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Understanding Carbon Credits

The most frequent announcements that companies make seeking to reduce their environmental footprint is that they are aiming to be carbon neutral, usually by means of carbon offsets. It’s a tempting idea however it’s complex for any business who has gone through this process will attest.

If your company invests in offsets for its greenhouse gas emissions each year You may believe that the funds will allow immediate reduction in greenhouse gases that is equal to the emissions you generate. This means that your business has been declared “carbon neutral” in the sense that the actions of your company are not affecting carbon emissions in the atmosphere. But, given how offsets are arranged, it is likely that, even after purchasing offsets, your business is in the end adding carbon to the atmosphere.

What happens to the money you spend on offsets?

The majority of media discussions about offsets has been focused on offsets as a type of greenwashing, the way in which the carbon reductions that offsets offer to customers are measured, and whether offset sellers actually perform what they claim they are doing. These are all crucial questions however, there are more fundamental questions regarding the purpose of carbon offsets.

A metaphor can be useful in this case. Imagine a bathtub. one gallon of water in the bathtub is one ton of carbon in the atmosphere. An average American has to be responsible for approximately 20 tonnes of carbon emissions per year. In the metaphor of the bathtub, carbon is expressed in 20 gal water. Quantity of carbon that is in the atmosphere is determined by the quantity of water that is that is in the bathtubs around the world.

With no offsets, the volume of the water that is in your tub is increased by 20 gallons every year. If you purchase offsets, you might believe that the purchase will take 20 grams of water out of the tub, so that the water level in the tub is exactly the same as the previous year. This is what people think of as they consider “carbon neutrality.”

The reality isn’t as easy. You could be purchasing credits that were generated from past actions. Perhaps someone other person has removed water from their tub, and you’re paying them for the actions they’ve made. In a way it’s like paying them to get the water from your bathtub, however, that water doesn’t go away. Instead, it is poured into a bathtub of someone else’s.

Or, you could be able to contribute funds to greenhouse gas reductions that are likely to occur in the near future. If all goes according to plan, offsets will decrease the volume of water in your tub by 20 gallons however it will take quite a while, and while you’re adding water at the amount of 20 gallons per year.

The cause of the confusion isn’t because offset companies are morally confronted. Instead, the majority of carbon-reducing investments require large upfront costs , and they reduce greenhouse gases for ten to twenty, or even fifty years or more. The majority of the reductions in greenhouse gases which are happening this year are a result of investment decisions earlier in the year. The actions that are taken now to cut greenhouse gas emissions will decrease greenhouse gases for a long time into the future.

Numerous “products” are available for sale as offsets with different offset companies providing different mixes of products. Certain offset companies allow customers to select the type of offsets you want to purchase. To know what you will get (and what you do not get) when you purchase offsets it’s helpful to look over the various kinds of offsets available on the market.

Carbon Reductions that result from the past actions

Certain carbon credits are traded on what is basically an exchange for financial assets. Within the U.S. there are two kinds of carbon credits that can be traded, Renewable Energy Certificates (RECs or “Green Tags”) and credits traded on a carbon credit exchange such as the Chicago Climate Exchange (CCX). Companies earn these credits by cutting their carbon emissions above the established targets (see the sidebar). Once the credits are obtained, they may be sold to firms who haven’t achieved their carbon reduction goals , or in order to compensate buyers.

What you get from your purchase What does it do? When you purchase CCX credit or RECs through an offset service Your purchase decreases the amount of credits offered to companies that haven’t fulfilled their carbon-reduction requirements and raises their cost. The price increase offers a greater reward for companies that exceed their commitments, while increasing the costs of those who aren’t meeting their obligations. This means that your offset purchase will increase the incentive for companies participating within market CCX or REC markets to lower emission of carbon. This incentive is an important element in companies making decisions for investing in green technology and many companies that participate in these markets depend on the sale of credit to ensure that their investment pays off.

Carbon Reductions in the Future

Certain offset companies make use of the funds you pay for to invest in projects that reduce greenhouse gas emissions in the near future. The projects vary but they typically include solar and wind power and methane capture as well as trees, and biomass.

What you pay for It will be used to fund projects that, once completed, lower the amount of greenhouse gases that are in the atmosphere. Since many projects that cut down on greenhouse gas emissions require substantial upfront expenses, financing can be an obstacle. Offset sales of funds could allow clean projects to be put in the pipeline faster. Forests are important “carbon sinks” that reduce the carbon emissions humans release in the atmosphere. Therefore, should your money be used to fund an initiative to plant trees, it could eliminate carbon dioxide from the atmosphere for long periods of time.

But, if you purchase the offset amount of 20 tonnes there isn’t an immediate reduction of 20 tons in greenhouse gas emissions. In the case of a renewable energy initiative with a life expectancy of 20 years then the twenty tons worth of savings in carbon will typically be spread across the course of the project, which means that the reduction in carbon will be one ton each year for 20 years. Additionally, the reduction does not start until the project has been completed, which may be one year or more after the purchase.

If the money is used for planting trees the purchase will not reduce greenhouse gases immediately since the amount carbon the trees absorb is proportional with their dimensions. Small saplings do not have a significant impact on greenhouse gas emissions; however, their impact grows with the size of the tree. If you purchase twenty tons worth of offsets to are used to fund a tree planting project It’s likely that atmospheric carbon will fall in less than five tonnes in the initial 25 years of tree’s life.

If your offset investment is directed to projects that are aimed at reducing greenhouse gas emissions in the near future, it may be difficult to know if these projects actually result in the greenhouse gas reductions they claim to reduce greenhouse gas emissions. A lot of offset companies provide details on their websites on the projects they fund, and many of them offer a third-party auditing and verification procedures. However, the kinds of information offered as well as the auditing and verification processes differ significantly between offset providers one another. Additionally, the calculations for carbon reductions are heavily influenced by the amount of carbon that could have been released without the project. Moreover, there are no standards to determine the baseline emissions or carbon reductions. When a tree plantation project is undertaken there is also the chance that the trees might be afflicted by disease or that the forest might become burned. Carbon impacts calculations of the forest must take into account these risks.

What’s happening with your bathtub? The investment you made removes the water from your bathtub However, the amount of water that is in the bathtub is rising. It’s because you’ve invested only a tiny amount of water over a prolonged amount of time. In the period of one year you’ll are able to add more water into the bathtub (through your usual business activities) than the offset purchase eliminates.


Many offset buyers would like their money to be the difference in the possibility of a carbon reduction project happening or not. In the world that carbon offsets are based on, the aspect is referred to by the term “additionality.” Deciding whether a specific initiative is “additional” is not easy. Renewable energy investments or energy efficiency, as well as reforestation might be added but it’s difficult to discern. Projects are initiated due to a myriad of reasons and project managers are in the incentive to present their projects as “additional” to ensure that they are able to attract offset investors. If the concept of additionality is important to you, you should read the information carefully. Some claims are more persuasive than others.

What’s a business to do?

If your business is looking to spend money on cutting down on carbon dioxide in the atmosphere begin by making changes to reduce your own carbon footprint. These investments are often not just good for the environment, but they can also help you save cash over the course of time. The replacement of incandescent light bulbs by compact fluorescents, utilizing hybrid vehicles to power the fleet of the company and installing controls for buildings to minimize energy use can decrease the carbon footprint of your business and increase your profitability of your business.

If you’re looking to do more offset purchases are definitely worth taking into consideration. The offset purchase revenue can are crucial to fund a variety of initiatives that help reduce greenhouse gas emissions. If you choose to purchase offsets, make sure you make sure you research the various offset suppliers. Check out their websites. If they’re more open and transparent be the more likely their work and their calculations will be viewed with confidence.