What Is Carbon Offsetting & Does It Work?

carbon offsetting

As climate change debates go, the one about carbon offsetting (and the whole carbon trading market) is one of the most vocal and heated. The problem is that the arguments are long and often confusing and the man on the street has neither the time nor inclination to read through everything and come to his own conclusions.

In this article I have attempted to break everything down into a Q&A format to find my own way to a balanced view on the matter.

Executive Summary:

  • Carbon offsetting is essentially a way for individuals or businesses to balance out their carbon footprint by funding a reduction of an equal amount in some other part of the world.
  • This often takes the form of investment into renewable energy, the cleaner burning of fossil fuels or a reduction in deforestation.
  • It is not generally possible to choose which projects get funding.
  • There are a number of different international standards to try and ensure that when 1 tonne of emission offsets is paid for, an amount as close to this as possible is actually offset.
  • The main argument against offsetting is that it effectively allows people to be able to pay to pollute. In other words, it is commoditising the atmosphere and the very climate we live in.
  • Many people also argue that the projects that are funded by offsetting would likely have happened anyway – this is the “additionality” argument.
  • The final argument is that offsetting actually prevents the reduction of emissions at the source.
  • There is a difference between a company being forced to offset by law and consumers who voluntarily offset.
  • Offsetting may actually be driving innovation as companies look to profit from selling offsetting credits.
  • Offsetting often contributes to projects that actually raise the standard of living of some of the world’s poorest people.
  • My own view is that once we have done everything in our power as individuals and businesses to reduce our greenhouse gas emissions, carbon offsetting is the final, logical, step to leading a life that is as close to carbon neutral as we can possibly get.

Jump to questions:

  1. What is carbon offsetting?
  2. Who controls carbon offsetting?
  3. Where do the reductions in emissions take place?
  4. What sort of projects count towards offsetting?
  5. Can you choose which projects you pay for with your carbon offset credits?
  6. How do governments use or implement carbon offsetting?
  7. Why do governments use carbon offsetting?
  8. How do companies use offsetting?
  9. Why do companies use offsetting?
  10. How do consumers use offsetting?
  11. Why do consumers use offsetting?
  12. Does offsetting hinder efforts to reduce emissions at source?
  13. Do carbon offsets truly reflect the reduction in emissions being claimed?
  14. Wouldn’t carbon reductions by companies now be worth a great deal more in the future?
  15. Are offsetting projects in the developed world feasible in terms of cost?
  16. Should offsetting be restricted to projects within the same country or region?
  17. Should larger rewards be given to companies in the developed world who reduce their own carbon emissions?
  18. Can most consumers afford to offset their carbon footprints independently?
  19. Do consumers care more about the effectiveness of the offsets than businesses?
  20. How do you encourage voluntary carbon offsetting by consumers?
  21. Can carbon offsetting stimulate growth in developing countries?
  22. Can offsetting actually drive innovation by the private sector looking to profit from carbon trading?
  23. Does offsetting at least encourage major polluters such as China and India to get one foot in the door of sustainable development rather than the alternative which might be for them to shun it in favour of development of their own economies at any cost?
  24. Does the very debate on carbon offsetting raise the awareness of the need to reduce emissions?

First things first: The basics of carbon offsetting

What is carbon offsetting?

To put it simply, when an individual or company offsets an amount of carbon, they are paying somebody else to reduce emissions on their behalf to that amount or to simply not create the emissions in the first place.

For example, Gas Guzzling PLC wants to offset 1000 tonnes of carbon emissions and pays for this amount of carbon credits.


  1. A new renewable energy project can be funded which will prevent the future emissions of those 1000 tonnes from other, “dirty” sources of energy.
  2. A current polluter (most likely another company) will work to reduce their own carbon footprint by 1000 tonnes in return for a cash payment matching the value of the carbon credits purchased by Gas Guzzling PLC.

A third option is what is known as sequestration but I will tackle this subject later on in this article.

Who controls carbon offsetting?

One of the major players in the offset market is the United Nations’ Framework Convention on Climate Change (UNFCCC) which has devised the Clean Development Mechanism (CDM). This mechanism is a primary way in which emission reductions are certified and thus made quantifiable. If this didn’t happen then trading credits based on these projects would be very difficult indeed. This certification of reductions is also one of the most controversial aspects of the whole debate as we will see later.

Where do the reductions in emissions take place?

Generally speaking reductions take place in the developing world in countries such as India, China, Brazil and across Africa. The reason this is the case is because the cost of projects in these regions tends to be lower than in the developed world. Many argue that this creates efficiency in terms of using the capital to reduce global carbon emissions, after all CO2 in the atmosphere is fairly uniform and thus the savings can come from anywhere.

What sort of projects count towards offsetting?

As far as I can see, carbon offsetting projects come in 3 broad types:

  1. Renewable energies – investment in new power generation plants using renewable technologies such as solar, wind, hydro and wave. These types of projects tackle emissions head on by switching our reliance from carbon-producing power supplies to non carbon-producing power.
  2. Efficiency savings – thanks to technological advancements we can now make products that are kinder to the environment and have a lower carbon footprint. Think about your energy saving appliances at home but on a much larger scale.

    While they are probably the cheapest to implement, in my opinion these efficiency savings do not directly address the crux of the problem. We will still use all of the natural resources of this world such as oil and gas; it might just take us a little while longer to get there.

    BUT as far as doing them or not doing them, we can at least start by implementing as many of these projects as possible to give us more time to create new carbon-neutral forms of energy and fuel.

  3. Sequestration and carbon capture – while reducing the amount of carbon we emit is one way to approach the challenge of climate change, another is to remove carbon from the atmosphere entirely using what are known as carbon sinks.

    Nature has this wonderful ability to remove carbon from the atmosphere in the form of plants, soil and oceans so any projects that can enhance or protect this ability actually help reverse the trend of increasing CO2 levels in the atmosphere.

    Some examples are:

    Reducing Emission from Deforestation and Degradation (REDD) which aims to protect the world’s forests, mainly in developing countries, in order to maintain the carbon sink effect they have due to photosynthesis within the plants and trees growing there.

    Ocean Iron Fertilization is a process that encourages growth of phytoplankton whose 60-day life cycle ends in it sinking to the bottom of the ocean. All the carbon contained within these microscopic organisms then gets stored rather than being released back into the atmosphere.

    Pumping CO2 into rocks or underground reservoirs which can act as carbon sinks to store the gas and not return it to the atmosphere.

Can you choose which projects you pay for with your carbon offset credits?

There may be circumstances where the party that is offsetting carbon can choose which projects they fund but, in the main, credits are traded as equal according to their accreditation standard. So for instance, offsetting a tonne of carbon at the Verified Carbon Standard should be the same no matter who you buy from and what project is being funded. Many offsetting companies will give the buyer an idea of what sort of projects it chooses to fund but only a few will then give the option to fund one project over another.

Who offsets and what are their motivations?

How do governments use or implement carbon offsetting?

The main example of how governments use a system that is very similar to carbon offsetting is the European Union’s Emissions Trading System (EU ETS). In this system, each country agrees a fixed cap on CO2 emitted from a large proportion of their economic activity (including but not restricted to electricity generation, power stations, refineries, iron and steel production and the manufacture of vehicles). EU member governments then allocate allowances (1 allowance = 1 tonne of CO2) to companies covered by the cap.

In a similar way to carbon offsets, these allowances can be traded between companies. This means that if a company generates more CO2 emissions than its allowances can cover, it can buy allowances from companies that have exceeded efficiency targets and have some spare. This is called a cap-and-trade system whereby a fixed reduction in emissions is agreed and companies are left to reach it via the trading of these allowances.

According to the Department of Energy & Climate Change, this system encompasses industries that account for around 48% of UK CO2 emissions.

Why do governments use carbon offsetting?

For those countries that signed up to the Kyoto Protocol, emissions trading is one of the 3 main mechanisms by which they can meet their emission reduction targets. The other 2 are the CDM mentioned above and Joint Implementation (JI) which basically allows parties to create emission reducing projects in countries outside of the Protocol itself with the host country benefiting from the foreign investment. For example, the UK might fund projects in Indonesia and the carbon reductions from them can still count towards our Kyoto Protocol targets.

How do companies use offsetting?

While companies within the structure of an emissions trading system are given allowances in which to trade, if other corporate bodies wish to reduce the impact of their carbon emissions (for whatever reason) then they can do so using the voluntary carbon market.

Why do companies use offsetting?

The reasons polluting companies may utilize the voluntary carbon market for offsetting are somewhat debatable; many would argue that ‘green’ core values are often just marketing ploys to improve a public image or damaged reputation. In essence you have to ask yourself: are those companies claiming to be carbon neutral really scrutinizing the effectiveness of their offsetting or are they merely presenting carbon credit certificates in the hope of gaining more customers?

On the other hand, where small and medium sized businesses have genuinely reduced their carbon footprint through waste reduction and efficiency savings, should they want to go completely neutral then carbon offsets are their only option – very few small businesses are able to completely negate their impact on the environment by building a solar panel array for example.

How do consumers use offsetting?

Much like companies, if an individual wishes to reduce the impact they have on the environment then the voluntary carbon market offers a way to do this. They would simply buy however many tonnes of carbon offsetting they wanted and the money would go to one of the projects described above.

Why do consumers use offsetting?

When you get down to the individual level, the motivation for offsetting is largely accepted. There are few arguments over an individual wanting to improve his public image or make a profit (celebrities aside) so there is a genuine desire to help the planet.

While the developed world may be gorging on a diet of carbon intensive products and services, unlike other problems with society, consumers can at least feel like they are making a contribution to a workable solution. Much like fair trade or free range produce, consumers can act on climate change whereas they probably feel helpless when it comes to crises such as the economy or the obesity epidemic.

The Good, The Bad & The Ugly – The Offsetting Debate

Now it’s time to get down to the arguments for and against carbon offsetting. I will try to make them easy to follow because they are not always straightforward.

Does offsetting hinder efforts to reduce emissions at source?

Those in the anti-offsetting camp will often fall back on this as one of their main arguments saying that the whole carbon market is simply a distraction from the more important and fundamental changes that individuals and businesses need to make in order to effectively combat climate change.

This point undoubtedly has some foundation in truth, particularly when it comes to businesses. For them it is almost certainly easier and cheaper to buy carbon offsets equalling their emissions then it is to implement company-wide changes to reduce their emissions themselves.

Some people refer to the argument of “indulgences” which has it’s origin in 15th and 16th century Holland. People who had committed a crime could redeem themselves in the eyes of God by paying a priest on a sliding scale depending on what the crime was. Parallels are thus made between this and the actions of companies who offset their carbon emissions thus absolving them from the sin of polluting; George Monbiot argues this point quite eloquently in this post.

Personally I think this trivializes what is a much more complicated issue. I consider myself to be a realist and the idea that all individuals and companies whether urban or rural are able to reduce their carbon footprint by the figures often discussed (as much as 90% according to some people) is a fairly ludicrous one. We can’t all live in solar powered houses, get our food from within walking distance, telecommute for work and give up our pet dogs.

Now I’m not denying that massive change is needed to reduce emissions but for the average Joe and for most small businesses, the actual impact they can have is somewhat limited once they have switched to a green energy tariff, recycled everything they possibly can and found all the efficiency savings available to them. I wouldn’t wish to deprive these people and companies the opportunity to do more in the fight against climate change but I concede that more pressure needs to be put on governments and the major polluting industries to lead the way.

Do carbon offsets truly reflect the reduction in emissions being claimed?

Another of the big points of contention within the debate on carbon offsetting is that of how carbon offsets are measured and thus how close are the claimed emission reductions to the true figure.

There are a few points to consider when coming to a balanced view on this:

  1. Would the projects funded by offsetting have happened anyway regardless of the investment from offsets?
  2. How long will it take for the offset to be realised? Will emissions today only be offset in 5 years time when a project is complete?
  3. Can you accurately measure the amount of CO2 that is saved by a project?

So let’s get down to each point individually:

1. Whether a project would have happened anyway regardless of offset funds is commonly know as the “additionality” problem. There have been studies (most notably this one by Friends of the Earth in 2009) that cast some doubt over the additionality of some developments.

There are some obvious cases to consider such as:

Certification that happens after projects have begun – it seems unlikely that a company/organisation would take the risk of starting work (whether construction or something else) if they were really to rely on offsets for it to be profitable.

Example: A hydroelectric plant in China is 12 months into construction before it gets certified as a source of carbon credits – how can this be additional if the work has already started? Surely it was being built anyway?

Projects that would have eventually been commissioned by national governments – it is often unclear whether a project would have been state funded 5 or even 10 years into the future if no funds from offsetting were available in the present day. Due to this Nostradamus-like requirement, it is often argued that out of 100 tonnes of carbon credits paid for, a significant proportion cannot be counted as additional because they merely accelerate the development of projects rather than account for their existence entirely.

My View: There are clearly going to be some projects that slip through the net in terms of additionality but I would hope that since the 2009 report by Friends of the Earth, a better decision making process has been implemented to keep these to a minimum. With regards to predicting the future, I would argue that if a national government were going to pay for or subsidise a project in years to come, without this requirement they can potentially use the money for other green schemes – it is not “lost” money.

2. The time at which offsets occur is not always clear when credits are being purchased and this may cause some false accounting when it comes to headline figures. If a wind farm is going to take 4 years to complete from planning through to power generation, if offsets are sold now to fund it should they be considered as part of this years offsetting total or the total for the year after power starts to flow?

This is an important question if we look into the numbers a bit more closely:

Major Polluter Limited pays to offset 2500 tonnes of carbon a year for 4 years. These payments go to fund the construction of said wind farm. After 4 years, the company has emitted 10000 tonnes of carbon into the atmosphere while the wind farm has yet to offset any.

In effect, there is a delay in the effectiveness of some projects which can be years long.

My View: Nothing we do as human beings to avert a possible climate disaster is going to happen overnight. Whether building renewable energy sources, drastically reducing our own usage or finding ways to remove more carbon from the atmosphere, there will inevitably be a time factor involved. I do not see this as an argument against offsetting at all.

3. Since carbon offset credits are traded by the tonne, it is obviously important to be able to measure the reduction in emissions accurately on a project by project basis. With energy generation this is quite possible because we know fairly accurately how much CO2 is emitted from various forms of fossil fuel burning (see: coal, natural gas, oil) and so when these are avoided or reduced by generating power in a green manner, we can say X number of tonnes have been saved.

In other cases it is not so clear. Take the prevention of deforestation for example; it had long been thought that 20% of all CO2 emissions occur because of deforestation (figures from the IPCC) but a 2009 report put this figure at more like 12%. In different forests, the carbon cost of chopping down 1 hectare of plant life will vary and so knowing how to accredit 1 tonne of savings is problematic.

My View: Many projects have a measurable impact while with others it’s a bit of a finger in the air job but I would imagine that the errors are on the small side when taking the whole carbon offsetting market together and so a tonne of offsets sold should equal roughly a tonne in actual emissions averted.

Cross-examining Company Usage of Carbon Offsets

Many of the arguments against carbon offsetting are directed squarely at business so I thought it would be good to take a look at these in more detail.

Wouldn’t carbon reductions by companies now be worth a great deal more in the future?

Right now there are many apparent ways to reduce the impact of carbon in the atmosphere that are relatively cheap and straightforward to implement, but if we were to look 5 or 10 years down the line when all of the low-hanging fruit is gone, the cost to companies for each tonne of CO2 offset will rise dramatically.

Many people would therefore argue that for long term benefits and cost reductions, a company is better off spending money reducing its output of carbon now instead of merely offsetting it.

If it currently cost $10 to offset 1 tonne for instance but in 5 years time this rises to $40 per tonne, any action by the company to reduce carbon production will not only save $10 per tonne per year now but in the future this exact same expenditure will be reducing the offsetting cost to the company by $40 per tonne per year.

Are offsetting projects in the developed world feasible in terms of cost?

In any country there are ways of reducing carbon emissions and thus a potential market for carbon offset projects but if we examine these more closely, are the costs of such schemes in developed countries prohibitive?

My point being is that if the cost of offsetting one tonne of emissions in a developed nation is 2, 3 or even 4 times the cost of the equivalent offsets in a developing country, can companies maintain their competitiveness if they choose to buy the more expensive offsetting credits where their competitors buy the cheaper credits?

Clearly the answer is no in industries where many thousands of tonnes are offset each year.

But it leads quite nicely onto my next question…

Should offsetting be restricted to projects within the same country or region?

If you were to say to companies that they could only buy credits from projects that exist within the country where they primarily operate, it would negate the competitiveness argument within the domestic market.

The problem is that this world is incredibly interconnected with multinationals doing business all across the globe. If the costs of offsetting are lower in one country than another, then companies who operate in that country will be more competitive on the global export market, basically meaning their products are cheaper than those made by another company in a country where offsets costs more.

To work effectively, all companies need to have access to carbon offsets at the same price (or similar) and thus the cheapest offsets are the ones that get the most demand. The fact that these cheap schemes happen to exist in developing countries is by no means a coincidence but rather a consequence of them being less developed.

Should larger rewards be given to companies in the developed world who reduce their own carbon emissions?

One way around the issue of competitiveness where offsetting in developed countries is concerned is to simply reward companies that lower their own emissions in way of compensation for spending money over and above what it would have cost them to offset.

So in effect, if a company spends £1 million to reduce its carbon footprint by 50,000 tonnes, the same amount of carbon offsetting would have cost say £500,000 meaning the company is then paid, by way of reward, something approaching £500,000 by the government to cover most of its additional cost.

The main problem with this is that reducing a carbon footprint will often lead to cost savings for the company anyway. So going back to my example, if the efforts of the company to reduce its emissions actually lead to a cost saving each year of £50,000 then should the government still be required to pick up the £500,000 bill?

In effect you are rewarding a company reducing costs and becoming more competitive – these are things that a good company should be doing anyway.

GreenSteve Solution: if a company cannot afford to invest such lump sums in emission reducing ventures and instead opts to pay for offsetting over the course of the year (due to cash flow) then a green loan fund could be setup by government to help pay the initial costs. If very low interest rates are provided and loans are repaid out of the cost savings made then such changes could be more rapidly implemented.

Looking Further Into Consumer Carbon Offsetting

Aside from big companies using offsetting as a way to reduce their impact on the environment, it is becoming more common to see consumers opting for this same solution when they want to do their bit.

At first we saw airlines giving passengers the choice to pay a little extra for their ticket in return for offsetting the carbon generated by their flight but nowadays there are places where regular members of the public can go to offset as much carbon as they want.

Here then we find ourselves asking a few questions about consumer offsetting and whether or not it represents a viable model for carbon reduction.

Can most consumers afford to offset their carbon footprints independently?

In an ideal world, everyone would be responsible for the impact they themselves have on the environment and would offset the amount of greenhouse gas emissions that they create but just how common is this in real life?

With household budgets seemingly under constant pressure from fuel bills, food costs, sky high rents and other big bills that are on the rise, can we really expect ordinary people to pay yet more money out of their budgets on reducing their carbon footprints?

Furthermore, with people being more “time poor” than ever, will another duty to perform be one too many?

It seems to me that in most cases, the answer to both questions is no. Many people have neither the money nor the time to offset their carbon footprints or indeed reduce them by changing their habits.

Do consumers care more about the effectiveness of the offsets than businesses?

For those consumers that can afford to offset, it is probably true to say that they want to be sure they are genuinely making a difference. Unlike businesses who are either obliged to offset because of regulation or offset solely to appear sustainable, consumers are volunteers in the process and offsetting because they think it the right thing to do, not because of some outside force.

Since this is the case, are consumers in a better position to have a positive impact on the quality of the overall offsetting system simply because they are more scrupulous when it comes to choosing a project to fund?

In my opinion it is unlikely that even those consumers with the best intentions will want to spend any longer than they have to choosing a project because of the time pressures mentioned above and the sheer complexity of the arguments.

However, I genuinely do think that consumers care more about where their money goes so an ideal solution would be a trusted figure of the green community giving their judgement on which offsetting company to use. This way consumers can be sure that the money they put aside to reduce their carbon footprint does just that.

How do you encourage voluntary carbon offsetting by consumers?

As I have stated, most consumers probably don’t have much spare money with which to offset their carbon but my gut tells me that there must be a way of convincing people that they should be doing it.

The British public are famously generous when it comes to charity and one of the reasons for this is that they want to help the less fortunate in the world. Using this sense of responsibility, we can educate people on how climate change and living conditions in some of the world’s poorest countries are closely tied together.

We can, for example, show how replacing inefficient cooking stoves in rural communities across the world not only helps families to save money on fuel and to suffer fewer health issues from inhaling toxic smoke, it also reduces the amount of greenhouse gas emissions and the extent of deforestation.

Such benefits help entire towns and villages to improve their standard of living through better health and a greater residual income with which they can provide better nourishment or pay for children to attend school.

And so, carbon offsetting can act as an additional form of charity and one which aids development in poorer countries without the associated rise in greenhouse gas emissions you’d otherwise see.

Another way to encourage voluntary carbon offsetting is to incentivise people to do it by making it cheaper for them to do so. Just like charities can claim Gift Aid on donations, I believe that offsetting companies should be able to claim an equivalent tax break so that consumers can pay less for their offsetting in the knowledge that this extra money will make up the rest.

Other Comments on Carbon Offsetting

Can carbon offsetting stimulate growth in developing countries?

As I stated in the previous section, development and carbon offsetting often go hand in hand and this is true both on the local level and the national level. While not specifically funded by carbon offsetting, the Guardian reported on a project in Afghanistan where access to clean energy has allowed small local businesses to produce more goods to sell, given children the opportunity to continue their education after dark without inhaling dangerous fumes and brought skilled labour back to the region.

There is an argument that suggests that by driving development in poorer countries, offsetting projects will actually lead to more, indirect emissions as communities grow richer. While I accept that this may be the case with some projects (not in all I should add), I fail to see the fairness in keeping the poor in poverty by preventing them access to clean energy.

Another point here is that development is already happening and whether or not offsetting stimulates it further, the fact that a country may choose to build a more expensive wind farm over a cheap coal power plant is surely a genuine, long term reduction in emissions?

Can offsetting actually drive innovation by the private sector looking to profit from carbon trading?

I believe that profit is king for many companies and that, if we can create opportunities for profit, we may be able to encourage the development and adoption of cleaner technologies.

Take wind power for example – it already forms part of many offsetting projects but given that they are getting paid by the tonne in terms of CO2 reduction, if you could make wind turbines twice as efficient then the offsetting incentive to install them would double.

Companies around the world are trying to design more efficient wind turbines which they can then sell at higher prices because of the additional revenue generated for the owner of the turbine.

Does offsetting at least encourage major polluters such as China and India to get one foot in the door of sustainable development rather than the alternative which might be for them to shun it in favour of development of their own economies at any cost?

This is actually a fairly weak argument for offsetting in my opinion. While it is true that China and India benefit from additional revenue brought in through carbon credits, it would be a short-sighted government that relied solely on fossil fuel energy production.

The cost of fossil fuels will only get higher and higher over time so renewable energy is an economic decision as much as anything else. It is now the case that China invests more into renewable energy than any other country so it can already be said to have both feet and most of the rest of its body in the door.

Does the very debate on carbon offsetting raise the awareness of the need to reduce emissions?

One thing that we cannot escape is that any debate will have its opposing points of view but it is often the very fact that a discussion is taking place that brings about positive action.

The offsetting principle is not perfect and I hope that I have covered both good and bad points in this article. By working through things in this way I believe improvements can be made to make the entire thing even more efficient and effective.

I also think that any method of bringing people’s attention back to the issues of greenhouse gas emissions and climate change is one worth pursuing.

Conclusion – Is Offsetting The Answer?

It is my belief that every attempt should be made to reduce emissions before carbon offsetting is utilised and that it should not be an excuse to continue polluting.

For individuals and businesses alike, there is always going to be a limit to how much a carbon footprint can be reduced and if they can say, hand on heart, that they have done everything in their power to minimise their own footprint, then I see no reason why offsetting cannot be used to effectively negate their impact on the environment.

My preference is for offsetting to mainly be used by individuals and very small businesses. Larger businesses with far larger turnovers should probably, in my opinion, be funding green energy generation in their home country and feeding this directly into the grid as this is a much more measurable way of offsetting their emissions. Some companies such as Google and Walmart already provide huge amounts of renewable energy to try to cover their own carbon footprints.

If individuals and small businesses have the cash flow available then I’d encourage them to do the same but I am aware that this is not possible in the majority of cases.