The false promise of carbon neutrality

The NewClimate Institute recently published a worrying study on carbon neutrality pledges made by 25 multinationals, including Amazon, Google and Volkswagen. According to the authors, these pledges are misleading, as the companies studied actually committed to reducing their emissions by just 40% on average—far from true carbon neutrality. As Canada is increasingly reliant on the private sector in the fight against climate change, should we build a more robust regulatory framework for corporate carbon neutrality pledges?

Carbon neutrality is an increasingly common goal among large corporations, both in Canada and abroad: nearly one-fifth of Fortune Global 500 companies have set a goal of becoming carbon neutral by 2050, including Canadian banks TD, RBC and BMO. However, the extent of these commitments varies greatly from one organization to the next, as each organization is free to interpret the concept of carbon neutrality as it sees fit.

Although there is no universally accepted definition, carbon neutrality is typically assessed based on three criteria: target scope, time frame for reaching the goal and type of emissions offset mechanism. Target scope refers to the source of an organization’s GHG emissions. For example, a “scope 1” target includes only GHG emissions from sources under the direct control of the emitter, such as CO2 from a factory smokestack. A “scope 2” target includes indirect GHG emissions, such as CO2 emissions from a thermal power plant whose energy is used by a company to operate its plant. Lastly, a “scope 3” target includes the GHG emissions produced by a company’s supply chain, i.e., all emissions from the production and transportation of raw materials, employee travel, waste treatment, etc. A company committing to carbon neutrality based on “scope 3” targets therefore has much more ambitious goals than a company with “scope 1” targets, with all the costs that this entails.

Companies aiming for carbon neutrality also have free rein when determining the year by which they will reach their goal. For example, Apple, Microsoft and Facebook have committed to going carbon neutral by 2030, whereas HSBC, American Airlines, BP and Glencore have chosen 2050 as their target. A far-removed deadline allows green technology investments to be amortized over a longer period, but can also prevent the organization from achieving its goals. The Financial Times recently estimated that most companies would go through at least four different CEOs before reaching their carbon neutrality objectives. With a long timeline before them, it can be very tempting for executives to pass the buck to their successors.

Lastly, some companies use emissions offset mechanisms to achieve carbon neutrality. However, not all carbon credits are the same, and it is sometimes difficult to verify whether an offset mechanism does in fact permanently neutralize a certain quantity of GHG.

Regulatory Wild West

There is more than one way to measure a company’s GHG emissions, the most widely recognized being the GHG Protocol standard, developed in the late 1990s by the World Resources Institute and the World Business Council for Sustainable Development. The Science Based Targets initiative (SBTi), a partnership between multiple international organizations has, for its part, developed a voluntary certification for companies committing to carbon neutrality. To be certified carbon neutral, a company must reduce its GHG emissions (scope 1, 2 and 3) to negligible levels, with each remaining tonne of GHGs captured and permanently stored. Agropur, Canadian National, Cogeco and Desjardins are among the companies that have set long-term targets for certification.

In Canada, there are currently no laws or regulations that specifically target carbon neutrality, although the issue is on policymakers’ radars. The Canadian Securities Administrators (which includes the AMF) has just concluded a public consultation on a policy proposal that would require the disclosure of information related to climate change. Among other things, the proposal would require companies to disclose their GHG emissions (scope 1, 2 and 3) using the GHG Protocol methodology (or another similar method), in line with similar initiatives in the United States and the European Union. However, the proposed policy would apply only to companies subject to securities laws, thus excluding a significant number of private companies that are not active in the capital markets.

The Competition Bureau, a federal agency under the responsibility of Minister of Innovation François‑Philippe Champagne, has broad powers to combat misleading advertising and greenwashing. For example, the Bureau recently cracked down on the Keurig coffee company over its claims that its capsules are recyclable. However, the Bureau has never taken a stance on carbon neutrality. Its most recent environmental claims guide, published in 2008, does not make any mention of the subject. In the last year, two complaints have been filed against oil and gas companies in relation to misleading claims about GHG emissions, but the Bureau has yet to publicly address them.

Just a few days ago, Minister Champagne announced a reform of the Competition Act. This could be the perfect opportunity to provide Canada with a modern regulatory framework for carbon neutrality that goes beyond financial disclosure requirements. The private sector must contribute to the fight against climate change, but without corporate transparency, it will be difficult for investors, consumers and citizens to distinguish the true climate leaders from the posers.