A carbon offset is a credit for emissions reduction given to a party to compensate for emissions. Buying offsets helps individuals and organizations account for the environmental costs of their business processes. In many cases, dependent on some regulatory environments, carbon offsets do not have to be applied locally. As the effects of a carbon offset can be experienced globally (much in the way emissions are experienced globally), the offset can be applied locally or globally equally. As well, the effects can be the same if an organization ceases an emission-causing activity or if the organization enables an equivalent emission-reducing activity elsewhere. Carbon offsets and related programs are intended to make it easier and more cost-effective for organizations to pursue the latter option.
Through these schemes, each carbon offset or credit is equivalent to a carbon reduction of 1 ton of carbon dioxide. Carbon reduction projects can include:
- Reforestation programs
- Avoided deforestation, or REDD (Reducing emissions from Deforestation and Forest Degradation)
- Enhancement and sustainable management of forestry
- Use of renewable energy sources
- Implementation of energy efficiency programs
- Capture of landfill gas or methane
- Clean cookstove projects
- Clean water access programs
The process of offsetting emissions involves procuring carbon credits. For these credits to be credible, they must be:
- Additional, in that the program ensures carbon reduction is real and permanent
- Verified, in that the credit program has proven assurance on its quality and credibility
- Traceable, such that the program is transparent and offers proof of the offset
These standards are offered through different verification schemes, with four mainstream verification schemes:
- Gold Standard
- Verified Carbon Standard (VCS)
- Plan Vivo
- UN Clean Development Mechanism
Offset claims are often considered defensible under a set of conditions, although organizations sometimes use other investments to make reduction claims, such as the purchase of "renewable energy credits." Often these other instruments do not meet the criteria for effective carbon offset claims.
The price for these carbon credits depends on the type of programs used, with two broad ways to price the carbon and determine the carbon offset. From an economic perspective, both programs work in equivalent ways—in one program, price for emissions is determined by setting a fee on emissions; in the other, the level of emissions is set. Both approaches promise to deliver on a reduction of emissions.
The first such program is a cap-and-trade program where laws or regulations limit (or 'cap') carbon emissions from sectors of the economy, if not the entire economy. Each ton of carbon emitted is considered a single allowance, which can be traded or sold among other market participants similar to the trading of securities on an exchange.
This second program uses laws or regulations to establish a fee per ton of carbon emissions from a sector if not from the whole of the economy. Emitters are subject to the tax based on their total emissions, which in turn incentivizes the reduction of emissions through a transition towards cleaner energy and more efficient energy use.
In some cases, a region will use hybrid approaches that include regulations to limit carbon emissions, but also set bounds on how much the price can vary. This approach can adjust the tax to ensure that specific emission reduction goals are met. And another hybrid approach could see an implementation on a cap-and-trade system for one sector, while another sector sees a carbon tax applied.
While these mechanisms are considered capable of establishing a price for carbon per ton, some consider the cost to be below the estimated cost of damage that each carbon pollution can cause on a global scale and in ocean acidification.
As well, when carbon offset is intended to occur, the main emission considered is carbon dioxide. The other mixture of gases known to cause damage to the atmosphere and environment, greenhouse gases (GHG), are also products of human activity, including methane, nitrous-oxide, hydrofluorocarbons, perfluorocarbons, nitrogen trifluoride, and sulfur hexafluoride. These GHGs include carbon dioxide, which is the most abundant, but the other gases can have similar or greater pollutant effects.
