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Carbon Offset: A Primer

Published May 20th 2008, 10:13pm by Jody DeVere in Featured Articles

Tree_2 If you are planning to go green, whether individually or as a business, the financial instrument called "carbon offset" can be a good friend.

Buying carbon offsets is a good approach to negate the greenhouse gas emissions from your business or daily lifestyle that cannot be easily reduced in the short-term. You can think of it as a way to assuage guilt. At the most basic, you pay some financial intermediary (i.e. carbon offset brokers) some money to get offset credits, and they turn around and invest the money into projects that help reduce greenhouse gas (GHG( emissions somewhere in the world. Such investments work because global warming is a borderless problem, hence reducing global GHG footprint is effective. Carbon offset brokers hunt for projects that qualify for offset credits to invest in, usually in reforestation or renewable energy, for example wind or solar, and then repackage these into variable sized financial instruments to accommodate different levels of buying power.


So why do we care about carbon? In today's global warming debate, the fundamental concern revolves around greenhouse gases (GHG), which trap heat and prevent it from radiating back out to space. The increasing amount of heat trapped within the earth's atmosphere causes temperature to rise -- hence, global warming. There are six greenhouse gases: water vapour (H2O), carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), ozone (O3), and sulfure hexafluoride (SF6). Since they each have different capacities for trapping heat, warming potential is measured as CO2-equivalent (or CO2-e). For example, methane, which is released from garbage landfill and animal waste, has 14,000x times global warming potential as CO2.

Carbon offset owes its birth to the wildly successful SOx NOx emission trading schemes, a market mechanism used by the United States to successfully combat acid rain. There are two types of carbon offsets: mandatory and voluntary. In the U.S. the carbon market is entirely voluntary, since we are not party to the Kyoto Protocol. There are various bets that this might change within a year or two, with a new administration coming in, that may be friendly to mandatory cap-and-trade regulations

Applications of carbon offset to individuals include offsetting personal trips. For example, if you fly 500 miles, you will emit 0.21 metric tons of CO2-e. So if you buy the carbon offset credit offered by your airline or travel agency, you can fly guilt-free knowing you are not further contributing to climate change. Today there are many outlets that will sell you offsets for anything that emit GHG -- from driving, or owning a house.

On the business side, carbon offsets are very useful for businesses looking to go green. Green business certifications, which is becoming more and more popular, may require a cap of GHG emissions, which can come from many factors, for example employee business trips and operational energy usage. Businesses should first take steps to address low-hanging fruits that reduce GHG emissions (e.g. replacing some business trips with tele-conferencing technology, using energy-efficient appliances). However, there would usually be harder to achieve reductions (e.g. when large capital investment is needed to install cleaner machinery or process). In these remaining cases, buying carbon offsets is a good temporary solution to help negate these emissions.

I stress temporary, because offsets are usually either valid for a specific period, or for a specific event, so you will have to keep buying them, which adds to expenses. In the big picture, carbon offsets simply buy the world some time to put into place more drastic actions to reverse the impact of global warming. Don't rely on it forever. Remember that buying carbon offsets is an easy way out, and most investors know that. While today you will certainly get positive PR from investing in it, in a few years, stakeholders will expect companies to do more than buying their way out. Do some financial analysis to see whether that seemingly expensive upfront capital investment to directly reduce your company's greenhouse gas emission has an acceptable payback period. If that's the case, it may even make sense to directly reduce than to buy offsets.

Carbon offset is part of a new field called "carbon finance." It is rather complex and jargony, so we will stop at this level of explanation for this general-purpose article. If you want more information, PointCarbon is a great site for news on this topic. Also, the Carbon Forums are excellent sources for education and networking... just make sure you brush up on carbon-related acronyms or you will get lost there.

You may, by now, have become a little uncomfortable about whether your money is really going to good use. Recent articles like this one may cause you to pause. Good offset projects should create additionality, be verifiable, and estimate their reduction conservatively.

In the recent Clean Air-Cool Planet (CACP), "A Consumer's Guide to Retail Offset Providers", additionality is defined as follows: Emissions reductions are "additional" if they occur because of the incentives associated with the existence of GHG markets. A variety of additionality “tests” have been proposed, but at its root demonstrating additionality means showing that the emissions reductions being used as offsets are not “business as usual.”

Verifiable means that reduction claims can be audited and confirmed. Conservative estimates are important since GHG emission calculations are influenced by many factors and are based on conversion factors which are economic averages.

So before you purchase, do some research and go with the well-known outfits. In the next article, I will explore some places where carbon offsets can be purchased.

Extrazoom Marn-Yee Lee
Contributing Editor
AskPatty.com

Marn-Yee Lee is pursuing an MBA in Sustainability at the Presidio School of Management in San Francisco. After spending a decade in I.T. and on Wall Street, she is now pursuing her passion for the environment. She sees business as a partner for creating innovative solutions to pressing environmental issues. In her spare time, she writes a blog to inspire others to consider the impact of their daily lives on the environment at busythinking.blogspot.com.

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