Definition of Offsets

Offsets exist in all cap-and-trade programs for greenhouse gases. Capped emitters buy allowances to meet their obligations. Allowances can be obtained from a commodities exchange or from offset providers. Offsets are a type of allowance produced from reducing emission outside of the capped emitters’ business area. One offset represents reduction of one ton of carbon dioxide equivalent. Emissions reductions made through offset projects must be real, additional, verifiable, permanent, and enforceable, otherwise the offset loses integrity.

History of Offsets

The first greenhouse gas cap-and-trade program was created under the Kyoto Protocol, which entered into force in 2005. Offsets are created under the project-based systems of the Clean Development Mechanism and Joint Implementation. Capped entities can use offsets, called CERs, to meet their compliance obligations. CDM offset projects occur in developing countries and JI offset projects occur in transition countries. Offset projects reduce emissions in these countries below the estimated business-as-usual path.

Emitters in countries with only voluntary carbon markets, such as the U.S. and Australia, buy and sell carbon allowances under unregulated trading. These offsets have variable quality. Voluntary offsets are used to publicly prove an effort to reduce carbon footprint. Government cap-and-trade systems would create a regulated and unified market for all allowances, including offsets.

Markets for Offsets

The market for offsets in the EU Emissions Trading Scheme ($4 Billion) is currently 17 times larger than all of the U.S. voluntary schemes. CDM/JI offsets trade at a slight discount to internally-produced EU allowances (about €14). Allowances and offsets are traded on the European Climate Exchange.

The Northeastern Regional Greenhouse Gas Initiative (RGGI) is a regional, regulated market that uses domestic and international offsets, the latter only if allowance prices exceed a threshold. The RGGI state governments oversee the carbon market. The U.S. voluntary market is covered by the Chicago Climate Exchange and the over-the-counter market. Allowance prices vary from $2-$17 and cannot be applied to RGGI.

Types of Offsets

There are several types of allowances referred to in cap-and-trade language. Voluntary emissions reductions (VERs) are allowances created by reducing emissions in a voluntary program through offset projects. Certified emissions reductions (CERs) are allowances created under a mandatory program through offset projects. European Union Allowances (EUAs) are tradable allowances that are not produced through an offset project.

Creating Offsets

Offsets are created through reducing emissions below the business-as-usual path. About two years is needed to create an offset project, including accreditation, design, and construction. A main concern is in proving that the project results in real, measurable, and long-term reductions. Reductions should not have occurred in a business-as-usual scenario and the revenue from creating the offsets must be driving the project’s existence. Before offsets are brought to the market, third parties must validate and verify the offsets and regulatory bodies must register and certify the offsets.

See the CCC Projects Page for a closer look at the methods for creating offsets.