By Naomi Zimmermann
Product Analyst
While the terms “net zero” and “carbon neutral” are both focused on neutralizing emissions, net zero is expanded in scope and implications.
Neutralizing emissions, or being “neutral,” refers to the amount of emissions that are emitted being equal to those being removed from the atmosphere (amount out = amount “in”). Emissions can be removed from the atmosphere via nature-based solutions, such as planting trees, or via technology, such as carbon capture and storage (CCS) technology.
The difference between the two has to do with what is being neutralized. Net zero refers to all greenhouse gases (GHGs) being neutralized, whereas carbon neutral refers to just carbon dioxide (CO2) being neutralized. It is important to keep this difference in mind when analyzing the climate targets being set by countries and companies globally.
Targeting Net Zero by 2050
While carbon neutrality refers to the total CO2 being emitted being equal to the amount of CO2 being reduced, net zero refers to the total amount of GHG emissions being emitted being equal to the amount of GHG being removed from the atmosphere. GHGs include CO2, methane (CH4), nitrous oxide (N2O), fluorinated gases and more. Global GHG emissions are dominated by CO2, which makes up about 75% of the total, followed by methane at around 15%.1
Many countries and companies have set targets to become net zero by 2050. At the COP 21 meeting in 2015, global governments set a goal to avert more than 1.5 oC of warming—also known as the Paris Agreement. Research from scientists and policymakers at the United Nations2 concluded that the world has to become net zero by 2050 in order to reach the goals of the Paris Agreement.
When referring to net zero targets, there are three scopes of GHG emissions.
Source: Anthesis. Understanding Scope 1, 2 and 3 Emissions. 2022.
Implementing Net Zero and Carbon Neutrality
When referring to net zero and carbon neutrality, emissions can be associated with many different entities ranging in scale, including a country, local government, company or organization.
Governments or companies will choose to set emissions reductions targets by a specific date. These targets can vary in timeline as well as scope.
- Timeline: The timeline refers to the date by which an entity aims to achieve their emissions reductions target. This is often stated as “Net zero by X date.
- Scope: Entities may choose to set their net neutrality targets for Scope 1-3 GHG emissions.
How to Achieve Net Zero and/or Carbon Neutral Goals
Cap and Trade
Under a cap and trade scheme, a government sets a limit, or “cap,” on the emissions for a country or region and then issues a set of allowances to companies that permits them to emit a given amount.3 The total allowances given to the companies add up to the emissions cap. Companies can then buy and sell allowances. If a company is able to reduce its emissions below its allowances, it can sell them to other companies. Conversely, if a company wants to pollute more, it can pay to buy these excess allowances. Therefore, companies are incentivized to reduce their emissions by increasing their energy efficiency or by investing in clean alternatives. This mechanism allows the market to find a price on carbon and reduces emissions in the most cost-effective way. Governments can gradually shrink the cap over time to draw down the total emissions for a country or region in order to meet net zero or carbon neutral targets.
Carbon Offset Credits
A carbon offset is a reduction in GHG emissions, or an increase in GHG storage (known as carbon sequestration). The name is slightly misleading, as carbon offsets refer to CO2 as well as other GHGs. Carbon storage can occur through a variety of activities and can include planting trees and restoring land.
A carbon offset credit is a tradable certificate that represents the offset (emission reduction), which is usually measured in metric tons of CO2 or an equivalent amount in other GHGs (often written as CO2-e). Entities can purchase and “retire” carbon offset credits to claim a reduction towards their own net GHG emissions, which can be used to achieve their emission reduction goals.
Carbon offset vs credit: The “offset” is a project that removes carbon emissions. The “credit” is tradable certificate that verifies that an offset has happened.
Real Emissions Reductions
Entities can work to lower the emissions (CO2 or other GHGs) from their own operations, energy consumption and/or supply chain.
Open Issues Relating to Net Zero and Carbon Neutrality
Carbon Avoidance vs Removal: Some are skeptical of how the focus on net zero or carbon neutrality may detract from decarbonizing a company’s (or country’s) operations, energy consumption or supply chain.
Carbon Offsets – Verifiability and Double Counting: Many companies use carbon offset credits in order to neutralize (offset) their emissions. Carbon offset systems still face issues, including that, at times, carbon offset projects cannot be verified, that the carbon removal capacity of a carbon sink is overestimated and/or that carbon sinks are double counted as offsets (across multiple companies or countries).
Challenges with Carbon Capture and Storage: Many companies will have to use carbon capture and storage (CCS) technology to keep CO2 emissions from reaching the atmosphere. CCS technology captures CO2 emissions when it is emitted from powerplants and factories and transports them to be stored permanently underground. While CCS is essential in decarbonizing heavy polluting industries, CCS projects face barriers to deployment, including high cost of implementation and transportation challenges.4
Other Emissions Reductions Instruments: There are several other instruments that can be used to offset GHG emissions, which are, at times, confused with carbon offset credits. These other instruments include renewable energy credits (RECs), renewable energy power purchasing agreements (PPAs) and carbon taxes.
Meeting Targets: Although many companies, countries and other entities have set targets to become net zero or carbon neutral, many are not on track to meet these goals in their expected timeframe.
The Bottom Line
While both net zero and carbon neutral are focused on neutralizing emissions, net zero is expanded in scope. 2050 is the target that many countries and companies have set to become net zero. The annual COP meetings provides an opportunity for continued accountability and dialogue towards meeting this goal.
Originally published by VanEck on 7 December 2022.
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DISCLOSURES
1 United States Environmental Protection Agency (EPA). Global Greenhouse Gas Emissions Data. 2014.
2 Intergovernmental Panel on Climate Change (IPCC), Global Warming of 1.5 oC, 2018.
3 Center for Climate and Energy Solutions. Cap and Trade Basics. 2022.
4 Resources for the Future. Carbon Capture and Storage 101. 2022.
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