Stop saying “carbon offset” A Carbone 4 series&nbsp;discussing the&nbsp;new&nbsp;carbon neutralityEpisode 2 : Moving from carbon offsetting to contributingBy&nbsp;<a href="http://www.carbone4.com/staff/cesar-dugast/?lang=en">César Dugast</a>&nbsp;and&nbsp;Renaud BettinOriginally, “carbon credits” were created to&nbsp;help the 37 countries committed to reduce their emissions, as part of the Kyoto Protocol signatories, to comply with the emission threshold. To prevent any outreach of this threshold, it was allowed to finance carbon offset projects in a non-committed country and claim the “ownership” of the reduction.Then came the voluntary offsetting market.&nbsp;All the stakeholders, especially the corporate ones,&nbsp;relied on it on a&nbsp;massive&nbsp;scale&nbsp;to “compensate” their own emissions. No&nbsp;regulatory need&nbsp;here : it was only about buying as many carbon credits as needed by a company on a given perimeter,&nbsp;so that a company can rightfully claim&nbsp;itself “carbon neutral”. The whole of the carbon emissions could therefore disappear behind a magic zero, as far as&nbsp;a company was making a vain wish to “reduce its emissions as much as possible before&nbsp;compensating&nbsp;through&nbsp;carbon offset projects”.<h3>THE VERY TERM “COMPENSATE” REFERS TO A MISLEADING IDEA</h3>But this mechanism, whilst rather positive (when considered as an additional&nbsp;financing lever to fight climate change), suffer&nbsp;from a&nbsp;poor image,&nbsp;due to its abusive use and&nbsp;a few structural pitfalls.<h4>1. NOT REDUCING&nbsp;ITS COMPANY EMISSIONS IS EQUIVALENT TO FINANCING A REDUCTION ELSEWHERE:&nbsp;FALSE</h4>Of course, the climate crisis is a global one. A ton of CO2 emitted has the same impact on the climate regardless of where it was emitted from. Still, in order to aim at a global carbon neutrality by 2050, avoiding the&nbsp;reduction of its own company emissions is not an option. Every sector and every company needs to drastically reduce its emissions&nbsp;and be compatible with a climate scenario limiting global warming to +2°C or +1,5°C, and this effort can not be outsourced. Buying a carbon credit, meaning financing the reduction project of someone else, is something to be encouraged, but will never replace its own efforts.<h4>2.&nbsp;A CARBON&nbsp;EMISSION HERE CAN BE IMMEDIATELY&nbsp;BALANCED&nbsp;BY A REDUCTION OR A SEQUESTRATION ELSEWHERE: RATHER FALSE</h4>Indeed, in terms of temporality, reducing emissions elsewhere rather than in its own company is&nbsp;equivalent if the financed project implies an immediate emission reduction. In other cases, this is false, for example, when the&nbsp;carbon credit comes from a forestry project: the CO2 sequestration happens over the&nbsp;many decades of the tree growth, not on the day the credit is purchased. As the climate crisis continue to worsen and the windows for action are shrinking, even slight differences are significant. Besides,&nbsp;there is no guarantee&nbsp;that the carbon will be stored long enough in the tree, as forest are not immune to climate hazards (fire, strong wind…), diseases or deforestation related to human activities.<h4>3. BUYING A CARBON CREDIT ALLOWS A COMPANY TO SUBTRACT&nbsp;THE SAME AMOUNT OF EMISSIONS FROM ITS GHG REPORT:&nbsp;FALSE</h4>It’s even forbidden by all the&nbsp;reference&nbsp;organization (UNFCCC, Science Based Targets Initiative, Bilan Carbone, ISO 14064, GHG Protocol…) that&nbsp;have&nbsp;some authority on corporate climate reporting requirements. For this reason, Carbone 4 advise its clients to adopt a new carbon accounting system to&nbsp;report&nbsp;more precisely about climate impacts.<h4>4. CARBON OFFSETTING ENCOURAGES A COMPANY TO SHRUG OFF ITS OWN RESPONSIBILITIES:&nbsp;TRUE</h4>The same old tune: carbon offsetting is used to “ease its&nbsp;guilt”, a 21st century version of the Catholic Church indulgences in the Middle Ages, etc. And this is no surprise: as soon as an initiative&nbsp;dangle the possibility to cancel its bad deeds (meaning emissions)&nbsp;by purchasing the good ones (meaning inexpensive carbon credits), it is immediately tempting not to consent to its own reduction efforts on&nbsp;its&nbsp;value chain.Today, after more than 15 years of existence, a vast majority of companies are still reluctant to use the unpopular “carbon offsetting”.&nbsp;And it is a pity, especially when we know the reliability of the&nbsp;voluntary offsetting markets and their ability to raise funds&nbsp;and support&nbsp;low-carbon initiatives, the ecological transition and the improvement of&nbsp;the&nbsp;living conditions of&nbsp;many&nbsp;populations.<h3>REINVENTING THE SEMANTICS TO REINVENT OUR RELATIONSHIP TO CARBON FINANCE</h3>To win the battle against climate, everyone needs to make the&nbsp;required efforts to reduce the emissions at levels that are consistent with a +1,5°C/+2°C global warming objective. But&nbsp;in a spirit of solidarity, and because the climate-friendly financial flows&nbsp;do need to&nbsp;increase, financing the transition beyond its perimeter has to be encouraged as well. However, as long as “carbon offset” hint a possibility to “own” emissions reductions made by others to hide its own,&nbsp;criticism and distrust will persist, and rightly so.We&nbsp;wish&nbsp;to switch from a logic of emissions “ownership” to a logic of “contribution” to those emissions reductions.So far, the voluntary carbon markets were used as a way to compensate its own emissions&nbsp;so that a company can&nbsp;claim itself “carbon neutral”, deciding the perimeter arbitrarily.&nbsp;Today, that vision&nbsp;is disconnected&nbsp;from the regional carbon neutrality objectives. It&nbsp;is lapsed, create very few competitive advantage, and is increasingly challenged by the public opinion.To restore the very meaning of the term “carbon offset”, we need to consider the voluntary carbon markets&nbsp;as what it has always been : an efficient tool to drive action towards a regional net zero.This is what Carbone 4 stand for since 2018, in its consulting activity as well as in its work through the&nbsp;<a target="_blank" rel="noopener noreferrer" href="http://www.netzero-initiative.com/fr">Net Zero Initiative</a>.In fact, this would encourage the promotion of a company contribution to a regional neutral objective, separately from its own carbon footprint. Every organization would then have 3 indicators to&nbsp;monitor&nbsp;simultaneously:<ul><li>The&nbsp;GHG emissions on&nbsp;its entire value chain.&nbsp;Those need to be reduced and compatible with a climate scenario limiting global warming to +2°C or +1,5°C ;</li><li>Its contributions to others’ emissions reductions, in particular through carbon credits&nbsp;financing reduction projects ;</li><li>Its contributions to the development of worldwide carbon sinks, in particular&nbsp;through&nbsp;carbon credits&nbsp;financing sequestration projects.</li></ul>Unlike “carbon offsetting”, it is impossible to&nbsp;ignore the first category (the induced emissions) just because an effort is made&nbsp;regarding the two others. It&nbsp;seems safer to consider those three categories as separated and non-fungible,&nbsp;while keeping in mind it needs to be conducted in an ambitious way. Communicate on a “contribution to a territorial neutrality”&nbsp;rather than&nbsp;“its own neutrality” brings several benefits:<ul><li>More collective: because the global neutrality challenge (the full measure of which has not yet been taken) will only be tackled by a collective and fair participation. This need to be quantified according to the contributions and efforts of everyone.</li><li>More precise : company emissions are separated, in accounting terms, to other positive contributions it can make additionnally (to help others reduce or increase carbon sinks). In other words, we need to set in stone that a company’s emissions do not disappear from the atmosphere when they contribute to someone else’s reduction or the increase of carbon sinks!</li><li>More&nbsp;positive&nbsp;: offsetting cancel the bad deeds, contributing value the good ones.</li><li>Fairer&nbsp;: buying a carbon credit means, above all, to support a project. It is a contribution similar to a climate-friendly philanthropy act that should, just like sponsorship, disregard the carbon price (within the limits of its resources), pay more attention to transparency regarding the use of the funds, and question the margins of the third party registered to sell carbon credits.</li></ul>This position is&nbsp;perfectly consistent with the&nbsp;post-2020 carbon markets&nbsp;taking shape with the Paris Agreement, and stating that only the host&nbsp;countries will be allowed to claim the “ownership” of the emissions reductions&nbsp;according to&nbsp;their NDC (National Determined Contributions).Moving from “carbon offseting” to “contributing”&nbsp;is not a simple semantics change. It is a prerequisite to clean up our collective imaginary about the voluntary carbon finance, which is inhibiting for far too many years the required increase in the financial flows towards low-carbon projects, and fill the “finance gap”*.&nbsp;Helping take the discussion forward, daring to&nbsp;reinvent the very&nbsp;concepts in the light of the new climate&nbsp;change&nbsp;imperatives, while preserving the best existing tools – which will be key&nbsp;advantages&nbsp;to continue&nbsp;shaping the climate action conceptual framework.&nbsp;This is the&nbsp;second episode of Carbone 4 series to&nbsp;discuss the&nbsp;new&nbsp;carbon neutrality. You can find the first episode by clicking here : <a target="_blank" rel="noopener noreferrer" href="http://www.carbone4.com/stop-saying-carbon-offset-territories/?lang=en">For a corporate carbon neutrality committed to its territories</a>&nbsp;*&nbsp;Missing climate investments&nbsp;compared to the current and excepted once.

Stop saying "carbon offset": moving from "offsetting" to "contributing"

Stop saying "carbon offset" A Carbone 4 series&nbsp;discussing&nbsp;a new carbon neutrality Episode 1 : For a corporate carbon neutrality committed to its territories. By <a href="http://www.carbone4.com/staff/cesar-dugast/?lang=en">César Dugast</a>&nbsp;and&nbsp;<a href="http://www.carbone4.com/staff/renaud-bettin/?lang=en">Renaud Bettin</a>&nbsp;<figure class="image"><img src="http://www.carbone4.com/files/wp-content/uploads/2019/06/dino-reichmuth-93777-unsplash-1024x653.jpg" alt=""></figure>&nbsp; On Monday, May 20th 2019, a French non-for-profit organization called Entreprises pour l'environnement (EpE)&nbsp;published the&nbsp;study “<a target="_blank" rel="noopener noreferrer" href="http://www.epe-asso.org/lancement-de-letude-vision-zen-2050/">ZEN 2050 - Inventing and building a carbon neutral France</a>” (in french). This prospective exercice, which Carbone 4 is proud to have taken part in, aims to explore the feasibility of a "net zero emission" objective by mid 21st century on a national scale. To&nbsp;do so, the study focus on both an analysis of&nbsp;the scale of the economy sectors, and a sociological&nbsp;approach of French changing&nbsp;lifestyles. In this&nbsp;EpE study, something interesting occurred : companies&nbsp;tried&nbsp;to define their role in a carbon neutrality objective at a national scale, without ever mentioning "their own" neutrality. But what&nbsp;is&nbsp;the link, and&nbsp;which&nbsp;one should exist, between the neutrality of a territory and the one of a company ?<h3>Local neutrality, a concept covering&nbsp;every scope</h3>Trying to build a ZEN France by 2050, such as&nbsp;the one stated in the&nbsp;EpE study, implies defining carbon neutrality as a local thing.&nbsp;It involves balancing&nbsp;anthropogenic emissions and removals of greenhouse gases in a&nbsp;limited geographical scope. This&nbsp;definition can easily cover any scope : first the earth (<a href="https://unfccc.int/sites/default/files/french_paris_agreement.pdf">article 4 of the Paris Agreement</a>&nbsp;(french), <a href="https://www.ipcc.ch/sr15/">Special report Global Warming of 1.5°C, IPCC</a>) ; a country&nbsp;(étude EpE, <a href="https://www.ecologique-solidaire.gouv.fr/strategie-nationale-bas-carbone-snbc">Low Carbon National Strategy</a>&nbsp;(french)) but also regions,&nbsp;public inter-municipality cooperation establishments (a specific administrative organization in France) and cities. The approach remains the same : balancing emissions and removals of greenhouse gases&nbsp;taking place in a limited geographical area, excluding importations and without considering&nbsp;a single purchase of carbon credits on international markets.<h3>Corporate neutrality : an abstract concept</h3>The idea of carbon neutrality is&nbsp;very popular in the business world.&nbsp;Powerful, federative, seemingly straightforward, the "zero" objective is often claimed, aimed, displayed... with diverse ambition and transparency levels. Today, a "neutral" company roughly follows&nbsp;the same operating mode&nbsp;: to&nbsp;Mesure,&nbsp;Reduce&nbsp;and Offset. Those three steps, although they seem&nbsp;reasonable, lack a couple of things increasingly difficult to ignore.&nbsp;<ul><li>First, no company defines its neutrality on the same emissions perimeter. Some are "neutral" on their whole value chain, others on their office life emissions only... while every company claims the same ambition, as there is but one word, "neutral", to describe a&nbsp;variety&nbsp;of&nbsp;cases.</li><li>Then, the reduction rates expected are often self-declared, based on&nbsp;small&nbsp;and incremental improvements which neither question the business as usual&nbsp;perspective, nor are required to be&nbsp;compatible with a climate scenario limiting global warming to +2°C or +1,5°C&nbsp;. Besides, carbon neutrality is not a future commitment : to be and remain "neutral"&nbsp;does almost never require to respect its emissions reduction targets. In other words, companies claiming to be "carbon neutral" can have their emissions increasing over time !</li><li>Finally, the very term of "carbon offset" suffer from a&nbsp;degraded image. This mechanism, yet virtuous when&nbsp;put to good use, has been a&nbsp;way to shrug off its own responsibilities to reduce its emissions at an affordable cost and for too long. It can even be dangerous and block any action when used to "ease its&nbsp;guilt". And let's not forget that&nbsp;carbon offsets&nbsp;never had the status of a real emissions reduction in corporate carbon accounting.</li></ul>Today, the concept of "corporate carbon neutrality" suffer&nbsp;a&nbsp;confusing and unfortunate conceptual blur,&nbsp;and miss a link with the neutrality targets of the company's territory or country. The latter is&nbsp;neither seek nor claimed. It would therefore be a pity to keep associating&nbsp;an&nbsp;unambitious but current definition to this powerful concept.<h3>The need for a common langage</h3>The need for&nbsp;action&nbsp;has&nbsp;never been greater. We need the action of all the stakeholders, and every financing mechanisms to unlock a transition and reach our targets on an international scale. So how can a company, willing to commit to a carbon neutrality approach with performance obligation at the&nbsp;regional scale, take part ? To answer this question, we need to create guidelines and tools about carbon neutrality. We should step out a navel-gazing vision of a carbon neutrality that would be individual. Let's accept that the real challenge is to reach collectively "net zero emission" at the global, national&nbsp;or local scale. Let's encourage the contributions that every stakeholder (company, citizen, public authorities) is able to make. It is time to reinvent the way we "claim" neutrality.&nbsp; We believe a company willing to be serious about neutrality is serious, above all, about its contribution in reaching the carbon neutral&nbsp;target of its territory,&nbsp;be it a city, a country or even the whole planet. We believe the first step to link companies&nbsp;to their territories lies in defining new indicators, tools and concepts, for companies to monitor their neutrality. To that end, the <a target="_blank" rel="noopener noreferrer" href="http://www.netzero-initiative.com/fr">Net Zero Initiative</a> is designing guidelines, based on a triple bottom line emissions accounting. A common langage, shared amongst everyone, with a set of rules and the same indicators. It is a solidarity and contribution story : beyond neutrality, it is up to us to build a positive and desirable future ! &nbsp;&nbsp;&nbsp;This is the first episode of Carbone 4 series to&nbsp;discuss the&nbsp;new&nbsp;carbon neutrality.&nbsp;

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Stop saying "carbon offset" : For a corporate carbon neutrality committed to its territories

hese ten principles result from collective work carried out between September 2021 and June 2022, as part of the&nbsp;<a href="https://www.net-zero-initiative.com/fr">Net Zero Initiative</a> project, in collaboration with the ADEME and thirty professionals working on climate change.&nbsp;Their purpose is to define the foundations of an ambitious and rigorous corporate climate strategy, in line with climate science and the Paris Agreement goals.&nbsp;The signatories call for all organisations, whatever their size and sector, to implement these principles to build a climate strategy that matches the challenges to be overcome.&nbsp;<a href="https://carbone4.com/files/Net_Zero_Initiative_10_principles_for_an_ambitious_corporate_climate_strategy.pdf">Download the 10 principles</a>

<h2>The 10 principles in detail</h2><h2>General approach&nbsp;</h2><h3>01. The notion of net zero refers primarily to the global balance between GHG emissions and carbon sinks.</h3>The main goal of climate action is to limit warming to the target temperature set out in the Paris Agreement, by immediately mobilising the resources to collectively attain net zero GHG emissions at the global level during the second half of the century.This international policy goal is based on the scientific recommendations of the IPCC. It requires the drastic reduction of GHG emissions, and in parallel the preservation of existing carbon sinks and the rapid development of natural and (in certain scenarios) artificial carbon sinks.<h3>02. For a company, having a net zero strategy means wanting to carry out the transformations needed to reach global carbon neutrality by 2050.&nbsp;</h3>A corporate climate strategy must aim at making the company's activities compatible with a world of net zero emission by 2050, and contributing at the just level to reach this objective of global net zero emissions through different paths of action.The activity of the company must take place within the global context recalled in principle 1.The climate strategy of a company must be considered as the just share of effort to be made in building a global net zero system. The perimeter and the "just levels of contribution” are set out in principles 5, 6, 8 and 9.&nbsp;In particular, the company's entire strategy must be consistent with this principle. The company's financial strategy must not contradict its climate strategy.&nbsp;<h3>03. To organise their climate action, companies must distinguish three different types of action that are non-fungible: reduction, avoidance, removal.</h3>A company has three levers by which it can organise its climate strategy: reduce the emissions of its value chain, help others to reduce their emissions, and develop carbon sinks. These levers must be assessed, objectivised, managed and reported separately.&nbsp;The company must:<ul><li>Pillar A/&nbsp;Reduce its direct and indirect emissions (scope 1+2+3) to the levels required by decarbonation scenarios compatible with the Paris Agreement.</li><li>Pillar B/&nbsp;Contribute to reducing emissions in society, through &nbsp;either the sales of products and services that decarbonize, or the financing of GHG avoidance projects outside its value chain.</li><li>Pillar C/&nbsp;Preserve and develop carbon sinks in and outside its value chain.</li></ul>These three levers act in synergy and cannot be added or subtracted, and all three must be activated at the just level of contribution.Methods of measuring direct and indirect emissions, avoided emissions and carbon capture, as well as the “just” levels of contribution, are set out in principles 5, 8 and 9.<h2>Emissions reductions&nbsp;</h2><h3>04. The priority objective of companies must be to reduce their emissions.</h3>For most of their activities, reduction at the right level and speed of direct and Indirect emissions must be an absolute priority of a company's climate strategy.In the general case, Pillar A (reducing the carbon emissions of companies) takes priority in relation to the two other paths of action, namely contribution to reducing emissions of others (Pillar B) and the development of carbon sinks (Pillar C).&nbsp;The method of defining the "right level" and the "right speed", i.e. the relevant GHG emission reduction trajectory for the company, is set out in principle 6.Direct and indirect emissions are the emissions of scopes 1, 2 et 3.&nbsp;Some companies sell products and services related to low-carbon transition which allows the rest of the economy to reduce its emissions. In the general interest, it might be desirable for them to expand their activity regarding these specific products and services, even if this development results in an increase in emissions. This point is under discussion within the Net Zero Initiative project. It remains certain however that this type of exemption can only be allowed at the scale of a particular product or service and not for the entire range of products of a company.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<h3>05. Companies must assess and communicate on all the emissions of their value chain.</h3>The assessment of the company's GHG footprint must cover at least all the direct and significant indirect emissions.In conformity with the rules of ISO 14064-1:2018 and the Carbon Balance, the company must quantify and report all the significant emissions of its activity, whether direct or indirect (scopes 1, 2 and 3). The accounting perimeter is its organisational and operational perimeter. The significant emissions for which the company esteems that it does not have a lever should nonetheless be included in the assessment.The direct and indirect emissions must also include those linked to the land sector (forests, soils).<h3>06. The emission reduction goals must be consistent with climate science.</h3>Companies are faced with the inevitable and urgent need to set reduction goals for their carbon footprint. For a credible climate strategy, these objectives must be consistent with 1.5° or well below 2°C carbon budgets. These goals must be specified for medium and long-term time frames.To define its reduction goals, the company can rely on the recommendations of reference frameworks and scenarios.The scenarios on which the company will build its emission reduction strategy can be:<ul><li>International scenarios: The SBTi requires following a 1.5°C reduction pathway for scope 1-2 emissions, and at least a well below 2°C for short-term goals of scope 3 emissions.</li><li>Regional and national scenarios, for example Europe’s climate neutrality plan and the French SNBC (National Low Carbon Strategy).</li><li>Scenario analyses carried out by the company regarding 1.5°C or well-below 2°C scenarios.</li></ul>By way of information, the mitigation efforts expected at the global level require a reduction of 5% to 7% in emissions per year.Companies are not necessarily bound to apply these figures as such to ensure compatibility with the Paris Agreement, since the efforts to be made depend on the sector and nature of the company. Nonetheless, the order of magnitude of the reductions expected at the global scale provide an idea of the magnitude of the emission reductions to be implemented, and illustrate the need to significantly rethink the business models of companies to take up the climate challenge.The trajectory must define the goals for several timeframes: the medium term (5 to 10 years) and the long term (more than 20 years) consistent with the time scales of the activity.Lastly, regarding the specific cases of companies selling decarbonising products and services, see principle 4.<h3>07. In addition to making commitments, it is urgent for companies to obtain concrete and rapid results on reducing their emissions.</h3>A climate strategy only has value if it leads to real reductions of the company's GHG emissions, in line with the trajectory pursued. To achieve this, it is vital to define a company transformation plan that must be followed and managed dynamically. Companies must give themselves the means to achieve their ambitions.Measuring emissions and defining a trajectory are pointless if they are not followed by the implementation of concrete actions to achieve the absolute reduction of emissions, providing tangible results and in line with the targets set.To achieve this, it is vital to define an action plan, i.e.,&nbsp;a list of initiatives, prioritised and scheduled through time that must be deployed in the company to generate emission reductions in its value chain. Those initiatives cannot be limited to step-by-step improvements of the company's processes. To provide the expected level of emission reductions, there is no other way but to transform business models, reorient investments and rethink the company's strategy. To this end, the company must carry out scenario analyses to help it rethink its activity and make it compatible with a net zero planet.The reduction of the company's GHG footprint must be monitored and managed dynamically at the highest level of the organisation.To build a full action plan, the company can rely on sectoral references such as ADEME's international initiative <a href="https://actinitiative.org/">ACT – Assessing low Carbon Transition</a>, to ensure consistency between the actions carried out and the reduction targets.Lastly, regarding the specific cases of companies selling decarbonising products and services or compatible with 1.5°C, see principle 4.<h2>Positive contributions&nbsp;</h2><h3>08. Companies must contribute to the decarbonization of their ecosystem as much as possible, through the generation of avoided emissions.&nbsp;</h3>Further to their action to reduce their value chain emissions, companies are encouraged to contribute to decarbonation beyond the scope of their carbon footprint, on the one hand by developing a range of products and services that decarbonize their clients, and on the other hand, by financing additional emission reductions outside their value chain.In addition to working to reduce their emissions, which remains the priority in most cases, companies are encouraged to contribute towards decarbonising the economy in general by generating emission reductions beyond the scope of their carbon footprint, quantified as “avoided emissions”. This can be done by using two main levers:<ol><li>Emissions avoided by products and services: the company sells 1.5°C-compatible low carbon solutions that reduce their clients’ carbon footprint.</li><li>Emissions avoided by financial contribution outside the value chain: the company generates additional avoided emissions through the financing of certified projects on the voluntary market, or through any other scheme that enables avoiding emissions according to a rigorous method recognised by reference institutions (e.g., Gold Standard, Verra methodologies, etc.).</li></ol>The first lever must be considered as having priority in comparison to the second, since the company’s portfolio of solutions is directly linked to its business strategy and risk exposure.Generating avoided emissions is different from the company's carbon footprint. One cannot be subtracted from the other.Avoided emissions by the company's solutions should be distinguished from the reduction of Scope 3.11 - “Use of sold products":<ul><li>The company can very well increase its scope 3 while generating increasing amounts of avoided emissions (case in which the company increases the sales of its decarbonising products);</li><li>On the contrary, scope 3 can very well decrease without however generating avoided emissions (case in which the company decreases the sales of carbon-intensive products that do not avoid emissions).&nbsp;</li></ul>Avoided emissions quantify the impact of a solution on the decarbonization of society, whereas a reduction in scope 3 emissions quantifies a decrease in the company’s emissions.&nbsp;As with the reduction of the carbon footprint, the company must adopt a three-step approach for its action related to avoided emissions:<ul><li>Assessment: use a rigorous and recognised method for the annual assessment of avoided emissions generated inside and outside the value chain.&nbsp;<a href="https://www.carbone4.com/files/Publication_2022_NZI_Guide_Pilier_B.pdf">A standardisation of this calculation</a> was proposed In June 2022 by the Net Zero Initiative project.</li><li>Targets: set quantitative targets for generating avoided emissions, that must reflect the just level of action of the company to achieve global net zero. Such methodological work is in progress within the Net Zero Initiative project.</li><li>Action plan: set up an action plan to reach those targets, manage them dynamically, monitor them and report the results.</li></ul>Regarding financing actions outside the value chain, specific attention must be given to the quality of the projects financed, especially to ensure the reality of their carbon contribution (in particular, the rigour of the quantification, uniqueness, additionality), as well as to the social and environmental impacts beyond carbon, in particular in favour of developing countries. The use of recognised standards (Gold Standard, VCS, etc.) is encouraged. Furthermore, companies shall be transparent on the volume of financing allocated to projects outside the value chain and, if relevant, on the volume of CO2 avoided.This action must be carried out in parallel with that of carbon sinks described in principle 9, and that of emission reduction described in principles 4 to 7.<h3>09. Companies must develop carbon sinks at the just level.</h3>In addition to their action to reduce their value chain emissions and contribute to the decarbonation of society (emission avoidance), companies are encouraged to contribute at the just level to the sustainable capture of CO2 in carbon sinks, by acting in priority within their value chains.In addition to working to reduce their emissions (which remains the priority) and avoiding emissions, companies are encouraged to contribute to the sustainable capture of CO2 in carbon sinks:<ul><li>In their value chain: in natural carbon sinks (soils, forests) and technological sinks (BECCS, DACCS, etc.), owned by the company or present in the value chain;</li><li>Outside their value chain: via the purchase of certified carbon credits, or other schemes for financing carbon removals according to a rigorous method recognised by reference institutions (e.g., Gold Standard, Verra, etc.).</li></ul>Carbon sinks in the value chain must be considered as having priority outside the value chain, since they are directly linked to the company's scope of responsibility.As with the reduction of the carbon footprint, the company must adopt a three-step approach for its action relating to carbon removal:<ul><li>Assessment: use a rigorous and recognised method for the annual assessment of carbon removals generated inside and outside the value chain, by applying recognised standards (in particular the GHG Protocol on Removals&nbsp;by the WRI, whose release is scheduled for the end of 2022).</li><li>Targets: set quantitative carbon removals targets that must reflect the just level of action of the company in its contribution to global net zero, by distinguishing a specific sub-target for removals inside the value chain.</li><li>Action plan: set up an action plan to reach the targets determined, manage them dynamically, monitor them and report the results.</li></ul>For projects outside the value chain, special attention must be given to the quality of the initiatives financed, notably to guarantee the robustness of their carbon contribution (quantification, uniqueness, permanence, additionality, etc.), as well as to the social and environmental impacts beyond carbon, in particular in favour of developing countries. The use of recognised standards (Gold Standard, VCS, etc.) is encouraged. Furthermore, companies shall be transparent on the volume of financing allocated to projects outside the value chain and, if relevant, on the volume of CO2 removed.Carbon sinks are distinguished according to their type and level of permanence.This action must be carried out in parallel with that of avoided emissions described in principle 8, and that of emission reductions described in principles 4 to 7.<h2>Communication</h2><h3>10. If companies wish to communicate on their climate strategy, it must be done with rigour and irreproachably.</h3>Companies are invited to communicate transparently and sincerely on their climate strategy, by placing emphasis on their concrete results, and by using indicators and elements of language that contribute to promoting a rigorous approach to climate change.Through concern for transparency, and to highlight the progress achieved, companies are encouraged to communicate internally and externally on the content and outcomes of their climate strategies.&nbsp;The dashboard of the&nbsp;<a href="https://www.net-zero-initiative.com/fr/referentiel">Net Zero Initiative</a> provides a relevant reporting framework.Companies are invited to go further than a declaration of intent and targets, by placing emphasis on the results delivered.Communicating quantitative indicators requires:<ul><li>specifying the methodology used for the quantification, and using a reference methodology (e.g., ISO 14064-1:2018, GHG Protocol, Bilan Carbone…);</li><li>specifying the perimeters (spatial, temporal, organisational) and the main hypotheses;</li><li>indicating the contextual elements required to understand the figures communicated (e.g., targets set, sectoral averages, significant events).</li></ul>Furthermore, the company must take care to use formulations that faithfully mirror the reality of the results and promote a rigorous approach to the climate challenge. In particular, in conformity with the&nbsp;<a href="https://librairie.ademe.fr/eco-responsabilite/5335-utilisation-de-l4argument-de-neutralite-carbone-dans-les-communications.html">opinion of ADEME</a> on carbon neutrality, and its&nbsp;<a href="https://presse.ademe.fr/2022/02/lademe-publie-un-avis-dexperts-sur-lutilisation-de-largument-de-neutralite-carbone-dans-les-communications.html">experts' opinions on the use of the “Carbon neutrality” argument in communications</a>, we strongly advise against the company making allegations of carbon neutrality regarding its products, services and events. We also advise against the notion of “carbon offset”. Instead, the company is invited to place emphasis on its contribution to global and collective carbon neutrality through its alignment with the reference trajectories of climate change mitigation, with the three indicators, namely reduction, avoidance and removal.&nbsp;Communicating can also be the opportunity for highlighting the co-benefits provided by setting up the climate strategy (e.g., social, biodiversity, resilience, etc.)

<h2>Glossary</h2><figure class="table"><table><tbody><tr><td>Additionality</td><td>Funding a mitigation action (reduction, avoidance, carbon capture) is additional when the action in question cannot be implemented without this funding, for economic and operational reasons.&nbsp;</td></tr><tr><td>BECCS</td><td>Bio-Energy with Carbon Capture and Storage</td></tr><tr><td>Value chain&nbsp;</td><td>All the actors up and downstream of the company's activity and necessary for it to take place: suppliers, transporters, distributors, clients, etc.</td></tr><tr><td>DACCS</td><td>Direct Air Carbon Capture and Storage</td></tr><tr><td>Decarbonation</td><td>Absolute reduction of the company's direct and indirect emissions (pillar A).</td></tr><tr><td>Avoided emissions&nbsp;</td><td>Generation of emission reductions in comparison to a counterfactual reference scenario, outside the perimeter of the company’s carbon footprint.</td></tr><tr><td>Significant emissions&nbsp;</td><td>Emissions representing the majority of the company's total emissions.Annex H of ISO 14064-1:2018 specifies a list of potential criteria for assessing the significance of indirect emissions, in addition to the magnitude/relative share criterion of emissions (which must be included by default):<ul><li>level of influence/lever,</li><li>risk/opportunity,</li><li>specific sectoral guideline,</li><li>subcontracting,</li><li>commitment of personnel&nbsp;</li></ul>For example, the Science-based Targets Initiative requires companies committed to SBT to include in their reduction perimeter all their significant emissions which they define as follows:<ul><li>the whole of scope 1+2;</li><li>the categories of scope 3 representing at least ⅔ of the whole of scope 3.</li></ul>&nbsp;</td></tr><tr><td>GHG&nbsp;</td><td>Greenhouse gas: all gases that contribute to intensifying the greenhouse effect, thus climate change. The main GHGs are: CO2 (carbon dioxide), CH4 (methane), and N2O (nitrous oxide).&nbsp;</td></tr><tr><td>Just level of contribution</td><td>For a given challenge, the theoretical level corresponding to the relative share of collective effort that should, ideally, be allocated to an actor as a function of their responsibility in the challenge and their capacity to address it efficiently.&nbsp;</td></tr><tr><td>Net zero / Net zero emission&nbsp;</td><td>Equilibrium situation at the level of the planet or a country, between two physical flows: greenhouse gas emissions (expressed in tCO2e) on the one hand, and CO2 removals on the other.&nbsp;</td></tr><tr><td>Neutralisation</td><td>In the vocabulary of the SBTi's Net-Zero Standard, all the actions relating to carbon capture (pillar C of the NZI) for a quantity of CO2 equivalent to the residual emissions of the company in 2050, according to a reduction pathway of 1.5°C.</td></tr><tr><td>Carbon neutrality</td><td>See “Net zero”</td></tr><tr><td>Perimeter</td><td>Boundaries defined for calculating an indicator or planning an action.&nbsp;<ul><li>Time perimeter: period of time considered (for example, a calendar year).</li><li>Spatial perimeter: geographical area considered (for example, metropolitan France).</li><li>Organisation perimeter: all the sub-entities of the company considered (for example: a branch, a brand, or the whole group).</li></ul></td></tr><tr><td>Permanence</td><td>For carbon capture: assurance that a ton of CO2 is captured sustainably, and that it will not be released into the atmosphere in the medium term due to, for example, a forest fire or anthropogenic deforestation.</td></tr><tr><td>CO2 capture</td><td>Storage - permanent or very long term - in carbon sinks (products with very long lifetimes, stable ecosystems, geological wells) - of CO2 of atmospheric origin, either by natural processes (plant growth, decomposition of organic matter), or by technological processes (direct capture of carbon, transformation of biomass).&nbsp;</td></tr><tr><td>Uniqueness</td><td>For an emission reduction or carbon capture: the fact that it is accounted for only once.</td></tr></tbody></table></figure>

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Download the 10 principles

10 principles for an ambitious corporate climate strategy 

A nine-month joint <a href="https://www.theguardian.com/environment/2023/jan/18/revealed-forest-carbon-offsets-biggest-provider-worthless-verra-aoe">investigation</a> by journalists from The Guardian, Die Welt and SourceMaterial has shown that 90% of the REDD+ carbon credits from the world's largest offsetting standard actually have no positive impact on the climate.The team based its findings on three recent scientific publications analyzing Verra's credits, as well as on a dozen interviews with climate scientists, insiders of the voluntary carbon market, and project developers.The result of the investigation is clear: Verra's REDD+ credits, whose goal is to provide private funds to protect rainforests in sensitive areas, seem to have truly avoided deforestation only in a very limited number of cases. 94% of the credits are reported to have had no effect on the fight against climate change.Why such a gap between Verra's predictions and reality? First of all, it is important to understand that REDD+ carbon credits are issued in proportion to the amount of deforestation avoided, i.e. the difference between the situation where the forest is protected and an alternative situation, called the "reference scenario", which would have taken place in the absence of protection. Credits are then generated based on the amount of carbon that was not emitted into the atmosphere as a result of funding the conservation program.

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The REDD+ mechanism rewards projects that avoid deforestation by allowing them to generate as many carbon credits as emissions avoided.

However, it appears that these baseline scenarios exaggerated the threat of deforestation in the areas under consideration, which had the effect of overestimating the positive effect of the projects. One of the three studies amounts this overestimation to +400%, and even +950% if three particularly successful projects in Madagascar are excluded from the calculation.Verra certifies three quarters of all carbon credits on the planet, and has issued more than one billion credits since its creation. Its rainforest protection program, the one targeted by the Guardian investigation, accounts for 40% of its credits. It is worth noting that carbon credits are the key element of the <a href="https://www.carbone4.com/analyse-decret-neutralite-carbone-produits">"carbon neutrality" claims</a> used by a large number of companies, either for their products and services or for their own corporate activities. Sometimes, these carbon credits are even directly counted as a direct reduction of their carbon footprint, which is prohibited by international climate accounting standards.In addition to the fact that the notion of "neutrality" at such small scales poses strong <a href="https://www.carbone4.com/en/decoding-ademe-carbon-neutrality">conceptual problems</a>, the Guardian's study reminds us that it is the very system for calculating and generating carbon credits that is undermined by methodological problems.<h3>A rigorous investigation that reveals a systematic overestimation of climate gains</h3>The investigation was based on three research papers. Two of them (<a href="https://www.pnas.org/doi/10.1073/pnas.2004334117">here</a> and <a href="https://arxiv.org/abs/2301.03354">here</a>, as a preprint) were produced by the same international team, the <a href="https://pubmed.ncbi.nlm.nih.gov/35713105/">third</a> by a team from Cambridge University. The work focuses on the analysis of 87 preservation projects certified by the Verra standard. Among the 29 projects for which the data was usable, only 8 had a real impact on the climate. Among these, only one had an effect equal to or greater than what was originally calculated by Verra.

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Among the 29 Verra REDD+ projects analyzed, 21 are reported to have had little to no positive impact on the climate.

It should be noted that the construction of a baseline scenario is a difficult exercise, since it is an estimate, by construction unverifiable, of what would have happened in the absence of the implementation of a project. The art of constructing a robust baseline scenario consists in imagining a future that is as plausible as possible; it is therefore an infinitely more complex exercise than a simple measure of emissions reduction over time, or a measure of carbon removal.

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Behind the generic name of "carbon credit" lies a multitude of different types of projects - and climate impacts.

Nevertheless, despite the uncertainty of this measure, the three research papers on which the Guardian's investigation is based independently show that Verra appears to have systematically overestimated the effectiveness of the projects analyzed. This result confirms the criticisms made of the voluntary carbon market over the past two decades.

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Les projets REDD+ d’évitement de la déforestation, le type de projets concerné par l’étude du Guardian, représentaient 25% du total des crédits échangés sur le marché du carbone volontaire en 2019.

At a time when <a href="https://www.iif.com/tsvcm">powerful forces</a> are moving to massively expand the voluntary carbon market, it is urgent to :<ul><li>correct the methodologies for certifying carbon projects as quickly as possible, so as to put private finance at the service of truly additional and climate-efficient projects. Otherwise, we will collectively lose precious time and money. The structural flaws of the voluntary market have unfortunately been known for the past twenty years; this discovery of the anomalies of Verra's REDD+ methodologies raises serious questions about the ability to one day "fix" this market, <a href="https://www.theguardian.com/environment/2023/jan/18/revealed-forest-carbon-offsets-biggest-provider-worthless-verra-aoe">which some are already calling for to be abandoned</a></li><li>to recall, as often as necessary, that a company has no right to count its carbon credits as emission reductions, as Carbone 4, Net Zero Initiative, ADEME, SBTi, GHG Protocol, ISO, and a host of other benchmarks have repeatedly pointed out. Only real scope 1, 2 and 3 emissions reductions can be counted as progress towards reduction targets.</li></ul>There is no doubt that the voluntary carbon market is playing a dangerous game. While it is necessary to mobilize private finance to fight deforestation, the beneficial effects of such financing should not be overestimated, nor should it be assumed that a company can choose to activate offsetting or decarbonization of its activities as two interchangeable levers.The <a href="https://www.net-zero-initiative.com/">Net Zero Initiative</a>, Carbone 4’s framework on the contribution of companies to global net zero emissions, has always considered the purchase of carbon credits to be a complementary action that must be distinguished from the efforts that the company must make to transform its business model and make it compatible with the Paris Agreement. NZI also recommends strictly separating "reduction", "avoidance" and "removal" credits. This approach to climate action by private actors does not solve all the structural problems of the carbon market, but it does have the merit of establishing safeguards in the development of corporate climate strategies at a time when any delay in climate action could prove fatal.

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Is it true that 90% of carbon credits are worthless?

Last September, the GFANZ published its proposal to define a normative framework for the decarbonization of the financial sector<a class="footnoteLink" href="#footnote-1">[1]</a>.The GFANZ proposal identifies 4 decarbonizing actions for financial players:&nbsp;<ul><li>Developing and scaling up climate solutions;</li><li>Financing assets or companies already aligned with a 1.5°C trajectory;</li><li>Financing assets or companies committed to reducing their emissions in line with 1.5°C trajectories;</li><li>Investing in very carbon-intensive assets in order to remove them (managed phase out strategy).</li></ul>It is structured in two parts, the first dealing with the definition of each of these actions, the second with the measurement of the performance of a company/asset with regard to a given type of action.&nbsp;

The purpose of this document is to clarify Carbone 4's position on the GFANZ proposal in order to suggest improvements to its methods and definitions. The document proposed by the GFANZ has laudable intentions and raises interesting questions: the mobilisation of financial flows is indeed essential to achieve global decarbonisation compatible with the 1.5°C objective. The specific focus on decarbonising assets and exiting from carbon assets, highlighted in the GFANZ report, seems to us to be a step in the right direction. However, we do not believe that the methodological options proposed by the GFANZ will make it possible to achieve the desired objective.

Six points in particular caught our attention:<ol><li>the problematic concept of Expected Emissions Reductions&nbsp;(EER) which consists of comparing a business as usual scenario with the emissions reduction pathway to which a company is committed;</li><li>the potential misuse of the concept of avoided emissions, especially when used for other purposes than estimating emissions reductions of solution providers and enablers;</li><li>the insufficient guarantees associated with the effective implementation of decarbonization commitments;</li><li>the absence of criteria to guarantee the financial additionality of investments;&nbsp;</li><li>the unsatisfactory distinction between solution providers and enablers, presented as a response to possible double counting of avoided emissions, but difficult to make in practice.</li><li>the exclusive focus on decarbonization, which does not tackle the fundamental question of the end purpose of products sold by companies and their compatibility with reasonable societal needs in a net zero economy&nbsp;</li></ol>&nbsp;<h3>We believe that the notion of Expected Emission Reductions (EER) is both unnecessary and potentially risky.</h3>The method envisaged by the GFANZ to quantify the environmental value of a project is largely based on the notion of Expected Emission Reductions (EER), rewarding financial institutions for the expected volume of emissions that would be avoided thanks to their investments and the actions taken by their customers. Estimating EERs, as described in the document for aligned and aligning companies, involves comparing a business-as-usual emissions pathway with the emissions pathway resulting from the commitments made by the companies. Carbone 4, like other players who have already communicated their position<a class="footnoteLink" href="#footnote-2">[2]</a>, believes that the method proposed by the GFANZ must be revised, or even abandoned, in order to be aligned with the overarching objective of decarbonizing the financial sector.&nbsp;&nbsp;Indeed, the EER concept, when comparing actual emissions to a company-level BAU (method used for aligned and aligning companies) is potentially risky in the sense that:<ul><li>It requires comparison with a business-as-usual pathway at company level, which can only be declarative and is inherently unverifiable.&nbsp;This business-as-usual trajectory can even describe an increase in emissions (and not just a constant level). It is theoretically possible for a company to exaggerate the business as usual emissions in order to maximize its EER in an abusive manner, without this being detectable by an external third party.</li><li>The method therefore provides a structural incentive to favor the most carbon-intensive players,&nbsp;who are on paper (but on paper only), and from a strict accounting point of view&nbsp;also those with the greatest potential for decarbonization. The GFANZ acknowledges this risk, admitting “the EER should be revised downward accordingly” (p. 32), but these revisions have little or no impact, as the funds invested have already been provided at the time when the drift is noted ex-post.</li><li>It leads to confusion between “actual emissions compared to a company-level BAU” and “emissions avoided by products and services”. While the latter type of avoided emissions is useful, since they help quantify the extent to which a solution contributes to the decarbonization of society (which is not captured by classic corporate carbon footprint assessments), the former is redundant with the notion of corporate carbon footprint.</li></ul>These risks are all the more unfounded in that the use of EERs seems unnecessary, given that it overlaps with the carbon footprint indicator (induced emissions). Measuring the gap between a company's emissions and its decarbonization pathway already gives good information about its alignment. Comparing a company's emissions against a hypothetical BAU would provide no additional information to that provided by a forward-looking emissions reduction pathway. Comparing actual decarbonization with a reference pathway aligned to 1.5°C, which is recognised and less open to discussion than a business as usual&nbsp;pathway constructed ad hoc, seems to offer a better guarantee, while avoiding directing investment towards the most carbon-intensive companies. This option also has the advantage of being easier to coordinate with existing frameworks (the SBTi in particular).Although this proposal may appear attractive at first glance, the devil is often in the details: without offering sufficient guarantees, the new concept of EER could offer an escape route for companies least aligned with the decarbonization imperative.<figure class="image"><img src="https://carbone4.com/files/david_stamm_7_Vfq35_Ko_Hh_U_unsplash.jpg"></figure> The use of avoided emissions could be useful, provided that they relate only to products and services sold, and are backed by a robust estimation framework.Our reservations about the use of EERs do not mean, however, that estimating avoided emissions is pointless.&nbsp;The comparison with a counterfactual baseline does make sense for products and services (or put another way, when we compare the emissions generated with and without the development of a product/service, which is a different approach from that of comparing a company's actual emissions pathway with that adopted in a business as usual scenario), since it enables companies to measure a positive impact on society that cannot be measured by calculating their carbon footprint. In this respect, we believe, as suggested in the GFANZ paper, that the use of this indicator is useful for actions aimed at promoting companies that provide low-carbon solutions (strategy 1), and for the managed phaseout of high-emitting physical assets (strategy 4). Nevertheless, the concept of avoided emissions, as developed in the GFANZ paper for these two strategies, seems to suffer from an ambiguity in that it suggests that the baseline could be chosen arbitrarily among alternative solutions. Yet, a proper baseline must rather reflect the most likely counterfactual situation, i.e. “what would have happened” without the solution.For example, if we follow this line of reasoning, even the installation of a gas-fired power plant could generate avoided emissions, if a coal-fired power plant had been chosen as the baseline scenario.&nbsp;In this case, the assessment of avoided emissions should instead focus on constructing a counterfactual scenario representing what would have happened without the deployment of the low-carbon solution (in our example, by considering the mix of power stations built recently, for example). The mere comparison between arbitrary products also conceals the possibility of a rebound effect.&nbsp;&nbsp;To avoid any fanciful estimates, the reference scenario must be based on a clear framework, such as the Avoided emissions Guidance jointly developed by Carbone 4 and the WBCSD<a class="footnoteLink" href="#footnote-3">[3]</a>.&nbsp;<h3>The guarantees associated with the effective implementation of the decarbonization plan must be strengthened</h3>In order to underpin the credibility of the emissions reduction pathways to which companies commit, the GFANZ asks players to document their decarbonization actions, or to justify the relevance of their projects. We feel that this requirement is essential, but that project/company governance is not addressed as one of the key criteria in the action plan, even though it is a decisive factor in the success of projects.&nbsp;<h3>Additionality of funding is insufficiently guaranteed</h3>The methodological developments proposed in the document aim to guarantee the existence of environmental additionality. They seek to answer the following question: if I invest in this project/this asset/this company, does my financing make it possible to reduce emissions, and if so, by how much? (it is additional from an environmental point of view, in the sense that it is of interest compared to the situation in which the project is not developed).&nbsp; However, they offer no guarantee of financial additionality, which seeks to determine whether this investment in the company(and the conditions required for this investment) has actually triggered additional action on the part of the company. Financial additionality does not focus on the environmental benefit of the project, but on the benefit of the financing: this time it asks whether the decarbonisation actions implemented were made possible by the financing in question, or whether they would have been implemented anyway.GFANZ assumes that a financial player can be considered "net zero aligned" thanks to its investments. However, financial players do not have the simple task of allocating capital to virtuous players; they must also play an active role in the transformation of companies, using these investments as levers to influence their strategic choices (for example via resolutions at general meetings, by making the amounts invested, the liquidity and the price of their interventions conditional on the achievement of environmental criteria, etc.). It is not obvious that investing in a company necessarily contributes to changing its strategy: if, for example, these securities are bought on the secondary market, this purchase is transparent from the company's point of view. If financial players wish to make a significant contribution to the goal of global carbon neutrality, their approach must be more ambitious than simply allocating capital.&nbsp;<h3>The distinction between Solution providers and Enablers does not always work in practice</h3>One of the key distinctions, supposed to avoid double counting of avoided emissions, is based on the distinction between solution providers and enablers. The GFANZ defines these two concepts as follows:&nbsp;<ul><li>solutions&nbsp;are products or activities that "directly contribute to the elimination, removal or reduction" of greenhouse gases,</li><li>enablers&nbsp;are “assets that indirectly contribute to, but are critical for, emission reductions by facilitating the deployment and scaling of solutions” (p. 15).</li></ul>To support this distinction, GFANZ cites the example of a battery manufacturer who facilitates the deployment of electric vehicles, here assimilated to a decarbonizing solution. While conceptually appealing, this distinction comes up against major practical difficulties in practice: the battery maker is an enabler relative to the car maker, but it is also a solution provider relative to the mining company. It is therefore not clear that the option presented here will avoid double counting.&nbsp;On this issue, we suggest allocating avoided emissions with the same manner as it can be done for the carbon footprint (ex: allocation with the added value). We also recommend introducing a threshold of a certain share of revenues (e.g.&nbsp;50% of revenues or CAPEX associated with green activities) to identify “Solution providers”. &nbsp;<h3>The EER concept focuses exclusively on decarbonization, which does not tackle the question of the compatibility of companies’ business models with reasonable societal needs in a net zero economy.</h3>The environmental transition calls for far-reaching changes: some activities will have to grow considerably (products linked to thermal renovation, soft mobility such as cycling), while others will have to disappear: for example, the gradual electrification of the car fleet and the drive to reduce energy consumption will require a complete reorganization of vehicle maintenance and repair activities (with the long-term disappearance of car parts linked to internal combustion engines); similarly, the decarbonization of emissions linked to packaging will no doubt require not only a marginal reduction in the carbon intensity of materials already in use, or the replacement of certain materials with others, but also the consideration of other packaging methods (bulk, deposits, etc.). ). In other words, decarbonizing the economy cannot consist of maintaining current structures and products by incrementally reducing their carbon intensity. The scale of the transformations required means that, when assessing the appropriateness of an investment, we need to consider the purpose of the assets and products being financed.&nbsp;This question must be asked in two complementary ways:<ul><li>Usefulness for decarbonization, i.e. the company’s contribution to reducing global emissions. This aspect is addressed in particular through the concept of avoided emissions by products and services.</li><li>Compatibility with a low-carbon horizon, i.e. the company's capacity to be resilient in a low-carbon world</li></ul>&nbsp;However, while the notions of EER and avoided emissions, both present in the report, are intended as an answer to the question of utility for decarbonization, the GFANZ proposal neglects the second aspect of the problem raised here: it does not explicitly consider the question of the compatibility of a product or asset with a low-carbon horizon (replacing an oil-fired power plant with a gas-fired plant lowers the carbon intensity associated with energy production, all other things being equal, which does not mean that the decision to build a gas-fired power plant is appropriate in a decarbonized world, particularly if a lower-emission alternative could have been considered instead). Worse still, by encouraging the financing of assets with the greatest decarbonization potential, it risks achieving the opposite of the desired effect on this point, by directing flows towards the least resilient assets (see 1.). Indicators do exist, however, albeit imperfectly, to attempt to approach this question: the Paris Agreement Compatibility Score (PACS) developed by Carbone 4, or other forms of taxonomy, are useful tools in this respect.&nbsp;<h3>Conclusion</h3>&nbsp;A clear framework must be defined to direct financial flows towards low-carbon assets and enable financial sector players to make appropriate decisions in the face of the environmental transition challenge, while avoiding greenwashing. This first GFANZ proposal has the merit of raising major questions, and placing them at the heart of the discussion.&nbsp;It also underlines the diversity of contribution levers, by distinguishing between several modes of action (financing companies in the process of alignment, decarbonizing solutions, abandoning carbon assets). &nbsp;However, Carbone 4 believes that, as they stand, the proposals contained in this version of the GFANZ consultation do not make it possible to achieve these objectives. In particular, the concept of Expected Emissions Reductions runs counter to their initial objective of "promoting transparency and accountability of net zero commitments" (p. 7 of the consultation).&nbsp; On this point, Carbone 4 calls for us to stick to measuring the gap between a company's emissions and its decarbonization trajectory, as applied, for example, under SBTi, and which already provides good information on its alignment. Although imperfect, this option seems to us to avoid the main pitfalls noted here concerning EERs.&nbsp;&nbsp;Carbone 4 calls on the GFANZ to take into account the concerns expressed by various ecosystem players in order to improve its initial proposal.

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Glasgow Financial Alliance for Net Zero, (2023). Defining Transition Finance and Considerations for Decarbonization Contribution Methodologies. Available here: <a href="https://assets.bbhub.io/company/sites/63/2023/09/Defining-Transition-Finance-and-Considerations-for-Decarbonization-Contribution-Methodologies-September-2023.pdf">https://assets.bbhub.io/company/sites/63/2023/09/Defining-Transition-Finance-and-Considerations-for-Decarbonization-Contribution-Methodologies-September-2023.pdf</a>

Reclaim Finance, (2023). Reclaim Finance response to consultation on draft GFANZ paper:&nbsp;&nbsp; “Defining Transition Finance and Considerations for Decarbonization Contribution Methodologies”. Available here: <a href="https://reclaimfinance.org/site/wp-content/uploads/2023/11/RF-comments-on-GFANZ-transition-contribution.pdf">https://reclaimfinance.org/site/wp-content/uploads/2023/11/RF-comments-on-GFANZ-transition-contribution.pdf</a>

Carbone 4, WBCSD, (2023). Guidance on avoided emissions. Helping business drive innovations and scale solutions toward net zero. Available here: <a href="https://www.wbcsd.org/contentwbc/download/15909/229494/1">https://www.wbcsd.org/contentwbc/download/15909/229494/1</a>

Carbone 4’s public response to the GFANZ Consultation on Transition Finance Strategies and Measuring the Impact on Emissions

The Science-based targets Initiative&nbsp;(SBTi) was founded in 2015 by the World Resources Institute&nbsp;(WRI), the Carbon Disclosure Project&nbsp;(CDP), the United Nations Global Compact and the World Wide Fund for Nature&nbsp;(WWF), with the intent of "develop[ping] standards, tools and guidance which allow companies to set greenhouse gas (GHG) emissions reductions targets in line with what is needed to keep global heating below catastrophic levels and reach net-zero by 2050 at latest."<a class="footnoteLink" href="#footnote-1"><a class="footnoteLink" href="#footnote-1">[1]</a></a> (i.e. 5% reduction in emissions per year).&nbsp;For almost 10 years, this initiative has helped increase the number of climate commitments made by companies, and contribute to bridge the gap between business and science. On April 9th, however, the organization's Board of Trustees&nbsp;&nbsp;issued a statement authorizing the use of "Environmental Attribute Certificates", including carbon credits, to achieve scope 3 carbon footprint reduction targets. The Board's decision is in line with the position of historical offset players such as the Voluntary Carbon Market Initiative&nbsp;(VCMI), with which SBTi recently formed a partnership<a class="footnoteLink" href="#footnote-2">[2]</a>. While the organization's&nbsp;employees and Technical Council&nbsp;have criticized this statement as “undermining [their] government processes”<a class="footnoteLink" href="#footnote-3">[3]</a> , this stance by the board is&nbsp;first and foremost scientifically questionable. Final validation of this intention, which could take place in July, would mark a clear step backwards in the ambition historically carried by the initiative, and would dangerously delay the collective action required for the ecological transition.<h2>Taking the easy way-out</h2>Since its creation in 2015, SBTi has become one of the most well-known climate-related labels: by the end of 2023, it announced that it had approved the targets of over 4,000 companies. So far, its rise to prominence has made the subject more accessible, provided a clear, albeit perfectible, framework, and enabled the setting of emissions reduction in line with climate science. With the targets of many of the pioneering certified companies set for 2025 (and those of the following ones shortly thereafter), compliance with the commitments made is about to be verified. Unfortunately, in most cases, companies seem to be falling short of the mark,&nbsp;despite an already accommodating framework that allows them to set intensity targets<a class="footnoteLink" href="#footnote-4">[4]</a> : of the 56 commitments due in 2025 or earlier, and listed for scope 1+2+3 in SBTi's Monitoring report 2022<a class="footnoteLink" href="#footnote-5">[5]</a>, only 18 (around 30%) have reached more than 70% of their target<a class="footnoteLink" href="#footnote-6">[6]</a>.&nbsp;This finding should have prompted us to reflect on the flaws in the current system, to better assess the credibility of commitments upstream (for example, by making public the resources deployed by the companies in terms of investment and governance), and to realize that, in the face of climate change, failure to question one's business model inevitably leads to marginal/negligible actions.&nbsp;The submission of SBTi targets must come from an in-depth analysis on the company's "business" resilience, from the point of view of both physical risks and transition risks and opportunities (assessments carried out for example by means of prospective scenario analyses respecting planetary boundaries<a class="footnoteLink" href="#footnote-7">[7]</a>). This reflection should enable the company to confirm or rethink its strategy, in order to make its activity and its product and service offers useful in an economy compatible with the planetary boundaries<a class="footnoteLink" href="#footnote-8">[8]</a>,<a class="footnoteLink" href="#footnote-9">[9]</a>. Unfortunately, the SBTi Board, without consulting the opinion of its Technical Council<a class="footnoteLink" href="#footnote-10"><a class="footnoteLink" href="#footnote-10">[10]</a></a>&nbsp;, has preferred to change the rules of the game rather than endorse this statement of truth to its financial backers.<h2>This position runs counter to the scientific consensus and contravenes the fundamental principles of carbon accounting.&nbsp;&nbsp;</h2>The first reason why this option is inconsistent is definitional. The carbon footprint is an inventory of the emissions on which an activity depends to function; however, the purchase of carbon credits in no way affects these dependencies. A company that has purchased carbon credits to "offset" its emissions has not lessened its exposure to emissions-related risks.The other argument is a physical one. Two major families of projects structure the credit market: projects aimed at avoiding emissions, and projects aimed at capturing CO2 from the atmosphere. Neither can "offset" the CO2e accounted for in a carbon footprint:&nbsp;<ul><li>From a physical point of view, a ton of GHG avoided&nbsp;is not equivalent to a ton of GHG emitted: the latter corresponds to a gas currently present in the atmosphere, whereas the former corresponds to a theoretical difference between actual emissions and those that could have taken place. Put another way, the increase in avoided emissions only guarantees that we are doing better than business-as-usual, not that we are actually reducing emissions. Equating an avoidance carbon credit with a scope 3 emission is therefore questionable.</li><li>The use of so-called sequestration&nbsp;carbon credits to compensate&nbsp;is no more acceptable. Let us mention&nbsp;the two main problems:</li><li>First, this is tantamount to equating a ton of CO2 already emitted with expected (and therefore uncertain) CO2 capture, which takes place over several years. In the case of a forestry project, for example, CO2 sequestration takes place over decades of tree growth, not at the time of the credit purchase.</li><li>Second, the potential for carbon sequestration is limited, making it impossible to&nbsp;"offset" all emissions<a class="footnoteLink" href="#footnote-11">[11]</a> . This is why the SBTi's "Net Zero" standard only promotes the "elimination" of corporate emissions once they have been reduced to an incompressible residual level in 2050, at the end of an emissions reduction process of the order of -90% compared to current levels.</li></ul>The deadlock of offsetting, from a physical point of view, has led to a broad consensus among carbon accounting bodies to exclude any fungibility between carbon credits and corporate carbon footprints. All authoritative bodies on climate reporting (UNFCCC, ISO 14064, GHG Protocol...), and more recently the CSRD<a class="footnoteLink" href="#footnote-12">[12]</a> , prohibit the subtraction of carbon credits from emissions. The SBTi, too, until now, had insisted on this point<a class="footnoteLink" href="#footnote-13">[13]</a> . Validating the use of carbon credits to achieve scope 3 reduction targets would therefore constitute a backtracking and a deviation from the SBTi approach. However, incentives to finance decarbonization projects outside the value chain can be implemented without diminishing ambition in terms of emissions reduction or giving in to the logic of offsetting: carbon credits are useful and contribute to the common effort, provided they are conceived as a complement to the action undertaken in one's own value chain&nbsp;(see conclusion).<h2>A choice that would be inefficient and harmful to the climate cause</h2>The use of carbon credits would perpetuate the illusion that a company can get rid of the problem all by itself, using only money&nbsp;. However, one of the main virtues (and the main difficulty) of the famous Scope 3 lies precisely in the need for cooperation that it implies: it enables a company to situate itself in its network of interdependencies, to involve other players beyond itself, through a game of mutual influence. Many companies may still underestimate the scale of the efforts required to reduce Scope 3 emissions: offering ways of getting around the difficulty, by opening up the use of carbon credits, would maintain the illusion of an easy ecological transition, and delay the implementation of transformative actions. However, the real lesson for a company submitting an SBT objective should be the following: greening one’s activity marginally, without actually questioning business-as-usual practices, will not be enough; the ecological crisis calls for a profound rethinking of business models.&nbsp;The direction taken by the Board of Trustees is&nbsp;also counter-productive from the point of view of financial flows, as it sends out the wrong signals and confuses the debate: a high-carbon industry could tomorrow, through the purchase of carbon credits, be considered "aligned with a 2°C trajectory", while a small business specializing in building renovation, that has chosen to invest to develop its business, would be considered less virtuous. Allowing the use of carbon credits would, in short, be tantamount to favoring companies capable of paying a very high price (the very companies for which the transformations required for decarbonization are the most complex) for these modern-day climate indulgences.&nbsp;Allowing emissions reduction through carbon credits is often presented by offset proponents as a great incentive for the financing of offset projects. This stance is debatable as well, as reducing climate performance to a single figure, resulting from the subtraction between emissions and credits, focuses the discussionon the quantity sequestered rather than the quality of projects. The influx of demand for carbon credits runs the risk of encouraging the development of the least costly and lowest-quality projects. The existence of labels, which tends to ensure a minimum level of quality, is not an absolute guarantee<a class="footnoteLink" href="#footnote-14">[14]</a> , and is not sufficient to direct flows towards the best projects (serious governance, consideration of biodiversity, etc.).&nbsp;<h2>Conclusion – How to get out of the crisis created by the announcement of the SBTi Board</h2>Other approaches are possible to meet both the need to decarbonize our activities, and the need to deploy projects to finance the transition. This is what the Net Zero Initiative<a class="footnoteLink" href="#footnote-15">[15]</a> is working on, by proposing a reporting&nbsp;method based on the logic of contribution to the goal of global carbon neutrality, i.e. the idea that a company should take part in a collective effort, rather than seeking to offset its emissions on its own. The framework proposed by the Net Zero Initiative is&nbsp;based on three non-fungible levers of action:&nbsp;<ul><li>reduction of the company’s carbon footprint - pillar A of the standard,</li><li>promotion of low-carbon products (primarily through the company’s own activities, then through carbon credits for avoided emissions) - pillar B,</li><li>contribution to the effort to sequester carbon and preserve and restore biodiversity (in the company’s value chain or via the purchase of carbon credits for sequestered emissions) - pillar C.</li></ul>Because this approach insists on not neglecting any one of these three pillars, it is more robust, fairer, and more effective.&nbsp;<ul><li>Robust&nbsp;because it is in line with the conclusions of the IPCC, which calls on the one hand to reduce emissions (pillar A)<a class="footnoteLink" href="#footnote-16">[16]</a> , and to do so, to review its product and service offering (pillar B)<a class="footnoteLink" href="#footnote-17">[17]</a> , and on the other hand to develop carbon sinks (pillar C)<a class="footnoteLink" href="#footnote-18">[18]</a> .</li><li>Fair, because it recognizes the contribution of organizations that provide innovative solutions for the transition: as a bicycle manufacturer grows its business, it may need to increase its direct emissions in order to decarbonize mobility. The Net Zero Initiative&nbsp;also prioritizes actions within&nbsp;the value chain - the most difficult, but also the most effective - over projects outside the value chain.</li><li>Efficient, because it enables us to map organizations' efforts precisely, and thus 1) encourages them to mobilize all the levers at their disposal; 2) direct financial flows towards the most virtuous.</li></ul>For all these reasons, we feel that this approach, which is still under development, provides some answers to the challenges raised by the crisis facing SBTi. We hope it will provide food for thought in the future.

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<a href="https://sciencebasedtargets.org/about-us#what-we-do">https://sciencebasedtargets.org/about-us#what-we-do</a>

<a href="https://www.greenbiz.com/article/sbti-yes-companies-can-use-carbon-offsets-abate-certain-scope-3-emissions">https://www.greenbiz.com/article/sbti-yes-companies-can-use-carbon-offsets-abate-certain-scope-3-emissions</a>

Employee letter reprinted in Clancy, H. (2024, April 11). Read the leaked protest letter from SBTi staff angry over new carbon offset policy. Greenbiz.&nbsp;<a href="https://www.greenbiz.com/article/read-leaked-protest-letter-sbti-staff-angry-over-new-carbon-offset-policy">https://www.greenbiz.com/article/read-leaked-protest-letter-sbti-staff-angry-over-new-carbon-offset-policy</a>It should be noted that the Board has since made it known that the principles of governance will be respected in the final decision on the terms and conditions of application.

Intensity targets involve reducing emissions per physical unit produced or per €. This option is aimed in particular at fast-growing companies and/or those making the biggest contribution to the transition, but in practice many companies are taking advantage of it.

<a href="https://sciencebasedtargets.org/reports/sbti-monitoring-report-2022">https://sciencebasedtargets.org/reports/sbti-monitoring-report-2022</a>

In other words, they have achieved 70% of the expected reduction in emissions.

See <a href="https://www.carbone4.com/expertises/resilience and https://www.carbone4.com/expertises/innovation/ifinitiative">https://www.carbone4.com/expertises/resilience and https://www.carbone4.com/expertises/innovation/ifinitiative</a>

<a href="https://www.carbone4.com/cp-emlyon-chaire-strategie">https://www.carbone4.com/cp-emlyon-chaire-strategie</a> and <a href="https://www.carbone4.com/webinaire-strategie-entreprise-urgence-climatique and https://www.ifinitiative.com/">https://www.carbone4.com/webinaire-strategie-entreprise-urgence-climatique and https://www.ifinitiative.com/</a>

In the European market, this work will in any case be made necessary by the CSRD, provided it is used as a tool for strategic rethinking and transformation, rather than simply as a regulatory compliance exercise.

Letter reprinted in Clancy, H. (2024, April 11). Read the leaked protest letter from SBTi staff angry over new carbon offset policy. Greenbiz.&nbsp;<a href="https://www.greenbiz.com/article/read-leaked-protest-letter-sbti-staff-angry-over-new-carbon-offset-policy">https://www.greenbiz.com/article/read-leaked-protest-letter-sbti-staff-angry-over-new-carbon-offset-policy</a>

See the March 2024 rules for calculating short-term targets, p. 10: https:<a href="https://sciencebasedtargets.org/resources/files/SBTi-criteria.pdf">//sciencebasedtargets.org/resources/files/SBTi-criteria.pdf</a>

Thomas, P-L. (2023, August 30). Verra, leader in carbon credits, nailed once again.&nbsp;La Croix.&nbsp;<a href="https://www.la-croix.com/Economie/Verra-leader-credits-carbone-nouvelle-fois-epingle-2023-08-30-1201280701">https://www.la-croix.com/Economie/Verra-leader-credits-carbone-nouvelle-fois-epingle-2023-08-30-1201280701</a>

<a href="https://www.net-zero-initiative.com/fr">https://www.net-zero-initiative.com/fr</a>

See the work of Group 1 in particular.

See the work of Group 2 in particular.

See the work of Group 3 in particular.

Why is the SBTi's intention to count carbon credits as emission reductions problematic? A Carbone 4 analysis

The Science Based Targets Initiative is accused of greenwashing.

César is a senior manager at Carbone 4, co-heading the Public Debate Department. This department aims to offer technical expertise to change agents (NGO, associations, trade unions, CSE elected representatives, parliamentarians, foundations, media) to help make the climate arguments and analyses that feed their actions (climate litigation, campaigns, advocacy, etc.) more effective.Since his arrival in June 2016, César has supported some 50 public and private organizations in their climate action and participated in several structuring methodological projects. In particular, he co-created and co-directed the Net Zero Initiative, a project aimed at realigning private sector action with the goal of zero net global emissions. He was co-leader of the Carbon Neutral Department between 2019 and 2023.He is co-author of the study "Faire sa part?" (2019) and of the study used by Affaire du Siècle in its legal action before the Conseil d'État (2020, 2021). César also teaches at HEC and Sciences Po.&nbsp;

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