Why net-zero targets require carbon offsets to succeed

Corporations have been making—and publicizing—their net-zero carbon emissions commitments at a rapid clip. Oil companies, airlines, global manufacturers, and even entire countries are promising to achieve a balance between the greenhouse gas emissions they produce and the amount they remove from the atmosphere, often by 2050.

With climate change concerns and impacts accelerating, these net-zero goals are encouraging. But digging deeper, the question remains: What do these promises really mean? And just as importantly, how will companies and countries achieve their net-zero emission aspirations?

This is where carbon offsets come into play. Few organizations can reach their net-zero goals solely via emission-reduction initiatives. Most are left with some residual emissions, which they can neutralize with carbon offsets. But as noted in the previous article, the carbon offset market remains opaque and lacks standardization.

Creating a more sustainable carbon offset market could provide an answer, by providing offset standards, eliminating low-quality decarbonization projects from the pool, and making it possible for net-zero promises to become a reality.

What's behind net-zero?

Net-zero commitments have become increasingly common. In fact, more than 110 of the 167 "Climate Action 100" focus companies have set a net-zero target. The Climate Action 100 represents a group of 600 investors and asset managers who have pledged to get their heaviest-emitting portfolio companies to decarbonize. The group is specifically focused on these 167 companies because they produce such a high amount of emissions.

For these 110 companies to achieve their net-zero goals by 2050—the target date for most net-zero commitments—they'll need to reduce their emissions by a collective total of 10.6 billion metric tons of carbon dioxide on an annual basis. That figure accounts for 20% of global CO2 emissions today. Indeed, creating more sustainable business practices that benefit the environment is part of the motivation for companies that set net-zero goals.

But you can't discount the pressure from investors and investor groups such as the Climate Action 100. They see the business risk that climate change poses to their portfolio, and they're pushing for their holdings to become decarbonized. Investors also see potential upside (even beyond benefits to the planet) as companies making net-zero promises innovate new products and create investment opportunities to reach their emission goals. For example, the technology sector is currently creating software, hardware, and other products to help customers decarbonize.

The carbon offset connection

While groups such as the Science-Based Target Initiative (SBTI) are developing frameworks for setting and evaluating effective net-zero goals, there's currently no required standard for what a net-zero commitment means. For instance, some organizations may include Scope 1, 2, and 3 emissions, including direct emissions generated by the company and indirect emissions generated by upstream suppliers and the company's products. Meanwhile, other organizations may only include emissions they produce in their net-zero commitment.

SBTI's framework calls for net-zero goals that encompass indirect emissions. With such a broad scope, many organizations will need to use carbon offsets to become carbon neutral. As noted in the previous article, the carbon offset market remains a Wild West, with little regulation for what constitutes a quality decarbonization project. SBTI and others are trying to change this by creating standards for offsets to go along with the frameworks for net-zero goals. For example, as we noted in the first section of this report, the SBTI net-zero framework contends that organizations can only use carbon offsets that remove, store, or sequester carbon. A carbon offset project that simply avoids emissions wouldn't cut it.

The growing connection between net-zero commitments and carbon offsets has fueled a renaissance of the carbon offsets market. A record 284 million carbon offsets were issued by registered projects in 2021. However, as carbon becomes a commodity, balancing the demand for offsets with the supply will become critical. Creating a removal-only market—with offset standards like those proffered by SBTI—may make offsets too expensive for general use by net-zero companies. But with no quality standards, offsets remain cheap, and there's little incentive for companies to take internal measures to reduce emissions.

The evolution of the carbon offset market will likely reflect a hybrid of the two, with standards evolving over the next several years as companies track their progress toward their net-zero goals and recalibrate their emissions initiatives along the way. However, one thing remains for sure—as long as net-zero initiatives are in play, carbon offsets will be too.