Carbon neutrality is loosely defined as achieving a balance between emitting greenhouse gases and absorbing them from the atmosphere via carbon sinks (European Parliament 2023) In other words, the concept of carbon neutrality allows companies to continue emitting greenhouse gases as long as those emissions are compensated by purchasing carbon offsets, such as those obtained through tree planting initiatives. Recently, the effectiveness of carbon offsets has sparked significant debate following the Science-Based Targets Initiative’s statement on their role in decarbonisation efforts across the value chain (Science Based Targets initiative 2024).
Beyond genuine concerns facing the efficacy and reliability of carbon offsetting schemes, a study conducted by the European Commission revealed that the majority of environmental claims, including those surrounding carbon neutrality, were found to be vague, misleading, or lacking evidence, while a striking 40% were completely unsubstantiated (European Commission 2022; Harvey 2023). The rising tide of climate awareness has fostered a growing sense of disapproval towards this approach to addressing climate issues. In response, some governments are taking action by implementing regulations that require companies to validate and verify their environmental claims. Yet, at the heart of the matter, a key question remains unanswered: Would a substantiated claim of carbon neutrality be enough to address the climate crisis? (Kurme 2023).
According to the Climate Crisis Advisory Group, the answer is clear: carbon neutral targets alone are insufficient to avert widespread climate disasters (Jackson 2021). Even if companies and governments were to establish a clear definition of the term, enforce scientific substantiation of neutrality claims, and regulate offsetting schemes to ensure their integrity, these measures alone would still fall short. Our current trajectory puts us on course for a 2.7°C increase above pre-industrial levels by the century's end, and with the 1.5°C target slipping out of reach, the urgency for meaningful action is quickly intensifying - but this cannot be achieved without the necessary resources and funding. These factors underpin our house view, which focuses on decarbonisation, highlighting the importance of setting scientifically based targets and developing realistic pathways to achieve zero emissions. We propose that companies adopt an internal carbon price, which assigns a monetary value to their greenhouse gas emissions. We believe this internal price should be, at minimum, aligned with the EU Emissions Trading System (“ETS”) carbon price— a market mechanism designed to reduce emissions through a cap-and-trade approach, setting an absolute limit on annual emissions in line with the bloc's climate targets. However, the EU ETS does not fully capture all the negative externalities associated with greenhouse gas emissions; in fact, the ETS carbon price falls significantly below most estimates of the social cost of carbon, which is a measure of the monetized value of the damages to society by each additional ton of emissions (Rennert et al 2022). As such, we encourage companies to consider the broader implications of emissions and strive to set an internal carbon price that accounts for the true societal and environmental impact of emitting greenhouse gasses.
Finally, we propose that the vast majority of the budget generated from this internal carbon price should be strategically allocated to support decarbonisation efforts, including abatement initiatives beyond the company's value chain. A smaller portion of the generated budget can be allocated to carbon removal or goodwill projects that align with the company's values. All in all, we believe this tactic creates tangible financial incentives for decarbonisation, raises climate awareness within companies, and has the potential to drive significant impact.
Holtara has extensive experience in creating decarbonisation strategies. If you are interested in learning more about how we can help, reach out to our Carbon and Climate team for additional information.
