A carbon offset is a reduction or removal of emissions of carbon dioxide or other greenhouse gases made in order to compensate for emissions made elsewhere. Offsets are measured in tonnes of carbon dioxide-equivalent (CO2e). One ton of carbon offset represents the reduction or removal of one ton of carbon dioxide or its equivalent in other greenhouse gases. Both the Oxford Principles for Net Zero Aligned Offsetting and the Science Based Targets initiative's Net-Zero Criteria argue for the importance of moving beyond offsets based on reduced or avoided emissions to offsets based on carbon that has been sequestered from the atmosphere, such as CO2 Removal Certificates (CORCs).There are two types of markets for carbon offsets, compliance and voluntary. In a compliance market like the European Union (EU) Emission Trading Scheme, companies, governments, or other entities buy carbon offsets in order to comply with mandatory and legally binding caps on the total amount of carbon dioxide they are allowed to emit per year. Failure to comply with these mandatory caps within compliance markets results in fines or legal penalties. According to the World Bank State and Trends 2020 Report, 61 carbon pricing initiatives are in place or are scheduled for implementation globally. These include both emission trading schemes (like cap-and-trade systems) as well as carbon taxes and, although these initiatives represent markets for carbon, not all incorporate provisions for carbon offsets, but instead place greater emphasis on achieving emission reductions within the operations of regulated entities. The original compliance carbon market was initiated by the Kyoto Protocol's Clean Development Mechanism (CDM). Signatories to the Kyoto Protocol agreed to mandatory emission reduction targets, enabled (in part) by carbon offset purchases by higher-income countries from low- and middle-income countries, facilitated by the CDM. The Kyoto Protocol was to expire in 2020, to be superseded by the Paris Agreement. The Paris Agreement determinations regarding the role of carbon offsets are still being determined through international negotiation specifying the "Article 6" language. Compliance markets for carbon offsets comprise both international carbon markets developed through the Kyoto Protocol and Paris Agreement, and domestic carbon pricing initiatives that incorporate carbon offset mechanisms.
With the increase of population, more specifically urban population due to densification, there is more of a demand for carbon offset. Within the voluntary market, demand for carbon offset credits is generated by individuals, companies, organizations, and sub-national governments who purchase carbon offsets to mitigate their greenhouse gas emissions to meet carbon neutral, net-zero or other established emission reduction goals. The voluntary carbon market is facilitated by certification programs (e.g. Puro Standard, the Verified Carbon Standard, the Gold Standard, and the Climate Action Reserve) which provide standards, guidance, and establish requirements for project developers to follow in order to generate carbon offset credits. These programs generate carbon offset credits provided that an emission reduction or removal activity meets all program requirements, applies an approved project protocol (also called a methodology), and successfully passes third party review (also called verification). Once carbon offset credits are generated, any buyer may purchase them; for example an individual may purchase carbon offsets to compensate for the emissions resulting from air-travel (see more on Air-travel and Climate).
Many entities exist within the voluntary carbon market (see offsetguide.org for more information). For example, carbon offset vendors offer direct purchase of carbon offsets, often also offering other services such as designating a carbon offset project to support or measure a purchaser's carbon footprint. In 2016, about US$191.3 million of carbon offsets were purchased in the voluntary market, representing about 63.4 million metric tons of CO2e. In 2018 and 2019 the voluntary carbon market transacted 98 and 104 million metric tons of CO2e respectively.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, biogas digesters, or hydroelectric dams. Others include energy efficiency projects like efficient cookstoves, 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. Carbon removal offsets include methods based on net-negative products and processes, such as biochar, carbonated building elements and geologically stored carbon (see Carbon Dioxide Removal).
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 (CERs).
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.