How Climate Assets Fit Into a Net-Zero Pledge
As global efforts to combat climate change intensify, many companies are turning to net-zero pledges as a way to demonstrate their commitment to sustainability. But a pledge is nothing without a plan. A net-zero plan is a roadmap for a company to eliminate its greenhouse gas emissions, either by reducing them directly or offsetting them through the purchase of carbon credits and renewable energy certificates. Here we’ll explain exactly how different climate assets fit into different parts of a company’s climate pledge and why it’s so important to get it right.
Different Climate Assets For Different Climate Actions
One key aspect of using climate assets as part of a net-zero plan is understanding the different “scopes” of emissions and how different climate assets can cure those scopes.
Scope 1 emissions refer to direct emissions from sources that are owned or controlled by a company or organization. These include emissions from fuel combustion in boilers, vehicles, and equipment, as well as emissions from industrial processes. For example, a chemical company producing cement for concrete would have Scope 1 emissions from the CO2 released by those chemical reactions.
Scope 2 emissions, on the other hand, refer to indirect emissions from the consumption of purchased electricity, heat, or steam. For example, a financial services firm that does not have its own power generation facilities would have Scope 2 emissions from the electricity it purchases from the grid to power its operations.
To reduce Scope 1 emissions, companies can invest in electrification or retool their processes to be less dependent on fossil fuels. In our example of a cement manufacturer, there is no known process for producing cement without the release of CO2, so those emissions are “unavoidable.”
To reduce Scope 2 emissions, companies can invest in more energy-efficient equipment and processes or install on-site renewable energy generation. In our example of a financial services firm, some amount of electricity will be used even after efficiency is maximized.
Once a company has taken all prudent steps to reduce direct and indirect emissions, they can use “climate assets” to account for the remaining “unavoidable emissions.”
Carbon offset is a way to counterbalance/offset the scope 1 emissions by supporting projects that reduce or remove them. For example, a company might invest in a reforestation project, enhanced weathering, or direct air capture.
Energy Attribute Certificates (RECs) provide a way for companies to cure unavoidable scope 2 emissions by purchasing certificates that represent the environmental attributes of renewable energy. These certificates are created by renewable energy generators and represent one megawatt-hour of electricity generated from an eligible renewable energy resource and are attributed to energy consumed by the business. If enough EACs are purchased and “redeemed” a company can effectively run on 100% renewable energy even when consuming grid electricity.
When using carbon offsets or EACs as part of a net-zero plan, it’s important to consider their relevance to a company’s scope 1 and scope 2 emissions. For example, carbon offsets may be used to offset scope 1 emissions, while EACs may be used to offset scope 2 emissions. By carefully managing the use of these tools, companies can ensure that they are effectively reducing their greenhouse gas emissions and making progress towards their net-zero goals. And it’s important that companies get this right, because both consumers and regulators are watching.
Carrots and Sticks for Climate Action
The benefits of making and sticking to a great net-zero plan are clear. In addition to the environmental benefits, a strong net-zero plan can also improve a company’s reputation and help it attract top talent and customers. It can also lead to cost savings, as companies that prioritize sustainability often find efficiencies in their operations. Making a climate action plan early also means having access to cheapest strategies (including climate assets) before every other company needs them.
However, there are also dangers when it comes to neglecting your climate goals. Messing up a net-zero plan can have serious consequences for a company’s reputation and bottom line. The U.S. Securities and Exchange Commission (SEC) has been increasingly scrutinizing companies’ environmental pledges. In 2010, the SEC issued interpretive guidance on the disclosure of material climate change risks and impacts, stating that companies should consider their greenhouse gas emissions as well as the potential financial effects of climate-related regulation and business trends. And this guidance has bite:
- In 2015, the SEC settled charges against electric utility company PPL Corporation for failing to disclose the potential financial impacts of climate change regulations on its business.
- In 2018, the SEC settled charges against oil and gas company Laredo Petroleum for failing to properly disclose the risks posed to its business by climate change.
- In 2019, the SEC settled charges against electric utility company NRG Energy for failing to adequately disclose the potential financial effects of climate change regulations on its business.
These cases demonstrate that the SEC takes the issue of accurate and timely disclosure of climate-related risks and impacts seriously, and that companies that fail to adequately address these issues may face enforcement action. It is important for companies to carefully consider their obligations under SEC guidance and regulations and to accurately and transparently disclose their environmental performance and climate-related risks and impacts.
It is important to note that climate assets should be used in addition to, rather than as a replacement for, direct emission reductions. Companies should also ensure that the climate assets they use are high quality, verifiable, and permanent in order to truly offset the emissions they are intended to address.
To learn more about high-quality EACs and how to use them, reach out to Jasmine here. We’d love to help!
