What Are Carbon Offsets?

What Are Carbon Offsets?

What Are Carbon Offsets?

Nov 24, 2021, 9:52:45 AM Tech and Science

The Problem

Carbon offsets were created as a solution to a problem. In order to understand what the carbon offsets are, we need to understand the problem, which they are trying to fix.

The International Panel on Climate Change (the UN body on climate change) has established, beyond any doubt, that increased greenhouse gases lead to climate changes and planet warming. Just by watching the news, over the last year, we will notice the extreme weather, caused by this global warming. Sadly, it is not just the weather.

Just last year, scientists confirmed climate change has been the direct cause of Australia’s recent devastating wildfires.

So it is easy to see that climate change and associated negative developments are causing humanity devastating risks and destruction.


The Gases


Knowing that global warming is caused by greenhouse gases, let’s take a look at what these are. The main greenhouse gases are carbon dioxide, methane, nitrous oxide, water vapor, and fluorinated gases. To put things into perspective – just the first two of these are responsible for about 90% of all greenhouse gases, the bulk of it (80%) being carbon dioxide.

These gases are called “greenhouse” because they trap heat into the atmosphere.

Although most of them are natural gases, their excess production is the result of human activity – here’s how:

●      Carbon dioxide is the result of the burning of fossil fuels, like coal, gas, and oil;

●      Methane is the result of coal, oil, and gas production, as well as the result of some bad agricultural practices;

●      Nitrous oxide is emitted from agriculture and again from the burning of fossil fuels;

●      Fluorinated gases are emitted from different industrial processes.


The Solution


As global warming is a global problem, which does not respect national boundaries, countries have come together, under the Kyoto Protocol (adoption in 1997 and 2005 entry into force) and then the Paris Agreement (2015), to take action and ensure the decrease of emissions of greenhouse gases. Both agreements were fathered by the United Nations.

As carbon dioxide has the biggest impact on global warming, it is efficient to focus the global efforts on the reduction of its release into the atmosphere, and ways to capture the gas and decrease it.

Hence carbon dioxide is more or less at the center of the global warming fight. The Kyoto Protocol set limits for greenhouse gas production, and hence carbon trade between countries started.


Carbon Credits


Gradually carbon pricing came into being. The idea behind this is that carbon dioxide emitters should pay for their production and the ones who reduce their carbon footprint should benefit. Caps of emissions were introduced by governments and international bodies and the cap and trade system came into being. The aim of the caps is to gradually decrease all greenhouse gas-generating industries.

Each business is allotted a given number of credits (rights to emit CO2). If the business is able to decrease its emissions, it will have credits to sell. If emissions are higher than the cap, the business should buy the necessary credits from businesses that have lower emission levels. The holder of a carbon emission credit can produce one metric tonne of carbon dioxide or the equivalent of another greenhouse gas.

Technically the market for these credits is a market where buyers buy the right to pollute with greenhouse gases more than what they were allowed.

The carbon credits themselves do not reduce greenhouse gas emissions. Rather they redistribute the allowed production quantities. The positive effect is achieved by the reduction of the caps each year.


Carbon Offset


A way to measure true greenhouse gas decrease in production is the carbon offset. Both the carbon credit and the carbon offset deal in one tonne of carbon dioxide and an equivalent amount of other greenhouse gases.

This is their similarity. But while the carbon credit is a way to redistribute pollution between pollutants, the carbon offset truly measures one tonne of CO2 not being produced, or better yet – captured and destroyed.

Examples of carbon offsets are planting trees, building renewable energy farms, methane reduction projects, and similar initiatives. The aim of a carbon offset project is to actually reduce future emissions of greenhouse gases – be it carbon dioxide or some other equivalent. The producer needs to register, present her project, and then is certified (following an inspection) by an authorised party.

When these projects get certified, they may be traded on the open market. Here both companies and individuals may purchase them, with the aim to reduce their personal carbon footprint (when technically further carbon reduction is not possible).

Some enterprises will purchase carbon offsets equivalent to their emissions. Thus they are making their production completely carbon neutral. This same exercise may be done with individuals. A person can offset the carbon impact of a specific activity he is engaged in (say driving a car), and then again he may purchase enough offsets to make his complete existence carbon neutral.


The Price Of An Offset


Sometimes it is a tad confusing to learn that the prices of green are so low. The prices of carbon offsets have been rising for the past year. Even with all the “rising”, the price of carbon offsets topped AUD 20 per tonne in July 2021. Experts fear that the current price levels are not stimulating significant investments in greenhouse gas reduction technologies.

Support is coming from a different group of investors. They are not investing in green technology, but they want to invest in green companies. Currently, prices of carbon offsets are soaring in Australia based only on growing demand from voluntary corporate pledges to reach specific carbon levels. However, prices are rising even faster in Europe. There, further to the voluntary drive a new wave of investors are pressuring companies to reach specific carbon footprints.

Hence companies, who wish to attract investments, even if not voluntarily “green”, will have to join the market on the demand side, further boosting prices.

Prices are expected to continue to rise and eventually to reach AUD 50 by the end of the decade. The interest to invest in green technologies may come even sooner.

Published by SMM Services

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