What are the differences between net zero and science-based emissions reduction targets?

Author Matthew Sprague, Sonya Samson, Sally Cook

Date November 2020

There are increasing expectations on companies and governments to deliver deep cuts to greenhouse gases. However, there are different types of targets which can be set, with different benefits, trade-offs and levels of commitment. In a recent podcast, three of Energetics’ leading advisors on climate change response held a discussion to demystify target setting. Sonya Samson advises clients on setting science-based targets for scope 1, 2 and 3 emissions, and brings insight to strategies such as internal carbon pricing to drive decarbonisation. Matt Sprague helps companies to set net zero targets and develop the pathways to their achievement. Guiding the discussion was Energetics’ strategy and policy lead, Sally Cook.

Where should businesses start when setting a greenhouse gas emissions reduction target?

Sonya said, “The target setting landscape is quite crowded, which can make it challenging for a company when choosing a target setting approach or a combination of approaches. If your business is at the start of the process, it is important to consider why you're setting an emissions reduction target. It could be a desire to be aligned to best practice in your industry, in which case, consider what your peers are doing and the frameworks they’re using. Or the motivation could be around brand integrity and reputation. Selecting targets and frameworks that have strong brand recognition or stringent requirements for accreditation could be more important. These are just two examples, but they highlight the need to interrogate the objectives for setting an emissions reduction target, identifying the most important criteria and using those criteria in assessing or comparing different target-setting frameworks. That should help with choosing the approach most relevant to your organisation.”

Matt added, “We also see companies setting targets to align with the climate science and the Paris target or to meet other sustainability goals. That objective also drives consideration of different frameworks.”

What are some of the common standards for science-based targets and Net Zero targets?

Science-based targets align an emissions reduction strategy with climate science. Under the Paris Agreement there is a commitment to limit warming to well below 2oC above pre-industrial levels and a further aspirational target to contain warming to 1.5oC. In late 2018 the Intergovernmental Panel on Climate Change released its special report, Global Warming of 1.5oC[1] which outlined the dangers of global average surface temperatures exceeding 1.5oC.

In the podcast discussion Matt commented, “Setting a science-based target shows that you have an emissions reduction trajectory over the next few decades; whether in step with a 1.5oC target or a ‘well below’ 2oC target. A net zero target is more tailored to an individual organisation. Under net zero, we set a target covering scope 1 and scope 2 emissions, or a target that also includes scope 3 emissions. In addition to organisations changing the boundary of the net zero target, they are choosing the timeframe for the target to be achieved. Another consideration is whether it's a target for the entire portfolio or for select parts. A recent example is the Wesfarmers’ announcement of a net zero 2030 target for their retail branches. They've also set a net zero 2050 target for some of the industrial sections of their portfolio.”

Sally Cook added, “So there's currently no broadly accepted standard for net zero targets. Because of that businesses need to be careful about potential ‘greenwashing’, particularly if you choose a target with a partial scope as Matt describes. It is important to ensure that the scope and ambition are clearly communicated in the public domain. If you are ambiguous about what your target covers, it might be called into question. The other differentiator between science-based targets and net zero targets is that science-based targets need to extend over five to 15 years. You could therefore set a science-based target over the shorter term and aim for net zero by 2040 or 2050.”

Matt said, “In a great example of a plan to achieve a target, the AMP Capital Real Estate net zero strategy intends to buy renewable electricity immediately and pursue energy efficiency and higher NABERS ratings for their buildings. They're also undertaking electrification studies for their natural gas heating systems and looking at a range of other opportunities, before turning to offsets as the last resort to deal with their remaining emissions.[2]

What do companies need to consider when planning to use offsets?

Sonya said, “There are two aspects of buying offsets to consider when using them to deliver your emissions reduction target. The first aspect is more short term or operational. You need to understand whether offsets are permitted within your chosen emissions reduction framework and if yes, are there any technical requirements around the vintage or type of offset allowed. The second consideration is in the longer term. If you've set a net zero target or an emissions reduction target that requires offsets at a particular date in the future, say 2030, then the expectation is you will be net zero every year following that . You will need to project your offsets procurement strategy well into the future and have a view on how the changing demand for offsets could affect your ability to access those offsets. Organisations should also seek to align the projects from which the offsets are sourced with other internal environmental or sustainability targets of your business. For example, for an Australian land-based company, indigenous offset projects or other Australian land-based projects could provide brand alignment. If you do a lot of work in India, you may look for offset projects in India. By establishing criteria for selecting offsets, an organisation can maximise the potential co-benefits.”

Sally added, “Doing your due diligence on international offsets and international standards is really important to make sure you're getting a quality offset and that both the standard and the type of project is likely to generate real offsets.”

Matt commented further, “Aligning the offset with the emissions sources presents a good opportunity for co-benefits. While not strictly offsets, a lot of businesses in Australia are using renewable electricity certificates to offset their scope two electricity emissions. So, while offsets are applicable for scope 2 emissions under some decarbonisation frameworks, it is increasingly more common to use renewable electricity to offset your electricity emissions”

Know the outlook for your emissions profile

Matt said, “At the core of target setting is a thorough understanding of your business’ emissions profile. Are you forecasting growth within your organisation? Are you plateauing or contracting as a business or as a sector? What are your plans? An example could be a property company looking to move away from C and D grade buildings, with a strategy to start procuring A and B grade buildings. Or one that is looking to electrify their heating to reduce their scope 1 emissions. These would result in a different emissions mix, even though the business’ overall size might be the same. Another example can be seen with airports as they are unlikely to grow unless new terminals are built. With a property and procurement strategy extending over 10 years, knowing the requirements for new infrastructure and energy-using equipment including control systems, communication systems, HVAC systems, is very important. Having that longer term view is key to understanding the overall target cost, the requirement for offsets, or the number of opportunities to reduce emissions. Building low emissions technologies into that strategy can be a significant emissions reduction opportunity, which can reduce your offset requirements later. Understanding the offset cost in the future can inform those procurement decisions.”

Setting a pathway to achieving your target

Matt said, “Taking the example of a 2030 target, a business shouldn’t leave its emissions reduction efforts until 2029 and then purchase the offsets needed. It is unlikely to be the most financially sensible approach. With a decade to achieve a 2030 target, the action needs to start now.”

“It begins with understanding your baseline emissions and identifying the emissions reduction opportunities. There are projects that offer not only emissions reductions but also cost saving benefits. That said, there will be other projects which incur costs. Developing a roadmap and a strategy is key. You need to outline the milestones, the stages and the key projects to be undertaken each year between now and 2030. Lowest possible cost must be considered, and emissions reduction projects planned according to capital budget constraints and the payback of each project.”

“Technology changes need to be factored in, particularly for long term targets. To illustrate the point, electrification typically does not have positive financial outcomes. A roadmap needs to build in points of review to understand shifts in the outlook for electrification. For example, in 2025 you consider whether costs have come down and whether electricity prices have changed. From there a review can be conducted of your renewable electricity procurement whether a PPA or LGC off take agreement is in place. Such a review should be held two or three years out from the end of that contract to assess if it is still the right strategy for you. Another consideration is whether any new technology opportunities have emerged that may reduce costs overall for the business.”

“We've also seen organisations which had set targets based on scope 1 and scope 2 targets only, because scope 3 was considered too hard, now looking to change their approach. Over the last two or three years, not only do they have a better grasp of their scope 1 and scope 2s, they’re looking to set more ambitious scope 3 targets. You can go back and re-baseline or re-set a target based on this year's emissions, including additional scopes. Returning to Sally's earlier point, as long as you're transparent and open about the sources included in a target, then there should be no repercussions from stakeholders around setting more ambitious targets based on better understanding and better data. We do however recommend that if you change targets significantly you continue to report on both your old and your new targets for brand protection reasons.”

Science-based targets: what are the challenges, especially with scope 3 targets?

The SBTi require a scope 3 emissions target if your scope 3 emissions are greater than 40% of scope 1 and scope 2, which is the case for the majority of companies.

Sonya said, “A first challenge is how a company can lower their business-as-usual emissions projection so that it's in line with a target emissions profile. For scopes 1 and 2, this challenge is often framed as financial or technological. Matt mentioned being aware of the technology options available both now and in the long term to meet your emissions reduction targets. For scope 3, that challenge is framed in terms of engagement and influence along your broader value chain. There are some scope 3s that are operational and over which you have greater influence. Examples include business travel, accommodation or use of taxis. A business can set up some policies and processes to reduce emissions from those sources. However, when thinking about your value-chain, engagement is required to achieve emissions reductions.

“A second challenge relates to data. Robust data is vital for a credible or a series of credible projections of emissions into the future. Access to data is also required to measure the effectiveness of engagement. In the example of say, a product supply chain, the ‘gold standard’ would be to have the carbon emissions at each stage of that product’s development delivery and use, but this is very hard, if not impossible, to get for large value chains. An alternative is to use proxy information, which is often data related to financial spend. This introduces challenges because it restricts your ability to understand where you could potentially implement emissions reductions activities and how to measure emissions improvements against a financial baseline. However, as we've discussed, target setting is a process through which being able to change and adapt can maximise the value to your business. When setting science-based targets, a company can start with the best information they have at the time, which is often financial data, and then work towards improving the quality of the data. When more direct activity data is used, a company can better understand actual points of emissions in the value chain and then revise and update the target and emissions reduction activities.”

Matt added, “The opportunity that a staged approach also gives you is to highlight the hotspots and the main emission sources for the initial targeted emission reduction strategy. If you know that 50% of your spend is on waste products, that's a good place to work with your waste management contractors.”

Summary points

Matt said, “There're three main things that organisations and businesses need to understand when setting targets. Firstly, know your inventory before you determine the target. Also, set longer term targets sooner rather than later. Secondly, understand the projects you can pursue within your own asset base, whether that's energy efficiency or renewables projects. Identify the easy wins to reducing emissions, which not only gives you runs on the board, it starts reducing emissions at low cost. Thirdly, develop a longer term strategy for the harder to abate emission sources. As part of that, determine your approach to aspects such as natural gas, refrigerants and HVAC and, alongside that, develop an offset strategy.”

Sonya concluded, “Also in looking at the broader process of target setting, some key takeaways would be to make sure you ask the question of why you're actually choosing to set an emissions reduction target, understanding that it is a process, not a once off static event and make sure that you really pay attention to transparency in disclosure to all of your stakeholders.”

 

Footnotes:

[1] Intergovernmental Panel on Climate Change (IPCC): Special Report: Global Warming of 1.5oC.

[2] Listen to Energetics’ podcast with Chris Nunn, Head of Sustainability for AMP Capital Real Estate.