What Are Carbon Offsets and Credits?

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A popular announcements made by companies trying to reduce their environmental footprint is the choice to go carbon-neutral, typically by means of carbon offsets. It’s a great idea, however it’s extremely complicated for any business that has been through this procedure can attest.

If your business is paying to offset its greenhouse gas emissions each year You might think that this money will result in an immediate reduction in greenhouse gas emissions that is equal to the emissions you generate. This means that your business has been declared “carbon neutral” in the sense that the actions of your company are not affecting carbon emissions in the atmosphere. However, based on the way offsets are arranged, it is likely that, even after purchasing offsets, your business is at the same time adding carbon to the atmosphere.

What happens to the money you spend on offsets?

The majority of media discussions about offsets has been focused on offsets as a type of greenwashing, the way in which the carbon reductions provided to customers are measured, and whether offset sellers actually are doing what they claim to are doing. All of these are important issues however there are more fundamental questions regarding the purpose of carbon offsets.

A metaphor can be useful in this case. Imagine a bathtub. each gallon of water that is in the tub represents the equivalent of a ton of carbon within the atmosphere. An average American contributes around 20 tonnes of carbon emissions per year. In the analogy of a bathtub, the carbon emissions would be expressed in 20 gal water. Carbon content that is in the atmosphere is determined by the quantity of water that is that is in the bathtubs around the world.

Without offsets, the amount of the water that is in your tub increases by 20 gallons per year. If you purchase offsets, you might believe that the purchase will take 20 grams of water out of the tub, so that the water level in the bathtub remains exactly the same as the previous year. This is the scenario that most people think of whenever they hear the word “carbon neutrality.”

The reality isn’t as straightforward. You could be purchasing credits that were generated through past actions. Someone other person has removed water from their tub, and you’re paying them for the actions they’ve made. In a way you’re paying them to remove some of the water from your tub, but the water does not disappear. Instead, it’s poured into a bathtub of someone else’s.

Or, you could provide funds for greenhouse gas reductions that are likely to be coming in the near future. If everything goes as planned, offsets can reduce the volume of water in your bathtub by 20gallons however, it’ll take quite a while, and you’re adding water at the daily rate of 20 gallons each year.

The cause of the confusion isn’t that offset companies are morally confronted. The majority of carbon-reducing projects have large initial expenses and reduce greenhouse gas emissions in the course of ten, twenty, or even fifty years or more. The majority of the reductions in greenhouse gases which are happening this year are a result of investment decisions previously made. Actions taken now to lower greenhouse gases will help reduce greenhouse gas emissions long into the future.

Numerous “products” are available for sale as offsets with various offset retailers with different mix of products. Certain offset providers let you to pick the kind of offsets you purchase. To better understand what you receive (and what you won’t) when you purchase offsets it’s helpful to look over the various types of offsets that are available in the market for sale.

Carbon Reductions as a result of the past actions

Certain carbon credits are traded on what is basically an exchange for financial assets. Within the U.S. there are two kinds of carbon credits that can be traded, Renewable Energy Certificates (RECs or “Green Tags”) and credits that are traded on the Chicago Climate Exchange (CCX). Businesses earn these credits through cutting their carbon emissions above set goals (see the sidebar). Once the credits are acquired,it’s possible to trade carbon credits to firms who haven’t achieved their carbon reduction targets or for offsets to buyers.

What you get from your purchase What does it do? When you purchase CCX credit or RECs through an offset provider Your purchase decreases the amount of credits that are available to businesses who haven’t met their carbon reduction obligations, and raises their cost. The price increase offers a greater reward for companies that exceed their requirements, as well as increasing the cost for those who aren’t meeting their obligations. So, your offset purchase boosts the incentive offered to companies that participate with market CCX as well as REC markets to lower emission of carbon. This incentive could be an important element in companies making decisions for investing in green technology and many companies that participate in these markets depend on the sale of credits to ensure that their investment pays off.

Carbon Reductions in the Future

Certain offset companies use your money to fund projects that can lower greenhouse gas emissions in the near future. Projects differ widely but they typically include solar and wind power and methane capture as well as trees, and biomass.

What will your purchase do It will be used to fund projects that will, when completed, decrease the quantity of greenhouse gases in the atmosphere. Because many projects to reduce greenhouse gas emissions need large upfront costs, financing is usually an obstacle. Offset sales of funds can help clean-energy projects enter the pipeline faster. Forests can be considered “carbon sinks” that reduce the carbon emissions humans release in the atmosphere. Therefore, should your money be used to fund an initiative to plant trees, it is likely to rid carbon dioxide out of the atmosphere for long periods of time.

If you buy twenty tons of offsets there won’t be an immediate 20-ton decrease in greenhouse gas emissions. If you are working on a renewable energy venture with a life expectancy of 20 years and 20 % carbon reduction will generally be spread out over the duration of the project, so the carbon reduction is 1 ton every year over 20 years. Furthermore, the reduction won’t start until the project has been completed, which can be one year or more after the purchase.

If the money is used for planting trees the purchase will not reduce greenhouse gases immediately, since the amount of carbon the trees absorb is proportional with their dimensions. Small saplings do not have a significant impact on greenhouse gases, but the impact increases as the tree grows. If you purchase the equivalent of 20 tonnes of offsets to will be used for a project to plant trees it’s possible that atmospheric carbon levels would drop to less than five tonnes in the first 25 years of trees’ existence.

If you are purchasing offsets to projects that are aimed at reducing greenhouse gas emissions in the future, it may be difficult to determine if these projects actually result in the greenhouse gas reductions they claim to reduce greenhouse gas emissions. Many offset companies have information on their websites regarding the projects they invest in and many include a third-party auditing or verification processes. However, the type of information offered along with the verification and auditing processes differ significantly from one offset company to another. Additionally, the calculations for carbon reductions are heavily influenced by the amount of carbon that would have been released prior to the project. There are no standards to determine the emissions at the baseline or the carbon reductions. In the case of tree-planting projects there is also the possibility that trees could be afflicted by disease or that the forest might be burned. Carbon impacts calculations of the forest must be able to account for these potential risks.

What’s happening with your bathtub? The investment you made removes the water from the tub However, the amount of water that is in the bathtub is rising. This is because your investment has removed some water over a lengthy duration of. Through the period of one year you’ll can add more water to your bathtub (through your usual business activities) than the offset purchase takes away.


Many offset purchasers want their money to be the difference in whether a carbon-reduction plan is implemented or not. In the context that carbon offsets are based on, the characteristic is referred to by the term “additionality.” The process of determining if a plan is “additional” is not easy. The investments in renewable energy or energy efficiency, as well as reforestation could be considered additional however it’s difficult to determine. Projects are initiated to satisfy a variety of motives and project managers are in the incentive to present their projects as “additional” to ensure that they can draw offset investors. If you are looking for additionality to you, then read the details carefully. Some claims are more persuasive than others.

What’s a business to do?

If your business wants to spend money on cutting down on carbon dioxide in the atmosphere begin by making changes to reduce your own carbon footprint. These investments are often not just good for the environment, but they can also help you save cash over the course of time. Switching out incandescent light bulbs to compact fluorescents, utilizing hybrid vehicles for your fleet of the company and installing controls for buildings to minimize energy consumption can help reduce your carbon footprint as well as improve your profitability of your business.

If you’re interested in doing more offset purchases are definitely worth looking into. Profits from offset purchases are crucial to fund a variety of initiatives that help reduce greenhouse gas emissions. If you choose to purchase offsets, be sure to study the different offset companies. Check out their websites. If they’re more open and transparent be the more likely their plans and calculations will be viewed with confidence.