Carbon Offsets and Reaching Net-Zero

By:

Lisa Ellram
University Distinguished Professor
Rees Distinguished Professor of Supply Chain Management
Miami University

Wendy Tate
McCormick Endowed Professor of Supply Chain Management
Ray and Joan Myatt Faculty Research Fellow
University of Tennessee

 

Many organizations have committed to achieving carbon neutrality by a specific date, such as 2030 or 2050. However, it is important to understand the different types of carbon neutrality in order to achieve it properly. There are two main types of carbon neutrality: absolute zero and net neutral. Absolute zero means that all carbon creation in your operations (scope 1), your energy consumption (scope 2), and your extended inbound and outbound supply chain (scope 3) have been completely eliminated. Achieving absolute zero is the most challenging type of carbon neutrality. Net neutral involves offsetting or sequestering the carbon you still create, rather than eliminating all carbon emissions. This is a more common approach than absolute zero and involves using offsets, renewable energy credits, and sequestration to neutralize the remaining carbon emissions.

Basic Concepts and Definitions Related to Climate Commitments

Most companies are not able to achieve absolute zero emissions because the technologies needed to reach this state do not exist on a broad enough scale. Absolute zero is not even included as a goal in the Science Based Target Initiatives (SBTi) that many companies are pursuing. The SBTi has developed a Corporate Net-Zero Standard in consultation with hundreds of companies and experts, which is specifically geared toward non-financial institutions with more than 500 employees. It provides separate guidelines for SMEs and financial institutions. The SBTi guideline states that the pathway to reaching net zero requires:

• Reducing scope 1, 2, and 3 emissions to zero or to a residual level consistent with reaching net-zero emissions at the global or sector level in eligible 1.5°C-aligned pathways.
• Neutralizing any residual emissions at the net-zero target year and any GHG emissions released into the atmosphere after that.

Following the pathway to reaching net zero requires four key steps (applicable with or without an organizational commitment to SBTi):

1. Set a near-term science-based target: Set science-based targets for emission reduction for 2030, this requires a minimum of halving current emissions by 2030.
2. Set a long-term science-based target: Commit to net zero emissions by 2050 by coming close to zero and neutralizing any emissions that cannot be eliminated.
3. Mitigate scope 1, 2, and 3 emissions: Most companies have targets to mitigate 90% of their emissions by 2050.
4. Neutralize any residual emissions by the time of your net-neutral target date: Neutralization may involve purchasing or creating offsets or looking for carbon sequestration options.

After mitigating the emissions you can, the focus shifts to neutralizing the remaining emissions. One approach is to create some type of offset which requires investing in reducing emissions elsewhere. These investments can come in the form of creating carbon offsets, buying carbon offsets, or creating or buying renewable energy credits. Carbon offsets offer the only practical way to claim “carbon neutrality” since it is difficult, if not impossible, to eliminate carbon footprint using only internal measures.

What are offsets?

Carbon offsets involve directly investing in or paying someone to invest in the reduction or removal of emissions of carbon dioxide or other greenhouse gases made to compensate for emissions outside of your operations. Organizations can purchase carbon offsets through brokers or invest directly. Some of the types of projects that can yield carbon offsets include replanting forests, investing in methane capture (carbon removal), investing in preserving a forest that was going to be cut down (avoided conversion), investing in renewable energy projects like windfarms, biomass, biogas digesters, and investing in energy efficiency projects like cookstoves or solar lamps in emerging economies.

How to Manage Offsets

Individuals, companies, organizations, and governments who purchase offsets to mitigate their greenhouse gas emissions to meet carbon neutral, net-zero, or other established emission reduction goals generate demand for carbon offset credits. The voluntary market is facilitated by certification programs that provide standards, guidance, and establish requirements for project developers to follow to generate carbon offset credits.

To offset the carbon emissions that cannot be eliminated, companies must look for credible, high-quality carbon offsets. It is important to purchase verified offsets, as this ensures the money invested is being used appropriately and the number of credits being produced is accurate. Certification is essential for this reason. The United Nations has a certified carbon offsets program, and many brokers also sell certified, verified offsets. The carbon offset guide provides a step-by-step approach for acquiring high-quality carbon offsets. This job requires someone knowledgeable or willing to learn about carbon markets, the organization's carbon commitments and performance, carbon-related issues, and climate change trends. The cost of carbon offsets varies significantly and is expected to increase as more companies demand them and competition increases. The UN's most recent view of carbon offsets has a price range of $1.50 per metric ton (MT) (1 ton available) to $20 per metric ton (MT) (~9000 tons available). A hydro project is available at $2.50 per MT, with over 190,000 MTNs available to offset. While it may be possible to purchase cheap offsets today to neutralize carbon, the price may increase dramatically in the future. This is because offsets are a pure expense, not an investment. There are numerous options available for companies to offset their net-zero targets, and the landscape is constantly changing.

CAPS members can read the full paper Carbon Offsets, Carbon Sequestration, and Renewable Energy Certificates in the CAPs library by clicking here. 

CAPS is a B2B nonprofit research center serving supply management leaders at Fortune 1000 companies. CAPS Research inspires leaders with profound discovery and executable strategies to shape the future of supply management. Research reveals the destination, benchmarking charts the course, and networking creates the path to transformation. All CAPS offerings are sales-free, bias-free, and practitioner-driven. CAPS was established in 1986 at the W. P. Carey School of Business at Arizona State University in partnership with the Institute for Supply Management. Learn more at www.CAPSResearch.org.