Part I: Where Carbon Offsets Originated and Why They Are More Important Now than Ever

Recent attacks on carbon offsets in both voluntary and compliance markets threaten to stymie evolving carbon markets twenty years into their existence—just as they are both gaining enough momentum to make meaningful greenhouse gas reductions. Net-zero goals by corporations and binding greenhouse gas reductions are being set by more than 197 nations worldwide under the Paris Agreement. Each of these commitments will need offsets in order to reach the deep reductions of 80% of 1990 levels necessary by 2050. Offsets, more than just a recent fad, are incredibly important to keeping the earth’s warming to only a 1.5 or 2-degree scenario. In this series, we go back to the origins of why they were used in the first place and trace their trajectory forward.

Part One: The Early 2000s

Carbon offsets, each of which is equal to one metric ton of carbon dioxide equivalence reduction, were originally designed in the early 2000s to provide cost containment for obligated entities in greenhouse gas markets. Successful sulfur and nitrous oxide markets created to reduce acid rains in 1994 in the U.S. provided evidence that tradeable instruments do provide cost reductions and provided a template for greenhouse gas markets to emulate. Having the flexibility to allow reductions made by one facility to count towards hard-to-make or expensive reductions at another showed that an overall level of pollution and increasingly stringent reductions could be made more economically if market participants could trade pollution permits.

Greenhouse gas markets built on this principle by allowing market participants to trade pollution permits, known as allowances, and use reductions in emissions from outside of the market boundaries to meet their compliance obligations. As an example, it can cost ~$6,000 to replace a home boiler and achieve the greenhouse gas reductions of ~15%,[1] saving about 0.3 metric tons of CO2 per year[2]. This works out to a cost of $20,000/metric ton of reductions. Optimistically assuming the boiler lasts 15 years, that works out to a reduction cost of $1,333/metric ton. By capturing and flaring landfill gas that would have otherwise been vented to the atmosphere, one metric ton of CO2 reduction in the form of an offset can be purchased for ~$4.50. Use of offsets not only provides cost containment for regulated entities but also allows for innovation in the market as new types of greenhouse gas mitigation options can be developed and qualify for credits.