The Difference Between Net Zero and Carbon Neutral
These two terms are used interchangeably in a lot of business communications. They are not the same thing, and the distinction matters more than ever.
Carbon neutral means that the carbon emissions your business produces are balanced by an equivalent amount of carbon being removed from the atmosphere elsewhere, typically through the purchase of carbon offsets. In conjunction with a credible carbon reduction strategy it’s a valid milestone, but on its own it does not require your business to have significantly reduced its actual emissions. You can, in theory, continue producing emissions at the same rate and simply offset them to achieve neutrality, therefore reducing emissions so you’re only offsetting any remaining/unavoidable emissions after your decarbonisation activities is key to credibility.
Net zero requires something more formal. It means reducing your emissions across Scopes 1, 2, and 3 to a level consistent with scientific consensus for limiting global warming to 1.5 degrees Celsius, and then, once a 90-95% reduction has been achieved, balancing only the final residual emissions that genuinely cannot be eliminated. The emphasis is on deep, real reduction first, with offsets used responsibly to address what remains at the end.
For SMEs, carbon neutrality done correctly is often a credible and meaningful first milestone on the road to net zero. What matters is that you are honest about which one you are claiming, and that any offset use is clearly disclosed and of verified quality.
Regulators, buyers, and investors increasingly understand this distinction. Conflating the two in your communications is a compliance risk under the Green Claims Code, which we cover in depth in Part 4 of this series.
What Makes a Target Credible?
A credible net zero target shares several characteristics. Whether you are setting yours independently or looking to align with a recognised framework, these are the principles that matter.
It is based on your actual measured footprint. Targets set before measurement is complete is guess work. Your reduction commitments should be calculated relative to your verified baseline. That baseline year becomes your reference point for all future progress reporting.
It covers all three Scopes. A target that only addresses Scope 1 and 2 will not be treated as credible by most informed stakeholders. Scope 3 can be phased in over time, but your target should acknowledge it and include a plan to address it.
It includes a clear timeline. “We will reach net zero” means very little without a date. Targets need an end point and, ideally, interim milestones so that progress can be assessed along the way.
It separates reduction from offsetting. A credible target makes clear how much of the reduction will come from actual emission reductions within the business and how much from offset use. A target that relies entirely on offsets is not a net zero target in any meaningful sense.
It is publicly committed. A target that exists only in an internal document is not a target. Publishing it, with the methodology behind it, is what creates accountability and allows it to be verified over time.
Science-Based Targets: Do They Apply to SMEs?
You may have heard of science based targets (SBTs) and the Science Based Targets initiative (SBTi), which provides the most widely recognised framework for corporate net zero commitments.
Formally validated SBTi targets are primarily designed for larger organisations, though the framework is evolving. For SMEs, the SBTi has published guidance specifically addressing smaller businesses, recognising that a proportionate approach is needed.
Whether or not you pursue formal SBTi validation, the principles behind science based targets are worth understanding and applying:
Your reduction targets should be aligned with what the climate science says is required, not just what is convenient or commercially comfortable. A reduction of 5 per cent over ten years may feel ambitious internally, but it will not hold up as a credible commitment in a market where 1.5-degree alignment is the emerging standard.
For most SMEs, aiming for a 50 per cent reduction in absolute emissions by 2030 (from your baseline year) and net zero by 2050 at the latest is broadly consistent with what science based frameworks require. Your specific target will depend on your sector, the nature of your operations, and your ability to address Scope 3.
Setting Your Interim Milestones
A 2040 or 2050 target is important, but it is not what drives action today. Interim milestones do.
Breaking your longer term target into shorter commitments makes the journey manageable and creates regular accountability checkpoints. A typical structure for an SME might look like this:
Year 1 to 2: Establish your verified baseline, complete your first full carbon footprint report, identify your highest impact reduction opportunities, and set your formal targets.
Years 2 to 5: Implement your priority reduction actions (energy efficiency, renewable energy transition, travel policy, supplier engagement). Aim for a measurable reduction against your baseline, typically 10 to 20 per cent.
Years 5 to 10: Deepen your Scope 3 supply-chain engagement. Address higher cost, longer lead reduction measures. Review and refresh your targets in line with your actual trajectory.
Beyond: Continue reducing residual emissions. Transition offset use toward high quality removals rather than avoidance credits. Maintain public reporting throughout.
These milestones will look different for every business. What matters is that they are specific, documented, and reviewed annually.
How Emissions Are Calculated
Once you have your activity data, those figures are multiplied by emissions factors to calculate your CO₂e total. Emissions factors are conversion figures published by recognised sources, including the UK Government GHG Conversion Factors for Company Reporting, issued annually by the Department for Energy Security and Net Zero (DESNZ). These factors show, for example, how many kilograms of CO₂e are associated with each unit of energy, fuel, travel, waste or other activity, including electricity consumed from the UK grid.
You don’t need to know these figures off the top of your head. A good carbon management platform or consultant will apply the correct, up-to-date factors to your data. What matters is that you understand the principle: activity data multiplied by emissions factors equals your carbon footprint.
The Role of Offsets in a Credible Target
Offsets have their place in a net zero strategy, but that place is clearly defined. They are not a substitute for reduction. They are a tool for addressing the emissions that genuinely cannot be eliminated.
When you set your targets, be explicit about your approach to offsets:
Which emissions do you expect to be unavoidable in the long term? These are your residual emissions, and they are the legitimate use case for offsetting.
What kind of offsets will you use? Quality matters enormously. Not all carbon credits are equal. Part 5 of this series covers the criteria for choosing high-quality offsets in detail.
At what point in your journey will you begin using offsets? A business that offsets everything from day one, while making no real reductions, is using offsetting as a shield rather than a tool. Credible practice means prioritising reduction.
Being clear about all of this in your target setting documentation is good practice and it protects you from the growing risk of greenwashing allegations.
Common Target Setting Mistakes to Avoid
Setting a target without a baseline. Without measurement, there is no starting point, and without a starting point, there is nothing to measure progress against. Sequence matters.
Committing to net zero without a roadmap. A target date is not a plan. If you cannot describe the actions that will get you there, the target is not credible.
Focusing only on what is easy to reduce. The areas where reduction is hardest are often where the biggest emissions sit. Scope 3, in particular, requires intentional engagement rather than avoidance.
Setting targets in isolation. Your finance director, procurement lead, and operations team all need to understand and own parts of your net zero plan. A target that lives only with the sustainability lead will stall.
Treating targets as final. The regulatory landscape, science, and your business will all change. Build in annual reviews and be prepared to strengthen your commitments as your understanding improves.
Your Action Checklist for Part 2
- Review your baseline footprint data from Part 1 and confirm your reference year.
- Research the SBTi SME guidance and assess whether full and formal validation or simply confirmation of alignment with the standard is appropriate for your business.
- Draft your headline net zero target, including a timeline and scope coverage.
- Define your interim milestones for the next two, five, and ten years.
- Document your approach to offsets, specifying that reduction comes first.
- Identify who in the business owns each element of the reduction plan.
- Begin the process of making your targets public, whether in a Carbon Reduction Plan, on your website, or in your annual reporting.
What Is Coming Next
Part 3 of the SME Net Zero Series gets into the practical detail of what you can actually do to reduce your emissions. From quick wins on energy and travel to longer term changes in procurement and supply chain, we set out the actions that make the biggest difference for businesses of your size, without requiring a large budget or a specialist team.
Setting credible targets requires reliable data. NCZ provides the independent verification and expert guidance that gives your targets credibility with customers, investors, and regulators alike. Talk to our team about how we can help you build a target framework that works.