrality certification bodies are emerging, there is yet to be a single definition of carbon neutrality or a standardized approach to how to achieve it. A carbon neutrality pledge can be a step in the right direction and is a positive shift for companies looking to progress toward low-carbon or net-zero operations. However, it’s a vague term and is generally not regarded as best practice for addressing the climate crisis.

Net-zero: the North Star for corporate climate action

The official definition of net-zero emissions from the Intergovernmental Panel on Climate Change (IPCC) is the point at which global greenhouse gas emissions added to the atmosphere by anthropogenic (i.e. human-caused) activities are balanced by anthropogenic removals over a specified period. Net-zero goals are informed by the climate science reported by the IPCC, recommended by leading frameworks like the Science-based Targets Initiative (SBTi), and were the specific call-to-action of the Paris Agreement.

At face value, the definitions of carbon neutral and net-zero sound similar, however, the outcomes for the environment and level of recognized leadership in climate action are quite different. What does the distinction really mean for corporate goal-setting? And why do organizations like the SBTi and COP26 recommend net-zero over carbon neutrality?

In short, corporate net-zero is more robust in both its definition and its guidance about how to decarbonize. Companies that commit to net-zero emissions promise to abate Scope 1, 2, and 3 greenhouse gas emissions to as close to zero as possible, and then (and only then) neutralize any truly unavoidable residual emissions.

Net-zero is meant to be a roadmap to avoiding emissions associated with 1.5°C or greater temperature increase, outlining how quickly companies should decarbonize, what emission scopes should be included, and what market mechanisms are acceptable to address unavoidable emissions. This roadmap includes:

  • Rate of decarbonization and temperature scenarios

In order to reach net-zero, a company must set a goal to reduce their emissions as much as possible, in line with the Science-based Target Initiative’s 1.5°C-aligned decarbonization pathways. According to the SBTi, most companies will ultimately make long-term emissions reductions of at least 90-95% to reach net-zero.

  • Scope of reductions

Emission reductions in line with a net-zero future must account for a company’s entire value chain, or, at a minimum, the value chain sources that account for the majority of carbon impact. An important distinction between net-zero and carbon neutrality is that net-zero must include Scope 3 emissions reduction targets.

  • Specific guidance on offsetting

The bulk of net-zero emission reductions must result from actions without the use of carbon offsets to neutralize residual unabated emissions. While some use of carbon offsets and removal through nature-based solutions is allowable in the official SBTi Corporate Net-zero Standard, offsets should primarily be used as 1) the entry point into longer-term emissions reducing activities or 2) applied only to impossible-to-abate emissions in sectors without equivalent and available zero-carbon options.

High-quality, verified carbon offsets are a useful and necessary tool in any company’s climate action toolbox, especially to reach near-term goals in the transition to net-zero, for bridging the gap to address impossible-to-abate residual emissions, and for financing additional climate mitigation after a science-based emission reduction target is achieved. However, they should not be relied upon for long-term decarbonization goals or in place of other abatement or transformational strategies.

Terminology matters

No matter how well-intentioned, a carbon neutrality commitment does not necessarily entail an actual reduction in overall greenhouse gas emissions. Through the use of energy attribute certificates (EACs) and offsetting, a company could technically achieve carbon neutrality even while its absolute emissions are increasing. Furthermore, even with universal adoption of carbon neutrality, the world could still miss the mark on avoiding the 1.5°C warming threshold. In contrast, a universal movement toward net-zero would rapidly put the world on track to avoid the worst impacts of climate change.

Just as the RE100 has well-defined guidance for what it takes for a company to reach 100% renewable electricity, the SBTi net-zero guidance clarifies exactly what companies must do to be certified as net-zero. The highly-anticipated new guidance is expected to become the industry standard for corporate net-zero targets, catalyzing corporate efforts towards net-zero and solidifying the path forward for the many companies that have already begun working toward net-zero emission operations.

Schneider Electric’s expert sustainability consulting team has played an active role in providing feedback on draft materials during SBTi’s net-zero framework development process. Setting long-term and interim goals to reach the ultimate goal of net-zero emissions is an iterative journey for corporates of any size. Understanding where to start to reach your desired level of decarbonization at any step on your path can be challenging. That’s why we developed an interactive guide to Basic, Better, and Best decarbonization goals and action steps. Explore our guide to benchmark where your organization’s decarbonization program stands today, and what it will take to get to net-zero.

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