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. One carbon offset represents the reduction of one metric ton of carbon dioxide or its equivalent in other greenhouse gases. Offsets are typically achieved through financial support of projects that reduce the greenhouse gas emissions. Examples are wind farms, biomass energy, hydroelectric dams, destruction of industrial pollutants, and forestry projects. Offsets are viewed as an important policy tool to maintain stable economies.
There are two markets for carbon offsets, the compliance market and the voluntary market. The compliance market consists of companies and governments that purchase carbon offsets to comply with caps on the total amount of carbon dioxide they are allowed to emit set forth in the Kyoto Protocol. The voluntary market consists of companies that purchase carbon offsets to mitigate their own greenhouse gas emissions.
There are three common features of carbon offsets known as vintage, source, and certification regime.
• Vintage: The year in which the carbon reduction takes place.
• Source: The project used to offset carbon emissions.
• Certification Regime: The systems and procedures that are used to certify and register carbon offsets. Different methodologies are used for measuring and verifying emissions reductions, depending on project type, size and location. Examples of certification agencies include the Chicago Climate Exchange, the Voluntary Carbon Standard and the CDM Gold Standard.