Introduction

A carbon offset is any project that indirectly “reduces” GHGGreenhouse Gases in the earth's atmosphere absorb and re-emit infrared radiation. The Kyoto Protocol lists six major greenhouse gases, which vary in their relative warming effect. The six gases are: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), HFCs (hydrofluorocarbons), PFCs (perfluorocarbons) and sulphur hexafluoride (SF6). emissions at one source by investing in GHG emissions reductions elsewhere. Offset products most typically involve projects that invest in renewable energy, energy efficiencyEnergy efficiency improvements refer to a reduction in the energy used for a given service (heating, lighting, etc.) or level of activity. Such savings are generally achieved by substituting technologically more advanced equipment to produce the same level of end-use services (e.g. lighting, heating, motor drive) with less electricity. and reforestationThe reestablishment of forest on land that was previously forested but converted to another use before 31.12.1989. . Offset credits can be purchased from an offset scheme provider or generated from your own projects. For more information please see the Offset step of the EPA's Carbon Management PrinciplesA set of Principles developed by EPA Victoria to guide carbon management strategies. They are, in order: Measure, Set objectives, Avoid, Reduce, Switch, Sequester, Assess and Offset. Find out more about the carbon management principles here..  

Companies are exploring carbon offsets in response to regulatory requirements as well as voluntary commitments. On the regulatory side, offsets help companies cost-effectively achieve GHG reduction targets such as those which are required in the European Union Emissions TradingUsually means an ETS. In relation to the Kyoto Protocol, Annex I countries can trade emissions reduction credits in order to comply with their Kyoto-assigned targets. (See also ETS.) Scheme. Australian companies may also have reduction targets in the future as part of an Australian Emissions Trading Scheme.

Offsets may be purchased voluntarily for a range of reasons, including: 

• meeting business goals to reduce greenhouse footprint as part of a carbon management strategy. 
• preparing for an emissions trading scheme or other regulatory mechanisms, including gaining market experience.
• enhancing brands and/or differentiating products and/or services in the market 
• attracting investors particularly in light of increasing awareness of risks associated with GHG emissions in carbon constrained future.
• engaging employees on environment issues.

For more detailed discussion of the business benefits of a robust carbon management strategy, see where offsets fit in a carbon management strategy.

Regulatory and Voluntary Offsets

Various governments around the world have developed regulated markets for trading greenhouse gas (GHG) credits (e.g. European Union Emissions Trading Scheme, New South Wales Greenhouse Gas Reduction Scheme, U.S. Northeast Regional Greenhouse Gas Initiative, etc.). These schemes are usually designed to support targets or requirements for businesses in specific sectors to reduce greenhouse gases (GHGs). They are governed by rules on a range of issues, such as monitoring and verification of emission reductions, and trading of GHG credits with other businesses in the scheme. Trading scheme rules also set out how emission reductions from outside the sectors covered under the scheme can qualify as ‘offsets’ in order to provide flexibility to businesses in meeting their GHG targets.

Outside of these regulated markets, businesses may voluntarily seek to reduce GHG emissions through offsetting, and this may involve:

• Voluntary purchases offset credits recognised under a regulated market.
• Voluntary purchases of offset credits from emission reduction or sequestration projects outside the regulated market.. The voluntary nature of these purchases also allow for investment in a broader range of projects than are available through regulated markets These projects can also be selected to reflect the goals or values of the purchaser (e.g. EPA invested in an offset product which also diverted waste from landfillA hole in the ground where domestic waste and waste products from industry are put and covered with soil. ).

Where to Start

First, before investigating offsets, make sure to consider cost-effective avoidance and reduction opportunities internally. Offset purchases should occur as the final step of a business' comprehensive carbon management strategy, after all possible internal emission reduction meaures have been considered and implemented. 

Second, consider cost constraints (offset prices can range from less than $10 to more than $50 per tonne of GHG equivalents), preferences for a certain type of project (e.g. biosequestration versus renewable energy) or preferences for a particular project location (domestic versus international).

Third, when investigating offset products, carefully determine exactly what is being offered by evaluating each offset's key characteristics (outlined in the following section). Request product disclosure documents (PDDs) for prospective offset projects that should provide a detailed overview of these important offset characteristics, which will help to decide which offsets to purchase.

Fourth, continually review your carbon management strategy. In most instances, onsite reductions are the most cost effective way to achieve your business goals or targets. Don't forget to communicate your actions to your staff, stakeholders and customers. Be transparent about which offsets you purchased, the standards to which they were accredited and the steps you took to purchase them. Click here for further explanation of these steps.  

Key Offset Characteristics

There are several key offset characteristics that businesses should consider when selecting offsets: additionality, permanence, leakage, double counting, timing of emissions reductions, monitoring & verification and co-benefits. It's important to understand how the offset project saves the amount of emissions it claims. Consider how the project will deliver the claimed savings over its lifetime; what are the risks of non performance? Ensure the claimed savings come from a project that has been specifically created to deliver carbon savings and is not a by product of a project that would have happened anyway. This is called additionality. For an explanation of each of these factors click here.

It is also important to be aware of the wide range of offset actions that reduce emissions, as each type of project has its own particular issues which purchasers should be aware of. Broad categories for offset projects are: Forestry/Biosequestration (the most popular form of offsets), Methane projects, Renewable energy, Energy efficiency, Industrial gas and Mixed/Other. For more information on the important issues relating to each of these categories please click here.