what are carbon offsets?
A carbon offset is an instrument to compensate for CO2 emissions (or generally GHG emissions, in their CO2 equivalent).
There are two possible ways to do this. One is by preventing emissions and the second by capturing past emissions that are already in the atmosphere (what is known as “carbon sequestration”).
An example of the first type is a hydro project, where we build a dam to generate clean electricity. (In developing countries where there would be no funding for such a project, carbon credits are often the only way to raise finance).
We can calculate the amount of CO2 that is not emitted as a result of building the dam, and which would have been, had the local community generated the same amount of electricity by burning coal or gas. By preventing X tonnes of CO2 from being emitted into the atmosphere, X units of carbon offsets are generated.
These carbon credits compensate for emissions taking place elsewhere.
A company purchasing a carbon offset to compensate for its own emissions is effectively participating in a zero-sum game but in the process a mechanism is being created to fund clean electricity and development of low-carbon technologies.
An example of the second type of offset is a reforestation programme.
These offsets are slightly different. The carbon is captured from the atmosphere over a number of years into the future. We can calculate the CO2 that will be captured by the forests over the trees’ life spans. This translates in carbon offsets that can be purchased by users today.
Even though these offsets are important to mitigate climate change (because they increase the carbon sink capacity of the planet), they are less priced by the markets because they are notoriously difficult to guarantee. The most respected offset standards provide a certification process for an offset that has taken place, not a promise of an offset at a future time.
Therefore in terms of financial value these offsets are weaker and cheaper and forestry offsets (even for a carbon capture value that has taken place) are less desirable than renewable energy offsets.
Fortunately the protection of the world’s rainforests in gaining prominence in climate change mitigation, and in the latest UN meeting in Cancun in 2010 for the first time provisions were made to commit funds for REDD.
Therefore, provided that the improvement of third-party verification standards allow a good metric to certify forestry offsets in future, we will probably see a change of fortune for this sector.