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Zero gravity

10 May 2021 By George Hay

What do Microsoft, British Airways, Royal Dutch Shell and Glencore have in common? They all reckon their greenhouse gas (GHG) emissions will hit “net zero” by 2050. Though the targets sound the same, investors shouldn’t assume they are. Breakingviews offers a way to sort substance from hot air.

What exactly is net zero?

To limit the increase in the planet’s temperature to 1.5 degrees Celsius above pre-industrial levels, the world needs to stop pumping new GHGs into the atmosphere by 2050 at the latest. That means eliminating 50 billion tonnes of annual emissions from the atmosphere. The “net” part of this target reflects its difficulty: many industries lack low-carbon alternatives. The Network for Greening the Financial System, a grouping of central banks, reckons heavy emitters could still produce 13 billion tonnes of GHGs annually by 2050. Cancelling these out means planting more trees to absorb the carbon dioxide or developing ways to remove gases from the air.

How aligned are companies with net zero?

Not very. Oxford University researchers found only a fifth of the world’s 2,000 largest public companies by sales have a net zero target. A separate report by the NewClimate Institute said that as of October 2020, companies with net zero objectives represented only 3.5 billion tonnes of GHGs a year. By comparison, a 2017 study by environmental charity CDP estimated the top 224 corporate emitters accounted for 30 billion tonnes annually.

Many heavy polluters like Saudi Aramco and Exxon Mobil lack net zero targets and full disclosure of their emissions. Big banks that lend to carbon-intensive industries have been similarly slow to elaborate on net zero aspirations.

What about those companies that have set targets?

They’re a mixed bag. Microsoft wants to develop technology to remove not only its current GHG output but to erase all emissions since the $2 trillion software group was founded in 1975. That’s laudable, but even today its annual emissions are less than 20 million tonnes. British Airways parent International Airlines Group produces 40 million tonnes, miner Glencore 300 million tonnes, and Shell 600 million tonnes – more than the United Kingdom.

Many net zero targets have three shortcomings: incomplete disclosure, confusing terminology, and problems with offsets.

What’s the problem with disclosure?

Companies serious about net zero targets should include not just so-called Scope 1 and 2 emissions, produced when they make their products, but also Scope 3, created when customers use those products. Think power stations burning Glencore’s coal, or cars fuelled by Shell’s petrol. Yet Oxford researchers reckon only a third of corporate net zero targets cover all three.

Large oil companies, for whom Scope 3 often constitutes 90% of total emissions, have recently improved their disclosure. But it’s still frustratingly piecemeal. Shell’s net zero target covers all three scopes worldwide. BP’s is similar but leaves out its 20% stake in Russia’s Rosneft, which accounts for a third of the UK group’s oil production. Total’s net zero target only includes European Scope 3 emissions.

What about the terminology?

A company claiming to be “carbon neutral” might sound the same as net zero. In fact, carbon dioxide accounts for only 75% of overall GHGs. Oil giants can use this loophole to ignore worse pollutants like methane.

Meanwhile companies that embrace “Paris-aligned” targets are craftily exploiting the fact that the 2015 accord signed in the French capital called for limiting global warming below 2 degrees Celsius by 2050. That’s less demanding than the tougher limit of 1.5 degrees. JPMorgan says it aligns the most polluting sectors it lends to with “the goals of Paris”, but the U.S. bank doesn’t have a company-level commitment to hit net zero by 2050.

What’s wrong with offsets?

Many companies intend to hit their targets by offsetting emissions. This involves buying credits in carbon-cutting ventures elsewhere. Offsets are integral to Shell, Glencore and IAG’s plans. The hope is that sellers of such credits use the money to plant new forests or develop technology to remove carbon from the atmosphere.

The danger is that companies just use flakier offsets to slow down actual reductions in emissions. Even leaving aside fraudulent ones, it’s hard to prove how much offset schemes reduce GHGs. They often base their emissions-cutting credentials on counterfactuals: preserving a forest that would otherwise be pulled down, for example.

Besides, it’s hard to guarantee offsets will work on the scale required. Shell’s net zero assumptions imply planting new trees across an area the size of Brazil. Total calls its shipments of liquefied natural gas to China “carbon neutral” because the French group is providing financing for a Chinese wind power project and a Zimbabwean forest protection scheme.

Only 33 of the 417 companies with net zero targets don’t plan to use offsets, Oxford researchers found. Just under two-thirds either gave no detail or said they would use them liberally.

Would banning offsets make net zero targets more credible?

Yes. But unless governments want to pay for tree-planting and carbon removal technology, there’s a role for private finance. One option is voluntary carbon markets, where companies that reduce or eliminate GHGs sell credits. Ex-Bank of England Governor Mark Carney reckons credits worth 100 million tonnes a year currently could become 1.5 billion tonnes by 2030, with checks and balances to ensure their credibility.

A more radical alternative would be to bin net zero goals altogether. Instead of stimulating dubious offsets to meet otherwise-unattainable targets, the World Wildlife Fund and Boston Consulting Group suggest companies disclose their emissions, estimate how much they can credibly reduce them, and pledge funding for research into permanent GHG removal.

So do net zero goals have any value?

Despite the brickbats, they are useful for focusing minds. But they need a better-regulated offset market, full disclosure of emissions and consensus about what the goal means. In the continuing absence of all three, investors should treat each bold target with scepticism.


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