If the world is to achieve net zero carbon emissions by 2050, then we need to cut 30 billion tons of CO2 from our global carbon footprint by no later than 2030. Mission impossible? Not quite. But the private sector is struggling to read and react properly to the poor price signal on greenhouse gas (GHG) emissions being sent by governments. As a result, progress on cutting emissions continues to be slow.

Until governments realise they need to enforce an economic system that places a higher value on good climate behavior, the bad behavior -- in the form of climate pollution -- will continue, according to a new report by South Pole, called How should the private sector step up climate action?

In this report, South Pole calls on the private sector to scale up climate action. Companies must make the most of all available climate solutions today. This means both avoiding and reducing greenhouse gas emissions within their operations and supply chains, as well as compensating for all remaining emissions on their way to net zero. Companies therefore need to take an ambitious, robust, and comprehensive climate strategy, starting immediately.

Frequently Asked Questions

1. What should the private sector do?

The private sector should play a key role in accelerating global decarbonisation through setting science-based targets to reduce emissions within their operations and value chains, and compensating for their residual emissions through buying carbon credits. Companies that set a clear roadmap to achieve net zero demonstrate their willingness to reduce their own emissions over time.

Given that we do not have the technologies at hand at an affordable price to allow all companies to reach zero emissions within their own operations and value chains today, it is fair to allow companies to compensate for the effect of their residual emissions by supporting emission reductions through buying carbon credits.

Compensating for residual emissions is critical:

• It puts an actual price on a company's emissions by having them pay for carbon credits, thereby providing a cost incentive for companies to reduce their own emissions in the long-run rather than buying carbon credits to achieve net zero;
• It attracts funding to eligible and deserving projects whose emission reductions would otherwise not be realised due to a lack of financing, technology transfer, and know-how;
• It allows companies to do something (rather than nothing) on their way to net zero
• It develops and supports (financial and technical) solutions that will dramatically reduce emissions today.

2. Is avoidance, reduction or compensation better tools to fighting climate change?

We don't have the luxury of time to push only one of these solutions. To meet the targets of the Paris Agreement, it means all hands on deck. Therefore, companies should avoid and reduce as much of their emissions as it is possible to do with technologies and solutions that exist today.

However, we do not have the technologies at hand at an affordable price to allow all companies to reach zero emissions within their own operations and value chains today. And critics do not offer an alternative solution for companies: they insist on full decarbonisation now. However, if a company cannot avoid or reduce their emissions now, would critics suggest that these companies need to stop operating today? This is not a reasonable solution for companies.

We need to stop fighting over the question of whether internal carbon reduction or compensation is better. Using the voluntary carbon markets to funnel financing to projects around the world that lower GHG emissions, certified under the highest quality carbon standards, ensures that these carbon credits drive faster climate action. It is an efficient, cost-effective and transparent way to catalyse global decarbonisation.

If we want to stand any chance to get to net zero by 2050, it is not 'either, or', but 'both, and'.

3. Private sector climate action remains timid. Why?

First, the cost of emitting greenhouse gases – in other words, the carbon price set by governments – is still too low. At around USD 5–10/tonne, the price of carbon does not accurately reflect the true cost of the damage of emissions from polluters. One tonne of carbon needs to be priced at more than USD 100 to correctly reflect its true cost.

Companies adopting a higher internal carbon price would mean putting in motion a number of other important actions:

• Companies who set net zero targets would realise that the cost of GHG emissions (to their operations) is substantial.
• This would trigger an effort to reduce emissions, both to reach their sustainability milestones and to lower operational costs, and to prepare these companies for potential compliance costs in the future should governments introduce stronger carbon regulation.
• The higher the carbon credit price, the more incentive the firm has to reduce its own emissions rather than pay the cost to compensate its residual emissions. Firms that are serious about achieving net zero should thus pay a fair price for carbon credits to drive decarbonisation efforts within and beyond their value chains.

Second, the flip side to a low price on carbon (which allows companies to emit at a low penalty), is that it does not provide sufficient incentives for companies to reduce their own emissions significantly, nor drive financing into green projects because the rate of return is too low. Why is that? If the carbon credits these projects generate cannot be sold at more than USD 10/credit, then investors are not interested in financing these projects.

Third, private companies do not see a clear path for action. In the media, using carbon credits to compensate for their emissions is criticised by actors who claim that it is 'greenwashing'. They insist that the only credible path for companies is to fully avoid all emissions throughout their operations and value chains. They insist that they should not be allowed to use carbon credits to 'atone for their sins'.

However, we do not have the technologies at hand at an affordable price to allow all companies to reach zero emissions within their own operations and value chains today. And critics do not offer an alternative solution for companies: they insist on full decarbonisation now. Would this mean stopping operations, to not emit at all? This is not an action companies could afford to take.

4. Is carbon compensation greenwashing?

No, not when companies are setting science-based targets and roadmaps to decarbonise their operations and value chains, and use carbon credits to compensate for residual emissions on their way to net zero.

Using the voluntary carbon markets to funnel financing to projects around the world that lower GHG emissions, certified under the highest quality carbon standards, ensures that these carbon credits drive faster climate action. It is an efficient, cost-effective and transparent way to catalyse global decarbonisation. It is also just one among many tools in the climate toolbox: it is an effective strategy and a robust solution that allows companies to act today, while more climate-friendly technologies are being developed to help them decarbonise as well.

Read more about the new report by South Pole - How should the private sector step up climate action?