By Professor Jonatan Pinkse
Successful decarbonisation will depend on companies no longer using fossil fuels. While the rhetoric of moving to net zero is now commonplace, the practical challenges to reach this target can range from hard to sometimes seemingly impossible.
Many areas of business such as steel, cement, shipping and airlines are so dependent on oil and gas products that it seems unfathomable what the affordable and scalable zero-carbon alternatives could be. At the same time, companies themselves are fuelling the hype of potential solutions like green hydrogen, sustainable aviation fuels, or synthetic fuels by overpromising their near-term impact for decarbonisation. How, then, can business leaders narrow the gap between creating impractical expectations and achieving realistic goals?
To pave the way for a route to net zero, companies have three options – pursue innovation in climate tech, phase out carbon-intensive activities, and offset residual emissions – but each comes with several warnings, too.
Innovating in climate tech
Relentlessly pursuing innovation is the most logical route to net zero. Replacing fossil fuels is a phenomenal challenge, but companies that crack this nut first will be thriving in their industry.
It is a highly risky option, though. In many industries it remains uncertain which low-carbon technology will be the winner. Too often, potential solutions are talked about as if they are already being used at scale, creating unrealistic expectations about their impact for emissions reductions.
As a result, climate tech innovations can quickly go from boom to bust, doing considerable harm to investor confidence. Across industries, bets have been put on electrification through renewables like solar and wind, green hydrogen for industrial applications, or carbon capture, usage and storage (CCUS). These innovations all face significant barriers common to immature technologies such as insufficient investment, difficulties to scale and bring down costs, and unfavourable regulations.
Companies with an entrepreneurial mindset can transform such barriers into business opportunities. In the steel industry, there are high hopes for using hydrogen to replace coke ovens. In the north of Sweden, start-up Stegra hopes to benefit from the region’s low-cost green electricity to produce green hydrogen, iron and steel. Interestingly, this startup has used orders from customers as collateral to obtain funding from investors.
In business-to-business markets, customer demand is growing as companies face pressure to reduce carbon emissions along their supply chain (so-called Scope 3 emissions). Car and construction companies might be willing to pay a price premium for solutions like green steel when it makes their own products greener and more attractive by having fewer ‘embodied emissions’.
A key lesson here is for business leaders to innovate in technologies with concrete orders from real customers. There is also a need to be transparent and realistic about when low-carbon solutions will start contributing to lower emissions.
Phasing out carbon-intensive activities
Phasing out is an option that is often forgotten as a form of decarbonisation because it involves companies moving away from business-as-usual and discontinuing what they do best. Ending profitable product lines will be uncomfortable. However, when these are no longer compatible with net zero, they should be discontinued.
In the UK, coal-based power generation has followed this pathway, as seen by the decision of Drax in 2023 to switch from coal to biomass in Drax Power Station. Phasing out does not have to apply to major product lines only. Companies should meticulously scrutinise which low-value, carbon-emitting activities can be eliminated from their operations.
The Danish utility Ørsted has become the poster child of the fossil fuel phase-out by divesting its oil and gas production. However, most of these activities were offloaded to other companies rather than discontinued. There is a risk here that carbon-intensive activities continue, just under different ownership. Moreover, if companies decide to offload activities, yet continue procuring the associated products and services from suppliers, they have merely transformed direct (Scope 1) into indirect (Scope 3) emissions. The decision of Petroineos to close its refinery in Grangemouth in Scotland could be seen as an example of this, as the company plans to transform the refinery into a sea terminal to import fossil fuels refined elsewhere.
Then again, when leading companies phase out carbon-intensive activities, they send a signal to investors that the sector’s future priorities lie elsewhere. A key lesson is that phasing out can be effective for decarbonisation but only when it leads to ending carbon-intensive activities, rather than offloading them.
Offsetting residual emissions
Offsetting has become the most popular option to achieve net zero because it can be achieved in the quickest way. At least on paper. Many companies have unscrupulously decided to claim net zero by buying carbon credits in the voluntary carbon market without paying much attention to what these credits represent.
The original idea behind net zero was to use offsets only for residual emissions (those that remain after all other options have been exhausted). Many companies have instead started their net zero journeys with offsetting. To improve offsetting practices, the Oxford Offsetting Principles were developed. They highlight the need for investing in projects for emissions removal and storage instead of emissions avoidance. A failure to follow such principles can be damaging when it leads to accusations of greenwashing.
The experience of airline easyJet illustrates the risks of putting offsets at the centre of net zero plans. Greenpeace accused easyJet and other airlines of relying on projects with questionable methodologies to measure emission reductions. Eventually, easyJet decided to abandon its offsetting scheme in 2022 as such greenwashing accusations were harming its reputation. In 2024, Shell also decided to abandon its offsetting business. Yet, while easyJet chose to invest in technological innovations such as hydrogen for aircrafts, Shell refocused on oil and gas to boost revenues and profits.
The question remains if offsetting should be part of a strategy for net zero. Offsetting could play a role for companies where innovation will take long and phasing out is no option. But the key lesson here is that offsetting needs to follow strict principles to safeguard the quality of the carbon credits and prevent greenwashing accusations.
Monitoring evidence while making progress
Depending on the near-term availability and government support for low-carbon alternatives in their industry, companies will likely strike a different balance in using these options. The political landscape can change rapidly as right-wing populists scale back government support for climate action. People’s concerns about climate impacts does not always translate into demand for low-carbon products. And each option can have unintended consequences. In the 2010s, enthusiasm for biofuels faded due to concerns about the impact on deforestation and global food prices.
A pragmatic route to net zero means that companies keep monitoring the latest evidence about the market readiness of low-carbon technologies, the possibility of phasing out of no longer essential carbon-intensive activities, and offsets leading to long-term removal of emissions.
About the Author
Professor Jonatan Pinkse is Professor of Sustainable Business and Director of the Centre for Sustainable Business at King’s Business School. The focus of his work and research is on helping firms make strategic decisions to create a sustainable economy and deal with tensions between issues and actors.
#Strategic #Guide #Executives