Measuring corporate Paris Compliance using a strict science-based approach

This paper addresses how to rigorously translate the Paris Agreement’s global temperature objective (well-below 2°C, pursuing 1.5°C) into company-level, science-based decarbonisation targets and assessments. The authors argue that many firms are not reducing emissions sufficiently and that inconsistent base years, varied methodologies, and limited regulatory pressure undermine comparability and accountability. They propose a strict framework to define and operationalise Paris Compliance for companies, focusing on consistency with Paris-aligned pathways, a common early base year (2015 or earlier), and robust metrics to track absolute emissions against company-specific carbon budgets. The purpose is to provide companies, investors, and other stakeholders with a defensible, comparable approach for assessing alignment with Paris goals and understanding transition risks linked to misalignment.

The study reviews existing methods for allocating global carbon budgets to companies: the Sectoral Decarbonisation Approach (SDA), Greenhouse gas Emissions per Unit of Value Added (GEVA), Absolute Contraction Approach (ACA), and the Context-based Carbon Metric (CSO). It evaluates them against proposed compliance conditions. SDA (using IEA pathways) and CSO meet the two necessary conditions (Paris-consistent pathway and base year ≤2015, with SDA depending on IEA scenario base), while CSO also incorporates differentiated responsibilities. GEVA and ACA have limitations: GEVA’s pathway consistency is unclear and ACA fixes equal percentage reductions irrespective of context. The paper also discusses initiatives assessing company alignment (Transition Pathway Initiative and ACT), noting they inherit shortcomings from SBTi (flexible base years, limited target recalculations when companies deviate) and add transparency issues. Prior work shows base-year choice materially affects company carbon budgets and that many IAM scenarios involve budget overshoot and later engineered drawdown, complicating alignment and comparability.

The authors define Paris Compliance via two necessary conditions and one desirable condition for any corporate emissions allocation method: (1) the underlying global/regional decarbonisation pathway must be Paris-consistent (peaking ASAP, well-below 2°C and pursuing 1.5°C), with transparent assumptions; (2) a common base year of 2015 or earlier, consistent with the underlying pathway, enabling fair comparison and accountability for post-Paris emissions; and desirable (3) account for common but differentiated responsibilities. They further specify operationalisation requirements: (i) update company carbon budgets and decarbonisation pathways annually using realised variables (e.g., actual market share); (ii) define a mandatory re-alignment pathway if targets are missed so cumulative emissions remain within the company’s budget; plus minor requirements (iii) treat mergers as if firms had been combined since the base year; (iv) allow new companies time to establish market share before applying constant reduction rates to net zero. To demonstrate, they construct Paris-Compliant Pathways (PCPs) using the SDA and the IEA B2DS pathway (base year 2014), calculating both intensity-based and absolute cumulative emissions pathways. PCPs are defined with actual market share to date and projected market share thereafter. If a company deviates from its PCP, a re-alignment PCP is computed that accelerates decarbonisation to stay within the budget. Three performance metrics are introduced: Metric 1 (Performance to Date) compares actual cumulative emissions since the base year with the PCP cumulative emissions; Metric 2 (Projected Performance) includes 2a Estimated Year to Finish (EYF) the carbon budget under a projection, 2b remaining positive-emissions production at EYF, and 2c degree of budget exceedance by the year the company should reach net-zero intensity; Metric 3 (Re-alignment Decarbonisation Rate) quantifies the factor by which future decarbonisation must accelerate relative to the original PCP if the company has underperformed. For electricity, a “maximum action” scenario projects asset operation to announced closure with replacements by zero-carbon capacity and constant market share; for data-poor sectors (cement), projections use geometric trends in intensity. Sample and data: Ten largest Australian electricity generators (2014 activity) using AEMO NEMReview for generator-level activity and emissions (aggregated to firm) for 2014–2021; IEA B2DS sectoral intensities and activities from Energy Technology Perspectives 2017; ten global cement producers (2014–2020) using Refinitiv Datastream for scope 1–2 emissions and intensities, deriving production and scope 1 intensities. Calculations and figures were produced in Excel and R.

- Applying the proposed Paris-Compliant Pathways and metrics to ten Australian electric utilities and ten global cement companies shows that all but one company are not currently Paris-compliant. - Australian electricity sector: In 2021, 9 of 10 companies had exceeded their PCP. Under a “maximum action” projection from 2021, all but two are expected to finish their carbon budgets before 2035 and exceed their budgets by roughly 1.2–3.0 times by 2050. Engie is Paris-compliant due to early retirement of coal assets (pre-2017), and under maximum action is not expected to exceed its budget; Origin is not currently on track but is not expected to exceed its budget due to planned closures. - Cement sector: All ten companies exceeded their PCP to date and are projected to exceed their carbon budgets by around 2046. - Re-alignment needs: Most electric utilities (all but two) and all cement companies must increase decarbonisation rates between about 1.01x and 6.6x compared to the rate required had they followed their PCP since 2014. - Detailed example (AGL): By 2021, cumulative emissions were 120% of the PCP (exceedance of 57 MtCO2). Under maximum action, EYF (budget exhaustion) is 2030, with 33.3 million MWh of positive-emissions production remaining at EYF, and projected 2050 emissions at 144% of the company’s budget. Immediate re-alignment requires a 1.77x acceleration of decarbonisation; delaying re-alignment five years implies needing 4.14x acceleration post-2027. - Each year of delayed action increases required decarbonisation rates, escalating transition risks and potential stranding of assets.

The findings demonstrate that strict, science-based conditions and operational requirements are essential to accurately assess and compare corporate alignment with the Paris Agreement. By enforcing a common early base year and Paris-consistent pathways, PCPs prevent hidden overshoot and ensure accountability for post-2015 emissions. The application across electricity and cement shows widespread misalignment, quantifies by how much companies have overshot their budgets, and specifies how fast they must decarbonise to re-align. This directly informs stakeholders about the scale and urgency of adjustments needed and links misalignment to heightened transition risks, including stranded assets, technology obsolescence, legal exposure, and reputational damage. The PCP metrics enable consistent tracking and comparability, supporting decision-making by investors, regulators, and companies to manage and reduce transition risk while meeting climate goals.

The paper introduces a strict framework to measure corporate Paris Compliance: two necessary conditions (Paris-consistent pathway; base year 2015 or earlier), a desirable equity condition, and clear operationalisation rules (annual updates for realised variables, mandatory re-alignment, and special cases for mergers and new entrants). It operationalises this framework via Paris-Compliant Pathways built on the SDA and IEA B2DS, and proposes three metrics to quantify performance, projections, and required re-alignment. Applied to major firms in electricity and cement, the approach reveals pervasive non-compliance and large required accelerations in decarbonisation. The authors call on stakeholders to adopt consistent, transparent methods to ensure the Paris carbon budget is met and to fairly compare firms. Future work should broaden acceptable underlying pathways while maintaining strict criteria, address overshoot and negative emissions assumptions, improve data availability and transparency (especially in data-poor sectors), and incorporate differentiated responsibilities more fully across geographies and sectors.

- Methodological reliance on SDA entails “grandfathering,” granting higher budgets to initially higher-intensity firms; equity considerations are limited. - The IEA B2DS pathway assumes significant mid/late-century CCS and negative emissions, implying budget overshoot and later drawdown; feasibility and sectoral allocation are uncertain. B2DS aligns with a 50% chance of 1.75°C, a conservative interpretation of Paris goals. - Limited availability of modelled pathways that meet the strict criteria (Paris-consistent and base year ≤2015) constrains choice; different companies aligning to different scenarios would hinder aggregate consistency. - Data availability and quality, especially for sectors like cement, necessitate simplified projections (e.g., geometric trends) and can affect precision; SDA requires both production and emissions data. - Targets often depend on projected variables (e.g., market share); discrepancies between projections and realised values require continual recalculation, adding uncertainty.