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Carbon offsets are measured in metric tons of carbon dioxide-equivalent (CO2e) and may represent six primary categories of greenhouse gases: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), perfluorocarbons (PFCs), hydrofluorocarbons (HFCs), and sulfur hexafluoride (SF6). One carbon offset represents the reduction of one metric ton of carbon dioxide or its equivalent in other greenhouse gases.
There are two 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. This market exists in order to achieve compliance with obligations of Annex 1 Parties under the Kyoto Protocol, and of liable entities under the EU Emission Trading Scheme. 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 much smaller, voluntary market, individuals, companies, or governments purchase carbon offsets to mitigate their own greenhouse gas emissions from transportation, electricity use, and other sources. For example, an individual might purchase carbon offsets to compensate for the greenhouse gas emissions caused by personal air travel. Many companies (see list) offer carbon offsets as an up-sell during the sales process so that customers can mitigate the emissions related with their product or service purchase (such as offsetting emissions related to a vacation flight, car rental, hotel stay, consumer good, etc.). In 2008, about $705 million of carbon offsets were purchased in the voluntary market, representing about 123.4 million metric tons of CO2e reductions.
Offsets are typically achieved through financial support of projects that reduce the emission of greenhouse gases in the short- or long-term. The most common project type is renewable energy, such as wind farms, biomass energy, or hydroelectric dams. Others include energy efficiency projects, the destruction of industrial pollutants or agricultural byproducts, destruction of landfill methane, and forestry projects. Some of the most popular carbon offset projects from a corporate perspective are energy efficiency and wind turbine projects.
Carbon offsetting has gained some 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 that 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 are unable to meet their emissions quota can offset their emissions by buying CDM-approved Certified Emissions Reductions.
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. Due diligence is recommended to help businesses in the assessment and identification of "good quality" offsets to ensure offsetting provides the desired additional environmental benefits, and to avoid reputational risk associated with poor quality offsets.
Offsets are viewed as an important policy tool to maintain stable economies. One of the hidden dangers of climate change policy is unequal prices of carbon in the economy, which can cause economic collateral damage if production flows to regions or industries that have a lower price of carbon—unless carbon can be purchased from that area, which offsets effectively permit, equalizing the price.
The Collins English Dictionary defines a carbon offset as "a compensatory measure made by an individual or company for carbon emissions, usually through sponsoring activities or projects which increase carbon dioxide absorption, such as tree planting".
The Environment Protection Authority of Victoria (Australia) defines a carbon offset as: "a monetary investment in a project or activity elsewhere that abates greenhouse gas (GHG) emissions or sequesters carbon from the atmosphere that is used to compensate for GHG emissions from your own activities. Offsets can be bought by a business or individual in the voluntary market (or within a trading scheme), a carbon offset usually represents one tonne of CO2-e".
The Stockholm Environment Institute defines a carbon offset as "a credit for negating or diminishing the impact of emitting a ton of carbon dioxide by paying someone else to absorb or avoid the release of a ton of CO2 elsewhere".
The University of Oxford Environmental Change Institute defines a carbon offset as "mechanism whereby individuals and corporations pay for reductions elsewhere in order to offset their own emissions".
The Encyclopædia Britannica defines a carbon offset as "any activity that compensates for the emission of carbon dioxide (CO2) or other greenhouse gases (measured in carbon dioxide equivalents [CO2e]) by providing for an emission reduction elsewhere."
Carbon offsets have several common features:
In 2009, 8.2 billion metric tons of carbon dioxide equivalent changed hands worldwide, up 68 per cent from 2008, according to the study by carbon-market research firm Point Carbon, of Washington and Oslo. But at EUR94 billion, or about $135 billion, the market's value was nearly unchanged compared with 2008, with world carbon prices averaging EUR11.40 a ton, down about 40 per cent from the previous year, according to the study. The World Bank's "State and Trends of the Carbon Market 2010" put the overall value of the market at $144 billion, but found that a significant part of this figure resulted from manipulation of a VAT loophole.
The global carbon market is dominated by the European Union, where companies that emit greenhouse gases are required to cut their emissions or buy pollution allowances or carbon credits from the market, under the European Union Emission Trading Scheme (EU ETS). Europe, which has seen volatile carbon prices due to fluctuations in energy prices and supply and demand, will continue to dominate the global carbon market for another few years, as the U.S. and China—the world's top polluters—have yet to establish mandatory emission-reduction policies.
On the whole, the U.S. market remains primarily a voluntary market, but multiple cap and trade regimes are either fully implemented or near-imminent at the regional level. The first mandatory, market-based cap-and-trade program to cut CO2 in the U.S., called the Regional Greenhouse Gas Initiative (RGGI), kicked into gear in Northeastern states in 2009, growing nearly tenfold to $2.5 billion, according to Point Carbon. Western Climate Initiative (WCI)—a regional cap-and-trade program including seven western states (California notably among them) and four Canadian provinces—has established a regional target for reducing heat-trapping emissions of 15 percent below 2005 levels by 2020. A component of California's own Global Warming Solutions Act of 2006, kicked off in early 2013, requires high-emissions industries to purchase carbon credits to cover emissions in excess of 25,000 CO2 metric tons.
The CDM identifies over 200 types of projects suitable for generating carbon offsets, which are grouped into broad categories. These project types include renewable energy, methane abatement, energy efficiency, reforestation and fuel switching.
Renewable energy offsets commonly include wind power, solar power, hydroelectric power and biofuel. Some of these offsets are used to reduce the cost differential between renewable and conventional energy production, increasing the commercial viability of a choice to use renewable energy sources.
Renewable Energy Credits (RECs) are also sometimes treated as carbon offsets, although the concepts are distinct. Whereas a carbon offset represents a reduction in greenhouse gas emissions, a REC represents a quantity of energy produced from renewable sources. To convert RECs into offsets, the clean energy must be translated into carbon reductions, typically by assuming that the clean energy is displacing an equivalent amount of conventionally produced electricity from the local grid. This is known as an indirect offset (because the reduction doesn't take place at the project site itself, but rather at an external site), and some controversy surrounds the question of whether they truly lead to "additional" emission reductions and who should get credit for any reductions that may occur. Intel corporation is the largest purchaser of renewable power in the US.
Some offset projects consist of the combustion or containment of methane generated by farm animals (by use of an anaerobic digester), landfills or other industrial waste. Methane has a global warming potential (GWP) 23 times that of CO2; when combusted, each molecule of methane is converted to one molecule of CO2, thus reducing the global warming effect by 96%.
An example of a project using an anaerobic digester can be found in Chile where in December 2000, the largest pork production company in Chile, initiated a voluntary process to implement advanced waste management systems (anaerobic and aerobic digestion of hog manure), in order to reduce greenhouse gas (GHG) emissions.
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While carbon offsets that fund renewable energy projects help lower the carbon intensity of energy supply, energy conservation projects seek to reduce the overall demand for energy. Carbon offsets in this category fund projects of several types:
Industrial pollutants such as hydrofluorocarbons (HFCs) and perfluorocarbons (PFCs) have a GWP many thousands of times greater than carbon dioxide by volume. Because these pollutants are easily captured and destroyed at their source, they present a large and low-cost source of carbon offsets. As a category, HFCs, PFCs, and N2O reductions represent 71 per cent of offsets issued under the CDM.
Land use, land-use change and forestry (LULUCF) projects focus on natural carbon sinks such as forests and soil. Deforestation, particularly in Brazil, Indonesia and parts of Africa, account for about 20 per cent of greenhouse gas emissions. Deforestation can be avoided either by paying directly for forest preservation, or by using offset funds to provide substitutes for forest-based products. There is a class of mechanisms referred to as REDD schemes (Reducing emissions from deforestation and forest degradation), which may be included in a post-Kyoto agreement. REDD credits provide carbon offsets for the protection of forests, and provide a possible mechanism to allow funding from developed nations to assist in the protection of native forests in developing nations.
Almost half of the world's people burn wood (or fiber or dung) for their cooking and heating needs. Fuel-efficient cook stoves can reduce fuel wood consumption by 30 to 50%, though the warming of the earth due to decreases in particulate matter (i.e. smoke) from such fuel-efficient stoves has not been addressed. There are a number of different types of LULUCF projects:
Voluntary purchasers can offset their carbon emissions by purchasing carbon allowances from legally mandated cap-and-trade programs such as the Regional Greenhouse Gas Initiative or the European Emissions Trading Scheme. By purchasing the allowances that power plants, oil refineries, and industrial facilities need to hold to comply with a cap, voluntary purchases tighten the cap and force additional emissions reductions.
Voluntary purchases can also be made through small-scale and sometimes uncertified schemes such as those offered at South African based Promoting Access to Carbon Equity Centre (PACE), which nevertheless offer clear services such as poverty alleviation in the form of renewable energy development. Also, as "easy carbon credits are coming to an end", these projects have the potential to develop projects that are either too small or too complicated to benefit from legally mandated cap-and-trade programs.
Once it has been accredited by the UNFCCC a carbon offset project can be used as carbon credit and linked with official emission trading schemes, such as the European Union Emission Trading Scheme or Kyoto Protocol, as Certified Emission Reductions. European emission allowances for the 2008–2012 second phase were selling for between 21 and 24 Euros per metric ton of CO2 as of July 2007.
The voluntary Chicago Climate Exchange also includes a carbon offset scheme that allows offset project developers to sell emissions reductions to CCX members who have voluntarily agreed to meet emissions reduction targets.
The Western Climate Initiative, a regional greenhouse gas reduction initiative by states and provinces along the western rim of North America, includes an offset scheme. Likewise, the Regional Greenhouse Gas Initiative, a similar program in the northeastern U.S., includes an offset program. A credit mechanism that uses offsets may be incorporated in proposed schemes such as the Australian Carbon Exchange.
A UK offset provider set up a carbon offsetting scheme that set up a secondary market for treadle pumps in developing countries. These pumps are used by farmers, using human power, in place of diesel pumps. However, given that treadle pumps are best suited to pumping shallow water, while diesel pumps are usually used to pump water from deep boreholes, it is not clear that the treadle pumps are actually achieving real emissions reductions. Other companies have explored and rejected treadle pumps as a viable carbon offsetting approach due to these concerns.
Carbon retirement involves retiring allowances from emission trading schemes as a method for offsetting carbon emissions. Under schemes such as the European Union Emission Trading Scheme, EU Emission Allowances (EUAs), which represent the right to release carbon dioxide into the atmosphere, are issued to all the largest polluters. The theory is that by buying these allowances and permanently removing them, the price of EUAs increases and provides an incentive for industrial companies to reduce their emissions.
Due to their indirect nature, many types of offset are difficult to verify. Some providers obtain independent certification that their offsets are accurately measured, to distance themselves from potentially fraudulent competitors. The credibility of the various certification providers is often questioned. Certified offsets may be purchased from commercial or non-profit organizations for US$5.50–30 per tonne of CO2, due to fluctuations of market price. Annual carbon dioxide emissions in developed countries range from 6 to 23 tons per capita.
Accounting systems differ on precisely what constitutes a valid offset for voluntary reduction systems and for mandatory reduction systems. However formal standards for quantification exist based on collaboration between emitters, regulators, environmentalists and project developers. These standards include the Voluntary Carbon Standard, Green-e Climate, Chicago Climate Exchange and the CDM Gold Standard, the latter of which expands upon the requirements for the Clean Development Mechanism of the Kyoto Protocol.
Accounting of offsets may address the following basic areas:
While the primary goal of carbon offsets is to reduce global carbon emissions, many offset projects also claim to lead to improvements in the quality of life for a local population. These additional improvements are termed co-benefits, and may be considered when evaluating and comparing carbon offset projects. Some possible co-benefits from a project that replaces wood-burning stoves with ovens using a less carbon-intensive fuel include:
In a recent survey conducted by EcoSecurities, Conservation International, CCBA and ClimateBiz, of the 120 corporates surveyed more than 77 per cent rated community and environmental benefits as the prime motivator for purchasing carbon offsets.
Carbon offset projects can also negatively affect quality of life. For example, people who earn their livelihoods from collecting firewood and selling it to households could become unemployed if firewood is no longer used. A paper from the Overseas Development Institute offers some indicators to be used in assessing the potential developmental impacts of voluntary carbon offset schemes:
In an effort to inform and safeguard business and household consumers purchasing Carbon Offsets, in 2009, the UK Government has launched a scheme for regulating Carbon offset products. DEFRA have created the "Approved Carbon Offsetting" brand to use as an endorsement on offsets approved by the UK government. The Scheme sets standards for best practice in offsetting. Approved offsets have to demonstrate the following criteria:
On 20 May 2011 the Department of Energy and Climate Change announced that the Quality Assurance Scheme would close on 30 June 2011. The stated purpose of the Quality Assurance Scheme was 'to provide a straightforward route for those wishing to offset their emissions to identify quality offsets'. Critics of the closure therefore argued that without the scheme, businesses and individuals would struggle to identify quality carbon offsets.
In 2012 the scheme was relaunched as the Quality Assurance Standard (QAS). The QAS is now run independently by Quality Assurance Standard Ltd which is a company limited by guarantee based in the United Kingdom. The Quality Assurance Standard is a comprehensive independent audit system for carbon offsets. Approved offsets are checked against a 40 point checklist  to ensure they meet the very highest standards in the world.
On 17 July 2012, the first organisations were approved as meeting the new QAS.
The Australian government is currently in a consultation period on the regulation of Carbon Offsets. On 20 December 2013, the Australian Government released the Emissions Reduction Fund Green Paper outlining its preferred design options for the Emissions Reduction Fund: a carbon buy-back model. The Government invites public comment and written submissions on the Green Paper by 5pm on Friday 21 February 2014.
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Less than 30 pence in every pound spent on some carbon offset schemes goes directly to projects designed to reduce emissions. The figures reported by the BBC and based on UN data reported that typically 28p goes to the set up and maintenance costs of an environmental project. 34p goes to the company that takes on the risk that the project may fail. The project's investors take 19p, with smaller amounts of money being distributed between organisations involved in brokering and auditing the carbon credits. In that respect carbon Offsets are similar to most consumer products, with only a fraction of sale prices going to the off-shore producers, the rest being shared between investors and distributors who bring it to the markets, who themselves need to pay their employees and service providers such as advertising agencies most of the time located in expensive areas.
Some activists disagree with the principle of carbon offsets, likening them to Roman Catholic indulgences, a way for the guilty to pay for absolution rather than changing their behavior. George Monbiot, an English environmentalist and writer, says that carbon offsets are an excuse for business as usual with regard to pollution. Proponents hold that the indulgence analogy is flawed because they claim carbon offsets actually reduce carbon emissions, changing the business as usual, and therefore address the root cause of climate change. Proponents of offsets claim that third-party certified carbon offsets are leading to increased investment in renewable energy, energy efficiency, methane biodigesters and reforestation and avoided deforestation projects, and claim that these alleged effects are the intended goal of carbon offsets. On October 16, 2009 responsibletravel.com, once a strong voice in favour of carbon offsetting, announced that it would stop offering carbon offsetting to its clients, stating that "too often offsets are being used by the tourism industry in developed countries to justify growth plans on the basis that money will be donated to projects in developing countries. Global reduction targets will not be met this way".
On 4 February 2010, travel networking site Vida Loca Travel announced that they would donate 5 per cent of profits to International Medical Corps, as they feel that international aid can be more effective at cutting global warming in the long term than carbon offsetting, citing the work of economist Jeffrey Sachs.
Tree-planting projects can cause conflicts with indigenous people who are displaced or otherwise find their use of forest resources curtailed. For example, a World Rainforest Movement report documents land disputes and human rights abuses at Mount Elgon. In March 2002, a few days before receiving Forest Stewardship Council certification for a project near Mount Elgon, the Uganda Wildlife Authority evicted more than 300 families from the area and destroyed their homes and crops. That the project was taking place in an area of on-going land conflict and alleged human rights abuses did not make it into project report. A 2011 report by Oxfam International describes a case where over 20,000 farmers in Uganda were displaced for a FSC-certified plantation to offset carbon by London-based New Forests Company
Several certification standards exist, offering variations for measuring emissions baseline, reductions, additionality, and other key criteria. However, no single standard governs the industry, and some offset providers have been criticized on the grounds that carbon reduction claims are exaggerated or misleading. Problems include:
- Widespread instances of people and organizations buying worthless credits that do not yield any reductions in carbon emissions.
- Industrial companies profiting from doing very little – or from gaining carbon credits on the basis of efficiency gains from which they have already benefited substantially.
- Brokers providing services of questionable or no value.
- A shortage of verification, making it difficult for buyers to assess the true value of carbon credits.
Because offsets provide a revenue stream for the reduction of some types of emissions, they can in some cases provide incentives to emit more, so that emitting entities can later get credit for reducing emissions from an artificially high baseline. This is especially the case for offsets with a high profit margin. For example, one Chinese company generated $500 million in carbon offsets by installing a $5 million incinerator to burn the HFCs produced by the manufacture of refrigerants. The huge profits provided incentive to create new factories or expand existing factories solely for the purpose of increasing production of HFCs and then destroying the resultant pollutants to generate offsets. Not only is this outcome environmentally undesirable, it undermines other offset projects by causing offset prices to collapse. The practice had become so common that offset credits are now no longer awarded for new plants to destroy HFC-23.
In Nigeria oil companies flare off 40 per cent of the natural gas found. The Agip Oil Company plans to build plants to generate electricity from this gas and thus claim 1.5 million offset credits a year. United States company Pan Ocean Oil Corporation has also applied for credits in exchange for processing its own waste gas in Nigeria. Oilwatch.org's Michael Karikpo calls this "outrageous", as flaring is illegal in Nigeria, adding that "It's like a criminal demanding money to stop committing crimes".
Although many carbon offset projects tout their environmental co-benefits, some are accused of having negative secondary effects. Point Carbon has reported on an inconsistent approach with regard to some hydro-electric projects as carbon offsets; some countries in the EU are not allowing large projects into the EU ETS, because of their environmental impacts, even though they have been individually approved by the UNFCCC and World Commission on Dams. It is difficult to assess the exact results of carbon offsets given the fact that they are a relatively new form of carbon reduction, and it is possible that some carbon offset purchases are made in an attempt to increase positive business public relations rather than to help solve the issue of greenhouse gas emissions.
Offset projects may also have negative social impacts, for example when local residents are evicted to enable a National Park to be marketed as a carbon offset.