Understanding Carbon Offsets
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Mandatory & Voluntary Offset Markets

Carbon markets exist under both mandatory (compliance) schemes and voluntary programs. Compliance markets are created and regulated by mandatory national, regional, or international carbon reduction regimes. Voluntary markets function outside of compliance markets and enable companies and individuals to purchase carbon offsets on a voluntary basis with no intended use for compliance purposes. Compliance offset market credits may in some instances be purchased by voluntary, non-regulated entities, but voluntary offset market credits, unless explicitly accepted into the compliance regime, are not allowed to fulfill compliance market demand.

The concept of carbon offsetting arose in the late 1980s, as policymakers first began to seriously grapple with how to mitigate climate change. Although the first demonstrations of carbon offset projects involved voluntary arrangements, the idea evolved into a tool for controlling costs within broader “market mechanisms” for addressing GHG emissions, including emissions trading systems. The first and largest carbon offset program was the CDM, established under the Kyoto Protocol as a mechanism to allow developed countries to cost-effectively meet emission reduction obligations by investing in mitigation in developing countries. As the comparison of offset programs suggests, a number of other regulatory emissions trading systems have also incorporated carbon offset credits as a compliance tool. Because demand for compliance offset credits is driven by regulatory obligations, their prices tend to be higher than offset credits issued solely for the voluntary market.

Voluntary carbon offset programs started to develop after 2005, as the CDM became more established and the corporate social responsibility community began to recognize that there was a demand for these instruments beyond just regulated companies and countries to the Kyoto Protocol. There is now a variety of carbon offset programs primarily (or exclusively) serving the voluntary market comprised primarily of corporations wishing to make GHG emission reduction claims.

In some cases, voluntary carbon offset programs have influenced and interacted with compliance markets. In California, for example, the Climate Action Reserve (CAR) developed a series of voluntary offset project protocols that were subsequently adopted (with some modification) in the California Compliance Carbon Offset Program. Offset credits issued under these protocols by CAR prior to the start of California’s cap-and-trade program were able to transition over and become eligible for compliance. Countries like Mexico and South Africa have also recognized offset credits issued by voluntary programs as a means of complying with carbon tax obligations.

For information on these programs, see:

Compliance Offset Programs

Voluntary Carbon Offset Markets

United Nations Offset Mechanisms