What is carbon offsetting?
Carbon Offsetting is the act of reducing emissions of carbon dioxide (CO2) in order to compensate for emissions that are made elsewhere. The phrase is also used in relation to other greenhouse gases and is measured in carbon dioxide-equivalents (CO2e), so one carbon offset is equal to the reduction in emissions of one metric tonne of CO2 or the equivalent of any of the other five primary greenhouse gases; methane (CH4), nitrous oxide (N2O), perfluorocarbons (PFCs), hydroflourocarbons (HFCs), and sulphur hexaflouride (SF6).
McLaren Formula One Racing Team buys carbon credits June 2012. They are the first carbon neutral F1 team so far.
UBS forecast 195% market increase to the end of 2013.
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What types of carbon credits are available?
There are officially two types of carbon credits which have been born from the Kyoto Protocol, Certified Emission Reduction (CER) and Clean Development Mechanism (CDM). One carbon credit is equal to 1 metric ton of CO2 which has been reduced, stored for the long term or been avoided entirely. As mentioned further on in this article the third and unofficial carbon credit is Voluntary Emission Reduction (VER).
Carbon offset schemes allow individuals and companies to invest in environmental projects around the world in order to balance out their own carbon footprints.
Typically, offsets are achieved through support (normally financial) of environmentally sound projects that work in some way to reduce the emission of greenhouse gases, whether in the short, medium or long-term. Some projects include improving energy efficiency, the removal and neutralisation of industrial pollutants or agricultural by-products, the removal and recycling of landfill methane, and forestry projects. The most common projects normally involve the generation of renewable energy, (wind farms, biomass, or hydroelectric etc.) and these are often the most interesting offset projects from a corporate perspective.
- Often the carbon offset schemes are located in distant countries where easy CO2 cutting ‘wins’ are available at a low cost;
- Some schemes work by soaking up CO2 directly from the air through the planting of trees. Or capturing the methane gas from landfill sites.
Carbon offsetting is a result of the Kyoto protocol
The Kyoto Protocol sanctioned offsets as a method by which governments and businesses can earn carbon credits, which can then be traded on one of many marketplaces. The Kyoto Protocol also established the Clean Development Mechanism (CDM). This mechanism measures, evaluates and validates projects, ensuring that stated benefits are authentic and that additional activities are genuine and not something that would have been undertaken anyway.
Caps, or quotas, are established by governments and other bodies to set a limit on the amount of greenhouse emissions an industry or organization can emit. This is measured in carbon credits (one carbon credit = one tonne CO2e). Organizations that produce fewer emissions than their quota can sell their surplus credits on the open market. Organizations that are unable to meet their emissions quota can offset their emissions by buying CDM-approved Certified Emissions Reductions.
The carbon offset market falls into two categories
Corporations – certified emission reduction (CER) and clean development mechanism (CDM)
There is the larger compliance market in which companies, governments, or other organizations are legally obliged to meet their emissions quotas. Those that cannot must buy carbon offsets in order to comply with the caps that have been set. This market has been set up in order to achieve compliance with the targets set by the Kyoto Protocol as well as the EU Emissions Trading Scheme. In 2006, approximately $5.5 billion of carbon offsets were traded in the compliance market, representing a reduction in CO2 emissions of around 1.6 billion tonnes.
Individuals – voluntary emissions reduction (VER)
The voluntary carbon offset (VER) market has been established in order for individuals and businesses to purchase carbon offsets to help compensate for their own greenhouse gas emissions, whether from the basic carbon footprint of daily life, or from business operations such as transportation and electricity use. Some individuals or businesses see it as an ongoing commitment whereas others may purchase carbon offsets to compensate for one particular activity, a long haul air flight for example. In 2008, about $705 million of carbon offsets were purchased in the voluntary market, representing a reduction in CO2e emissions of about 123.4 million tonnes.
- Often individuals can neutralise their own carbon emission by paying a carbon offsetting website to purchase carbon credits so that their use of gas, electricity and flights is offset;
- Prices do vary quite a lot but as of writing £8 per tonne was a reasonable price to pay. It has been calculated the average UK family would need to pay around £45 per year with that amount shooting up dramatically if flights are to be factored in. For example, to cover a flight from London to Italy might be around £4 per ticket.
Increasingly corporations such as McDonalds and touring rock bands have been purchasing voluntary emissions reduction carbon credits to help raise their profile and offset their carbon emissions beyond what is required by law.
There are a number of reasons for individuals and businesses to trade on the voluntary carbon offset market. The most common reason is corporate responsibility. Although some corporations truly are responsible, public perception and consumer pressure causes many to behave so. Businesses seek to offset their greenhouse emissions because this will improve their ‘green’ credentials, which will in turn improve their public image and consequently their bottom line. Businesses can keep both the customers and the shareholders happy by offsetting their carbon footprint.
The other major motivation for buying voluntary carbon offsets is the pre-compliance market. Companies that buy for pre-compliance are effectively betting against a mandatory cap or quota being introduced to their industry. The introduction of a mandatory cap will cause a sharp rise in prices for that particular sector, so by buying ‘offsets’ before they become mandatory, gives companies, especially those with large carbon footprints and the corresponding financial exposure, a chance to purchase carbon credits now at a lower price than they expect it will become in the future.
There are two main types of carbon emission projects, those that aim to cut emissions and those that aim to capture and store carbon emission for the long term. The former are known as carbon reduction schemes.
Individuals or businesses buying offsets at retail price are also a significant part of the carbon offsets voluntary market. As stated above, this is often done simply to compensate for greenhouse emissions made elsewhere. Typically a retailer will offer the facility to calculate your carbon footprint. It is then possible to purchase offsets to match the footprint. By offering details and a choice of scheme offset retailers enable a sense of participation and ‘ownership’ to customers. Many environmental NGOs offer the opportunity to purchase carbon offsets, as do particularly carbon intensive industries such as airlines etc.
The other main category of buyer on the carbon offsets market is traders. Traders here operate in the same way as traders on stock markets. The aim is simply to buy low and sell high. With the possibility of a profit to be made all of the major financial institutions are represented here.
Demand is set to soar
With the world population already beyond the 7 billion mark and staring at 9 billion by the year 2050 there will be an increase in carbon emissions and therefore an increase in the offsets required by corporations and individuals who want to tread lightly on this fragile earth. It is assumed that if global GDP increases at a rate of 3% per annum over the next 25 years it is also predicted that demand for carbon credits will double within the same time frame.
Most individuals purchase VER carbon offsets for purely ethical reasons, but if you are interested in investing in the carbon offset market for a profit then there are a number of trusts and funds available that will take some of the work out and may be the solution for you. Be sure to do your homework well as this is a complex market place.
- Carbon offsetting, carbon trading
- Emissions trading
- Feed-in tariff (FIT)
- Green oil investment
- Renewable energy investment
- Solar investments
Carbon offsetting is just one of many forms of green investments which allow you to control your own financial future and help sustain a better future for the next generations. There are other alternative investments known as ethical investments and they include teak, bamboo, forestry and timber farming.
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