Readers know I am skeptical of the current state of Net Zero/climate commitments. I’ve written previously about offset scams and climate reporting fraud (here and here). The topic is also discussed at length in my book. Perhaps the biggest problem I pointed out there is that:
Many, if not most, of the companies signed up for Net Zero commitments are not anticipating making actual reductions, at least not anytime soon. Instead, they are over-relying on buying carbon offsets to meet their goals. Furthermore, the multi-decade time horizon frequently committed to in Net Zero pledges (many times, up to the year 2050) means today’s executives/managers take credit for climate action, while kicking the can down the road for successors to face tough decisions.
Bad news continues to pile up about the future of relying on others to develop solutions to reduce your emissions. Earlier this week, Bloomberg reported on two developments that could affect common assumptions used by companies towards their climate pledges and in disclosures:
More Questionable Forest-Based Offsets
The first article questions forest-based offsets:
The State of Michigan and five counties in Wisconsin recently inked agreements … to create projects on approximately 800,000 acres [of public land]. That’s about three-times more public land than is currently generating carbon credits in the U.S. These projects are expected to begin selling credits later this year or in 2023. At least a dozen more Wisconsin counties and several other states are considering following suit, according to county documents and interviews with public officials…
But overseers of each of these public forests aren’t planning to change how they manage their trees, according to public records reviewed by Bloomberg Green and interviews with forest managers. Instead, they’re able to capitalize on weak rules in the carbon markets to garner payments for continuing the same forest practices they’ve utilized for decades…
Steven Davis, a professor of political science at Edgewood College in Madison, Wisc., who has studied county forests in the U.S., says the impact will be minimal. ‘It’s kind of a nothing-burger for the climate,’ he says. ‘These forests have been managed the same way for 70 years.’
In other words, a lot of companies are assuming an increase in the amount of carbon that these “new” public forests will absorb – but that’s a flimsy assumption when anyone examines how the forests are being managed. This isn’t a gain for the environment, and companies relying on these offsets may end up with a mess on their hands.
U.S. Solar Installations at a Stand Still
The second article notes that a federal tariff probe on solar panels has all but halted many projects that were underway:
The $30 billion U.S. solar industry is being ensnared in a trade probe that’s leaving projects … in limbo and threatening to slow down — possibly even derail — the country’s shift to renewable power… The threat of tariffs, equal to as much as 239% of the equipment’s value, forced [one project developer’s] supplier to halt shipments.
At least 65% of U.S. solar capacity set to come online in 2022 and 2023 is now at significant risk of cancellation or delay, according to an advocacy group… And that’s just based on the announcement of the investigation, which could take a year to complete. If the Commerce Department decides to expand tariffs, the consequences would be even more far-reaching.
There is even one of these projects just a few miles from where I live that is awaiting panels – simply collecting tumbleweeds and black widows for the time being.
Just last week, I wrote about reports from the Lawrence Berkeley National Laboratory (Berkeley Lab) and the Department of Energy that were pessimistic about the future of many alternative energy projects:
…most projects that apply for interconnection are ultimately withdrawn, and those that are built are taking longer on average to complete the required studies and become operational … a large amount of potential clean power capacity is struggling with the wait times and costs of connecting to the transmission grid, and the construction of new high-voltage transmission lines has declined over the last decade.
That means that assumptions that count on solar to reduce emissions might also be unreasonable.
The Road to 1.5 Degrees May Be Behind Us
The Intergovernmental Panel on Climate Change published its 6th report in early April. The Economist summarized the IPCC’s bleak outlook:
The report says that to avoid more than 1.5°C of warming, global emissions must peak before 2025 and then fall by 43% before 2030, compared with 2019 levels. Yet human societies emit more greenhouse gases with every passing decade, and the last one saw the largest rise in emissions in human history. While the report’s socioeconomic simulations of the coming decades show that it is theoretically possible to cut emissions by the amounts needed, the political realities and inherent inertia of economies that are largely structured around fossil fuels make the transition challenging, particularly at the speed that is now required.
And that was prior to Russia’s invasion of Ukraine, which triggered a massive shock to the energy situation in the EU – already in a period of debilitating inflation – resulting in Germany reactivating coal plants as only one example of the EU’s backtracking to fossil fuel reliance that calls into question their ability to meet carbon reduction goals. So, you may also need to reexamine your macro assumptions around the transition economy, to test whether your net-zero plan is truly reasonable.
More Urgent Than You Think
Validating your assumptions isn’t just an unrealistic “best practice” – it’s something that you’ll need to do to protect your company and directors from liability. Here are a couple of reasons why:
- The SEC climate proposal contains provisions that would require registrants to disclose their use of offsets, Scope 2 emissions inventory, and include some of this information within an attestation; and
- Investors are more closely scrutinizing Net Zero commitments – and coalitions are pressuring investors and portfolio companies that don’t follow through.
There hasn’t been a lot of private litigation or regulatory enforcement yet – but any time plaintiffs’ lawyers find a new way to make a buck, you can bet they’ll be there. I would be shocked if they let this ESG “opportunity” slip by.
What You Can Do
Companies need to take a hard look at their climate programs and commitments and determine how much achieving their goals relies on third party actions and developments. From there, it would be prudent to do a “check up” on those third parties and find out how far along they are, whether that progress is consistent with the company’s expectations and if not – develop contingency plans or new directions.
Last summer, we posted a two-part piece (here and here) from Advisory Board member Mark Trexler on auditing your climate assumptions that can be helpful. Other climate-specific member resources include:
- Checklists (for instance, on Avoiding Greenwashing and Starting a Climate Program – which includes establishing a contingency plan for emissions reduction plans that don’t come about),
- My 25-minute podcast with Tamara Close about defining “net zero”, and
- Our very practical webcast from mid-April about “Parsing the SEC’s New ‘Climate Disclosure’ Proposal” – which discusses steps companies should take right now to prepare for compliance (transcript coming soon).
For even more practical guidance, register now for our upcoming 1st Annual Practical ESG Conference – which will be held virtually on October 11th. Our agenda will deliver insights on critical topics that ever person in the ESG space needs to understand – including a session on “carbon accounting” – and we’re continuing to add notable speakers. Sign up before June 10th to take advantage of our “early bird” discount!