Carbon Offsetting Explained

A carbon offset is a financial instrument which represents a reduction in greenhouse gas emissions. Although there are six primary categories of greenhouse gases, carbon offsets are measured in metric tons of carbon dioxide-equivalent (CO2e). One carbon offset represents the reduction of one metric ton of carbon dioxide, or its equivalent in other greenhouse gases.

There are two primary markets for carbon offsets. In the larger compliance market, companies, governments, or other entities buy carbon offsets in order to comply with caps on the total amount of carbon dioxide they are allowed to emit. In 2006, about $5.5 billion of carbon offsets were purchased in the compliance market, representing about 1.6 billion metric tons of CO2e reductions.

In the smaller voluntary market, individuals, companies, or governments purchase carbon offsets to mitigate their own greenhouse gas emissions from a variety of sources. Examples of such sources include: transportation, electricity use and air travel.

In 2006, about $91 million of carbon offsets were purchased in the voluntary market, representing about 24 million metric tons of CO2e reductions.

Offsets are typically generated from emissions-reducing projects. The most common project types are renewable energy projects; such as wind farms, biomass energy, or hydroelectric dams. Other common project types include; energy efficiency projects, the destruction of industrial pollutants or agricultural byproducts, destruction of landfill methane, and forestry projects.

Purchase and withdrawal of emissions trading credits also occurs, which creates a connection between the voluntary and regulated carbon markets.

Carbon offsetting, as part of a "carbon neutral" lifestyle, has gained appeal and momentum mainly among consumers in western countries who have become aware and concerned about the potentially negative environmental effects of energy-intensive lifestyles and economies. The Kyoto Protocol has sanctioned offsets as a way for governments and private companies to earn carbon credits which can be traded on a marketplace. The protocol established the Clean Development Mechanism (CDM), which validates and measures projects to ensure they produce authentic benefits and are genuinely "additional" activities that would not otherwise have been undertaken. Organizations that have difficulty meeting their emissions quota are able to offset by buying CDM-approved Certified Emissions Reductions. The CDM encourages projects that involve, for example, renewable energy production, changes in land use, and forestry, although not all trading countries allow their companies to buy all types of credit.

The commercial system has contributed to the increasing popularity of voluntary offsets among private individuals, companies, and organizations as well as investment in clean technologies, clean energy and reforestation projects around the world. Offsets may be cheaper or more convenient alternatives to reducing one's own fossil-fuel consumption. However, some critics object to carbon offsets, and question the benefits of certain types of offsets.

Carbon offsets have several common features:

• Vintage: An offset's vintage refers to the year in which the carbon reduction takes place.

• Source: Source refers to the type of project or technology used in offsetting the carbon emissions. Project types can include land-use, methane, biomass, renewable energy and industrial energy efficiency, among others. Different project types have different secondary benefits (or "co-benefits"). For example, projects that reduce agricultural greenhouse gas emissions can also improve water quality by reducing fertilizer usage.

• Certification regime: Certification refers to the system or protocols under which an offset is certified and registered. Different methodologies are used for measuring and verifying emissions reductions, depending on project type, size and location, for example; the Chicago Climate Exchange uses one set of protocols and the CDM another.

In the voluntary market, a variety of industry standards exist including the Voluntary Carbon Standard 2007, Green-e Climate, CDM Gold Standard, VER+, ISO 14064 / 65 and Environmental Resources Trust, are all emerging to provide levels of verification and quality assurance. Third-party standards provide the credibility that a carbon offset is real and backed by other organizations and experts.