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 tonnes of carbon dioxide-equivalent (CO2e). One tonne of carbon offset represents the reduction of one tonne of carbon dioxide or its equivalent in other greenhouse gases.
There are two markets for carbon offsets. In the larger, 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. For instance, an entity could be complying with obligations of Annex 1 Parties under the Kyoto Protocol or of liable entities under the EU Emission Trading Scheme, among others. 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 the much smaller, voluntary market, individuals, companies, or governments purchase carbon offsets to mitigate their own greenhouse gas emissions from transportation, electricity use, and other sources. For example, an individual might purchase carbon offsets to compensate for the greenhouse gas emissions caused by personal air travel. Carbon offset vendors offer direct purchase of carbon offsets, often also offering other services such as designating a carbon offset project to support or measuring a purchaser's carbon footprint. In 2016, about $705 million of carbon offsets were purchased in the voluntary market, representing about 123.4 million metric tons of CO2e reductions.Offsets typically support projects that reduce the emission of greenhouse gases in the short- or long-term. A common project type is renewable energy, such as wind farms, biomass energy, or hydroelectric dams. Others include energy efficiency projects, the destruction of industrial pollutants or agricultural byproducts, destruction of landfill methane, and forestry projects. Some of the most popular carbon offset projects from a corporate perspective are energy efficiency and wind turbine projects.The Kyoto Protocol has sanctioned offsets as a way for governments and private companies to earn carbon credits that can be traded on a marketplace. The protocol established the Clean Development Mechanism (CDM), which validates and measures projects to ensure they produce authentic benefits and are genuinely "additional" activities that would not otherwise have been undertaken. Organizations that are unable to meet their emissions quota can offset their emissions by buying CDM-approved Certified Emissions Reductions.
Offsets may be cheaper or more convenient alternatives to reducing one's own fossil-fuel consumption. However, some critics object to carbon offsets, and question the benefits of certain types of offsets.Due diligence is recommended to help businesses in the assessment and identification of "good quality" offsets to ensure offsetting provides the desired additional environmental benefits, and to avoid reputational risk associated with poor quality offsets.Offsets are viewed as an important policy tool to maintain stable economies and to improve sustainability. One of the hidden dangers of climate change policy is unequal prices of carbon in the economy, which can cause economic collateral damage if production flows to regions or industries that have a lower price of carbon—unless carbon can be purchased from that area, which offsets effectively permit, equalizing the price.