CPLC+ NetZero Report

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Report of the

Task Force on
Net Zero Goals
& Carbon Pricing
COPYRIGHT

© 2021 International Bank for Reconstruction and Development / The World Bank
1818 H Street NW, Washington, DC 20433
Telephone: +1-202-473-1000
Internet: www.worldbank.org

This Report of the Task Force on Net Zero Goals and Carbon Pricing, a group of
business leaders and other eminent leaders from the public sector and academia
convened by the Carbon Pricing Leadership Coalition (CPLC), was supported by the
staff of the International Bank for Reconstruction and Development. It represents the
collective views of the Task Force on Net Zero Goals and Carbon Pricing. The CPLC
is a voluntary partnership of national and subnational governments, businesses,
and civil society organizations that agree to advance the carbon pricing agenda.
The CPLC Secretariat is administered by the World Bank Group. The findings,
interpretations, and conclusions expressed by World Bank Group Staff or external
contributors in this work do not reflect the views of the World Bank Group, its Board
of Executive Directors, or the governments they represent. The World Bank Group
does not guarantee the accuracy of the data included in this work. The boundaries,
colors, denominations, and other information shown on any map in this work do not
imply any judgment on the part of the World Bank Group concerning the legal status
of any territory or the endorsement or acceptance of such boundaries.

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Please cite the work as follows: World Bank Group, 2021. Report of the Task Force
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Report of the
Task Force on
Net Zero Goals
& Carbon Pricing
R E P O R T o f T H E TA S K F O R C E o n
NET ZE RO GOAL S and CARBON PRICING

Contents
Acknowledgements 5
Objectives 6
Foreword 7
Key Messages 8
Introduction 10

The Global Transition to Net Zero 14


The Role of Carbon Pricing 18
National Transitions to Net Zero 26
Private Sector Transitions to Net Zero 34
Sustainable Finance and Carbon Pricing 44
Measuring and Communicating Progress 48

Annex 52
Glossary 55
Endnotes 59
R E P O R T o f T H E TA S K F O R C E o n
NET ZE RO GOAL S and CARBON PRICING 5

Acknowledgements
The Task Force on Net Zero Goals and Carbon Pricing was convened under
the auspices of the Carbon Pricing Leadership Coalition (CPLC), a World Bank
Group initiative. The project was managed by Angela Churie Kallhauge.
Clare Breidenich was the lead author, with support from Harikumar Gadde,
Marcos Castro, Michael McCormick, Shamini Selvaratnam, Jichong Wu,
Carlo Alberto Amadei, and the team from the World Bank’s CPLC Secretariat.

The Task Force would also like to thank the following partners who
contributed insights that informed the preparation of this report:

William Acworth, International Carbon Action Partnership (ICAP); Malin Ahlberg, The Federal Ministry
of the Environment, Nature Conservation and Nuclear Safety (BMU) ; Jess Ayers, Children’s Investment
Fund Foundation (CIFF); Edward Baker, Principles for Responsible Investment; Barbara Baarasma,
RaboBank; Pedro Martins Barata, Environmental Defense Fund (EDF); Hannah Bebbington, Stripe;
Derik Broekhoff, Stockholm Environment Institute (SEI); Rafael Broze, Microsoft; David Burns, World
Resources Institute (WRI); Cyril Cassisa, International Energy Agency (IEA); Darragh Conway,
Climate Focus; Arpad Cseh, Climate Moonshot Initiative; Cynthia Cummis, World Resources Institute;
Patrick De Decker, Total Energies SE; Paul DeNoon, Coalition for Rainforest Nations; Sean Doherty,
World Economic Forum (WEF); Thomas Duchaine, Government of Quebec; Gilles Dufrasne, Carbon
Market Watch; Julio Friedmann, Columbia University; Taryn Fransen, World Resources Institute (WRI);
Teresa Hartmann, World Economic Forum (WEF); Lauren Kickham, Microsoft; Vedantha Kumar, Children’s
Investment Fund Foundation (CIFF); Kishan Kumarsingh, Ministry of Planning and Development, Trinidad
and Tobago; Stephanie La Hoz Theuer, International Carbon Action Partnership (ICAP); Paige Langer,
World Resources Institute; Kelly Levin, Bezos Earth Fund; Gary Litman, US Chamber of Commerce;
Luca Lo Re, International Energy Agency (IEA); Jennifer Lyons, Microsoft; Marta Martinez, Iberdrola;
Sara Moarif, International Energy Agency (IEA); Kenneth Möllersten, Swedish Environmental Research
Institute (IVL); Gökçe Mete, Stockholm Environment Institute (SEI); Axel Michaelowa, Perspectives;
Brandon Middaugh, Microsoft; Daniel Nachtigall, Organisation for Economic Co-operation and
Development (OECD); Ryan Orbuch, Stripe; Zac Pinard, Clean and Prosperous Washington;
Nan Ransohoff, Stripe; Michael Sandler, Carbon Share; Frances Seymour, World Resources Institute
(WRI); Feike Sijbesma, Royal DSM; Moekti Handajani Soejachmoen, Indonesia Research Institute for
Decarbonization (IRID); Jamal Srouji, World Resources Institute, Nigel Topping; High-Level Champion
for Climate Action at COP26; Lord Adair Turner, Chair of Energy Transitions Commission;
Elizabeth Willmott, Microsoft; Daniel Yang, Stanford University.
R E P O R T o f T H E TA S K F O R C E o n
NET ZE RO GOAL S and CARBON PRICING 6

Objectives
The Carbon Pricing Leadership Coalition (CPLC) Task Force on Net Zero Goals
and Carbon Pricing was formed to contribute to the common understanding
of net zero and to explore the role of carbon pricing in supporting the transition
to net zero over the next 10 to 15 years. A central focus of the Task Force’s work
was the nexus between global ambition and the commitments and strategies
of both national governments and the private sector, including finance.

This report represents the collective views of the Task Force, whose
members were serving in their personal capacity. The contents do not
necessarily reflect the views or stated policies of the World Bank Group
nor the organizations the specific members are affiliated to.

TASK FORCE CO-CHAIRS TASK FORCE MEMBERS

Mauricio Cárdenas Amal-Lee Amin - CDC Group


Visiting Senior Research Scholar, Jennifer Austin - COP High-Level Champions for Climate Action
Center on Global Energy Policy, Richard Baron - 2050 Pathways Platform
Columbia University Nicolette Bartlett - CDP
Juan Pablo Bonilla - Inter-American Development Bank (IDB)
Helen Mountford Felipe De León Denegri - Costa Rica
Vice President for Climate Cédric de Meeûs - Holcim
and Economics, Maosheng Duan - Tsinghua University
World Resources Institute Dirk Forrister - International Emissions Trading Association (IETA)
Tanguy Gahouma - Gabon
Anirban Ghosh - Mahindra Group
Martin Hession - European Commission
Yemi Katerere - Rights and Resources Institute
Kelley Kizzier - Environmental Defense Fund (EDF)
Michelle Lancaster - Microsoft
Chris Leeds - Standard Chartered Bank
Sebastien Pascual - Temasek
Mandy Rambharos - Eskom
Susan Shannon - Royal Dutch Shell
Chandra Shekhar Sinha - World Bank Group
Adrien Vogt-Schilb - Inter-American Development Bank (IDB)
Jongikhaya Witi - South Africa
R E P O R T o f T H E TA S K F O R C E o n
NET ZE RO GOAL S and CARBON PRICING 7

LO R D B A R K E R O F B AT T L E
C P LC H I G H - L E V E L A S S E M B LY C O - C H A I R

Foreword EXECUTIVE CHAIRMAN


EN+ GROUP

Never before has humanity faced a common Importantly, carbon pricing needs to be used as a carrot,
challenge quite like climate change. From not just as a stick. Economies everywhere need to
take their public with them and, as with any new policy
national governments to local communities, initiative, be alive to unintended consequences that
global corporates to small businesses, as can manifest themselves in different ways in different
individuals, the choices we make in the markets. Carbon pricing needs to be employed in
coming decades will determine the life ways that secure public trust and acceptance as well
as supporting global ambition and a just transition to
chances and security of future generations. net zero.

Securing a safe and sustainable future hinges on whether The potential is impressive. Currently 45 countries are
we can move toward a net zero world. At present, covered by carbon pricing programs, with another
63 countries, 733 cities, and 3,067 businesses have three anticipated to introduce programs within the
committed to becoming net zero by around 2050. next few years. Meanwhile, in the private sector,
That aspiration must turn into action—and fast. At nearly half of the world’s largest 500 companies
current levels of annual emissions, the world has less use an internal carbon price. However, carbon
than 20 years remaining on its carbon budget. pricing schemes still cover just 21.5 percent of global
greenhouse gas emissions. When compared to this
The good news is that there is much more we can do patchwork implementation, a globally linked carbon
to stave off a planetary disaster. Carbon pricing, a pricing system could double emission abatement at
key tool in our policy toolkit, has barely begun to no additional cost.
deliver its full potential to drive emission reductions.
This is an opportunity we must grab. Putting a price There is also a growing imperative to ensure carbon
on emissions can help direct capital to the most pricing translates into real impact. Current carbon
efficient tools for decarbonization as our response prices remain far too low to drive the transformative
evolves and technologies develop. change needed. In fact, less than 4 percent of global
emissions are covered by prices aligned with the
This report provides us with a good basis to strengthen Paris Agreement. It is also essential that governments
our understanding of what net zero really means. and businesses can buy credits and offsets with
It outlines the potential of carbon pricing and how, confidence that they are contributing to meaningful
when it is integrated into a broader package of and lasting decarbonization—not just moving numbers
climate action measures, it can incentivize sectoral around a spreadsheet. Rigor, transparency, and
transformations, align investments to decarbonize the accountability have never been more important when
global economy, scale up carbon removals, and spur introducing a new financial measure.
innovation in greenhouse gas mitigation technologies
and practices. The revenues it generates can be Huge challenges demand a commensurate response.
used to support a just transition or fund research into We won’t defeat climate change by tinkering with
breakthrough green technologies. the status quo. It’s time to press the reset button and
put in place credible and effective strategies that will
Carbon pricing can provide drivers for positive change enable economies and companies around the world to
even in hard-to-abate sectors where rapid emission get to net zero by mid-century. For this, we will need
reductions will be more challenging, mitigation to bring effective carbon pricing out of the textbook
technologies are not yet commercially available, and on to the statute book. This report points the
electrification or fuel switching is not feasible, or way. Around the world we have an unexpected
emissions are diffuse. opportunity at a global reset—let’s not waste it. ●
R E P O R T o f T H E TA S K F O R C E o n
NET ZE RO GOAL S and CARBON PRICING 8

Key Messages
1 Global net zero will be achieved when human-caused GHG emissions
have been reduced to the absolute minimum levels feasible; and
any remaining “residual emissions” are balanced by an equivalent
quantity of human-caused removals that are permanently stored so
that emissions cannot be released into the atmosphere.

2 The scale and urgency of emission reductions needed by both countries


and the private sector mean that we can no longer take action only
where emissions reductions are low cost or in a piecemeal fashion.
Instead, we must reduce all emissions comprehensively and as quickly
and efficiently as possible.

3 Carbon pricing, including international cooperation through carbon


markets, should be included in the arsenal of measures to enable the
achievement to net zero targets. Carbon prices must also be high
enough to provide effective signals to society, to drive the level of
investment and technological changes necessary to reach net zero and
be taken in conjunction with complementary policy actions to make
carbon pricing relevant across company value chains. This can be
achieved by expanding pricing mechanisms and coordination across
countries to cover a higher proportion of global emissions.

4 International carbon markets must increase ambition and leverage


investment, rather than being used solely to reduce costs.

5 As countries work towards net zero and emissions are aggressively


abated, the use of emission reduction credits must necessarily
decrease. Only high-quality removal credits should be used to balance
residual emissions at net zero and beyond. However, high-quality
emission reduction credits can provide an important flow of capital
to accelerate action on the path to net zero and progress towards
emission reductions now.

6 Corporate achievement of net-zero occurs when value chain emissions


have been abated to the maximum extent possible and the remaining
residual emissions neutralized by an equivalent quantity of removals.

7 Net zero criteria should be integrated into all investment decisions,


including those by development finance institutions, to support rapid
decarbonization across all economic sectors, taking into account the
national circumstance of individual countries.
R E P O R T o f T H E TA S K F O R C E o n
NET ZE RO GOAL S and CARBON PRICING 9
KE Y M ESSAG ES

8 Whether implemented by countries or by the private sector, net zero


strategies should support socially fair and just transitions across all
regions to be successful. Governments and companies should respect
human rights and pay attention to the impacts of these strategies on
people, especially vulnerable and indigenous populations, align with
development objectives, and promote jobs and the distribution of costs
and benefits.

9 The credibility of ambition and stakeholder engagement in net zero


development and implementation processes depend on transparent
net zero targets. Moreover, it will foster sectoral mainstreaming and
identify opportunities for gains from alignment and collaboration needed
to achieve truly systemic change at the pace and scale required.

10 Transparency in efforts and separate targets for emission reductions


and removals along the trajectory to net zero at all levels, rather than
solely net emission targets, would promote accountability and may
help prioritize emission abatement.

11 To be credible and to gain and maintain public acceptance all carbon


market instruments need to operate within a clear trajectory to net
zero, and apply robust accounting rules to ensure the avoidance of
double counting. Companies must robustly account for credits and
mitigation contributions and, where possible, track and disclose where
credits are sourced.

12 If a company uses international credits for compliance purposes, it


must ensure that the reductions or removals are not double counted.
Companies should not use international credits without a corresponding
adjustment in the host country if that credit is accounted toward the
NDC of another country.

13 All countries, sectors and companies need to participate in this “race


to zero” but not all countries will achieve net zero at the same time.
Due to their capabilities and historic emission levels, advanced countries,
in particular, must reach net zero as quickly as possible. Developing and
emerging countries may need to take a slower pace due to institutional
or capacity limitations or development needs. Still, they should also strive
to achieve net zero as quickly as possible.
R E P O R T o f T H E TA S K F O R C E o n
NET ZE RO GOAL S and CARBON PRICING 10

Introduction
Despite international efforts to limit global warming over the past two
decades, atmospheric concentrations of greenhouse gases (GHGs) have
risen as global emissions of these gases have increased year after year.
The likely increase in human-caused global surface temperature since
pre-industrial times is around 1.07°C, and the Intergovernmental Panel
on Climate Change (IPCC) expects it will continue to increase until at
least the mid-century.1 The world is already experiencing the effects of
a changing climate in the form of, for example, more high-heat days,
longer droughts and wildfire seasons, more frequent and intense storms,
and rising sea levels. The record-breaking heatwaves and catastrophic
flooding around the world in 2020 are only the most recent examples.
Some extreme weather events have also intensified and occur more
frequently, damaging natural ecosystems and hurting human populations.
The impacts will worsen until atmospheric GHG concentrations are
stabilized and, even then, they will continue for some time afterwards; the
extent of the impacts will depend on the level at which global average
temperature peaks.

According to the IPCC, 2 to avoid the most damaging world does not reach net zero emissions by mid-
effects of climate change, the global average century, the likelihood of global temperatures rising
temperature must be limited to 1.5°C above pre- above 1.5°C increases significantly.
industrial levels. The latest evidence suggests
that global warming of 1.5°C and even 2°C will be The scale of reductions required to achieve the 2050
exceeded during the 21st century unless deep net zero target can be illustrated by the global
reductions in carbon dioxide (CO2) and other GHG “carbon budget”—the cumulative CO2 emissions
emissions urgently occur. Higher temperatures will permitted to limit warming to 1.5°C. Global
result in greater impacts from climate change, and anthropogenic CO2 emissions over the almost 170-
an increase above 2°C could result in irreversible year period (1850–2019) between the start of the
damage, such as species losses in some land and industrial era and 2019 was in the range of 2,150
ocean ecosystems. Staying within the 1.5°C limit will to 2,630 gigatons of carbon dioxide (GtCO2). In
require immediate and deep emission reductions and comparison, the remaining estimated carbon budget,
for that global net anthropogenic CO2 emissions need from the beginning of 2020, with a two-thirds (67%)
to decrease by half by 2030 relative to 2010 levels likelihood of limiting global warming to a temperature
and become “net zero” by 2050—a state where any limit of 1.5°C was 400 GtCO2 and 500 GtCO2 for
remaining emissions are balanced by CO2 removals an even chance (50%).3 At current levels of annual
from the atmosphere. Strong, rapid, and sustained emissions, with no additional removals, the world
reductions in methane emissions and other GHGs will deplete the estimated remaining carbon budget
will also be needed to limit the warming effect. If the within the next 20 years.
R E P O R T o f T H E TA S K F O R C E o n
NET ZE RO GOAL S and CARBON PRICING 11
INTRODUCTION

Recognizing the urgency for climate action, many The lack of a common understanding of what net zero
countries are submitting enhanced 2030 national means and what a credible transition to net zero
climate plans (Nationally Determined Contributions, looks like is hampering climate action ambition.7
NDCs) to the United Nations Framework Convention A key question is the appropriate role of carbon
on Climate Change (UNFCCC) ahead of COP26 in pricing, in all its various forms, in supporting the
Glasgow in November 2021. In support of the long- global transition to net zero. Reaching the levels of
term temperature goal of the Paris Agreement, 63 emission reductions and removals needed to reach
countries have now pledged to reach net zero carbon net zero will require a fundamental transformation
emissions by around 2050,4 and many of these are in global energy and industrial systems, cities, and
stepping up their 2030 plans to align with this target. infrastructure (including transport and buildings), as
In addition, as of August 2021, 31 subnational regions, well as in agricultural production, forestry, and other
733 cities, 3,067 businesses, 661 organizations, and land-use practices.
173 investors have announced their own net zero
commitments.5 Carbon pricing can be a powerful tool in a broader
toolkit to incentivize sectoral transformations and
While this momentum is welcome and needed, a align investments to decarbonize the global economy,
significant gap remains between the current pledges scale up carbon removals, and spur innovation in
and the aggressive emission reductions needed GHG mitigation technologies and practices, but it
to achieve net zero globally by mid-century: if must be employed in a way that supports global
fulfilled, mitigation targets to the UNFCCC and ambition and a just transition to net zero.
other government-announced pledges as of April
2021 would miss the amount of emission reductions Securing public trust and acceptance for stronger
needed by 2030 to be on track to reach net zero by and broader carbon pricing will require addressing
mid-century by a wide margin—about 20-23 GtCO2e.6 perceptions that carbon pricing perpetuates social
inequities or impairs industrial competitiveness, and
Companies are also increasingly committing to that international markets lock in expectations of low-
decarbonizing their own operations and value chains ambition pathways, or lower incentives for countries
in line with Science-Based Targets. Further, some or companies to take abatement action at home.
companies are committing to neutralizing emissions
that cannot be abated through permanent carbon The Carbon Pricing Leadership Coalition (CPLC) Task
removals to reach net zero by 2050 or earlier. This Force on Net Zero Goals and Carbon Pricing was
is not enough. To ensure these commitments are formed to contribute to the common understanding
robust and do not overshoot emission limits in of net zero and to explore the role of carbon pricing
earlier years, they should be backed up with a clear in supporting the transition to net zero over the next
trajectory to reach net zero by 2050 and intermediate 10 to 15 years. A central focus of the Task Force’s
targets (for example, for 2030) that can be monitored. work is the nexus between global ambition and
Furthermore, to keep the total stock of GHGs in the commitments and strategies of both national
the atmosphere below a critical threshold, and governments and the private sector, including
therefore limit global warming to 1.5C, companies finance.
should not only aim for “net zero” as an endpoint
but also compensate for their unavoidable emissions This Task Force report builds on previous CPLC work,
along the path to reaching net zero. To encourage notably the reports of the High-Level Commission
companies to commit to this higher ambition level, on Carbon Prices8 in 2017 and the High-Level
they should be recognized for it, through a clearer Commission on Carbon Pricing and Competitiveness9
and more ambitious definition of what it means to in 2019, in helping governments, the private sector,
be “on the path to net zero.” and other stakeholders navigate carbon pricing.
R E P O R T o f T H E TA S K F O R C E o n
NET ZE RO GOAL S and CARBON PRICING 12
INTRODUCTION

It also benefits from, and complements, ongoing


work by other initiatives to advance understanding
of net zero and raise climate ambition, including
the Glasgow Financial Alliance for Net Zero
(encompassing the Net-Zero Asset Owners Alliance,
the Net-Zero Banking Alliance, the Net-Zero Asset
Managers Initiative, and the Net-Zero Insurance
Alliance), the Science Based Targets initiative, the
Mission Possible Platform, the Natural Climate
Solutions Alliance, the Voluntary Carbon Markets
Integrity Initiative, the Taskforce on Scaling Voluntary
Carbon Markets, the World Economic Forum’s Net
Zero Challenge, and the Race to Zero Campaign.10

The CPLC Task Force believes that recovering from


the global impact of COVID-19 presents a rare
opportunity to accelerate climate action. Our
collective experience over the past year has
demonstrated how closely the economy, public
health, and the environment are interlinked.
The world can build back better from the pandemic
in a way that not only rapidly transforms and
decarbonizes the global economy, but also
promotes economic prosperity, resiliency, and
equity. We hope that this report will contribute
to that outcome. ●
R E P O R T o f T H E TA S K F O R C E o n
NET ZE RO GOAL S and CARBON PRICING 13
The Global Transition
to Net Zero
R E P O R T o f T H E TA S K F O R C E o n
NET ZE RO GOAL S and CARBON PRICING 15
T H E G LO B A L T R A N S I T I O N t o N E T Z E R O

GLOBAL TRANSITION TO NET ZERO AND THE ROLE OF REMOVALS


GLOBAL TRANSITION to NET ZERO AND THE ROLE of REMOVALS

Net Emissions Business as Usual


Trajectory

Net Zero
Emissions
Emissions

Actual Emissions
Reductions

Removals

2010 2020 2030 2040 2050 2060 2070

Net Negative Emissions

G LO BA L TR A N S ITI O N The next 10 to 15 years will be critical to rapidly


to N E T Z E RO decarbonize the global economy in the transition
to net zero. Global carbon emissions must de-
cline by 50 percent by 2030 for the world to
Global net zero will be achieved when human-
be on a path to avoid warming greater than
caused GHG emissions have been reduced 1.5°C.11 The timing of efforts is vitally important:
to the absolute minimum levels feasible, earlier emission reductions and neutralization of
and any remaining “residual emissions” remaining emissions by removals will result in lower
atmospheric concentrations, and thus impacts, than
are balanced by an equivalent quantity of
later reductions and removals. Early action is also
human-caused removals that are permanently a hedge against the possibility that new scientific
stored so that emissions cannot be released findings may require even more rapid action in
into the atmosphere. After net zero has the future.

been achieved, the world will likely need


The scale and urgency of emission reductions needed
to move into a state of negative emissions, by both countries and the private sector means
where emissions continue to be reduced that we can no longer take action only where
and removals exceed levels of remaining emission reductions are low cost or in a piecemeal
fashion, but instead must reduce all emissions
emissions, to stabilize global temperatures
comprehensively and as quickly and efficiently
at 1.5°C above pre-industrial levels. as possible. All countries, sectors, and companies
need to participate in this “race to zero.”
R E P O R T o f T H E TA S K F O R C E o n
NET ZE RO GOAL S and CARBON PRICING 16
T H E G LO B A L T R A N S I T I O N t o N E T Z E R O

Fundamental transformations in global energy, addition, nature-based removals are at risk of


urban, industrial, and food systems are required reversal, which must be prevented. For these
for aggressive decarbonization. These include reasons, engineered removals must augment
decarbonizing electricity generation; electrifying nature-based removals, but these technologies
energy services, especially transportation; and are not yet commercially available or their energy
switching to clean fuels. Sectors where mature requirements and economic cost are quite high.
mitigation technologies are available, such as
electricity generation, must reduce emissions The International Energy Agency estimates that, even
rapidly to minimum levels. Even within these with aggressive abatement across all sectors, over
sectors, significant investments are needed to 7 Gt of removals from carbon capture, utilization,
scale already available technologies, such as and storage will be needed yearly by 2050 to
renewable generation and modern electricity balance residual emissions associated with energy
grid infrastructure. For hard-to-abate sectors, production and consumption alone.13 Large carbon
financing for researching and developing mitigation removal projects, like any energy or infrastructure
technologies will be critical to reduce costs and project, require reliable revenue streams. Policies
make new technological solutions available. and incentives are needed to align markets and
investments to drive innovation and enable rapid
Investment in sustainable agriculture and land-use scale-up of permanent carbon capture, utilization
practices and incentives for forest protection are and storage technologies. Governments and
urgently needed to end deforestation, maintain the private sector must take care to ensure that
existing natural carbon stocks, and address other investments in both natural and engineered
land-use-related emissions.12 Mature standing removals complement, rather than replace,
forests and natural landscapes contain carbon aggressive emission abatement.
stores that, once released, cannot be recaptured
within a timeframe to limit warming to 1.5°C.
What Do We Mean
Carbon removals must be increased to balance out by a Just Transition?
emissions during the transition to and at net zero.
The quantity of removals needed will depend For net zero strategies to be successful,
on the trajectory of emission reductions (in other countries and the private sector should
words, how much delay there is in reducing consider carefully how strategies will affect
emissions to minimum levels) and the level of any people and jobs and the distribution of costs
residual emissions. The greater the quantity of and benefits. A just transition ensures that
emissions above the technically feasible minimum benefits and costs are distributed fairly, that
in 2050, the greater the quantity of removals low-income and vulnerable communities are at
needed. least as well off in the transition as they would
otherwise be, and that no one is left behind.
Given their existing availability, relatively low cost, Although the term was originally used nar-
and potential to provide other environmental and rowly to refer to job and income opportunities
socioeconomic benefits, nature-based removals and labor protections, it has since come to be
have a central role to play in achieving net zero. used more broadly to refer to the full range of
However, the potential scale of nature-based socioeconomic costs and benefits, including
removals, particularly land-based ones, is limited environmental justice and human rights.
due to competing uses for land and water. In
R E P O R T o f T H E TA S K F O R C E o n
NET ZE RO GOAL S and CARBON PRICING 17
T H E G LO B A L T R A N S I T I O N t o N E T Z E R O

“Net zero means a different global economy, one where we balance climate change
mitigation, adaptation, and social welfare for all people. It also means an opportunity
for building a new system creating jobs in renewable energy, green hydrogen, new
technologies. Having a sustainable food and land management system and a new endorsed
trans circular economy. Net zero means opportunity, it also means a great challenge.”
Claudia Octaviano Villasana - General Coordinator of Climate Change Mitigation,
National Institute of Ecology and Climate Change, Mexico

Achieving net zero globally by mid-century means All forms of international cooperation, including
that delays by some countries will necessitate through carbon markets, must be enhanced to
more aggressive abatement by other countries, support developing countries in transitioning to
for example, continuing positive emissions in one net zero. Developed countries have a responsibility
country will need to be balanced out by either to provide financing to support emission reductions
earlier achievement of national net zero targets or removals in other countries as part of their climate
or net negative emissions in other countries. finance commitments. Strategies to achieve net
All countries should act immediately, but not all zero globally must also recognize and respond
will achieve net zero at the same time. Due to to the specific local and regional barriers to
their capabilities and historical emission levels, decarbonization in developing countries.
developed countries in particular must reach net
zero as quickly as possible. Developing countries Transparency in efforts will be critical for demonstrating
may need to take a slower pace due to institutional ambition and assessing progress toward global
or capacity limitations, or development needs, but net zero. Separate targets for emission reductions
should also strive to achieve net zero as quickly and removals along the trajectory to net zero at all
as possible. levels, rather than solely net emission targets, would
promote accountability and may help prioritize
emission abatement. Common and rigorous
accounting of emission reductions and removals
by all actors will ensure that there is only one set
of emission “books” for the planet.

C A S E S T U DY

Trinidad and Tobago Considers Proposals


to Use Carbon Pricing to Support a Just Transition
Trinidad and Tobago, as both a petroleum producer and small island developing state, is particularly vul-
nerable to climate change impacts. A just transition to net zero for the country must both promote climate
resilience while protecting the economy and jobs, including the petrochemical industry. Given Trinidad and
Tobago’s historic implementation of a domestic Green Fund, an innovative way to use carbon pricing in
support of a just transition is being proposed. The fund is financed through a 0.3 percent tax on corporate
profits across economic sectors. The revenue collected is distributed to non-governmental organizations,
statutory bodies, and subnational governments for environmental projects.

To boost the country’s climate resilience, the government is considering modifying the management of the
Green Fund to better incentivize emission reductions, while also actively supporting investments in green
technologies. Two proposals have been made. The first is to convert a proportion of the tax on profits to a
carbon tax on corporate emissions. A fixed portion of the tax revenue would be returned to companies for
investment in emission abatement measures and technologies. The second is to designate the remainder
of the fixed portion of the tax for a climate line item in the national budget, where it could be used to fund
climate adaptation and emission abatement, and help leverage climate investment.
The Role of
Carbon Pricing
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THE ROLE of CARBON PRICING

TH E RO LE of C A R B O N PR I C I N G • Government-imposed carbon pricing, in the


form of an emissions trading system (ETS) or
carbon tax, can be an economically efficient
Economic theory is clear that carbon pricing
means to reduce emissions, as it provides flex-
is a powerful and efficient instrument, able ibility for entities subject to the price to find the
to incentivize least-cost emission reductions least expensive emission reductions.
and removals and drive behavioral change,
• Carbon credits can provide an avenue for
technological innovation, and investment
companies to contribute to climate solutions, in
decisions—particularly for the private sector. addition to pursuing their own science-aligned
emission reductions, by compensating for the
emissions they cannot immediately mitigate in
the short term.

• Carbon pricing can raise government revenue


to finance emission abatement and removals in
sectors not covered by carbon pricing systems.
Revenue can also be used to support a just
transition, by channeling investment to popu-
lations affected by climate change or emission
abatement measures.

• Carbon pricing that predictably and credibly in-


creases over time incentivizes long-term invest-
ments in mitigation technologies and practices
that are expected to be less expensive than the
carbon price in the future.

• Within companies, carbon pricing can drive in-


novation and efficiency improvements. The use
of an internally applied carbon fee can generate
funds for investment in further abatement or
research and development.

• International carbon credit markets and re-


sults-based financing help drive financial flows
to climate solutions in developing countries,
including to protect carbon stocks and enhance
removals, for low-carbon development and to
support commercialization of emerging technol-
ogies. These could also provide new markets
and revenue sources for nations with geolog-
ical storage capacity and zero-carbon energy
resources that could support scale-up and
commercialization of carbon removal services.
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THE ROLE of CARBON PRICING

Given its many benefits, carbon pricing should be approaches, as well as linking ETSs across juris-
included in a broader arsenal of tools to achieve dictions to harmonize the price that trade-exposed
net zero, but it is not a silver bullet. Carbon pricing industries face.
must be implemented in a way that addresses
deficiencies that have to date prevented it from Government-imposed carbon pricing (an ETS or tax)
achieving its full potential in helping to mitigate will be most effective for price-responsive sectors
climate change, including weak emissions caps or and sectors where emission abatement or removal
low carbon tax levels, limited sectoral coverage, technologies are commercially available. Howev-
and unclear long-term carbon price signals. Use er, even within these sectors, the effectiveness of
of international markets will need to reflect and carbon pricing will be influenced by the policies
protect global and national trajectories to net zero, and incentives adopted. For instance, the ability of
in rules on allocation and avoidance of double carbon pricing to deliver emission reductions in the
counting. As current NDCs fall well short of what transportation sector will depend on the availability
is needed to achieve net zero by 2050, and the of alternatives to traditional GHG-emitting forms of
quantity of final emissions and removals remains mobility. Other complementary policy actions are
uncertain, countries and companies participating needed in addition to or as an alternative to carbon
in carbon markets will need to do so on the basis pricing to deliver emission reductions in some
of long-term low-emissions strategies. sectors:

Carbon prices in most countries must be much • In sectors that are not responsive to carbon
higher than they are today to drive the level of price signals, or where emissions sources are
investment and technological changes needed difficult to monitor or impose a pricing obliga-
to reach net zero. Tightening ETS caps to levels tion, sector-level regulations (such as codes and
consistent with net zero emission trajectories will standards) may be more effective in reducing
likely result in significantly higher prices under emissions. Information-based instruments, such
these programs. Similarly, levels of carbon tax will as energy efficiency standards, can complement
need to be increased over time to assure delivery and enhance the impact of carbon prices.
of the necessary emission reductions. Continued
strengthening of methodologies and standards for • Time-limited public support in the form of
quantifying and ensuring quality of international industry subsidies for emission abatement or
credits will also likely increase prices of credits public investment in infrastructure and research
over time. Programs will need to credit at levels and development to support technological
consistent with net zero emissions trajectories, innovation may be needed to bring about
and methodologies and standards will need to economic transformations for decarbonization
adjust to take these trajectories into account. in hard-to-abate sectors, and those that have
received relatively little investment, such as
Carbon pricing should be expanded to cover a great- industrial manufacturing, aviation, agriculture,
er proportion of global emissions, and ideally bet- and CO2 removal.
ter coordinated across countries. Such coordina-
tion could include supporting the implementation • Regulations that were built around incumbent
of national and regional carbon pricing programs, technologies and business models but now
moving toward minimum carbon prices in govern- hamper the uptake of zero-carbon solutions14
ment-mandated programs, removing fossil fuel should be updated to enable profitable business
subsidies, shifting from crediting to trading-based models for clean technology.
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THE ROLE of CARBON PRICING

“The pathway towards decarbonization is critical if we are to reach the destination


of a 1.5 degree world. We can’t keep emitting carbon at a business-as-usual rate or
even slowly reduce our emissions and think we can offset these emissions by easily
removing carbon out of the atmosphere. We don’t have the land to plant enough
trees or the technology today to mechanically remove carbon from the atmosphere
in the magnitude needed to displace the emissions we’re producing. Countries and
companies must first deliver deep emission cuts in line with science and only after
that should they consider purchasing the removal of carbon from others.

At WWF we say this must be the decade of action for reducing our emissions and
the decade of readiness for investing in technologies to store and remove carbon.
To achieve this, we must set a price on carbon that is ambitious and powerful—
meaning high enough to incentivize a shift in economic behavior. But most
importantly, we must implement carbon pricing in an inclusive and equitable
way that does not create an added burden to those who can afford it least.”

Marcene Mitchell - Senior Vice President, Climate Change, WWF-US

State and Trends in Carbon Pricing


Currently 45 countries are covered by carbon pricing it will increase the price of its federal carbon tax by
programs, with another three anticipated to intro- Can$15/tCO2e (US$11.94/tCO2e) annually to reach
duce programs within the next few years. As of Can$170/tCO2e (US$135.30/tCO2e) by 2030. In the
April 1, 2021, 21.5 percent of global GHG emissions EU, allowance prices have hit all-time highs as the
are covered by carbon pricing programs, represent- bloc steps up both long- and short-term climate
ing a significant increase from 15.1 percent in 2020. ambition.
The expansion is largely due to the launch of China’s
national ETS. In 2020, carbon pricing programs gen- Within the private sector, nearly half of the world’s
erated $53 billion in revenue—an increase of around largest 500 companies by market value report using
$8 billion from 2019, which is mostly due to the rise an internal carbon price, or the intention to use one
in the European Union’s (EU’s) allowance price. within the next two years. In 2020, 853 companies
disclosed using an internal carbon price, with a
Most carbon prices today remain far below the further 1,159 noting an intention to adopt one over
$40-80/tCO2e range needed to help meet the 2°C the next two years. This represents a 20 percent
temperature goal of the Paris Agreement. As of increase from 2019.
April 2021, only 3.76 percent of global emissions are
covered by a carbon price in this range. Even higher Ecosystem Marketplace reports volumes of trans-
prices will be needed to reach the 1.5°C target. actions in the voluntary market of more than 104
Many of the 63 countries that have adopted net zero MtCO2e in 2019, an increase of 6 percent from 2018.
targets already have carbon pricing programs in While volumes of renewable energy credit transac-
place. A number of jurisdictions are in the process tions increased, those for agriculture, forestry, and
of defining the role of carbon pricing in achieving land use decreased, despite the market value of
the net zero strategies, including Canada, China, the this latter category being more than twice that of
EU, individual EU member states, and New Zealand. renewable energy. Demand for forest credits from
For instance, to facilitate its updated GHG mitigation developing countries remains especially strong.
target, Canada announced in December 2020 that
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THE ROLE of CARBON PRICING

International carbon markets must increase ambition Only high-quality carbon credits with measurable impact
and leverage investment, rather than being used have a role to play in mitigating climate change. The
solely to reduce costs. To reduce the risk of falling availability and use of emission reduction credits must
short of net zero targets, use of credits should necessarily decrease over time as emissions are ag-
supplement aggressive emission abatement in gressively abated and all countries approach net zero.
acquiring countries and companies. Sales of credits Ultimately, only high-quality removal credits should
should support low-carbon development and an be used to balance residual emissions at net zero and
increase in ambition in selling countries. To this end, beyond, and their availability will be limited by global
carbon credit investments should be targeted at removal capacity. However, given that we need as
sectors, technologies, and practices that are need- many emission reductions as possible now, the flow of
ed to transform economies toward a net zero future. capital that emission reduction credits can provide is
important to accelerate action and progress during the
Sales of credits must also support socioeconomic transition to net zero, including providing an avenue
development and a just transition in developing for companies to go further than they would without
countries. Evaluating the impact of the potential this type of credit. Wise channeling of the investment
transfer of credits on selling countries’ achievement from credit sales can put seller countries in a position
of current and future NDC targets, and of the local to make more ambitious targets in future NDCs.
socioeconomic and environmental impacts of these
credit activities on communities and within sectors, Choices regarding investments in emission reduction
would help ensure that the credits are appropriately and removal credits over time must align with long-
priced and benefits fairly distributed. term strategies and the transition to net zero globally.
Reliance on land-based emission reduction and re-
Adherence to a single set of global emission “books” moval credits in the near term should not detract from
means that there can be no double counting of investments in emission reductions and technological
reductions and removals by countries. removals that will be essential in the long term.

Article 6 and Corresponding Adjustments


Article 6 of the Paris Agreement provides a framework for global cooperation to strengthen climate
ambition through the international transfer of carbon credits or internationally transferred mitigation
outcomes (ITMOs) between countries. To prevent double counting of the emission reductions or
removals by two different countries, Parties to the Paris Agreement have agreed to apply “corre-
sponding adjustments” where the transactions are authorized by the countries involved. The country
that transfers an ITMO would add the emission reduction or removal to its NDC accounting, so that
its effective emissions for purposes of accounting for progress toward its national commitment are
higher than they would have been without the transfer. The acquiring country subtracts the emission
reductions or removals associated with the ITMO from its NDC accounting, so that effective emissions
are lower than they would have been without the acquisition. Although the concept of corresponding
adjustment has been agreed, negotiations on implementation rules, including how corresponding
adjustments will be applied and tracked, are ongoing.
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THE ROLE of CARBON PRICING

C A S E S T U DY

California’s Experience in Driving Equitable


and Effective Climate Action
Ensuring a just transition has been integral to California’s climate strategy since the passing of the
state’s Global Warming Solutions Act in 2006. The Act directed the California Air Resources Board
(CARB) to develop and periodically update an overall strategy (the AB 32 Scoping Plan) to achieve
the state’s GHG limits in a way that minimizes economic costs and maximizes benefits to the state.
It also directs the Board to ensure that GHG investment (private and public) is directed toward the
state’s most disadvantaged communities and that a market-based mechanism is designed to prevent
an increase in the emissions of toxic air contaminants or criteria air pollutants. The Act mandates the
appointment of an Environmental Justice Committee to advise CARB on these issues.

In response to recommendations of the Environmental Justice Committee during development of the


initial Scoping Plan, CARB developed and continues to use a three-pronged approach to achieving
the state’s GHG goals: two carbon pricing programs—an ETS and a Low Carbon Fuel Standard—are
central components of the state strategy. These are complemented by direct emission regulations and
incentive programs to drive emission reductions and removals across all sectors. For instance, GHG
emission standards for vehicles and rebates for buying zero-emission vehicles help to drive down
transportation emissions.

CARB has also taken several steps to ensure that the ETS’s benefits are distributed equitably, and
economic costs are not unfairly borne by vulnerable communities or specific economic sectors. A
Climate Investments program directs revenue from the auction of allowances to projects that reduce
GHG emissions and deliver economic and local environmental and public health benefits. Half of the
funding to date has gone to projects that benefit priority communities. In addition, state utilities are
required to use the allowance value to limit the impact of price increases to consumers, particularly
low-income consumers, through bill rebates that are not directly tied to the volume of electricity or
natural gas consumed. Free allocation of allowances to energy-intensive, trade-exposed industries
helps maintain jobs within those sectors. While there is no evidence that the ETS has exacerbated
local air pollution, CARB actively monitors air quality and has strengthened existing programs
to reduce toxic and air pollutants. The agency has also introduced new programs15 that involve
local communities in strategies to address air pollution and to direct investment to vulnerable and
marginalized communities. A short-lived climate pollutant strategy aims to maximize both climate
and health benefits.

As CARB moves forward with the next Scoping Plan to achieve California’s 2045 net zero target,
climate equity will continue to be a fundamental principle. The agency has signaled that the
assessment of local environmental impacts and distribution of the costs and benefits of climate
action will be fully integrated into its modeling. In addition, affected communities will be actively
engaged in the Scoping Plan development.
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THE ROLE of CARBON PRICING

“Net zero targets in Australia have transformed the debate from the vagaries of
low-carbon economic goals to a focus on the transition strategies required to
achieve that clear target. There are four Ts in transition strategies.

Timeliness, we have a focus on 2050 for net zero, but it’s also important to
think about 2030 and the Paris Agreement ratchet mechanism, which will then
drive our focus every five years thereafter. Transparency, not only governments
have to communicate their transition strategies, but corporations as well.
Terminology, in the last 12 months we’ve seen incredible focus and accountability
for corporations on greenwashing and the like, around carbon neutrality and
net zero pathways, corporations are realizing that they’ve got to get it right.
Technology, Australia is a high-carbon political economy, but one where we’ve
got significant opportunities, in clean energy, green hydrogen, and negative
emissions drawdown technologies such as carbon farming and sequestration.

For that we need proper carbon markets, independent review, and proper
carbon pricing signals to guide the further increased investments.

You can say what you like about Australia’s policy ambition, but it has a policy
architecture, and indeed carbon markets and pricing that can evolve into one that
is fit for purpose. Australia has a small compliance market under the Safeguard
Mechanism where emission intensity baselines could become a driver for
decarbonization investments. We also have sovereign-backed emission reduction
and carbon sequestration measurement, reporting and valuation systems with
governments and corporations active in voluntary carbon markets. Australia’s
assurance system is internationally respected and now also backed by the
Carbon Market Institute’s world first Carbon Industry Code of Conduct. Finally,
we have a Climate Change Authority that could be charged with a greater role
in the establishment of short-term targets and policies to match
world’s best practice in UK, NZ, and elsewhere.”

John Connor - CEO, Carbon Market Institute


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THE ROLE of CARBON PRICING
26
XX

National Transitions
to Net Zero
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N AT I O N A L T R A N S I T I O N S t o N E T Z E R O

N ATI O N A L TR A N S ITI O N S Sectoral targets based on technology roadmaps and


to N E T Z E RO milestones can help guide the timely pursuit of
cost-effective measures in key sectors. Aggressive
emission reductions in hard-to-abate sectors (for
Countries will pursue different low-carbon example, cement, chemicals, metal manufacturing,
development pathways tailored to their transportation, and agriculture) will be more difficult
national circumstances (such as levels of and likely to lead to higher short-term economic
economic development needed, historical costs than in other sectors because mitigation
technologies are not yet commercially available, the
emissions, financial capacity, and removal sectors are not conducive to electrification or fuel
potential). They should develop national switching, or emissions are diffuse (come from mul-
long-term emission trajectories, including tiple small sources). Sectoral characteristics and the
short- and medium-term targets, and availability of abatement technologies should there-
fore be considered when defining sectoral emission
separate targets for emission reductions pathways and to identify policy levers to drive trans-
and removals to identify and prioritize formations. Countries should also encourage the
sectoral transformations required to private sector to set their own net zero targets and
achieve net zero. Because of the dis- develop plans aligned with the national strategies
and sectoral pathways to attract international financ-
proportional impact of short-lived GHGs ing to support emission abatement transformations.
(such as methane and hydrofluorocarbons)
on climate in the short and medium term, Internal carbon pricing (such as, shadow pricing) can
countries may also wish to develop be an important part of a wider planning toolkit to
help develop national pathways and strategies. To
separate targets for these gases. be most effective, the price used must be sufficiently
high (and increase over time) to help drive timely
emission reductions in line with the trajectory to
reach net zero. Due to differing marginal abatement
cost curves and the comparative commercial avail-
ability of abatement technologies, carbon prices will
have different impacts on emission trajectories
in different sectors.

National and sectoral net zero strategies must sup-


port and balance multiple policy goals—economic
growth, jobs, access to energy, poverty eradication,
protection of vulnerable communities and ecosys-
tems, and economic and environmental resilience.
While the transition to net zero is an opportunity to
create economic growth and jobs, it must be aligned
with the broader sustainable development agenda
unique to each region and country.16 Understanding
the potential benefits of the transition to a net zero
economy is important, and governments should work
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NET ZE RO GOAL S and CARBON PRICING 28
N AT I O N A L T R A N S I T I O N S t o N E T Z E R O

with all sectors to ensure they materialize.17 Policy solutions in the transition to net zero, or as a revenue
makers should also identify the potential negative im- source through selling credits in international carbon
pacts of decarbonization transformations on different markets, should be grounded in the broader policy
sectors or communities, allowing them to address any context and follow the principle of informed consent to
inequities in the distribution of benefits and ease costs enable appropriate consideration of the benefits and
as appropriate. trade-offs, including the impacts on local and indige-
nous communities. Countries should consider com-
Investing in nature-based emission reductions (such as peting demands for limited land and the trade-offs or
conserving forests and wetlands) and removals (such synergies between different potential land uses, such
as reforestation and restorative agriculture) can yield as carbon sequestration, biodiversity, food production,
ecological benefits in many countries, but should also rural livelihoods, renewable electricity, and protecting
support biodiversity, and economic and climate resil- indigenous heritage. Processes should inform and
ience in local and indigenous communities, and re- engage communities in decisions on nature-based
spect human rights in line with international principles. solutions and ensure that the benefits of investments
Decisions regarding the role of these nature-based are shared equitably.

C A S E S T U DY

Gabon’s Experience Illustrates Need for Higher Valuation


of Nature-Based Solutions
Gabon has long recognized the importance of preserving its forests for local
economies, carbon absorption, and other ecosystem services. By focusing on
sustainable management over the past decade, the country has reduced emissions
from deforestation and increased employment in the forest economy. Gabon hopes
to use international carbon credit financing to go further, but notes that current credit
prices are still too low.

The agreement with Norway under the Central African Forest Initiative (CAFI)
proposes a maximum price of $10 per ton on the condition that Gabon meets all
UNFCCC REDD+ criteria and certifies the carbon credits through ART-TREES.
However, while $10 is higher than the current average market price, it is still below
the $18 per ton that Gabon believes is needed to accurately reflect the cost of
sustainable forest management and the value of maintaining forests for carbon
removal and ecosystem services, as well as provide a return on the investments it
has already made in forest conservation. Even at $18 per ton, there is a wide disparity
between the prices of credits from natural solutions and the prices charged under the
EU ETS and other government-mandated schemes.

A substantial increase in the price of credits for natural alternatives would create
much stronger incentives for conservation and sustainable forest management.
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N AT I O N A L T R A N S I T I O N S t o N E T Z E R O

“Achieving net zero emissions not only contributes to


the objectives of the Paris Agreement but also fulfils
our national priorities and these national priorities are
part of our development strategy as stated in our Vision
2030 plan, whereby we have committed to placing the
environment at the center of all national development.
For countries that have capacity to implement such an Placing a price on carbon as well as participation in the
carbon market can provide opportunities for Trinidad
approach, an ETS or carbon tax can be an important
and Tobago to accelerate the net zero transition.
policy instrument for achieving national net zero tar-
gets. The level of the cap or price levels under the tax In our case this is particularly relevant as we are
currently developing a just transition of the work force
should be sufficient to help drive emission reductions policy to guide potential challenges that may arise in
in covered sectors in line with what is needed for this transition to net zero emissions. We’re of the firm
the trajectory to reach net zero nationally. Countries view that any carbon pricing scheme must be designed
should aim to expand coverage of carbon pricing pol- and administered in such a way so as to be able to
icies over time and adopt complementary abatement maximize the benefits and impacts, including through
the engagement of stakeholders, and in alignment
policies for sectors outside the carbon pricing regime. with the just transition policy.”
Countries should also ensure that cap levels under an
Camille Robinson-Regis
ETS do not create a structural surplus of allowances - Minister of Planning and Development,
that may lock in low ambition in covered sectors. Trinidad and Tobago

Emerging Efforts to Ensure High-Quality Nature-Based


Emissions Reduction and Removal Credits

The Architecture for REDD+ Transactions (ART) is a standards body formed to promote the environmental
and social integrity and ambition of credits from the forest sector. ART’s REDD+ Environmental Excellence
Standard (TREES), first published in February 2020, established technical requirements to ensure the
environmental integrity of forest-based emission reduction credits. TREES also requires conformity with the
“Cancun Safeguards,” which were adopted under the UNFCCC to ensure that forest carbon initiatives avoid
negative social and environmental impacts. Version 2.0 of TREES, expected in 2021, will include a method
to credit removals. The TREES standard requires jurisdictional-scale accounting, and eligibility is restricted
to national and subnational governments. If credits are to be transferred internationally, TREES requires
approval from the host country, and the ART registry will reflect attestation by the government if a corre-
sponding adjustment will be made and reported to the UNFCCC.

The non-profit Emergent was formed to mobilize private sector financing to prevent tropical deforesta-
tion, and aggregates buyers and sellers of jurisdictional-scale REDD+ credits. Emergent transacts only
TREES-certified credits to ensure that credits are of high integrity. With support from a bilateral donor,
Emergent also ensures a minimum price for credits to the jurisdictional sellers—currently $10 per ton, which
is significantly higher than current prices for forest-based credits in voluntary markets.

Supported by Emergent, the Lowering Emissions by Accelerating Forest finance (LEAF) Coalition of several
governments and leading corporations, launched in April 2021, has selected ART/TREES as its quality
standard. The LEAF Coalition requires government sellers to invest proceeds from credit sales in reducing
deforestation and the investments to conform with robust financial, social, and environmental safeguards.
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N AT I O N A L T R A N S I T I O N S t o N E T Z E R O

C A S E S T U DY

Any use of credits sourced from domestic sectors outside


the carbon pricing regime should be limited and China Launches the
reduced over time, as climate targets and abatement World’s Largest ETS
measures are extended to cover those sectors. The
use of offset credits should be coupled with other China aims for its national carbon emissions to
policies to ensure that the use of the credits does not peak by 2030 and reach net zero by 2060. In
lead to negative impacts such as increased local air an important step toward achieving these goals,
pollution. Countries should ensure that both gener- in 2021 China launched a national emission
ation and use of international credits (generation by trading program for the electricity sector, which
hosts, and use by buyers) does not hinder achieve- is dominated by coal and gas generation and
ment of their national emissions reduction trajectories accounts for about 40 percent of national
consistent with net zero. emissions. This program builds on experiences
gained in regional pilot programs over the past
A carbon tax or an ETS should be designed to limit decade. At its launch, the new ETS created the
negative economic impacts on vulnerable groups and world’s largest carbon market, covering 2,225
ensure that benefits are equitably distributed. These companies and over 4,000 MtCO2 annually.
distributional effects will differ across countries and By 2025, China intends to expand to cover
may be more pronounced in developing economies petrochemicals, chemicals, building materials,
than in developed ones. Tax or allowance auction iron and steel, non-ferrous metals, paper and
revenue can be used for multiple purposes, including pulp, and civil aviation.
for investments in vulnerable communities, job train-
ing, or cash transfers to blunt inequitable impacts of China’s program is unusual in that it is based on
increased prices on households. However, the amount carbon intensity (tCO2e/megawatt-hour) rather
of this revenue will decrease over time as emissions than an absolute emissions cap. China freely
are reduced. Complementary policies may be neces- allocates allowances to electric companies based
sary to mitigate negative impacts on certain sectors on their actual electrical and thermal output in
or to ensure benefits accrue to specific populations. the compliance year. Companies with relatively
For instance, additional investments may be needed high emission intensity may purchase permits
to address concerns about other air pollutants, or to from companies with lower emission intensity to
ensure that clean technologies are used in specific comply with the emission intensity target.
geographic areas.
Allocating permits to generators for free is critical
for political acceptance of the ETS, as it will
prevent sharp increases in electricity generation
costs, while still providing a price signal for
investment in emission abatement. Prices under
the ETS are low, around $8/ton shortly after the
launch, but are widely expected to increase over
time as the emission intensity target is made
more stringent or an absolute cap is introduced
in line with China’s emission goals, additional
sectors are added, and distribution of allowances
transitions to auction.
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N AT I O N A L T R A N S I T I O N S t o N E T Z E R O

“It is important that every jurisdiction recognizes that carbon pricing is an efficient and
effective way to reduce emissions. In British Columbia, we have worked to create a
carbon pricing system that ensures low- and moderate-income people are supported
through our B.C. Climate Action Tax Credit. A thoughtful, well designed carbon pricing
system will be critically important as we move to net zero while ensuring equity for all.
We also return a portion of carbon tax paid by industry to incentivize and support
initiatives and technological innovations that reduce their GHG emissions and help
fill the demand for low-carbon commodities and products.”
George Heyman - Minister of Environment and Climate Change Strategy, British Columbia

Direct, free allocation of allowances or the ability to use When implemented effectively, linking ETSs between
more offsets in early years can mitigate short-term countries can reduce the overall cost of emission
transition costs and potential competitiveness impacts abatement in those countries, and thus enable more
for hard-to-abate sectors. These approaches should aggressive abatement in the linked program than if
decline over time as more jurisdictions adopt carbon countries had continued with separate systems. For
pricing programs and competitive distortions decline. instance, studies suggest that a globally linked carbon
Border tax adjustments are another tool to address pricing system could almost double emission abate-
emission leakage that would arise from the potential ment relative to countries acting alone, at no additional
competitiveness impacts on energy-intensive, inter- cost.18 Expanding and linking national compliance
nationally trade-exposed sectors, but need careful markets would also harmonize the carbon price that
consideration to ensure compliance with World Trade trade-exposed industries face in those countries and
Organization rules. reduce the risk of emission leakage. Such linkage
should be restricted to countries with similar levels
of ambition so as not to dilute allowance prices. Both
programs must also have equivalent reporting and en-
forcement provisions to ensure environmental integrity.

C A S E S T U DY

European Union Proposal for a


Carbon Border Adjustment Mechanism
The ETS has been the central pillar of the EU’s climate strategy since 2005. With the advent of
the Green New Deal, adopted in 2019, the cap under the ETS will be progressively tightened
to drive emission reductions in covered sectors in line with the trajectory needed to achieve
net zero targets by 2050. This tightening of the annual caps is expected to significantly
increase allowance prices over the next decade.

If other countries do not adopt equivalent carbon prices, domestic production in hard-to-abate
sectors in the EU risks being relocated to other countries as allowance prices rise, resulting
in emission leakage. To prevent this risk of leakage, the European Commission has proposed
a Carbon Border Adjustment Mechanism (CBAM). The mechanism would require importers
of designated high-emission sectors from jurisdictions with lower or no carbon pricing to
purchase CBAM certificates as a condition of import. The price of the certificates will be linked
to current allowance prices under the ETS, and will vary depending on the embedded carbon
in the product being imported and the level, if any, of carbon pricing in the originating country.

By addressing the risk of emission leakage, the CBAM will enable the EU to allow hard-to-
abate sectors covered by the ETS to bear higher allowance prices and remain on a level
playing field with importers. Free allocation of allowances to sectors covered by the CBAM
will be progressively phased out between 2026 and 2035.
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C A S E S T U DY

Participation in international carbon markets can help


countries leverage new streams of capital and bring
Indonesia’s Example on Article 6
emerging emission reduction and removal technolo-
gies to market. To maximize these opportunities, both
Indonesia recently submitted an updated
acquiring and transferring countries should under-
NDC to the UNFCCC. The NDC reflects the
stand the implications of participating in these markets
country’s first Long-Term Strategy on Low
and must have the capacity to monitor, approve, and
Carbon and Climate Resilience 2050, which
track credit transfers, so that they can ensure such
aims for GHG emissions to peak in 2030 and
participation supports the domestic transition to net
reach net zero by 2060 or sooner.
zero. Both acquiring and transferring countries and
companies have responsibilities in this regard.
Article 6 of the Paris Agreement can be an
important resource for Indonesia to meet
Acquiring countries should ensure that any purchase of
its NDC because the country can both buy
credits, either directly or by the private sector, comple-
and sell credits. The revenue from selling
ments aggressive domestic emission reductions at the
credits can finance and expedite technology
sectoral and company levels. Options include limiting
development and use in the country, while
the total quantity of credits that can be acquired,
buying credits where abatement costs are
lower in other countries in the region, such as
the Lao People’s Democratic Republic, can
help reduce the costs of achieving the NDC.

Participating in the Article 6 mechanism can


also support multiple policy objectives in
Indonesia. The land-use and forestry and
renewable energy sectors, especially micro-
“Norway introduced carbon pricing nearly 30 years
ago. Today over 80 percent of Norway’s emissions are
hydro projects and technologies, have huge
covered. Our low carbon development, sustainable potential to support a just transition because
policies, and new technologies are good for almost the revenue from selling credits will be
everyone, but they can also lead to changes in directed to local communities. In addition to
employment and in social transactions. Accounting reducing GHG emissions, projects enabled by
for such structural elements is very important
because we need to build broad support and need to
Article 6 can create a trickle-down effect and
enable a green shift through that support. But we will bring co-benefits in energy access, health,
get there, because the solutions we need get cheaper and education to people.
and more accessible every day. There isn’t a one-size-
fits-all solution, strategies can differ, tools can differ As Indonesia’s Finance Minister Sri Mulyani
from country to country around the world. But it still
remains my firm belief that at the center of all these
Indrawati observed, “To achieve our climate
tools we need to have a price on carbon.” change goals, we definitely need to address
carbon price and carbon price can only work
Sveinung Rotevatn
- Minister for Climate and Environment, Norway if there is a global mechanism to create a
carbon market.”
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voluntarily canceling ITMOs rather than applying a prices appropriately reflect the full opportunity costs of
corresponding adjustment, discounting corresponding different land uses, including ecosystem services; and
adjustments, or limiting the acquisition of credits to that emissions leakage is avoided. Jurisdictional, rath-
sectors where emission abatement costs are particu- er than project-based, crediting approaches are more
larly high. effective at avoiding leakage and double counting
and incentivizing the government actions necessary
Acquiring countries should also consider ways that credit to address the root causes of forest loss. The pro-
purchases can encourage transferring countries to cess of transitioning projects into jurisdictional-scale
increase their ambition, such as helping transferring accounting systems and programs must address any
countries design and implement net zero strategies or gaps in government capacity in areas such as forest
requiring that credits meet specific characteristics or monitoring, and institutions and processes to ensure
are sourced from countries with conditional “stretch the revenues from jurisdictional-scale accounting are
goals” in their NDCs. Credit sales can put transferring equitably shared.
countries in a position to reach those stretch goals,
thanks to the early investment they can attract for
low-carbon development strategies.

Transferring countries should ensure that transferred


credits are not double counted and not needed to “To harness the power of nature we invest in our forest,
achieve their own NDCs and net zero trajectories. If wetlands and surrounds, implementing a border-to-
countries are able to capture lower-cost solutions in border restoration program. We are also addressing
their own NDCs, they should consider ways to steer energy and transport emissions by phasing out biomass
fuel for cooking and introducing aggressive e-mobility
international carbon market investment to high-im-
incentives. We have also faced difficulties in financing
pact abatement or removals (for example, immature our ambitious plan to become a carbon neutral and
or high-cost emission technologies) to enable an climate resilient economy by the middle of the century.
increase in their national ambition. Countries should That’s why we established the Rwanda Green Fund
also ensure that they receive appropriate value for to act as the engine of green growth and facilitate
investment in climate resilience. Initiatives taken by
readily available abatement and removal potential.
Rwanda would be enhanced by a strong carbon market,
Establishing approval processes and requirements for one that is working to develop a carbon trading hub for
all international credit transfer, including for voluntary mitigation project, at the national and regional level.
markets, would support these objectives. Involvement The hub will unlock climate finance and investment for
of affected communities and interested organizations green projects in Rwanda and across the continent.
in monitoring and approval processes would help Any carbon pricing system has social economic
provide accountability and ensure that credit transfers implications and needs to be carefully designed. Policies
support national ambition. must consider people in the planning to ensure an
inclusive and equitable transition to net zero.”

Procedures for approving investments and transfers Jeanne Mujawamariya


- Minister of Environment, Rwanda
should ensure that the impacts of land-use emis-
sion reduction and removal credit activities on local
communities have been considered; that the credit
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XX

Private Sector Transitions


to Net Zero
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PR I VATE S E C TO R TR A N S ITI O N S For the private sector, a credible trajectory to net zero
to N E T Z E RO means aggressively reducing emissions in their own
operations and within their value chains (that is, emis-
sions they induce) in line with the 1.5-degree pathway
Voluntary action by companies is important to for their sector over the next 10 to 15 years. By taking
the global mitigation effort, particularly in the responsibility for the emissions of their full value
absence of national ambition. Corporate net chains, companies can contribute to a transition to net
zero targets and mitigation claims must align zero, and accelerate results. Companies should plan
to address unabated value-chain emissions through
with global net zero ambition and should investments in emission reductions outside their value
support an increase in national ambition chain (compensation). As the world moves closer to
wherever a company does business. net zero, they should neutralize any remaining emis-
sions through investments in removals.

Ambitious leadership from companies requires interim


targets (five and 10 years) along the transition pathway
to guide planning and to immediately begin reducing
emissions within the value chain. Differences in the
type and nature of the NDCs in countries where a
company operates should not undermine the ambition
of the company’s emission reduction trajectory.

The Science Based


Targets initiative
The SBTi is a partnership between CDP, the
United Nations Global Compact, the World
Resources Institute (WRI), and the World Wide
Fund for Nature (WWF) that aims to define and
promote best practice in corporate action on
emission reductions and net zero targets in line
with climate science. To date, over 1,600 com-
panies have committed, through SBTi, to adopt
science-based emission reduction targets. The
SBTi’s most recent work has focused on corpo-
rate science-based net zero targets. Over 600
companies, including Microsoft, IKEA, ENEL, and
Rolls Royce, have already made or are committed
to science-based net zero pledges through the
Business Ambition for 1.5°C campaign.
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CORPORATE GHG EMISSION SCOPES

GLOBAL CAR COMPANY’S


Country A National Inventory Country B National Inventory Value-Chain Emissions

SCOPE 1 SCOPE 3
CO M
PA N Y ’ S Vehicle Vehicle
CAR Emissions Production Usage
AL
OB hain
GL alue - C
V

SCOPE 2 SCOPE 3
SCOPE 1
SCOPE 3 Electricity Steel
AC M E S T Consumption Production
EEL
Va l u e - C C
hain OMP
Em A
iss NY’
ion S
s

SCOPE 1

SCOPE 2
SCOPE 2 ACME STEEL COMPANY’S
Value-Chain Emissions

SCOPE 1 SCOPE 3
Steel Iron Ore
SCOPE 3
Production Extraction

SCOPE 2
Electricity
Consumption

GLOBAL CAR COMPANY’S ACME STEEL COMPANY’S


Value-Chain Emissions Value-Chain Emissions

SCOPE 1 SCOPE 1
Steel Production
The Vehicle
widely used WRI/WBCSD Corporate
Production Greenhouse Gas • Global Car Company has Scope 1 (vehicle production) and
Protocol
SCOPE 2 categorizes the emissions
SCOPE 2 associated with a Scope 2 (electricity consumption) emissions in country A.
Electricity Electricity
company’s
Consumption business activities into three scopes. Scope
Consumption It has Scope 3 emissions associated with steel production in
1 SCOPE
covers 3
the direct emissions of the company itself, such country B, and Scope 3 emissions associated with vehicle
SCOPE 3
as emissions
Vehicle Usage due to fuel combustion by company boilers
Iron Ore Extraction usage in both countries A and B.
or industrial production. Scope 2 covers the emissions
SCOPE 3
associated with electricity or heat that a company consumes.
Steel Production • Global Car Company’s Scope 3 emissions for steel production
Emissions associated with all other business activities of are considered Acme Steel’s Scope 1 emissions. Emissions
a company are included in Scope 3. Scope 3 includes associated with iron ore extraction are considered part of
emissions embedded in products that the company uses, Acme Steel’s Scope 3 emissions.
including to make its own products (for example, the
emissions embedded in steel used to produce cars), as • Global Car Company’s Scope 1 and 2 emissions will also be
well as emissions caused by use of products sold by a reflected in the national inventory of country A; its Scope 3
company (such as emissions from customers driving the emissions from steel production will be included in the inventory
cars). Scope 3 also covers emissions from activities such of country B; its Scope 3 emissions from vehicle usage will be
as business travel, or a company’s investments. included in the national inventories of both countries A and B.

Categorizing emissions by scope facilitates planning and • Acme Steel’s Scope 1 emissions from steel production and
accounting for GHGs at a corporate level, but creates Scope 3 emissions from iron ore extraction are reflected in
complexity when overlaid with national and global GHG Country B’s inventory.
targets. Consider a hypothetical vehicle manufacturer, Global
Car Company, that produces automobiles in Country A and This example provides an extremely simplified illustration of
purchases steel from a supplier, Acme Steel Company, that accounting for value-chain emissions across countries. In
operates and sources iron ore in Country B. Global Car reality, emission accounting is much more complicated due to
Company sells vehicles in countries A and B. the complexity of companies’ business operations, production
inputs and outputs, and the multinational nature of global
supply chains. Accounting in land-use sectors, such as forestry
and agriculture, are additionally complicated by the fact that
these activities can both emit and sequester carbon.
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The use of internal carbon pricing can help companies the highest degree of influence (pass/fail) over
make decisions about emission reduction strate- investment decisions.
gies and investments to achieve their targets along
the net zero trajectory. Internal carbon pricing may Investment in high-quality emission reductions or
be particularly important in the absence of formal removal credits can complement a company’s efforts
regulations or pricing signals from governments. If to reduce emissions outside its value chain. Use of
a company uses this tool, it should first develop an credits, whether domestic or international, should
overall long-term abatement strategy, then focus not undermine a company’s efforts to aggressively
on the right price to drive change in line with the reduce emissions within its value chain. Companies
strategy.19 The company should determine which should ideally use credits along the net zero path-
value-chain activities the price will apply to and, most way only for reductions or removals in complement
critically, which decisions will be made based on the to value-chain emission abatement in line with their
carbon price. If internal carbon pricing is central to science-based net zero transition trajectory. Because
the company’s emission reduction strategy, the price companies in hard-to-abate sectors have limited
must ultimately cover all emission scopes (where abatement options in the short term compared with
these emissions are not covered by an equivalent companies in other sectors, they may wish to invest
carbon pricing commitment of a supplier) and have in credits to contribute to global ambition.

C A S E S T U DY

How Shell is Using Internal Carbon Pricing


In February 2021, Shell announced its updated Powering Progress strategy to become net zero by 2050.
Shell assesses its portfolio decisions, including investments and divestments, against the potential impacts
of the energy transition to the use of lower-carbon energy. These include higher regulatory costs linked to
carbon emissions and lower demand for oil and gas. Shell’s annual carbon cost exposure is expected to
increase over the next decade because of evolving carbon regulations.

To assess the resilience of new projects, Shell considers the potential costs associated with operational
GHG emissions. Shell develops its carbon cost estimates using short-term policy outlooks and long-term
scenario forecasts, both of which reflect current NDCs and evolving national policy developments. Real-term
carbon cost estimates range from $5 to $110 per ton of GHG emissions in 2030. Shell’s real-term carbon cost
estimates for all countries are expected to increase to at least $100 per ton of GHG emissions by 2050 as
countries tighten their NDCs. In response, Shell will update its carbon cost estimates each year.

As Shell works to transform its business for a lower-carbon future, it supports carbon pricing as a key policy
tool that governments can use to help increase global ambition and encourage investment in lower-carbon
technology and infrastructure. Shell’s investments in carbon capture and storage (CCS) in Canada have
shown how government-mandated carbon pricing mechanism can incentivize uptake of these technologies.
Quest, financially supported by the governments of Canada and Alberta, is the world’s first commercial-scale
CCS facility applied to oil sands operations, 20 and has captured over 6 million tons since it launched in 2015.
Following the success of Quest, Shell recently announced a proposal to build a large-scale CCS project at
its Scotford Complex. Shell is developing the first phase of this proposed project, incorporating the lessons
learned from Quest, the current/projected price of carbon, and a proposed Canadian Clean Fuel Standard.
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Net zero for companies is appropriately used only


to describe the end state in which value-chain
emissions have been abated to the maximum extent
possible and the remaining residual emissions
neutralized by an equivalent quantity of removals.
Companies should not claim to have attained net
zero by netting emission reduction or removal
credits against value-chain emissions when those
emissions have not been aggressively abated in line
with a science-based pathway. Additional emission
reductions and removals can be pursued beyond
net zero to help the world become net negative as
abatement technologies further evolve.

C A S E S T U DY

Microsoft Commits $1 Billion to Decarbonize


In January 2020, Microsoft made a commitment to operate carbon negative across its value chain
by 2030. As part of this commitment, and in recognition of the urgent need for decarbonization
technologies, Microsoft will commit $1 billion in investments over four years through a new Climate
Innovation Fund (CIF). The CIF supports the development of new and emerging climate technologies
and the scale-up of existing technologies across the world. In keeping with Microsoft’s sustainability
commitments, the CIF invests in technology and carbon reduction and removal solutions across a
range of economic sectors to reduce emissions and improve water and waste management. Potential
investments are prioritized based on their ability to provide measurable climate benefits, bring
capital for decarbonization solutions into underfunded markets, benefit developing economies and
underserved communities, and align with Microsoft’s core business and those of its customers. CIF
investment decisions do not explicitly use a carbon price. However, carbon pricing scenarios are
included in the evaluation of future growth prospects for potential project investees.

Through its separate carbon removal program, Microsoft procures removal credits to apply to its
corporate inventory. Microsoft does not receive carbon credits via CIF investments, although it does
procure credits from some of those projects separately. In the future, as technologies evolve and
standards improve for verifying reductions and removals, Microsoft may apply certified credits from
its CIF investments toward its formal corporate commitments.
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INDICATIVE CORPORATE CARBON NEUTRAL AND NET ZERO TRAJECTORIES


INDICATIVE CORPORATE CARBON NEUTRAL and NET ZERO TRAJECTORIES

Net Zero

Carbon Neutral

Abatement

Emissions

2020 2030 2040 2050 2060 2070

Value-Chain Business as Usual


The terms carbon neutral and net zero are often used
Emissions Value-Chain
interchangeably but mean different things.Emissions
This paper Aligned
is Emissions
with
primarily 1.5°C as
focused on net zero, which we identify
Compensation Pathway
the state Compensation
where(Emission
a companyReduction
has reduced its current value chain emissions (Emission Reduction
Carbon Neutral
/Avoidance)
to near zero in line with science and any remaining /Avoidance)
Emissionemissions
Trajectory
have been neutralized by removals (which may be from within
Neutralization Neutralization
the value chain or credits from outside theNet Zero
value Emission
chain). (Removals)
(Removals) Trajectory
This paper does not delve into the concept of carbon neutral, Business as Usual

which is sometimes used to describe the state where a Emissions Aligned


company’s current value chain emissions are completely with 1.5°C Pathway
offset by carbon credits from outside the company’s value Carbon Neutral
chain, (which may represent removals, emission reductions, Emission Trajectory
or avoided emissions) and/or removals from inside the value Net Zero Emission
chain. Carbon neutral claims do not necessarily imply anything Trajectory
The terms carbon
about the ueutral
reductions and net value-chain
of a company’s zero are often
emission. value chain. This example shows a Carbon
usedThisinterchangeably
example shows a carbon neutral emission
but mean differentreduction Neutral emission reduction trajectory that is
trajectory that is aligned with a 1.5 degree pathway, but not all
things. This paper is primarily focused on Net
are. As carbon neutrality is further explored, it will be crucial
aligned with a 1.5 degree pathway, but not all
Zero, which we identify
that carbon neutral astrajectories
emission the statearewhere
designedtheto be are. Carbon Neutral claims in use today do not
company has reduced its current value chain
consistent with the global achievement of net zero emissions. necessarily imply anything about the reductions
emissions to near zero in line with science and of a company’s value-chain emission. As we
any remaining emissions have been neutralized further unpack/explore/define carbon neutrality,
by removals (which may be from within the value it will be crucial that carbon neutral emission
chain or credits from outside the value chain). trajectories are designed to be consistent with
the global achievement of net zero emissions.
Carbon Neutral is currently used in a variety of As shown here, carbon neutral emissions
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If a company uses international credits for compliance


purposes, it must ensure that the reductions or remov-
Why Do Companies
als are not double counted. Accounting must result in
corresponding adjustments according to rules under Voluntarily Invest in GHG
Article 6 of the Paris Agreement, including the broader Reductions or Removals?
set once adopted, and the national requirements of
the transferring and acquiring countries. Companies While companies that operate within an ETS
should not use international credits without a corre- may invest in emission reductions or removal
sponding adjustment in the host country if that credit offset credits to reduce the costs of complying
will be counted toward the NDC of another country. with the program, many that operate outside
of an ETS invest voluntarily out of a desire
The emerging concept of “mitigation contributions,” to be environmentally responsible or to limit
as an alternative to using credits to offset emissions, the risk of future regulation. A company may
could help align private sector efforts with global need to be responsive to a stakeholder board
ambition. A mitigation contribution would represent an that demands the company reduce its carbon
investment in emission reductions or removals outside footprint, or to make its products or services
a company’s value chain but would not be used to more attractive to environmentally conscious
offset a company’s value-chain emissions. Similarly, consumers, or to attract and retain staff. Often,
in the case of an international investment, the mitiga- it’s some combination of the three.
tion contribution would not offset an ITMO that would
result in a corresponding adjustment. Because the For companies that invest in emission re-
emission reductions or removals underpinning the ductions or removals to be environmentally
mitigation contribution credit are not used by the responsible, mitigation contributions may be
company for its own internal abatement, but instead as (or more) attractive as (than) using credits to
to go beyond what it does internally, mitigation offset value-chain emissions. Communicating
contributions would not affect the company’s overall to customers what a mitigation contribution
abatement goal, nor result in a decrease in national represents may be more challenging than
abatement in the country where the company claims communicating about offsetting emissions, but
mitigation contributions. Thus, mitigation contributions may be viewed more credibly, particularly if
would avoid the risk of double counting. They can also grounded in a science-based net zero target.
be a vehicle for results-based capital flows to support
ambition in developing countries, provided that invest-
ments are made in high-value and high-integrity emis-
sion reductions or removals and are consistent with
the host country’s long-term strategy. Certification and
registration mechanisms would be needed to track
the mitigation contribution to provide transparency
and accountability but could use much of the existing
credit infrastructure.
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C A S E S T U DY

“For South Africa it is critically important


that we reduce emissions while addressing
How Holcim is Building a Net Zero Future our key strategic priorities for job creation,
poverty alleviation, and inclusive economic
Holcim, one of the world’s leading manufacturers of building growth. It is within this context that
products, joined the UN Global Compact’s “Business Sasol is also transitioning our coal to
liquids operations. Against this backdrop,
Ambition for 1.5°C” pledge with intermediate targets approved
Sasol firmly believes that carbon pricing
by the SBTi in alignment with a net zero pathway. It is now is a critical part of the suite of policy
partnering with the SBTi to look beyond 2030, to support the interventions required to achieve the
development of the first climate targets for a 1.5°C future in transition to a low-carbon future and
the cement sector. the Paris Agreement goals.
A stable and predictable carbon pricing
As part of their endeavor, in 2020 Holcim began offering its mechanism that recognizes the need for
ECOPlanet and ECOPact lines of low-carbon cement and flexibility to incentives and subsidies is
required to deliver on any climate goals.
concrete, respectively. These low-carbon products represent In this regard a coordinated national
a reduction in carbon intensity ranging from 30 percent to vision is a prerequisite that gives clarity
70 percent compared to standard cement and concrete. With to all stake-holders and allows for spheres
the addition of the new ECOPlanet Zero and ECOPact Zero of the government to work in harmony
lines, Holcim now offers its customers with the possibility to towards this vision.”

reach a 100 percent reduction in carbon intensity through Fleetwood Grobler - CEO, Sasol
local compensation.

For these “Zero” product lines, emissions associated with


manu-facturing and distribution are reduced to the maximum
extent currently technologically feasible. Holcim then uses
certified removal credits to compensate for residual emissions
that are unavoidable with today’s technologies. To ensure
that the removal credits provide local environmental benefits,
the credits are sourced locally. The removal credits are not
reflected in Holcim’s corporate inventory nor claimed as
progress toward the company’s net zero commitment. Only
its customers benefit from it by purchasing a certified product
that has an emission intensity reduced by 100 percent.

While demand for low-carbon products is in its infancy, the


company is keen to offer solutions today to collaborate with
its value chain and accelerate the transition toward net zero
carbon construction. Bringing these products to the market
today also facilitates engagement with policy makers to
support decarbonization in this essential-to-abate sector and
aims to drive customer demand for low-carbon alternatives.
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Companies that invest in mitigation contributions could


claim to have contributed to national and global net
zero efforts through financing the emission reductions
or removals, but could not net the emission reductions
or removals against unabated emissions in their value
chains. To date, companies have shown little demand
for mitigation contributions. More discussion of what
mitigation contributions represent and how they may
fit into net zero concepts—to companies, stakehold-
ers, and their customers—would be useful.

C A S E S T U DY

Stripe Accelerates New Carbon Removal Solutions as an Early Customer


Stripe, which processes internet payments for businesses, is acting as an early purchaser to help
promising new carbon removal technologies reduce costs and increase production. Recognizing the
critical role of carbon removal in reaching net zero but how far behind it is in scaling, Stripe decided to
focus on helping to fill that gap.

To select projects, Stripe uses project criteria that characterize the gap in the portfolio of carbon
removal solutions that exists today. Specifically, it looks for solutions that are permanent (>1,000
years), scalable (>0.5 gigatons per year by 2040), low cost (<$100 per ton by 2040), and, importantly,
do not compete with agricultural land uses. Examples of technologies are direct air capture, enhanced
mineralization, and ocean-based removals. While Stripe is paying $100–$2,000 per ton of carbon
removed from its current project portfolio, it expects prices to decrease substantially over time. Stripe’s
job is to be the first-choice buyer: the “demand-side signal” that a market exists for carbon removal.

Stripe’s portfolio is made up of promising nascent technologies, for which verification and certification
standards do not yet exist. Stripe works with a team of science and governance experts to ensure that
selected projects meet its target criteria, which consider permanence, cost, scalability, safety, as well as
social and environmental responsibility.

The Stripe Climate program arose out of one of the company’s corporate climate initiatives. After
the company’s initial purchase of $1 million in carbon removal from four innovative projects, positive
feedback from Stripe’s customers prompted the company to expand the program to allow its customers
to direct a fraction of their revenue toward carbon removal. This became Stripe Climate, which is
now made up of over 5,000 businesses from all over the world that are collectively accelerating the
development of next-generation carbon removal through a large-scale, voluntary market.
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“It is critical that a global net zero pathway is inclusive, with non-prescriptive approaches
that allow nations to play a prominent role in decarbonization efforts and to find solutions
that are compatible with their economic and social make up.

The announcements of the net zero producers forum by major oil producers representing
40 percent of global oil demand in April 2021 was a major leap in leadership.
One that focuses on commonalities and enhances cooperation.

The circular carbon economy framework proposed during the Saudi G20 Presidency is
another approach that is inclusive and responsive to the social and economic realities facing
nations wanting to play a role in fighting climate change, and is now a national framework
guiding the Kingdom’s commitment to neutrality.

The ambitious level of cooperation, necessary in the form of joint funding, technology transfer,
and mobilization of private capital, will require a set of guidelines to ensure credibility and
avoid greenwashing activities that hinder progress and suppress serious ongoing and
future efforts to limit emissions. This would include standardized accounting and monitoring
systems, cross border policy harmonization, and aligned taxonomies for sustainable finance.”

HRH Princess Noura Al Saud - Founder, AEON Strategy


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XX

Sustainable Finance
and Carbon Pricing
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S U S TA I N A B L E F I N A N C E A N D C A R B O N P R I C I N G

C A S E S T U DY

How Carbon Pricing Can Support


Sustainable Agriculture and
S U S TA I N A B LE F I N A N C E
a n d C A R B O N PR I C I N G
Supply Chain Decarbonization
The food chain already represents more than
Because of their important role in a quarter of global GHG emissions and global
supporting low-carbon development, demand for food is projected to double in
the next two decades. Rabobank is working
development finance institutions should
to reduce emissions and enhance removals
make net zero a central principle of their across the supply chain of the agri-food sector.
portfolios. Net zero criteria should be Central to this effort is the Rabo Carbon Bank,
integrated into all investment decisions which supports farmers to transition to “carbon
farming” and food corporations on their way to
to support rapid decarbonization across
net zero. In 2020, the Rabo Carbon Bank began
all economic sectors, taking into account developing climate-smart propositions. Carbon
the national circumstance of individual farming offers farmers a one-stop shop to
countries. Internal carbon pricing at a adopt new land-management practices. These
practices generate high-quality removal credits,
price level that would align investments
while also protecting biodiversity, reducing land
with net zero trajectories can also be used degradation, and increasing agriculture yields.
for scenario analyses to assess risks and The Carbon Bank works closely with agronomic
opportunities of investment decisions. advisors and standard-setting organizations
to help farmers monetize the value of these
practices by verifying removals and certifying
and aggregating credits for sale.
Individual investments should be aligned with
regional, national, and sectoral net zero strategies
Under its “Supply Chain Decarbonization”
where they exist. Transformative emission
proposition, the Carbon Bank packages carbon
reduction and removal technologies and business
reduction and removal credits generated in
models should be prioritized, particularly in hard-
the agricultural supply chain. With its large
to-abate sectors. Investments in forest product
food and agribusiness clients the Carbon
and agricultural companies should prioritize
Bank achieves, monitors, and verifies carbon
companies that move to less carbon-intensive
reductions and offers financial structures and
and more sustainable practices, and take
incentive models that enable farmers and
aggressive action to halt tropical deforestation
suppliers to implement low-carbon practices,
and conversion of other natural ecosystems.
such as methane digesters. Because the credits
generated remain within the clients’ own supply
Finance institutions can also use carbon pricing to
chains, this approach enables those clients to
implement a strategy to achieve net zero across
reduce their Scope 3 emissions.
their own value chains.

Through these and other efforts, Rabobank


aims to reduce emissions and enhance
removals in the agri-food sector by 1 gigaton
by 2030.
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S U S TA I N A B L E F I N A N C E A N D C A R B O N P R I C I N G

Finance Sector Initiatives to Support Net Zero Ambition

The support of the finance sector is critical to achieving a net zero future. A CDP report21 concludes that
portfolio emissions are over 700 times larger than financial institutions’ direct operational emissions.
Financial institutions are also lagging in aligning their portfolios with a net zero economy. A diverse
group of 332 financial institutions—representing $109 trillion in assets—disclosed to CDP that fewer
than half of banks (45 percent), asset owners (48 percent), and asset managers (46 percent) are taking
action to align investments with a well-below 2°C goal, and only 27 percent of insurers are doing so for
underwriting portfolios.

Multiple initiatives have sprung up to encourage and coordinate ambitious finance sector action
toward net zero. Several of these are convened within the UN system:

• The Net-Zero Banking Alliance brings together 43 banks from 23 countries


with $28.5 trillion in combined assets that are committed to aligning their
lending and investment portfolios with net zero emissions by 2050.

• Both the Net-Zero Asset Owner Alliance (937 institutional investors representing
$5.7 trillion in managed assets) and the Net Zero Asset Managers Initiative (87
signatories with $37 trillion in assets) support the transition of investment portfolios
to align with 2050 net zero emissions targets.

• The soon-to-be-launched Net-Zero Insurance Alliance brings together seven


of the world’s largest insurers and re-insurers to accelerate the transition to
a net zero global economy in their role as risk managers.

Outside the UN, the Net Zero Investment Framework for asset owners and managers provides guidance
to a broad range of investors to define strategies, measure alignment of portfolios with emission targets,
and transition portfolios toward net zero. The Paris Aligned Investment Initiative has similar objectives.
The Net Zero Endowments Initiative brings together top university endowment managers and socially
responsible investment experts to build support for climate-friendly portfolio commitments.

The Glasgow Financial Alliance for Net Zero (GFANZ), representing over 250 firms that are responsible
for over $70 trillion in assets, brings together the four initiatives in the UN system into one sector-wide
strategic forum. Participating firms agree to establish science-aligned 2030 interim and 2050 net zero
targets covering all scopes, and to transparently account and disclose progress in line with the UN Race
to Zero criteria. GFANZ is also helping to coordinate efforts across the financial system by developing
analytical tools and market infrastructure to promote accountability of these efforts, such as credit rating
agencies, auditors, and stock exchanges.

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S U S TA I N A B L E F I N A N C E A N D C A R B O N P R I C I N G
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XX

Measuring and
Communicating Progress
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M E A S U R I N G A N D C O M M U N I C AT I N G P R O G R E S S

MEASURING and Countries and companies should disclose:


CO M M U N I C ATI N G PRO G R E S S
• Net zero commitments, including separate
emission reduction and removal targets,
Full transparency around net zero targets interim targets, and the trajectory to net zero.
and the strategy for achieving them is
essential for credibility of ambition, to • Any use of internal carbon pricing policies in
encourage stakeholder engagement in the net zero strategy.

net zero development, accountability, and • Detailed transition plans to decarbonize


implementation processes. Transparency operations and value chains.
will also help various actors better
understand the plans of others in their • Planned trajectories (short, medium, and
long term) of emissions and removals in the
sector. This in turn can build confidence country or within a company’s value chain,
and help identify opportunities for gains and assumptions and data used.
from alignment and collaboration needed
to achieve truly systemic change at the • Any planned reliance on domestic or
international credits or investment in
pace and scale required. mitigation contributions and whether these
represent emission reductions and avoidance
or removals.

• Annual progress toward targets, including on


use of offset credits or contribution claims.

Countries and companies should transparently review


progress toward net zero targets periodically and
revise their net zero strategy based on the review.
Independent, third-party auditing of net zero strate-
gies and their results would improve credibility and
effectiveness of these strategies. Companies should
disclose where emissions, emission reductions, and
removals within their value chain occur to provide
transparency around where these are reflected in
national inventories.

Credible accounting of carbon market transactions is


necessary to avoid double counting and to create a
social license for carbon pricing. Credits and miti-
gation contributions must be accounted both where
issued and where used. To the extent possible, com-
panies should also track and disclose where credits
are sourced.
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M E A S U R I N G A N D C O M M U N I C AT I N G P R O G R E S S

All credits used by countries or companies must the risk of non-permanence and leakage, and
meet quality criteria established by standard-setting promote equity (for example, buffer pools,
bodies and key initiatives. In particular, credits discounting, valuation of other attributes, high
should represent real, measurable, and additional co-benefits, and jurisdictional approaches for
emission reductions or removals; be verified and aggregating investment).
subject to measures to address material risks of
non-permanence and leakage; and avoid double • Develop approaches to ensure investment in
counting. high-value emission reduction and removal
credits or mitigation contributions while
Further work is needed to align the efforts of the private discouraging overreliance on these credits.
sector in the short to medium term with the level
of ambition required to reach net zero globally and • Reach consensus around comparable metrics
to enable transparent comparison of claims. This and transparency standards around net zero
includes the following: targets and trajectories for governments and
the private sector.
• Clarify the relationship between corporate
and country-level accounting and improve • Develop governance structures for and
harmonization and oversight of crediting standardize voluntary carbon markets
standards. and ensure compatibility with increasingly
important compliance markets.
• Resolve core knowledge gaps, particularly
around the limitations of removal capacity • Nationally track and publish information on
and the technical opportunities and costs for international investment in offset projects or
emission reductions and removals. mitigation contributions.

• Reach consensus on safeguards for natural • Engage in processes of planning and defining
removals to ensure additionality and reduce national net zero targets and strategies.
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M E A S U R I N G A N D C O M M U N I C AT I N G P R O G R E S S

The CPLC Task Force believes that


recovering from the global impact of
COVID-19 presents a rare opportunity to
accelerate climate action. We hope that this
report will contribute to that outcome.
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Annex : SO M E R E LE VA NT N E T Z E RO I N ITI ATI V E S

Race to Zero Campaign Race To Zero is a global campaign to rally leadership and support from
businesses, cities, regions, investors for a healthy, resilient, zero-carbon
recovery that prevents future threats, creates decent jobs, and unlocks
inclusive, sustainable growth. The objective is to build momentum around
the shift to a decarbonized economy ahead of COP26, where governments
must strengthen their contributions to the Paris Agreement. This will send
governments a resounding signal that business, cities, regions, and investors
are united in meeting the Paris goals and creating a more inclusive and
resilient economy.

The Science Based Targets Launched in 2015, the SBTi is a partnership between the CDP, the UN Global
initiative (SBTi) Compact, the World Resources Institute, and WWF. The SBTi has kickstarted
a process to develop the “first science-based global standard” specifically
for net zero targets.

United Nations-Convened As a coalition of institutional investors with over $6.6 trillion assets under
Net-Zero Asset Owner Alliance management, the Net-Zero Asset Owner Alliance has committed to transition
its portfolios to net zero emissions by 2050. Members include some of the
largest insurers and pension funds in the world, building critical scale to
support longer-term decarbonization investments and the development of
low-carbon business models.

Climate Ambition Alliance: The Climate Ambition Alliance brings together countries, businesses, investors,
Net Zero 2050 cities, and regions who are working towards achieving net zero CO2 emissions
by 2050. Country engagement in this Alliance is led by the governments of
Chile and the United Kingdom, with support from UN Climate Change and
UNDP; while mobilization of a non-government actors is led by the High-Level
Climate Champions for Climate Action – Nigel Topping and Gonzalo Muñoz –
under the ‘Race to Zero’ campaign.

The 2050 Pathways Platform The 2050 Pathways Platform is a multi-stakeholder initiative launched at
COP22 by High-Level Climate Champions Laurence Tubiana and Hakima
El Haite to support countries seeking to develop long-term, net zero GHG,
climate-resilient, and sustainable development pathways.

Energy Transitions Commission The Energy Transitions Commission (ETC) is a global coalition of leaders from
across the energy landscape committed to achieving net zero emissions by
mid-century. It urges governments, investors, corporates, and civil society to
work together to accelerate the deployment of zero-carbon solutions before
2030 to put mid-century targets within reach.

Climate Neutrality Coalition The Carbon Neutrality Coalition brings together a group of pioneering
countries that have agreed to develop ambitious climate strategies to meet
the long-term objectives of the Paris Agreement.
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ANNEX:
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The Leadership Group The Leadership Group for Industry Transition (LeadIT) gathers countries and
for Industry Transition (LeadIT) companies that are committed to action to achieve the Paris Agreement. It is
supported by the World Economic Forum. LeadIT members subscribe to the
notion that energy-intensive industry can and must progress on low-carbon
pathways, aiming to achieve net zero carbon emissions by 2050.

The Management Board is made up of representatives from Sweden, India,


and the World Economic Forum. A Technical and Expert Committee, made
up of LeadIT member representatives, advises the Board. The Management
Board approves new company members and decides on the workplan of
the Secretariat. The Secretariat is responsible for managing the work of the
Leadership Group and is hosted by Stockholm Environment Institute (SEI).

World Economic Forum The Net-Zero Challenge is a voluntary initiative and a prerequisite only
– Net-Zero Challenge for those who are or wish to be members of the WEF’s Alliance of CEO
Climate Leaders.

Voluntary Carbon Markets VCMI is a multi-stakeholder platform to drive credible, net zero aligned
Integrity Initiative (VCMI) participation in voluntary carbon markets. VCMI coalesces stakeholders
around a shared vision for voluntary carbon markets to make a meaningful
contribution to climate action and limit global temperature from rising to
1.5˚C above pre-industrial levels, while also supporting the achievement of
the UN Sustainable Development Goals.

Deep Decarbonization The Deep Decarbonization Pathways initiative is a collaboration of leading


Pathways Initiative research teams currently covering 36 countries. Their aim is to help govern-
ments and non-state actors make choices that put economies and societies
on track to reach a carbon neutral world by the second half of the century.

Global Commission on The Global Commission on the Economy and Climate is a major international
the Economy & Climate initiative to examine how countries can achieve economic growth while
| New Climate Economy dealing with the risks posed by climate change. The Commission comprises
former heads of government and finance ministers and leaders in the fields
of economics and business, and was commissioned by seven countries
—Colombia, Ethiopia, Indonesia, Norway, South Korea, Sweden, and the
United Kingdom—as an independent initiative to report to the international
community.

The New Climate Economy (NCE) is the Commission’s flagship project.


It provides independent and authoritative evidence on the relationship
between actions which can strengthen economic performance and those
which reduce the risk of dangerous climate change.
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Climate Transparency Climate Transparency is a global partnership with a shared mission to


Partnership stimulate a “race to the top” in climate action in G20 countries through
enhanced transparency.

Low Emission Development The Low Emission Development Strategies Global Partnership (LEDS GP)
Strategies Global Partnership is a global accelerator of knowledge and solutions that lead the way
(LEDS GP) to climate resilient and low-carbon development. It is a platform driven
by climate leaders in Africa, Asia, and Latin America and the Caribbean
that enables collaborative and ambitious climate action, peer learning,
and innovation. The LEDS GP fosters country leadership and regional
communities that enable the transformational changes needed for
low-carbon and climate-resilient development.

Oxford Net Zero Oxford Net Zero is an interdisciplinary research initiative based on
the University of Oxford’s 15 years of research on climate neutrality.
It is a growing network and collaboration of leading researchers from
partner institutions from around the world are working to track progress,
align standards, and inform effective solutions in climate science, law,
policy, economics, clean energy, transport, land and food systems,
and greenhouse gas removal and storage.
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Glossary
Allowances: A permit to emit is to successfully limit global combined with geological
greenhouse gases (GHGs) under warming to any given level, storage. Removal activities are
an emission trading system (ETS). such as 1.5°C, within a specific also referred to as sequestration
The total quantity of allowances confidence range. The concept or carbon storage, although these
issued yearly under an ETS is is based on the fact that the are somewhat different terms.
equal to the emission cap for amount of warming that will occur
that year. Allowances may be can be approximated by total Carbon market: A market for trading
freely allocated by the agency carbon dioxide (CO2) equivalent allowances or carbon credits
administering the ETS program, emissions. in response to carbon pricing,
or auctioned. Entities that are including an ETS. Carbon markets
covered by the ETS must acquire Carbon capture and storage: are characterized as mandatory
and surrender allowances equal A process in which a relatively or voluntary depending on how
to their emissions. Supply and pure stream of CO2 from industrial demand is created.
demand for allowances creates and energy-related sources is
the carbon price signal. separated (captured), conditioned, • A mandatory or compliance
compressed, and transported to market is created by a
Ambition: The scale and pace of a storage location for long-term government carbon reduction
an actor’s pledges to reduce isolation from the atmosphere. program under which private
cumulative emissions and sector actors subject to the
increase removals toward net Carbon credit or credit: program must acquire and
zero. A transferrable instrument surrender allowances or carbon
certified by governments or credits equivalent to their
Anthropogenic: Human-caused. independent certification emissions to comply with the
The international efforts to bodies that represents emission program.
address climate change reductions or removals measured
distinguish between against a counterfactual baseline. • Voluntary carbon markets
anthropogenic GHG emissions Carbon credits are commonly operate outside of a compliance
and removals, and naturally used to “offset” emissions. framework and demand is
occurring emissions driven by the desire of actors,
and removals. Carbon dioxide equivalent (CO2e): mostly the private sector, to be
A metric used to quantify the environmentally responsible or
Avoided emissions: Emissions climate impact of different GHGs. to try to stave off government
that have been prevented regulation.
from entering the atmosphere. Carbon dioxide removals or
For instance, investments in removals: Activities that remove • Voluntary and compliance
energy efficiency result in less CO2 from the atmosphere and carbon markets overlap in
emissions being released into store it in some durable way. The that the supply of credits can
the atmosphere than would tons of CO2 that are removed serve both market types.
occur without increased energy are often referred to as removals However, compliance markets,
efficiency. or negative emissions. Removal such as a national emission
activities may be nature-based, trading program, typically
Carbon budget: A measure of the such as reforestation or adding impose restrictions on the
cumulative emissions that can carbon to soils, or technological, type, source, quality, and
enter the atmosphere if the world such as direct air carbon capture quantity of credits that may
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G LO S S A R Y

be used. Tracking credits is Direct removals: The physical Emission trading system (ETS):
important in both voluntary and removal of CO2 from the atmo- A type of carbon pricing whereby
compliance markets to ensure sphere from processes under an a government imposes an
that the emission reductions or actor’s ownership or control. aggregate limit or “cap,” which
removals they represent are decreases over time, on emissions
not double counted. Emission leakage: An increase in from specific sectors and sources.
GHG emissions elsewhere when Companies covered by the
Carbon neutrality: Balancing an activity is moved to a different cap comply with the program
emissions attributable to an location in response to an action by acquiring and surrendering
actor by a corresponding to reduce or avoid emissions or allowances, and/or credits where
quantity of emission reduction, increase removals in a specific permitted, which may be traded in
avoidance, or removal credits. location. For example, emission a carbon market. The market price
Carbon neutral differs from net leakage occurs if protecting a of allowances at any given time
zero, in that net zero allows only forest leads to deforestation is what is commonly called the
for removal credits to balance elsewhere. carbon price.
residual emissions when these
emissions have been reduced as Emission scopes: GHG emissions Engineered removal: Removal of
aggressively as possible. are categorized into three CO2 from the atmosphere through
groups or “scopes” for GHG technological means, such as
Carbon pricing: An approach accounting and reporting direct carbon capture, combined
that imposes a price per ton of purposes by corporations and with storage in a geological
CO2e emissions to incentivize other subnational actors under formation.
investment in emission reductions the most widely used international
or removals. Emission trading accounting tool, the Greenhouse Hard-to-abate sectors: Economic
systems and carbon taxes are Gas Protocol Corporate and sectors where emission
both types of carbon pricing. Accounting Standard. Scope abatement costs are significantly
Carbon pricing can also be used 1 covers direct emissions from higher than in other sectors or
as an internal decision-making entity-owned or -controlled where abatement technologies
tool for companies, governments, sources. Scope 2 covers indirect are not yet commercially available.
investors, or other actors. This is emissions from the generation Steel, chemical, and cement
commonly referred to as carbon of purchased electricity, steam, production are classic examples.
shadow pricing. heating, and cooling consumed Heavy-duty transportation (such
by the entity. Scope 3 includes as trucks, ships, and planes) and
Decarbonization: The process by all other indirect emissions that agriculture (such as application of
which countries, the private occur upstream or downstream fertilizer to land) are sometimes
sector, or other entities aim to in a company’s value chain, such considered hard-to-abate
reduce or remove GHG emissions as materials purchased and because of the diffuse nature of
across the economy. used in the production of goods, emission sources in these sectors
emissions caused by customers and/or the lack of cost-effective
Direct emissions: Emissions that are using or disposing of goods, and viable alternatives.
directly physically released into employee travel.
the atmosphere by an activity
or process under an actor’s
ownership or control.
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G LO S S A R Y

Indirect emissions: Emissions Mitigation practices: Negative emissions: The state


resulting from an actor’s activities, • Abatement: The avoidance, beyond net zero at which
such as the production or reduction, or elimination of GHG removals exceed emissions.
consumption of goods, but that emissions within a country or
occur at sources that the actor within a company’s value chain, Net zero emissions: A state
does not own or control. For including reduction in land-use- where anthropogenic residual
instance, emissions from fossil change emissions. GHG emissions are balanced
fuel generation are considered by permanent anthropogenic
indirect emissions of an electricity • Compensation: The avoidance, removals.
consumer. reduction, or elimination of
emissions outside a country Net zero target: Timeframe for when
Internal carbon pricing: The or outside a company’s value an actor aims to achieve and
establishment of a price per chain during the transition to maintain net zero emissions.
ton of emissions to be used as net zero.
a planning tool for investment Offsetting: The use of carbon
in mitigation activities by • Neutralization: CO2 removals credits generated from mitigation
governments, the private sector, from the atmosphere to coun- activities outside a country,
or other actors. An internal carbon terbalance residual emissions. jurisdiction, or company supply
price is sometimes referred to as Such removals may occur chain for which emissions are
a carbon shadow price. inside or outside a country or measured and accounted,
a company value chain. toward a compliance obligation
Mitigation: Actions to limit climate or voluntary pledge of a country,
change and its effects by reducing Nationally Determined Contribution jurisdiction, or company.
GHG emissions or enhancing (NDC): The national level of
removals. climate ambition pledged by a Permanence/non-permanence:
country pursuant to the Paris Characterization of the risk
Mitigation contribution: Quantified Agreement of the United Nations that CO2 removed from the
emission reductions or removals Framework Convention on atmosphere and stored will be
achieved outside a country or Climate Change (UNFCCC). re-released into the atmosphere.
company’s value chain as a Only removals that have
result of an intervention by that Nature-based removal: Removal extremely low risk of reversal
country or company, such as a of CO2 from the atmosphere or over indefinite timescales are
financial investment, but which oceans through additional transfer considered permanent.
are not used to offset the country of carbon into durable biomass.
or company’s own emissions. Also called natural or biogenic REDD+: An acronym for a framework
Instead, the actor may claim to removals. adopted under the UNFCCC
have contributed to global or for reducing emissions from
national efforts to reach net zero. Nature-based solutions: A collective deforestation and forest
term referring to both nature- degradation in developing
Mitigation hierarchy: A sequential based emission reductions, such countries.
framework of action originally as conservation of forests and
developed to manage biodiversity wetlands, and nature-based Residual emissions: The GHG
risk. In the context of net zero removals, such as reforestation emissions that remain after
targets, it refers to prioritizing and restorative agriculture. aggressive abatement to the
abatement of emissions over lowest technically feasible levels.
compensation and neutralization.
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G LO S S A R Y

Reversal: The release of CO2 from Value-chain emissions: All emissions


carbon storage back into the from activities associated with a
atmosphere. company’s operations, including
inputs to products or services
Shadow pricing: Assigning a sold by the company, and the
hypothetical or estimated price to use and disposal by consumers
carbon to facilitate planning and of products sold by the company.
investment decisions. Value-chain emissions include
the direct emissions associated
Science-based target: Emission with the company’s operations
abatement targets (not net zero (Scope 1), as well as the indirect
targets) that are in line with emissions associated with
emission trajectories that the electricity and heat consumption
latest climate science deems (Scope 2), and upstream and
necessary to meet the goals of downstream activities (Scope 3).
the Paris Agreement—to limit
global warming to well below 2°C
above pre-industrial levels and
pursue efforts to limit warming to
1.5°C by mid-century.

Science-based net zero target:


Emission abatement targets
that are aligned with the ambition
of the Paris Agreement and
consistent with the depth of
abatement in pathways that limit
warming to 1.5°C with no or low
overshoot and that neutralize the
impact of any residual emissions
by permanently removing an
equivalent volume of atmospheric
CO2.

United Nations Framework


Convention on Climate Change
(UNFCCC): The international
treaty established to prevent
dangerous anthropogenic climate
change. The Paris Accord is an
agreement adopted under the
UNFCCC.
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Endnotes
1. IPCC, 2021, Summary for Policy 9. CPLC, September 2019, Report of the 17. Saget, Catherine, Adrien Vogt-Schilb,
Makers, In Climate Change 2021: High-Level Commission on Carbon and Trang Luu. 2020. Jobs in a Net-
The Physical Science Basis. Pricing and Competitiveness, https:// Zero Emissions Future in Latin America
Contribution of Working Group I to www.carbonpricingleadership.org/ and the Caribbean. Inter-American
the Sixth Assessment Report of the competitiveness Development Bank and International
Intergovernmental Panel on Climate 10. While these initiatives focus on Labour Organization. http://dx.doi.
Change, https://www.ipcc.ch/report/ enhancing the understanding around org/10.18235/0002509
ar6/wg1/downloads/report/IPCC_AR6_ net zero strategies and targets, there
WGI_SPM.pdf are diverging views as to whether or 18. IETA, University of Maryland, CPLC,
the extent to which credits can be September 2019, The Economic Potential
2. IPCC, 2018, Summary for Policymakers, used to offset emissions that have not of Article 6 of the Paris Agreement and
Special Report: Global Warming of been aggressively abated in line with Implementation Challenges, https://www.
1.5°C, https://www.ipcc.ch/sr15/chapter/ a science-based target. ieta.org/resources/International_WG/
spm/ Article6/CLPC_A6%20report_no%20
11. IPCC, 2018, Special Report: Global crops.pdf; Environmental Defense Fund,
3. Table SPM.2 of IPCC, 2021, Summary Warming of 1.5°C, https://www.ipcc. 2018, The Power of Markets to Increase
for Policy Makers, In Climate Change ch/sr15/ Ambition, https://www.edf.org/sites/
2021: The Physical Science Basis. default/files/documents/Power_of_
Contribution of Working Group I to 12. Goldstein, A., Turner, W.R., Spawn, S.A. markets_to_increase_ambition.pdf
the Sixth Assessment Report of the et al. 2020. “Protecting Irrecoverable
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