Net Zero Strategies in the Automotive Sector - Thematic Research

Net Zero Strategies in the Automotive Sector - Thematic Research

Summary

The journey to net zero has begun, yet far more work needs to be done. Original equipment manufacturers (OEMs) are far away from net zero. In the auto sector, most OEMs aim to reach net zero by 2050, but emissions reporting and standards remain weak. Incoming regulatory pressure on emissions will require companies to improve their emissions reporting and curate more pragmatic net-zero strategies.

Emissions from business operations (Scope 1 and 2) only make up around 1% of total emissions. The transition to using renewable energy is the best way to reduce Scope 1 and 2 emissions. This can be achieved through directly installing renewable energy sources onsite or purchasing electricity from renewable energy providers.

Value chain emissions (Scope 3) comprise 99% of total emissions. For 2022, only 12 of the 20 companies analyzed reported Scope 3 emissions, with half of those reporting an increase in emissions. Most of these arise from the production of purchased goods and services and the use of sold vehicles. The sector’s main decarbonization strategy is the electrification of vehicle fleets. Yet, most automakers are behind on their electrification targets.

Electrification is not a one-and-done solution. The production of electric vehicles (EVs) emits more emissions than the production of internal combustion engine (ICE) vehicles. Automakers must adopt a circular business model and increase the use of sustainable materials. This will help automakers reduce the environmental impact of EV production.

Tesla has successfully offset its operations through carbon credits received through its energy business. However, most OEMs should avoid investing in carbon offsets. Carbon offset projects are facing increased scrutiny from environmental activists over their effectiveness in reducing global emissions. Investment in clean technologies is a far more effective method of sustainably reducing net carbon emissions, as the carbon offset market will become more heavily regulated.

Key Highlights

The journey to net zero has begun, yet far more work needs to be done. Original equipment manufacturers (OEMs) are far away from net zero. In the auto sector, most OEMs aim to reach net zero by 2050, but emissions reporting and standards remain weak. Incoming regulatory pressure on emissions will require companies to improve their emissions reporting and curate more pragmatic net-zero strategies.

Emissions from business operations (Scope 1 and 2) only make up around 1% of total emissions. The transition to using renewable energy is the best way to reduce Scope 1 and 2 emissions. This can be achieved through directly installing renewable energy sources onsite or purchasing electricity from renewable energy providers.

Value chain emissions (Scope 3) comprise 99% of total emissions. For 2022, only 12 of the 20 companies analyzed reported Scope 3 emissions, with half of those reporting an increase in emissions. Most of these arise from the production of purchased goods and services and the use of sold vehicles. The sector’s main decarbonization strategy is the electrification of vehicle fleets. Yet, most automakers are behind on their electrification targets.

Electrification is not a one-and-done solution. The production of electric vehicles (EVs) emits more emissions than the production of internal combustion engine (ICE) vehicles. Automakers must adopt a circular business model and increase the use of sustainable materials. This will help automakers reduce the environmental impact of EV production.

Tesla has successfully offset its operations through carbon credits received through its energy business. However, most OEMs should avoid investing in carbon offsets. Carbon offset projects are facing increased scrutiny from environmental activists over their effectiveness in reducing global emissions. Investment in clean technologies is a far more effective method of sustainably reducing net carbon emissions, as the carbon offset market will become more heavily regulated.

Scope

Net zero means cutting greenhouse gas emissions (GHG) to as close to zero as possible, with any remaining emissions then “offset”. Firms that achieve net zero emissions may say they are “carbon neutral”.

Companies typically first aim to achieve net zero operations by reducing their Scope 1 and 2 emissions and purchasing offsets.

Companies can then achieve net zero value chains by reducing their Scope 3 emissions and purchasing offsets to offset the remainder. For most companies, Scope 3 emissions are the largest and most difficult to measure and reduce. Emissions are offset by supporting projects that reduce emissions or remove greenhouse gases from the atmosphere. Companies are under pressure to cut emissions as countries aim to achieve their climate commitments. Every major economy has signed up to the Paris Agreement, the global climate agreement that commits signatories to keep global warming well below 2C above pre-industrial levels.

Reasons to Buy

Understand the impact of the ESG theme in the automotive sector. Access the latest environmental and emissions data in the automotive sector. Identify the leading net zero strategies automotive companies are investing in. Understand what leading players are doing in the ESG theme.