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Carbon offsets and credits

Carbon offsetting is a carbon trading mechanism that allows entities such as governments or businesses to compensate for (i.e. “offset”) their greenhouse gas emissions. It works by supporting projects that reduce, avoid, or remove emissions elsewhere.[2][3][4] In other words, carbon offsets work by offsetting emissions through investments in emission reduction projects. When an entity invests in a carbon offsetting program, it receives carbon credits. These "tokens" are then used to account for net climate benefits from one entity to another.[5] A carbon credit or offset credit can be bought or sold after certification by a government or independent certification body.[6][7][8] One carbon offset or credit represents a reduction, avoidance or removal of one tonne of carbon dioxide or its carbon dioxide-equivalent (CO2e).

This article is about the use of carbon offsets and carbon credits for countries, corporations, and, in some cases, individuals. For more information on carbon credits for individuals, see personal carbon trading.

Offset projects that take place in the future can be considered to be a type of promissory note. The purchaser of the offset credit pays carbon market rates for the credits. In turn they receive a promise that the purchaser's greenhouse emissions generated in the present (e.g. a ten-hour international flight) will be offset by elimination of an equal amount at some point in the future (e.g. 10 to 20 years for planting 55 seedlings). Offsets that were generated in the past are legitimate only if they were in addition to reductions that would have happened anyway.[9]


A variety of greenhouse gas reduction projects can create offsets and credits. These include forestry projects (avoidance of logging, sapling planting, etc.),[1][10] renewable energy projects (wind farms, biomass energy, biogas digesters, hydroelectric dams, etc.), as well as energy efficiency projects. Further projects include carbon dioxide removal projects, carbon capture and storage projects, and the elimination of methane emissions in various settings such as landfills.


Carbon offset and credit programs provide a mechanism for countries to meet their Nationally Determined Contributions (NDC) commitments to achieve the goals of the Paris Agreement.[11] Article 6 of the Paris Agreement includes three mechanisms for “voluntary cooperation” between countries towards climate goals, including carbon markets. Article 6.2 enabled countries to directly trade carbon credits and other units such as gigawatts (GW) of renewable power with each other. Article 6.4 established a new international carbon market allowing countries or companies to use carbon credits generated in other countries to help meet their climate targets.


Carbon offset and credit programs are coming under increased scrutiny because their claimed emissions reductions may be inflated compared to the actual reductions achieved.[12][13][14] To be credible, the reduction in emissions must meet three criteria. Firstly, the must last indefinitely (e.g. the newly planted forest must not be logged or susceptible to wildfires). Secondly, they must be additional to emission reductions that were going to happen anyway. And thirdly, they must be measured and monitored to assure the that the amount of reduction promised has in fact been attained.[9]

: A term that refers to the complex issue of whether emissions reductions achieved by a project are “additional” to what would have happened without the project. If a wildlife preserve, for example, sells carbon credits for not logging its forests, the presumption of credits may come under scrutiny.[19]

Additionality

Carbon markets: systems in which carbon credits can be bought and sold.

Carbon emission trading

Carbon-neutral or : Terms used to describe a state where an entity’s greenhouse gas emissions are entirely balanced by purchasing carbon credits from past or future offsetting projects.

net zero

: Offset credit holders must "retire" carbon offset credits in order to claim their associated GHG reductions towards a specific GHG reduction goal. In the voluntary market, carbon offset registries define the manner in which retirement happens. Once an offset credit is retired, it cannot be transferred or used. This means it is effectively taken out of circulation.[20] Voluntary purchasers can also offset their carbon emissions by purchasing carbon allowances from legally mandated cap-and-trade programs. Such programs include the Regional Greenhouse Gas Initiative or the European Emissions Trading Scheme.[21]

Carbon retirement

Forward crediting: A practice that issues credits for projected emission reductions that the project developer anticipates. This provides financial support for the project, but risks issuing too many credits if it does not achieve its planned impact. The practice allows credit buyers to claim emission reductions in the present for activities that have not yet occurred.

[22]

Offset certification registries: An offset registry program is a system for reporting and tracking offset project information including project status, project documents, credits generated, ownership, sale, and retirement. These vary in terms of governance and accounting practices.

[23]

Verified emission reduction or certified emission reduction: Labels for the one-tonne emission reduction credits. The label is designated by the particular program that certifies the reduction project.

[24]

Vintage: The vintage is the year in which the carbon emissions reduction project generated the carbon offset credit. This is usually the year in which a third party verifies the project. Examples of such third parties are a validation-verification body, a designated operational entity,[26] or other accredited third party reviewers.[27] "Legacy credits", for projects such as wind farms that were built in the past, meanwhile can allow ongoing carbon pollution with no additional impact on climate change, because renewable energy may displace fossil fuels, but in many cases the renewables' reductions in emissions were projects that are going to happen anyway.[9]

[25]

Common features associated with carbon offset programs are listed below in alphabetical order.

Origins and general features[edit]

In 1977 major amendments to the US Clean Air Act created one of the first tradable emission offset mechanisms. This allowed a permitted facility to increase its emissions. In return it had to pay another company to reduce its emissions of the same pollutant by a greater amount at one or more of its facilities.[28] The 1990 amendments to that same law established the Acid Rain Trading Program. This introduced the concept of a cap and trade system, where limits on a pollutant would decrease over time. It allowed companies to buy and sell offsets created by other companies that invested in emission reduction projects.[29] Regulatory frameworks for the US Clean Water Act enabled wetlands offsetting and mitigation banking in the 1990s. Wetlands offsetting also set the procedural and conceptual precedent for carbon offsetting.[30] In 1997 the Clean Development Mechanism was created as part of the Kyoto Protocol. This program expanded the concept of carbon emissions trading to a global scale. It focused on the major greenhouse gases that cause climate change.[31] These include carbon dioxide (CO2), methane, nitrous oxide (N2O), perfluorocarbons, hydrofluorocarbons, and sulfur hexafluoride.[32]


Carbon credits are part of national and international efforts to mitigate growth in concentrations of greenhouse gases (GHGs). These programs cap greenhouse gas emissions. Markets then allocate the emissions among the group of regulated sources. The goal is to allow market mechanisms to drive these sources towards lower GHG emissions. Since GHG reduction projects generate offset credits, the approach can finance carbon reduction projects from trading partners around the world. Within the voluntary market, demand for carbon offsets arise from individuals, companies, organizations, and sub-national governments. They do this to meet carbon-neutral, net-zero, or other GHG reduction goals. Certification programs offer project developers guidelines and other requirements necessary to produce carbon offsets. In this way they support this industry.

Baseline and Measurement—What emissions would occur in the absence of a proposed project? And how are the emissions that occur after the project is performed going to be measured?

—Would the project occur anyway without the investment raised by selling carbon offset credits? There are two common reasons why a project may lack additionality. One is if it is financially worthwhile anyway due to energy cost savings. The second is if environmental laws and regulations require it to be done anyway.

Additionality

—Does implementing the project cause higher emissions outside the project boundary?

Leakage

Permanence—Are some benefits of the reductions reversible? Trees may be harvested to burn wood. Does growing trees for wood to burn decrease the need for ? If woodlands are increasing in area or density, then carbon is being sequestered. After roughly 50 years, forests begin to reach maturity, and remove carbon dioxide more quickly than a recently re-planted forest area.

fossil fuel

—Is the project claimed as carbon offsetting by more than one organization?

Double counting

—Are there other benefits in addition to the carbon emissions reduction, and to what degree?[105]

Co-benefits

Effectiveness[edit]

Offset and credit programs have been identified as a way for countries to meet their NDC commitments and achieve the goals of the Paris agreement at a lower cost.[11] They may also help close the emissions gap identified in annual UNEP reports.[120]


These programs also have other positive effects. Experts call these co-benefits. Common environmental co-benefits include better air quality, increased biodiversity, and water and soil protection. There are also social benefits. These include community employment opportunities, energy access, and gender equality. Typical economic co-benefits include job creation, education opportunities, and technology transfer. Some certification programs have tools and research products to help quantify these benefits.[121][122]

(2001), Metz, B.; Davidson, O.; Swart, R.; Pan, J.; et al. (eds.), Climate Change 2001: Mitigation, Contribution of Working Group III to the Third Assessment Report of the Intergovernmental Panel on Climate Change, Cambridge University Press, ISBN 978-0-521-80769-2, archived from the original on 27 February 2017{{citation}}: CS1 maint: numeric names: authors list (link) (pb: 0-521-01502-2).

IPCC TAR WG3

. World Bank. 2022. doi:10.1596/978-1-4648-1895-0 (inactive 31 January 2024). hdl:10986/37455. ISBN 9781464818950. Retrieved 24 March 2023.{{cite book}}: CS1 maint: DOI inactive as of January 2024 (link)

State and Trends of Carbon Pricing 2022