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What is decarbonization?

Decarbonization is the elimination of carbon dioxide and other greenhouse gas emissions from processes, products, and services across the economy.

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What does decarbonization mean?

Decarbonization means rethinking how a business runs—across its operations and supply chains—to cut emissions and drive long-term sustainable growth.

These goals are achieved by shifting from fossil fuel-based production and materials to cleaner, more sustainable low-carbon or zero-carbon alternatives, such as renewable energy, electrification, and lower-carbon materials or products. Decarbonization presents businesses with an opportunity to reduce costs, meet regulatory requirements, protect brand reputation, and align with growing consumer and investor expectations for sustainability. These are powerful reasons for leaders across all functions to embed decarbonization as part of wider sustainability initiatives in their business strategies.

Types of emissions that contribute to decarbonization

Decarbonization means reducing or eliminating greenhouse gas emissions—carbon dioxide (CO₂), methane (CH₄), nitrous oxide (N₂O), and fluorinated gases (synthetic GHGs)—but for ease of implementation, they are expressed in CO₂ equivalents, often referred to as just “carbon,” for short.

To understand a company’s full carbon footprint, it’s important to look at the three main types of emissions, as each captures different sources of greenhouse gases across business operations and the value chain.

Scope 1 emissions are direct greenhouse gas emissions that result from activities within the company's operations, such as burning fossil fuels for heating, generating electricity, or transporting staff or materials using company-owned vehicles.

Scope 2 emissions are indirect greenhouse gas emissions associated with the consumption of purchased electricity, steam, heat, or cooling.

Scope 3 emissions are indirect emissions that occur across a company’s value chain—from the goods it purchases to how its products are used and disposed of—making them often the largest and hardest to control.

Why decarbonization matters

Sustainability is not just a regulatory obligation—it’s a central driver of long-term success in a competitive market. Reducing carbon emissions helps companies lower long-term energy costs and meet the expectations of increasingly eco-conscious customers, investors, and employees. As markets shift toward greener practices and products, businesses that proactively decarbonize position themselves to innovate faster, reduce risk, and gain a competitive edge in a low-carbon economy.

Here are some of the factors influencing business decarbonization decisions:

Regulatory pressure
A dynamically growing number of global sustainability regulations and standards mandate compliance. These include emissions reporting required under regulations such as the EU Corporate Sustainability Reporting Directive (CSRD), the International Sustainability Standards Board (ISSB) IFRS Foundation Sustainability Disclosure Standards S1 and S2, California SB 253, or the EU Sustainable Finance Disclosure Regulation (SFDR), or under carbon pricing instruments like Emissions Trading Schemes (ETS) and Carbon Border Adjustment Mechanism (CBAM), which require reporting and paying for emissions.

Some—including CRSD, CSDDD, and IFRS—demand that companies disclose emissions reduction targets and transition plans, if they have them. In the case of CRSD, companies that don’t have a plan but do have measurable emissions identified are required to explain why. If they don’t act upon these mandates, companies may incur penalties and lose access to international markets.
Cost of carbon
The rising cost of emissions makes decarbonization a financial imperative. More than 70 countries now have carbon pricing initiatives, such as ETS and CBAM, with more expected to follow (such as the UK CBAM, set to start in 2027).
Investor and stakeholder demand
Investors increasingly use ESG criteria in funding decisions. They want transparency into how companies are managing environmental risks by means of a transition plan to reduce emissions. Employees, customers, and regulators are demanding ever-higher standards of sustainability, as are business partners who increasingly seek low-emissions suppliers to support their own regulatory liability and/or decarbonization strategies.
Operational risk
Climate-related risks such as supply chain disruption, resource scarcity, and extreme weather events pose direct threats to business continuity and cost structure—risks that can be mitigated through decarbonization and climate risk management strategies.
Innovation and growth
Decarbonization fosters innovation, enhances operational efficiency, and opens up opportunities for green products and services, potentially allowing businesses to charge a “green premium.”
Brand and talent appeal
Companies with strong decarbonization strategies enhance their brand and are better-positioned to attract values-driven talent.

How to decarbonize

Wanting to decarbonize is one thing but putting it into action is quite another. Every business needs a clear decarbonization strategy to manage risks, capture new market opportunities, and stay ahead of compliance requirements.

Decarbonization strategies

Businesses can approach decarbonization through a mix of operational and strategic initiatives, including:

Energy efficiency
Upgrade equipment, systems, and processes to use less energy and use power purchase agreements (PPAs), on-site renewable installations, or green energy suppliers to reduce emissions.
Renewable energy transition
Shift from fossil fuels to solar, wind, and other clean sources.
Electrification of operations
Replace fossil fuel-powered vehicles and machinery (like gas boilers or diesel vehicles) with electric alternatives. Swap out combustion-based equipment with electric alternatives to reduce emissions.
Supply chain emissions management
Encourage, or even require, suppliers to adopt lower-emission practices, as indirect emissions can be the largest share of a carbon footprint. Companies must engage suppliers, set decarbonization targets, and track supplier emissions to reduce carbon in the supply chain.
Product redesign and circular economy
Switching from high-emitting materials to low-emitting materials improves a product’s carbon footprint, facilitated through product lifecycle management. Investing in circular business models also helps reduce waste and emissions.
Carbon pricing and budgeting
Setting an internal carbon price and establishing carbon budgets are powerful strategies for driving decarbonization. By assigning a financial value to emissions, organizations can factor the cost of carbon into investment decisions, operational planning, and supply chain management. Carbon pricing incentivizes low-carbon choices and helps prioritize projects that reduce emissions, while carbon budgets set clear limits on allowable emissions over time, holding teams accountable and aligning actions with sustainability targets.
Data-driven decision making
Implement ESG data platforms that provide transparency, ensure data quality, and support regulatory reporting. Integrating sustainability data into ERP systems allows CFOs and other leaders to make better-informed decisions. Using advanced carbon accounting tools, which combine sustainability and financial data for granular analysis (for example, at the cost- or profit-center level), enables strategic decision making.
Carbon offsets and capture
For emissions that are hard to abate, companies can consider investing in certified, verifiable carbon-offset projects (like reforestation or direct air capture) to neutralize residual emissions—but use these as a bridge rather than a long-term crutch.

Decarbonization challenges

Despite myriad decarbonization strategies and an urgent need to implement them, business leaders face significant challenges when figuring out how to decarbonize their business.

Data quality and transparency
Many organizations struggle to gather reliable emissions data, especially around Scope 3 emissions. Without accurate data, it’s nearly impossible to identify, implement, and monitor emissions or make strategic reductions that go beyond obvious “carbon hotspots.”
Regulatory complexity
The global tapestry of carbon taxes, emissions trading models, and sustainability reporting obligations changes rapidly. Keeping up with the ever-evolving regulatory landscape is daunting, particularly for multinational organizations.
Cross-functional integration
Effective decarbonization requires collaboration across departments—finance, procurement, operations, and IT—which is challenging without centralized systems.
Upfront costs and ROI visibility
Investments in decarbonization can be capital-intensive. Businesses need clear visibility into the return on investment, which depends on carbon pricing mechanisms, avoided costs, and green premiums.
Change management and culture
Shifting organizational priorities and culture toward sustainability requires leaders to champion change, upskill teams, and embed sustainability into KPIs.

Decarbonization challenges differ by role

Across all lines of business, leaders are embedding sustainability into their core strategies. The need to manage risk and regulation has evolved, and each role—whether it’s the CFO managing compliance costs, the COO ensuring resilient supply chains, or the CIO integrating sustainability data—faces individual challenges.

The growing role of CFOs and COOs

While every executive has their own challenges, the role of the CFO in particular is evolving due to sustainability. CFOs must ensure compliance with new regulatory requirements, proactively manage risks impacting business finances, and understand the relationship between cost and sustainability measures to guide strategic decision making.

Sustainability initiatives are increasingly tied to financial metrics, such as cost savings from energy efficiency, risk management related to climate change, and ESG investment. Financial leaders need insights from financial and non-financial data to improve decision making for long-term, sustainable growth.

The COO plays a critical role in advancing sustainability and decarbonization by embedding these initiatives into core operations, supply chains, and business processes. They oversee efforts to reduce emissions—particularly Scope 3 emissions—by collaborating with suppliers, improving operational efficiency, and integrating sustainable practices across production, logistics, and procurement. Balancing sustainability with cost and performance, the COO ensures that decarbonization initiatives are practical, scalable, and aligned with business objectives, while also enhancing resilience to environmental and regulatory risks.

Decarbonization technology

Technology plays a pivotal role in how companies decarbonize. Innovations in digital platforms, analytics, AI, and clean technologies can help reduce emissions while boosting operational efficiency.

ERP-centric sustainability platforms

Platforms that combine financial and carbon data allow businesses to manage and analyze emissions alongside traditional financial metrics, helping enable decisions that balance cost and carbon.

AI and machine learning

AI solutions help identify emission patterns, simulate decarbonization scenarios, and optimize operations. For example, AI can help forecast demand more accurately, reducing overproduction and energy waste. It can also help reduce manual tasks related to emissions management, freeing up valuable time to dedicate to decarbonization activities instead.

IoT and smart devices

Sensors and IoT devices enable real-time tracking of energy use and emissions. These tools can automate efficiency improvements, such as adjusting HVAC systems or flagging wasteful machinery usage.

Blockchain for ESG transparency

Blockchain enhances traceability in the supply chain, helping validate emissions data and ethical-sourcing claims. It improves transparency for both regulators and stakeholders.

Digital twins

Digital replicas of physical assets or processes can simulate carbon-reduction strategies, enabling companies to test approaches virtually before implementing them in the real world.

Carbon accounting software

These tools support regulatory compliance, calculate carbon footprints, support carbon data exchange, and enable carbon accounting and planning alongside financials. Integrating them with enterprise systems ensures efficiency, consistency, and audit-readiness.

Decarbonization is a business imperative

Decarbonization has become a business-critical effort that increasingly lies at the intersection of technology, data, regulation, and strategic leadership. By integrating sustainability into core financial systems, embracing decarbonization technology, and addressing barriers like availability of granular data and regulatory complexity, businesses can meet their climate goals yet still drive growth. An intelligent decarbonization strategy enables not just compliance—but resilience, innovation, and long-term value in a rapidly changing world.

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FAQs

What’s the difference between decarbonization and carbon neutrality?

Decarbonization is the process of reducing or eliminating greenhouse gas emissions from activities like energy production, transportation, and manufacturing.

The EU defines carbon neutrality as “a balance between emitting carbon and absorbing carbon from the atmosphere in carbon sinks. A carbon sink is any system that absorbs more carbon than it emits.” Natural carbon sinks include soil, forests, and oceans. However, currently there are no artificial carbon sinks capable of removing carbon from the atmosphere on a large scale.

To summarize, a company reaches carbon neutrality when it offsets or eliminates as much carbon as it emits into the atmosphere. While decarbonization/emission reduction is one path to carbon neutrality, offsetting emissions through verifiable projects such as reforestation or direct air capture is another. The ideal strategy is to decarbonize/reduce as much as possible, then offset the remaining hard-to-abate emissions.

How long does decarbonization take?

The timeline for decarbonization varies widely depending on the industry, goals, and investment level. Effective decarbonization strategies should always be time-bound and differentiate between what can be done short-term, mid-term, and long-term. For example, many organizations work with one to three years, then 2030 and 2050 as timelines. For example, the 1.5° C target in the Paris agreement as well as related targets in the EU Green Deal set 2050 as the net-zero year for many, with sub-targets on the way there (such as reducing emissions by x% until 2030, then 2040, and finally reaching a 90% reduction by 2050, with 10% remaining to offset until net zero).

What are the biggest barriers to decarbonization?

Key obstacles to decarbonization include, first and foremost, a lack of transparency into data. Other factors are high upfront costs, legacy infrastructure, limited access to clean technologies, a lack of regulatory clarity, and shortage of organizational expertise or incentives. In some sectors, like heavy industry and aviation, technical limitations also make decarbonization especially challenging.

Is decarbonization only for big companies?

While large enterprises often have more resources and face greater scrutiny, small- and mid-sized businesses also play a crucial role. They can decarbonize by improving energy efficiency, sourcing renewable power, optimizing supply chains, or becoming a larger company’s low-carbon supplier. Many governments and sustainability programs offer support to help businesses of all sizes progress toward their decarbonization goals.

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