About Offsetting and Carbon Credits

What is offsetting?

Offsetting is the purchase of carbon credits to enable the purchaser (for example an organisation) to compensate for their own GHG emissions. Purchasing enough carbon credits to fully offset emissions achieves carbon neutral status.

What is a carbon credit?

A carbon credit is a certificate asserting that a single tonne of carbon dioxide has either been removed from the atmosphere (e.g. sequestered through a reforestation project), or not been emitted into the atmosphere (e.g. an emission avoided from the implementation of a renewable energy project, rather than a fossil fuel based project).

There are two types of carbon credit markets:

• Regulated markets operate for participants which have obligations within emissions trading schemes, including those associated with the Kyoto Protocol. The regulated markets trade in various credits, such as certified emissions reductions (CERs) and Assigned Amount Units (AAUs). Carbon credits traded in the regulated market are either those issued by market authorities or those issued by projects which have been certified by an appropriately authorised body (such as the CDM Gold Standard). The New Zealand Emissions Trading Scheme (ETS) is an example of a regulated market (see below).
  
• The voluntary market exists for those without formal obligations, but who wish to purchase carbon credits for other reasons, for example organisations wishing to offset their own emissions and so demonstrate their commitment to tackling climate change. Carbon credits available in the voluntary market can be issued by any party which claims that its activities (or projects) result in the removal or avoidance of GHG emissions. However, increasingly, such parties are having their credits independently assessed against one of a number of certification standards (Gold Standard, Voluntary Carbon Standard) operating in the voluntary market. Key considerations include that the project results in reductions which would otherwise not have taken place (the additionality test), and that the project does not result in increased emissions elsewhere (the leakage test).

Why offset?

For a business, a decision to buy carbon credits should be based on commercial reasons, such as contributing to brand enhancement or customer retention and attraction. Buying carbon credits and achieving carbon neutral status is clearly more relevant for organisations operating in certain markets.

When to offset?

Offsetting should not be a substitution for taking reasonable action to reduce GHG emissions through efficiency improvements.