A carbon offset is a reduction in emissions of carbon dioxide or greenhouse gases made in order to compensate for or to offset an emission made elsewhere.
Carbon offsets are measured in metric tons of carbon dioxide-equivalent (CO2e) and may represent six primary categories of greenhouse gases. The categories include 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.
In the 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 Emissions 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 2009, 8.2 billion metric tons of carbon dioxide equivalent changed hands worldwide, up 68% from 2008. The World Bank puts the overall value of the market at $144 billion.
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. 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.
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, accounts for about 20% 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.