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21 Dec 2020

Understanding Net Zero: What Is Net Zero?

By Liz Curmi, Citi Global Insights Net zero is the path for the business world to be part of a sustainable future

Net zero is not that a company, city, country or even household will produce no harmful emissions. It is that across the supply chain any emissions are offset to achieve an effective zero emission status.

A company can achieve this in isolation, but it will come at a cost as any inputs across the supply that go into manufacturing a product or service will have to be accounted for in the path to the consumer - and that may come at a cost to all companies along the supply chain as well as the end consumer.

However, a company with a net zero target, particularly with a hard timeline to achieve that goal, will gravitate to other companies with similar objectives, as they will act as cost effective partners that do not require potentially costly offsets to reach a net zero target.

They likely will also gain a competitive advantage by being an early adopter, as the processes will already be in place once net zero becomes mainstream. Society is also likely to favour brands and products that can demonstrate a commitment to a better environment.  

The same will apply to any other entities seeking to negate emissions, be it a sovereign or a metropolis,

The concept of ‘net zero’ has arisen from (1) the drive to reduce the world's net amount of emissions to zero by 2050 and (2) an increasing number of corporate, city and sovereign targets embracing the target.

What Exactly Does ‘Net Zero’ Mean?

First of all, the distinction between zero emissions and ‘net zero’ is an important one. The ‘net’ element implies that an entity could still be producing significant quantities of CO2, so long as these were in some way offset, be it via other activities (e.g., reforestation) or potentially via the purchase of carbon offsets.

At this point there is no standardisation of net zero targets, and there is a significant difference in the ambition, and dare we say quality, of these targets. Some mean exactly what they say — with a strategy and business plan to take an organisation to net zero emissions by a certain date, and published milestones along the way with progress being independently audited and reported on.

For others, ‘net zero’ can consist of merely an aspiration, and the technology may not even exist for some industries to get there.

The latter should not be castigated. Indeed it could be argued that for a business to aspire to this, without the technology yet existing in a commercially viable format, is actually braver than for the business where it exists and is just marginally more expensive, requiring only a tweaking of the business model.

The pragmatic approach

This highlights another important point —we should not view all net zero targets as equal in their complexity. For a predominantly coal-fired utility to reach net zero will require a root and branch rethink of its business model, and a potentially complete rotation/turnover of its operating infrastructure and assets.

Conversely, for a media company, it could just mean purchasing its electricity (and heat, etc.) from renewable sources, as well as examining emissions related to product sourcing, distribution, etc. if applicable.

All are equally worthy, but some are significantly more complex, fundamental, and expensive. By the same token, to move our coal-fired utility to net zero will clearly have a greater systemic benefit than for our media company, and hence we should recognise the greater benefit that comes from that greater cost and complexity or transformation.

The different paths to net zero

Which brings us to perhaps the greatest area of contention and misunderstanding about net zero targets — the so-called ‘Scopes’, as described below:

  • Scope 1: Refers to all direct emissions from the activities of an organization or under their control. This includes fuel combustion on site such as gas boilers and fleet vehicles.
  • Scope 2: Refers to indirect emissions from electricity and heat purchased and used by the organization. Emissions are created during the production of this energy and eventually used by the organization.
  • Scope 3 – Refers to all other indirect emissions resulting from the activities of the organisation and occurring from sources they do not own or control. These are usually the largest share of a company’s carbon footprint, covering emissions associated with business travel, waste management, upstream and downstream transportation of their goods and services, etc.

For some companies, such as oil companies, it will also entail emissions resulting from the usage of their end product, e.g., emissions resulting from using gasoline manufactured by the company to fuel a car, as well as the emissions resulting from making the concrete which they may use in drilling operations.

Most importantly, these emissions are outside of the company’s direct control. They are also the hardest to quantify, not least as there are usually multiple suppliers and distributors involved. Moreover, accuracy tends to suffer as there are an increasing number of assumptions regarding, for example, how much of a supplier’s emissions actually relate to the product that a company is using or consuming.

Pressure is mounting

Effectively, what this means, is that any business which commits to being net zero — at least on Scope 1, 2, and 3 basis — must therefore ensure all of the elements of its supply chain and distribution network (and in some cases incorporating the usage of the end product) are net zero.

There will be costs involved, and across a long supply chain it could be significant. The path of least resistance will be for companies with similar aspirations to seek each other out.

 

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