Carbon neutral (CO₂-neutral): a guide for companies

Carbon neutrality means that only as much CO₂ is released as can be removed from the atmosphere again. Neutrality can be understood as a state in which two quantities are equal in their opposing effect and cancel each other out (Honegger et al. 2020). The idea is therefore to establish a balance between emission and removal.

The term refers exclusively to the greenhouse gas CO₂. In practice, carbon neutral is nevertheless often equated with greenhouse gas neutral or climate neutral. This is technically incorrect, because the three concepts differ in their scope and in their effect on the climate.

Carbon neutral means that only as much CO₂ is emitted as can be removed from the atmosphere again by natural or technical means. Carbon neutrality is achieved when all CO₂ sources and CO₂ sinks are balanced.

Greenhouse gas neutral refers to all greenhouse gases prioritised in the Kyoto Protocol and describes a balance between their sources and sinks. According to the UNFCCC list, these are carbon dioxide (CO₂), methane (CH₄), nitrous oxide (N₂O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), sulphur hexafluoride (SF₆) and nitrogen trifluoride (NF₃).

Climate neutral is the most ambitious concept. It describes a balance between all human-caused and natural effects that influence the climate. According to Honegger et al. (2020), it is also the only concept that leaves the global average temperature unchanged. Carbon neutrality and greenhouse gas neutrality, by contrast, lead to a slowing of global warming.

Net zero describes the state in which all human-caused greenhouse gas emissions are removed from the atmosphere again by human measures. This is how the Intergovernmental Panel on Climate Change, IPCC (2023), defines it.

As a climate target, net zero is gaining in importance for states, organisations and companies. However, the targets are difficult to compare. According to Pineda et al. (2020), target definitions differ mainly in three respects: in scope, that is, which emission sources are taken into account; in the time horizon by which the target is to be achieved; and in the approach to achieving it. It is therefore demanding for stakeholders to assess companies' net-zero targets and the associated measures.

Cities, companies and providers of individual products increasingly describe their goal as climate positive. This means the aim of removing more greenhouse gases from the atmosphere than are released by their own activities.

However, the term is not sufficiently defined either nationally or internationally. It is used in very different ways and sometimes even equated with carbon neutral. According to IKEM (2022), this lack of clarity can give rise to accusations of greenwashing, conflicts and climate-related litigation.

With the Paris Agreement, the international community set itself the goal of limiting global warming to well below 2 °C above pre-industrial levels and, if possible, to 1.5 °C. To this end, the parties regularly submit their climate protection plans, the Nationally Determined Contributions (NDCs), and report their targets for reducing greenhouse gas emissions and adapting to climate change to the UN Climate Change secretariat.

With the European Green Deal, the European Union has set the goal of emitting no net greenhouse gases and enshrined this goal in the European Climate Law. Interim targets and regulations such as the EU Emissions Trading System (ETS), emission standards for vehicles and requirements for renewable energies are continuously revised for this purpose.

For sustainability reporting, the EU has created a regulatory framework with the Corporate Sustainability Reporting Directive (CSRD), the EU Taxonomy and the Sustainable Finance Disclosure Regulation (SFDR). Companies within scope disclose whether and how they contribute to climate protection. In addition, there are due diligence obligations in the supply chain and initiatives to promote low-emission technologies. Which obligations, deadlines and thresholds apply in detail changes and should be checked against the current legal position.

Anyone who uses carbon neutrality or comparable terms in advertising claims to consumers needs a scientific basis for doing so. Otherwise there is a risk of greenwashing accusations, up to and including legal proceedings. Given the demanding legal situation, some companies keep quiet about their efforts towards carbon neutrality in order to avoid public and legal disputes.

At European level, there are efforts to create greater clarity here and to protect consumers from greenwashing. The basic idea: environmental claims should be scientifically substantiated. The claim that a product has been manufactured carbon neutrally would therefore have to be substantiated and verified by an independent body.

The requirements for companies to contribute to achieving climate neutrality targets are increasing. In many cases, companies subject to reporting requirements must calculate their corporate carbon footprint and report on their contribution to climate protection. Whether this applies in an individual case is shown by the double materiality assessment provided for under the CSRD. If it shows that climate protection is a material sustainability aspect, the corporate carbon footprint must be determined and reported on.

Companies not subject to reporting requirements are also increasingly affected indirectly. More and more companies ask their suppliers for the product carbon footprint so that they can calculate their Scope 3 emissions. Besides regulations such as the CSRD, the drivers are rising customer demands for environmentally friendly products and services and growing sensitivity to greenwashing.

Suppliers are increasingly asked to calculate their emissions, set reduction targets and disclose them or have them validated. A well-known platform for publishing emissions data is the Carbon Disclosure Project (CDP). The non-profit organisation regularly collects emissions data and offers various types of membership.

Companies can have their reduction targets validated by the Science Based Targets initiative (SBTi). The science-based initiative checks whether the targets are compatible with achieving net zero.

The basis for developing targets and measures to reduce emissions is the greenhouse gas inventory, that is, the corporate carbon footprint of a company or organisation. GHG accounting usually follows the GHG Protocol and, through Scope 3, also includes supply chain emissions.

transformis supports companies in determining their corporate carbon footprint and in developing targets and measures to reduce emissions. Conceptual clarity is the first step: knowing whether carbon neutrality, greenhouse gas neutrality, climate neutrality or net zero is meant makes it possible to formulate targets robustly and represent them externally.