Sustainability Simplified: Net Zero vs. Carbon Neutral

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.

The 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.

For more news, information, and analysis, visit the Beyond Basic Beta Channel.


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.

Please note that VanEck may offer investments products that invest in the asset class(es) or industries included in this blog.

This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.

Sustainable Investing Considerations: Sustainable investing strategies aim to consider and in some instances integrate the analysis of environmental, social and governance (ESG) factors into the investment process and portfolio. Strategies across geographies and styles approach ESG analysis and incorporate the findings in a variety of ways. Incorporating ESG factors or Sustainable Investing Considerations may inhibit the portfolio manager’s ability to participate in certain investment opportunities that otherwise would be consistent with its investment objective and other principal investment strategies.

ESG investing is qualitative and subjective by nature, and there is no guarantee that the factors utilized by VanEck or any judgment exercised by VanEck will reflect the opinions of any particular investor. Information regarding responsible practices is obtained through voluntary or third-party reporting, which may not be accurate or complete, and VanEck is dependent on such information to evaluate a company’s commitment to, or implementation of, responsible practices. Socially responsible norms differ by region. There is no assurance that the socially responsible investing strategy and techniques employed will be successful. An investment strategy may hold securities of issuers that are not aligned with ESG principles.

ESG integration is the practice of incorporating material environmental, social and governance (ESG) information or insights alongside traditional measures into the investment decision process to improve long term financial outcomes of portfolios. Unless otherwise stated within an active investment strategy’s investment objective, inclusion of this statement does not imply that an active investment strategy has an ESG-aligned investment objective, but rather describes how ESG information may be integrated into the overall investment process.

All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.

©️ Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.