In line with its ambition to reduce the continent's emissions by 55% by 2030, in July 2021 the European Commission presented its objectives and measures for light vehicles<a class="footnoteLink" href="#footnote-1">[1]</a>. Among them is the obligation for manufacturers to reduce CO2 emissions per kilometre from new vehicles by 100% by 2035, a provision that caused a stir because it amounts de facto to banning the sale of new&nbsp;combustion-powered vehicles. Despite an agreement reached at the end of 2022 between the Council (the institution representing the Member States) and the Parliament (the institution representing European citizens) on this target, the European authorities finally backed down last March during the final vote: under pressure from Germany in particular, the European Union went back on this ban, introducing an exception for "carbon-neutral e-fuels". What consequences does this reversal have for Europeans, and is this exemption justified?<h3>Context</h3>Transport by car and van accounts for around 15% of total emissions in the European Union<a class="footnoteLink" href="#footnote-2">[2]</a>. In France, national emissions from the road transport sector recorded in the SECTEN inventory are up slightly since 1990 (116 MtCO2e in 1990 compared with 127 in 2019), despite the fact that the National Low Carbon Strategy is aiming for "complete decarbonisation by 2050"<a class="footnoteLink" href="#footnote-3">[3]</a>. The ban on new internal combustion vehicles, coupled with a strategy of sobriety, therefore represents a major challenge both from the point of view of the decarbonisation imperative and the competitiveness of European industries, faced with the challenge of electrification and the emergence of new players who have long been positioned on the electric market (Tesla, the best known, Byd in China). Despite this, many voices, including Germany's, spoke out against the measure, fearing that it would weaken the automotive industry, which accounts for 12% of the country's workforce and 4.7% of its GDP<a class="footnoteLink" href="#footnote-4">[4]</a>. A compromise was finally reached at the end of March, on the basis of an exemption for vehicles powered by "carbon-neutral" synthetic fuels known as "e-fuels".&nbsp;<h3>Les « e-fuels », une alternative crédible aux carburants classiques pour décarboner ?</h3>Electrofuels, known as "e-fuels" or "synthetic fuels", are new-generation liquid or gaseous fuels. They are synthesised from renewable energy sources such as solar, wind or hydroelectric power to produce hydrogen (via a water electrolysis process) and carbon dioxide (or nitrogen in the case of e-ammonia). The CO2 used during the process can either be captured diffusely in the atmosphere (so-called DACCS technologies) or captured directly from the effluents of certain high-emission industrial sites (so-called CCU/CCS technologies).

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Simplified e-fuels synthesis diagram

This chemical process for creating synthetic fuel is not new. In the 1920s, two German chemists, Franz Fischer and Hans Tropsch, succeeded in liquefying a synthetic gas produced from coal, of which Germany had an abundance. It was not until the Second World War that this technology was developed on a large scale, in particular to meet the fuel needs of the German army.The complexity of the chemical synthesis and refining process makes these fuels extremely expensive, which is the main reason why they were only developed to a very limited extent after the war, in favour of petroleum-based fuels.More recently, these electrofuels have emerged as a promising solution for reducing greenhouse gas emissions in the transport sector for two main reasons. Firstly, they can be used in current combustion engines without requiring major modifications. Secondly, electrofuels have a carbon footprint that is at least 70% smaller than that of petroleum fuels<a class="footnoteLink" href="#footnote-5">[5]</a> throughout their production cycle. These synthetic fuels are therefore an effective solution for reducing greenhouse gas emissions from transport.However, this type of fuel suffers from a major flaw that calls into question its relevance for decarbonising motor vehicles: its low energy efficiency compared with battery-electric vehicles (the main alternative for decarbonising cars). While the latter uses electricity directly, the e-fuel engine involves an additional energy conversion: the synthesis of the fuel. Added to this is the fact that once the energy has been charged into the car (either by an electric battery or by storing the e-fuel), the electric motor is much more thermally efficient, so the energy given back to the car to move forward will be greater than for its internal combustion equivalent.As a result, with the same amount of decarbonised electricity available, a battery-powered vehicle can cover 3 to 5 times as many kilometres<a class="footnoteLink" href="#footnote-6">[6]</a> as its internal combustion equivalent using e-fuel. The choice of whether or not to use e-fuels is therefore above all a question of prioritising the use of available low-carbon energy.

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The distance you can travel in an electric car or a combustion-powered e-fuel car with the same amount of available energy

While the car industry can use electric batteries, this will not be the case for other mobility sectors. Heavy and long-distance transport (land, sea and air) will find it difficult to decarbonise through electrification or hydrogen. E-fuels therefore appear to be an interesting transitional solution, complementing a more global decarbonisation strategy. Proof of the growing interest in this type of fuel, the aeronautical sector has very recently increased the proportion of its use in its decarbonisation roadmap for the European Union, starting in 2030<a class="footnoteLink" href="#footnote-7">[7]</a>.<h3>Carbon-”neutral" fuels?</h3>In addition to efficiency considerations, a second reservation can be made about the "neutral" nature of these fuels. The argument put forward for reversing the ban on new combustion vehicles is based on the supposed carbon 'neutrality' of these synthetic fuels: the combustion engine powered by an e-fuel would be 'neutral', insofar as the CO2 emitted during its combustion would first have been taken from the air or from the factory, and the hydrogen needed to produce it would have been generated from decarbonised electricity. In this respect, European legislation should make no distinction between an internal combustion vehicle running on synthetic fuel and an electric vehicle: since both solutions are considered equivalent (because they are "neutral"), European legislation should refrain from favouring one or the other in its wording, and leave it to the market to select the most viable technological option. The reasoning, while seemingly appealing, does not stand up to analysis.<ol><li>Firstly, it is highly questionable to consider the two types of engine to be neutral, and therefore equivalent, on the grounds that the CO2 used to produce e-fuels has first been captured on an industrial site or in the air. Since the ban on the production of internal combustion vehicles powered by conventional fuels is not the subject of debate between the political authorities, the appropriateness of the exemption granted to e-fuels presupposes comparing 1) the situation in which internal combustion vehicles are banned and only new electric vehicles are authorised with 2) the situation in which internal combustion vehicles are banned and both e-fuels and electric vehicles are authorised. However, the equivalence between electric vehicles and e-fuel, even from the sole point of view of combustion emissions, is only valid if we assume that the capture device (DACCS or CCU) has been deployed for the production of e-fuel. Let's consider the most favourable case for e-fuels, i.e. the one in which the fuel is synthesised from CO2 taken from the atmosphere (the device therefore starts by generating a "negative emission": CO2 is removed from the atmosphere). The diagram above shows the flow of combustion emissions from a plant and a vehicle in several configurations (with or without a capture device; electric, thermal or e-fuel).</li><li>But above all, it would be highly questionable to confine ourselves to combustion emissions alone, which is what the critics of electric vehicles generally point out when they highlight the emissions generated by the manufacture of batteries<a class="footnoteLink" href="#footnote-8">[8]</a>: as we have shown, the energy efficiency of a combustion vehicle, whether powered by conventional fuel or e-fuel, is much lower than that of an electric vehicle, which means that for the same distance, more energy has to be mobilised by the former. As the production of this energy generates emissions, it is wrong to assume that the emissions generated by the two types of vehicle are equivalent: a combustion vehicle powered by e-fuel is not neutral, any more than a vehicle powered by electricity, but the latter is indeed more virtuous from a climate point of view, once all the emissions generated over the life of the vehicles are taken into account.</li><li>More fundamentally, the reasoning implicitly accepts that products can be "neutral" and that this criterion alone is sufficient to identify those best suited to the low-carbon transition. The attribute of "neutrality" presupposes the possibility of taking the emissions of a process as zero (or at least cancelling them out) - in this case, the alleged "neutrality" is supposed to reside in the capture operation prior to combustion by the vehicle, and in the renewable origin of the electricity used to produce the hydrogen - which obscures part of its climatic impact. But above all, its binary nature (a product is either neutral or it isn't) leads to an excessively simplistic understanding of the issues: if there are neutral products, it's because the choice between them can be considered equivalent from a climate point of view, and therefore politicians don't have to make a decision. The problem is not to determine whether a product is neutral or not, but to compare the merits and limitations of several solutions to a given problem (in this case, the decarbonisation of passenger transport): directing the production of carbon-free hydrogen towards passenger transport, through the production of e-fuels for example, means at the same time depriving other sectors, such as the steel industry, which do not have the same alternatives.</li></ol>This last observation calls for a broader reflection on the role of the European legislator: in a context of increasingly constrained resources, the legislator cannot simply identify, from among the existing alternatives, 'neutral' products that the free market would then have to sort out. The exacerbated pressure on resources and the need for coherent action mean that politicians, in this area as in others, must fully assume their role as strategists to ensure that resources are used wisely for the common good.

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<a href="https://www.consilium.europa.eu/fr/policies/green-deal/fit-for-55-the-eu-plan-for-a-green-transition/">https://www.consilium.europa.eu/fr/policies/green-deal/fit-for-55-the-eu-plan-for-a-green-transition/</a>

<a href="https://www.consilium.europa.eu/en/infographics/fit-for-55-emissions-cars-and-vans/">https://www.consilium.europa.eu/en/infographics/fit-for-55-emissions-cars-and-vans/</a>

<a href="https://www.ecologie.gouv.fr/sites/default/files/2020-03-25_MTES_SNBC2.pdf">https://www.ecologie.gouv.fr/sites/default/files/2020-03-25_MTES_SNBC2.pdf</a> (page 80)

<a href="https://www.tresor.economie.gouv.fr/Articles/ab29bd3a-c676-46e6-b9a3-25e515e7d0e3/files/794dbe07-edb6-4924-bfae-ba671342f7be">https://www.tresor.economie.gouv.fr/Articles/ab29bd3a-c676-46e6-b9a3-25e515e7d0e3/files/794dbe07-edb6-4924-bfae-ba671342f7be</a>

Minimum greenhouse gas emission reduction rate set by the European directive on renewable energies RED II

<a href="https://theicct.org/e-fuels-wont-save-the-internal-combustion-engine/">https://theicct.org/e-fuels-wont-save-the-internal-combustion-engine/</a> and <a href="https://www.transportenvironment.org/wp-content/uploads/2020/12/2020_12_Briefing_feasibility_study_renewables_decarbonisation.pdf">https://www.transportenvironment.org/wp-content/uploads/2020/12/2020_12_Briefing_feasibility_study_renewables_decarbonisation.pdf</a>

<a href="https://www.iata.org/en/pressroom/2023-releases/2023-04-26-02/">https://www.iata.org/en/pressroom/2023-releases/2023-04-26-02/</a>

Beyond 30 to 40,000 km, the electric vehicle is more advantageous than the internal combustion vehicle: over its lifetime in France, an electric car emits overall 3 to 4 times less CO2e than its equivalent. See Carbone 4 (2022). “<a href="https://www.carbone4.com/en/analysis-faq-electric-vehicles">Misconceptions about electric vehicles</a>”.

The future of the European car: why are synthetic fuels not the solution?

Last September, the GFANZ published its proposal to define a normative framework for the decarbonization of the financial sector<a class="footnoteLink" href="#footnote-1">[1]</a>.The GFANZ proposal identifies 4 decarbonizing actions for financial players:&nbsp;<ul><li>Developing and scaling up climate solutions;</li><li>Financing assets or companies already aligned with a 1.5°C trajectory;</li><li>Financing assets or companies committed to reducing their emissions in line with 1.5°C trajectories;</li><li>Investing in very carbon-intensive assets in order to remove them (managed phase out strategy).</li></ul>It is structured in two parts, the first dealing with the definition of each of these actions, the second with the measurement of the performance of a company/asset with regard to a given type of action.&nbsp;

The purpose of this document is to clarify Carbone 4's position on the GFANZ proposal in order to suggest improvements to its methods and definitions. The document proposed by the GFANZ has laudable intentions and raises interesting questions: the mobilisation of financial flows is indeed essential to achieve global decarbonisation compatible with the 1.5°C objective. The specific focus on decarbonising assets and exiting from carbon assets, highlighted in the GFANZ report, seems to us to be a step in the right direction. However, we do not believe that the methodological options proposed by the GFANZ will make it possible to achieve the desired objective.

Six points in particular caught our attention:<ol><li>the problematic concept of Expected Emissions Reductions&nbsp;(EER) which consists of comparing a business as usual scenario with the emissions reduction pathway to which a company is committed;</li><li>the potential misuse of the concept of avoided emissions, especially when used for other purposes than estimating emissions reductions of solution providers and enablers;</li><li>the insufficient guarantees associated with the effective implementation of decarbonization commitments;</li><li>the absence of criteria to guarantee the financial additionality of investments;&nbsp;</li><li>the unsatisfactory distinction between solution providers and enablers, presented as a response to possible double counting of avoided emissions, but difficult to make in practice.</li><li>the exclusive focus on decarbonization, which does not tackle the fundamental question of the end purpose of products sold by companies and their compatibility with reasonable societal needs in a net zero economy&nbsp;</li></ol>&nbsp;<h3>We believe that the notion of Expected Emission Reductions (EER) is both unnecessary and potentially risky.</h3>The method envisaged by the GFANZ to quantify the environmental value of a project is largely based on the notion of Expected Emission Reductions (EER), rewarding financial institutions for the expected volume of emissions that would be avoided thanks to their investments and the actions taken by their customers. Estimating EERs, as described in the document for aligned and aligning companies, involves comparing a business-as-usual emissions pathway with the emissions pathway resulting from the commitments made by the companies. Carbone 4, like other players who have already communicated their position<a class="footnoteLink" href="#footnote-2">[2]</a>, believes that the method proposed by the GFANZ must be revised, or even abandoned, in order to be aligned with the overarching objective of decarbonizing the financial sector.&nbsp;&nbsp;Indeed, the EER concept, when comparing actual emissions to a company-level BAU (method used for aligned and aligning companies) is potentially risky in the sense that:<ul><li>It requires comparison with a business-as-usual pathway at company level, which can only be declarative and is inherently unverifiable.&nbsp;This business-as-usual trajectory can even describe an increase in emissions (and not just a constant level). It is theoretically possible for a company to exaggerate the business as usual emissions in order to maximize its EER in an abusive manner, without this being detectable by an external third party.</li><li>The method therefore provides a structural incentive to favor the most carbon-intensive players,&nbsp;who are on paper (but on paper only), and from a strict accounting point of view&nbsp;also those with the greatest potential for decarbonization. The GFANZ acknowledges this risk, admitting “the EER should be revised downward accordingly” (p. 32), but these revisions have little or no impact, as the funds invested have already been provided at the time when the drift is noted ex-post.</li><li>It leads to confusion between “actual emissions compared to a company-level BAU” and “emissions avoided by products and services”. While the latter type of avoided emissions is useful, since they help quantify the extent to which a solution contributes to the decarbonization of society (which is not captured by classic corporate carbon footprint assessments), the former is redundant with the notion of corporate carbon footprint.</li></ul>These risks are all the more unfounded in that the use of EERs seems unnecessary, given that it overlaps with the carbon footprint indicator (induced emissions). Measuring the gap between a company's emissions and its decarbonization pathway already gives good information about its alignment. Comparing a company's emissions against a hypothetical BAU would provide no additional information to that provided by a forward-looking emissions reduction pathway. Comparing actual decarbonization with a reference pathway aligned to 1.5°C, which is recognised and less open to discussion than a business as usual&nbsp;pathway constructed ad hoc, seems to offer a better guarantee, while avoiding directing investment towards the most carbon-intensive companies. This option also has the advantage of being easier to coordinate with existing frameworks (the SBTi in particular).Although this proposal may appear attractive at first glance, the devil is often in the details: without offering sufficient guarantees, the new concept of EER could offer an escape route for companies least aligned with the decarbonization imperative.<figure class="image"><img src="https://carbone4.com/files/david_stamm_7_Vfq35_Ko_Hh_U_unsplash.jpg"></figure> The use of avoided emissions could be useful, provided that they relate only to products and services sold, and are backed by a robust estimation framework.Our reservations about the use of EERs do not mean, however, that estimating avoided emissions is pointless.&nbsp;The comparison with a counterfactual baseline does make sense for products and services (or put another way, when we compare the emissions generated with and without the development of a product/service, which is a different approach from that of comparing a company's actual emissions pathway with that adopted in a business as usual scenario), since it enables companies to measure a positive impact on society that cannot be measured by calculating their carbon footprint. In this respect, we believe, as suggested in the GFANZ paper, that the use of this indicator is useful for actions aimed at promoting companies that provide low-carbon solutions (strategy 1), and for the managed phaseout of high-emitting physical assets (strategy 4). Nevertheless, the concept of avoided emissions, as developed in the GFANZ paper for these two strategies, seems to suffer from an ambiguity in that it suggests that the baseline could be chosen arbitrarily among alternative solutions. Yet, a proper baseline must rather reflect the most likely counterfactual situation, i.e. “what would have happened” without the solution.For example, if we follow this line of reasoning, even the installation of a gas-fired power plant could generate avoided emissions, if a coal-fired power plant had been chosen as the baseline scenario.&nbsp;In this case, the assessment of avoided emissions should instead focus on constructing a counterfactual scenario representing what would have happened without the deployment of the low-carbon solution (in our example, by considering the mix of power stations built recently, for example). The mere comparison between arbitrary products also conceals the possibility of a rebound effect.&nbsp;&nbsp;To avoid any fanciful estimates, the reference scenario must be based on a clear framework, such as the Avoided emissions Guidance jointly developed by Carbone 4 and the WBCSD<a class="footnoteLink" href="#footnote-3">[3]</a>.&nbsp;<h3>The guarantees associated with the effective implementation of the decarbonization plan must be strengthened</h3>In order to underpin the credibility of the emissions reduction pathways to which companies commit, the GFANZ asks players to document their decarbonization actions, or to justify the relevance of their projects. We feel that this requirement is essential, but that project/company governance is not addressed as one of the key criteria in the action plan, even though it is a decisive factor in the success of projects.&nbsp;<h3>Additionality of funding is insufficiently guaranteed</h3>The methodological developments proposed in the document aim to guarantee the existence of environmental additionality. They seek to answer the following question: if I invest in this project/this asset/this company, does my financing make it possible to reduce emissions, and if so, by how much? (it is additional from an environmental point of view, in the sense that it is of interest compared to the situation in which the project is not developed).&nbsp; However, they offer no guarantee of financial additionality, which seeks to determine whether this investment in the company(and the conditions required for this investment) has actually triggered additional action on the part of the company. Financial additionality does not focus on the environmental benefit of the project, but on the benefit of the financing: this time it asks whether the decarbonisation actions implemented were made possible by the financing in question, or whether they would have been implemented anyway.GFANZ assumes that a financial player can be considered "net zero aligned" thanks to its investments. However, financial players do not have the simple task of allocating capital to virtuous players; they must also play an active role in the transformation of companies, using these investments as levers to influence their strategic choices (for example via resolutions at general meetings, by making the amounts invested, the liquidity and the price of their interventions conditional on the achievement of environmental criteria, etc.). It is not obvious that investing in a company necessarily contributes to changing its strategy: if, for example, these securities are bought on the secondary market, this purchase is transparent from the company's point of view. If financial players wish to make a significant contribution to the goal of global carbon neutrality, their approach must be more ambitious than simply allocating capital.&nbsp;<h3>The distinction between Solution providers and Enablers does not always work in practice</h3>One of the key distinctions, supposed to avoid double counting of avoided emissions, is based on the distinction between solution providers and enablers. The GFANZ defines these two concepts as follows:&nbsp;<ul><li>solutions&nbsp;are products or activities that "directly contribute to the elimination, removal or reduction" of greenhouse gases,</li><li>enablers&nbsp;are “assets that indirectly contribute to, but are critical for, emission reductions by facilitating the deployment and scaling of solutions” (p. 15).</li></ul>To support this distinction, GFANZ cites the example of a battery manufacturer who facilitates the deployment of electric vehicles, here assimilated to a decarbonizing solution. While conceptually appealing, this distinction comes up against major practical difficulties in practice: the battery maker is an enabler relative to the car maker, but it is also a solution provider relative to the mining company. It is therefore not clear that the option presented here will avoid double counting.&nbsp;On this issue, we suggest allocating avoided emissions with the same manner as it can be done for the carbon footprint (ex: allocation with the added value). We also recommend introducing a threshold of a certain share of revenues (e.g.&nbsp;50% of revenues or CAPEX associated with green activities) to identify “Solution providers”. &nbsp;<h3>The EER concept focuses exclusively on decarbonization, which does not tackle the question of the compatibility of companies’ business models with reasonable societal needs in a net zero economy.</h3>The environmental transition calls for far-reaching changes: some activities will have to grow considerably (products linked to thermal renovation, soft mobility such as cycling), while others will have to disappear: for example, the gradual electrification of the car fleet and the drive to reduce energy consumption will require a complete reorganization of vehicle maintenance and repair activities (with the long-term disappearance of car parts linked to internal combustion engines); similarly, the decarbonization of emissions linked to packaging will no doubt require not only a marginal reduction in the carbon intensity of materials already in use, or the replacement of certain materials with others, but also the consideration of other packaging methods (bulk, deposits, etc.). ). In other words, decarbonizing the economy cannot consist of maintaining current structures and products by incrementally reducing their carbon intensity. The scale of the transformations required means that, when assessing the appropriateness of an investment, we need to consider the purpose of the assets and products being financed.&nbsp;This question must be asked in two complementary ways:<ul><li>Usefulness for decarbonization, i.e. the company’s contribution to reducing global emissions. This aspect is addressed in particular through the concept of avoided emissions by products and services.</li><li>Compatibility with a low-carbon horizon, i.e. the company's capacity to be resilient in a low-carbon world</li></ul>&nbsp;However, while the notions of EER and avoided emissions, both present in the report, are intended as an answer to the question of utility for decarbonization, the GFANZ proposal neglects the second aspect of the problem raised here: it does not explicitly consider the question of the compatibility of a product or asset with a low-carbon horizon (replacing an oil-fired power plant with a gas-fired plant lowers the carbon intensity associated with energy production, all other things being equal, which does not mean that the decision to build a gas-fired power plant is appropriate in a decarbonized world, particularly if a lower-emission alternative could have been considered instead). Worse still, by encouraging the financing of assets with the greatest decarbonization potential, it risks achieving the opposite of the desired effect on this point, by directing flows towards the least resilient assets (see 1.). Indicators do exist, however, albeit imperfectly, to attempt to approach this question: the Paris Agreement Compatibility Score (PACS) developed by Carbone 4, or other forms of taxonomy, are useful tools in this respect.&nbsp;<h3>Conclusion</h3>&nbsp;A clear framework must be defined to direct financial flows towards low-carbon assets and enable financial sector players to make appropriate decisions in the face of the environmental transition challenge, while avoiding greenwashing. This first GFANZ proposal has the merit of raising major questions, and placing them at the heart of the discussion.&nbsp;It also underlines the diversity of contribution levers, by distinguishing between several modes of action (financing companies in the process of alignment, decarbonizing solutions, abandoning carbon assets). &nbsp;However, Carbone 4 believes that, as they stand, the proposals contained in this version of the GFANZ consultation do not make it possible to achieve these objectives. In particular, the concept of Expected Emissions Reductions runs counter to their initial objective of "promoting transparency and accountability of net zero commitments" (p. 7 of the consultation).&nbsp; On this point, Carbone 4 calls for us to stick to measuring the gap between a company's emissions and its decarbonization trajectory, as applied, for example, under SBTi, and which already provides good information on its alignment. Although imperfect, this option seems to us to avoid the main pitfalls noted here concerning EERs.&nbsp;&nbsp;Carbone 4 calls on the GFANZ to take into account the concerns expressed by various ecosystem players in order to improve its initial proposal.

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Glasgow Financial Alliance for Net Zero, (2023). Defining Transition Finance and Considerations for Decarbonization Contribution Methodologies. Available here: <a href="https://assets.bbhub.io/company/sites/63/2023/09/Defining-Transition-Finance-and-Considerations-for-Decarbonization-Contribution-Methodologies-September-2023.pdf">https://assets.bbhub.io/company/sites/63/2023/09/Defining-Transition-Finance-and-Considerations-for-Decarbonization-Contribution-Methodologies-September-2023.pdf</a>

Reclaim Finance, (2023). Reclaim Finance response to consultation on draft GFANZ paper:&nbsp;&nbsp; “Defining Transition Finance and Considerations for Decarbonization Contribution Methodologies”. Available here: <a href="https://reclaimfinance.org/site/wp-content/uploads/2023/11/RF-comments-on-GFANZ-transition-contribution.pdf">https://reclaimfinance.org/site/wp-content/uploads/2023/11/RF-comments-on-GFANZ-transition-contribution.pdf</a>

Carbone 4, WBCSD, (2023). Guidance on avoided emissions. Helping business drive innovations and scale solutions toward net zero. Available here: <a href="https://www.wbcsd.org/contentwbc/download/15909/229494/1">https://www.wbcsd.org/contentwbc/download/15909/229494/1</a>

Carbone 4’s public response to the GFANZ Consultation on Transition Finance Strategies and Measuring the Impact on Emissions

The Science-based targets Initiative&nbsp;(SBTi) was founded in 2015 by the World Resources Institute&nbsp;(WRI), the Carbon Disclosure Project&nbsp;(CDP), the United Nations Global Compact and the World Wide Fund for Nature&nbsp;(WWF), with the intent of "develop[ping] standards, tools and guidance which allow companies to set greenhouse gas (GHG) emissions reductions targets in line with what is needed to keep global heating below catastrophic levels and reach net-zero by 2050 at latest."<a class="footnoteLink" href="#footnote-1"><a class="footnoteLink" href="#footnote-1">[1]</a></a> (i.e. 5% reduction in emissions per year).&nbsp;For almost 10 years, this initiative has helped increase the number of climate commitments made by companies, and contribute to bridge the gap between business and science. On April 9th, however, the organization's Board of Trustees&nbsp;&nbsp;issued a statement authorizing the use of "Environmental Attribute Certificates", including carbon credits, to achieve scope 3 carbon footprint reduction targets. The Board's decision is in line with the position of historical offset players such as the Voluntary Carbon Market Initiative&nbsp;(VCMI), with which SBTi recently formed a partnership<a class="footnoteLink" href="#footnote-2">[2]</a>. While the organization's&nbsp;employees and Technical Council&nbsp;have criticized this statement as “undermining [their] government processes”<a class="footnoteLink" href="#footnote-3">[3]</a> , this stance by the board is&nbsp;first and foremost scientifically questionable. Final validation of this intention, which could take place in July, would mark a clear step backwards in the ambition historically carried by the initiative, and would dangerously delay the collective action required for the ecological transition.<h2>Taking the easy way-out</h2>Since its creation in 2015, SBTi has become one of the most well-known climate-related labels: by the end of 2023, it announced that it had approved the targets of over 4,000 companies. So far, its rise to prominence has made the subject more accessible, provided a clear, albeit perfectible, framework, and enabled the setting of emissions reduction in line with climate science. With the targets of many of the pioneering certified companies set for 2025 (and those of the following ones shortly thereafter), compliance with the commitments made is about to be verified. Unfortunately, in most cases, companies seem to be falling short of the mark,&nbsp;despite an already accommodating framework that allows them to set intensity targets<a class="footnoteLink" href="#footnote-4">[4]</a> : of the 56 commitments due in 2025 or earlier, and listed for scope 1+2+3 in SBTi's Monitoring report 2022<a class="footnoteLink" href="#footnote-5">[5]</a>, only 18 (around 30%) have reached more than 70% of their target<a class="footnoteLink" href="#footnote-6">[6]</a>.&nbsp;This finding should have prompted us to reflect on the flaws in the current system, to better assess the credibility of commitments upstream (for example, by making public the resources deployed by the companies in terms of investment and governance), and to realize that, in the face of climate change, failure to question one's business model inevitably leads to marginal/negligible actions.&nbsp;The submission of SBTi targets must come from an in-depth analysis on the company's "business" resilience, from the point of view of both physical risks and transition risks and opportunities (assessments carried out for example by means of prospective scenario analyses respecting planetary boundaries<a class="footnoteLink" href="#footnote-7">[7]</a>). This reflection should enable the company to confirm or rethink its strategy, in order to make its activity and its product and service offers useful in an economy compatible with the planetary boundaries<a class="footnoteLink" href="#footnote-8">[8]</a>,<a class="footnoteLink" href="#footnote-9">[9]</a>. Unfortunately, the SBTi Board, without consulting the opinion of its Technical Council<a class="footnoteLink" href="#footnote-10"><a class="footnoteLink" href="#footnote-10">[10]</a></a>&nbsp;, has preferred to change the rules of the game rather than endorse this statement of truth to its financial backers.<h2>This position runs counter to the scientific consensus and contravenes the fundamental principles of carbon accounting.&nbsp;&nbsp;</h2>The first reason why this option is inconsistent is definitional. The carbon footprint is an inventory of the emissions on which an activity depends to function; however, the purchase of carbon credits in no way affects these dependencies. A company that has purchased carbon credits to "offset" its emissions has not lessened its exposure to emissions-related risks.The other argument is a physical one. Two major families of projects structure the credit market: projects aimed at avoiding emissions, and projects aimed at capturing CO2 from the atmosphere. Neither can "offset" the CO2e accounted for in a carbon footprint:&nbsp;<ul><li>From a physical point of view, a ton of GHG avoided&nbsp;is not equivalent to a ton of GHG emitted: the latter corresponds to a gas currently present in the atmosphere, whereas the former corresponds to a theoretical difference between actual emissions and those that could have taken place. Put another way, the increase in avoided emissions only guarantees that we are doing better than business-as-usual, not that we are actually reducing emissions. Equating an avoidance carbon credit with a scope 3 emission is therefore questionable.</li><li>The use of so-called sequestration&nbsp;carbon credits to compensate&nbsp;is no more acceptable. Let us mention&nbsp;the two main problems:</li><li>First, this is tantamount to equating a ton of CO2 already emitted with expected (and therefore uncertain) CO2 capture, which takes place over several years. In the case of a forestry project, for example, CO2 sequestration takes place over decades of tree growth, not at the time of the credit purchase.</li><li>Second, the potential for carbon sequestration is limited, making it impossible to&nbsp;"offset" all emissions<a class="footnoteLink" href="#footnote-11">[11]</a> . This is why the SBTi's "Net Zero" standard only promotes the "elimination" of corporate emissions once they have been reduced to an incompressible residual level in 2050, at the end of an emissions reduction process of the order of -90% compared to current levels.</li></ul>The deadlock of offsetting, from a physical point of view, has led to a broad consensus among carbon accounting bodies to exclude any fungibility between carbon credits and corporate carbon footprints. All authoritative bodies on climate reporting (UNFCCC, ISO 14064, GHG Protocol...), and more recently the CSRD<a class="footnoteLink" href="#footnote-12">[12]</a> , prohibit the subtraction of carbon credits from emissions. The SBTi, too, until now, had insisted on this point<a class="footnoteLink" href="#footnote-13">[13]</a> . Validating the use of carbon credits to achieve scope 3 reduction targets would therefore constitute a backtracking and a deviation from the SBTi approach. However, incentives to finance decarbonization projects outside the value chain can be implemented without diminishing ambition in terms of emissions reduction or giving in to the logic of offsetting: carbon credits are useful and contribute to the common effort, provided they are conceived as a complement to the action undertaken in one's own value chain&nbsp;(see conclusion).<h2>A choice that would be inefficient and harmful to the climate cause</h2>The use of carbon credits would perpetuate the illusion that a company can get rid of the problem all by itself, using only money&nbsp;. However, one of the main virtues (and the main difficulty) of the famous Scope 3 lies precisely in the need for cooperation that it implies: it enables a company to situate itself in its network of interdependencies, to involve other players beyond itself, through a game of mutual influence. Many companies may still underestimate the scale of the efforts required to reduce Scope 3 emissions: offering ways of getting around the difficulty, by opening up the use of carbon credits, would maintain the illusion of an easy ecological transition, and delay the implementation of transformative actions. However, the real lesson for a company submitting an SBT objective should be the following: greening one’s activity marginally, without actually questioning business-as-usual practices, will not be enough; the ecological crisis calls for a profound rethinking of business models.&nbsp;The direction taken by the Board of Trustees is&nbsp;also counter-productive from the point of view of financial flows, as it sends out the wrong signals and confuses the debate: a high-carbon industry could tomorrow, through the purchase of carbon credits, be considered "aligned with a 2°C trajectory", while a small business specializing in building renovation, that has chosen to invest to develop its business, would be considered less virtuous. Allowing the use of carbon credits would, in short, be tantamount to favoring companies capable of paying a very high price (the very companies for which the transformations required for decarbonization are the most complex) for these modern-day climate indulgences.&nbsp;Allowing emissions reduction through carbon credits is often presented by offset proponents as a great incentive for the financing of offset projects. This stance is debatable as well, as reducing climate performance to a single figure, resulting from the subtraction between emissions and credits, focuses the discussionon the quantity sequestered rather than the quality of projects. The influx of demand for carbon credits runs the risk of encouraging the development of the least costly and lowest-quality projects. The existence of labels, which tends to ensure a minimum level of quality, is not an absolute guarantee<a class="footnoteLink" href="#footnote-14">[14]</a> , and is not sufficient to direct flows towards the best projects (serious governance, consideration of biodiversity, etc.).&nbsp;<h2>Conclusion – How to get out of the crisis created by the announcement of the SBTi Board</h2>Other approaches are possible to meet both the need to decarbonize our activities, and the need to deploy projects to finance the transition. This is what the Net Zero Initiative<a class="footnoteLink" href="#footnote-15">[15]</a> is working on, by proposing a reporting&nbsp;method based on the logic of contribution to the goal of global carbon neutrality, i.e. the idea that a company should take part in a collective effort, rather than seeking to offset its emissions on its own. The framework proposed by the Net Zero Initiative is&nbsp;based on three non-fungible levers of action:&nbsp;<ul><li>reduction of the company’s carbon footprint - pillar A of the standard,</li><li>promotion of low-carbon products (primarily through the company’s own activities, then through carbon credits for avoided emissions) - pillar B,</li><li>contribution to the effort to sequester carbon and preserve and restore biodiversity (in the company’s value chain or via the purchase of carbon credits for sequestered emissions) - pillar C.</li></ul>Because this approach insists on not neglecting any one of these three pillars, it is more robust, fairer, and more effective.&nbsp;<ul><li>Robust&nbsp;because it is in line with the conclusions of the IPCC, which calls on the one hand to reduce emissions (pillar A)<a class="footnoteLink" href="#footnote-16">[16]</a> , and to do so, to review its product and service offering (pillar B)<a class="footnoteLink" href="#footnote-17">[17]</a> , and on the other hand to develop carbon sinks (pillar C)<a class="footnoteLink" href="#footnote-18">[18]</a> .</li><li>Fair, because it recognizes the contribution of organizations that provide innovative solutions for the transition: as a bicycle manufacturer grows its business, it may need to increase its direct emissions in order to decarbonize mobility. The Net Zero Initiative&nbsp;also prioritizes actions within&nbsp;the value chain - the most difficult, but also the most effective - over projects outside the value chain.</li><li>Efficient, because it enables us to map organizations' efforts precisely, and thus 1) encourages them to mobilize all the levers at their disposal; 2) direct financial flows towards the most virtuous.</li></ul>For all these reasons, we feel that this approach, which is still under development, provides some answers to the challenges raised by the crisis facing SBTi. We hope it will provide food for thought in the future.

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<a href="https://sciencebasedtargets.org/about-us#what-we-do">https://sciencebasedtargets.org/about-us#what-we-do</a>

<a href="https://www.greenbiz.com/article/sbti-yes-companies-can-use-carbon-offsets-abate-certain-scope-3-emissions">https://www.greenbiz.com/article/sbti-yes-companies-can-use-carbon-offsets-abate-certain-scope-3-emissions</a>

Employee letter reprinted in Clancy, H. (2024, April 11). Read the leaked protest letter from SBTi staff angry over new carbon offset policy. Greenbiz.&nbsp;<a href="https://www.greenbiz.com/article/read-leaked-protest-letter-sbti-staff-angry-over-new-carbon-offset-policy">https://www.greenbiz.com/article/read-leaked-protest-letter-sbti-staff-angry-over-new-carbon-offset-policy</a>It should be noted that the Board has since made it known that the principles of governance will be respected in the final decision on the terms and conditions of application.

Intensity targets involve reducing emissions per physical unit produced or per €. This option is aimed in particular at fast-growing companies and/or those making the biggest contribution to the transition, but in practice many companies are taking advantage of it.

<a href="https://sciencebasedtargets.org/reports/sbti-monitoring-report-2022">https://sciencebasedtargets.org/reports/sbti-monitoring-report-2022</a>

In other words, they have achieved 70% of the expected reduction in emissions.

See <a href="https://www.carbone4.com/expertises/resilience and https://www.carbone4.com/expertises/innovation/ifinitiative">https://www.carbone4.com/expertises/resilience and https://www.carbone4.com/expertises/innovation/ifinitiative</a>

<a href="https://www.carbone4.com/cp-emlyon-chaire-strategie">https://www.carbone4.com/cp-emlyon-chaire-strategie</a> and <a href="https://www.carbone4.com/webinaire-strategie-entreprise-urgence-climatique and https://www.ifinitiative.com/">https://www.carbone4.com/webinaire-strategie-entreprise-urgence-climatique and https://www.ifinitiative.com/</a>

In the European market, this work will in any case be made necessary by the CSRD, provided it is used as a tool for strategic rethinking and transformation, rather than simply as a regulatory compliance exercise.

Letter reprinted in Clancy, H. (2024, April 11). Read the leaked protest letter from SBTi staff angry over new carbon offset policy. Greenbiz.&nbsp;<a href="https://www.greenbiz.com/article/read-leaked-protest-letter-sbti-staff-angry-over-new-carbon-offset-policy">https://www.greenbiz.com/article/read-leaked-protest-letter-sbti-staff-angry-over-new-carbon-offset-policy</a>

See the March 2024 rules for calculating short-term targets, p. 10: https:<a href="https://sciencebasedtargets.org/resources/files/SBTi-criteria.pdf">//sciencebasedtargets.org/resources/files/SBTi-criteria.pdf</a>

Thomas, P-L. (2023, August 30). Verra, leader in carbon credits, nailed once again.&nbsp;La Croix.&nbsp;<a href="https://www.la-croix.com/Economie/Verra-leader-credits-carbone-nouvelle-fois-epingle-2023-08-30-1201280701">https://www.la-croix.com/Economie/Verra-leader-credits-carbone-nouvelle-fois-epingle-2023-08-30-1201280701</a>

<a href="https://www.net-zero-initiative.com/fr">https://www.net-zero-initiative.com/fr</a>

See the work of Group 1 in particular.

See the work of Group 2 in particular.

See the work of Group 3 in particular.

Why is the SBTi's intention to count carbon credits as emission reductions problematic? A Carbone 4 analysis

The Science Based Targets Initiative is accused of greenwashing.

Within Carbone 4, Florian works on assessing the carbon impact of companies and participates in defining their climate strategy. Florian also contributes to the development of the Carbone4 Academy, which trains economic and financial players in climate and energy issues.Before joining Carbone 4, Florian taught philosophy. He is particularly interested in contemporary work conducted in the field of environmental philosophy.&nbsp;

Florian Zito

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