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How Carbon Offsets Work:

The problem: Global warming caused by greenhouse gas emissions

A partial solution: carbon offsets

Carbon offsets are a market mechanism to help reduce overall carbon dioxide emissions. When you buy a carbon offset, you are basically paying for someone else to reduce their carbon dioxide emissions.

Practically, how does this work? In the U.S., we do not have a mandatory market for carbon dioxide like the one that exists in the EU under the Kyoto protocol. However, we do have several voluntary markets.

The market for green tags (aka Renewable Energy Credits, or RECs) is the most popular way of offsetting carbon. TerraPass and NativeEnergy both use green tags in their offsets. The offset retailers buy green tags, usually from wholesalers, and owners of renewable energy projects get a little boost to their bottom line that encourages more renewable energy development. A green tag is a certificate that states a certain amount of electricity is produced by renewable energy. The renewable energy displaces the fossil-fuel-fired generation (and the associated carbon dioxide emissions) that would normally produce the electricity.

The retailers look at what kind of fossil-fuel-fired generation the renewable energy is displacing. This depends on the makeup of the local electric grid; a green tag from California, for example, displaces less carbon than one from Michigan, because most of Californias fossil-fuel generation is from natural gas, a less carbon-intensive fuel than the coal that fires Michigans power plants. Green-e is the most widely accepted certifying body for green tags. Green-e monitors renewable energy power plants to ensure that they are producing the amount of electricity they claim. Green-e tags also have a sell-by date to help ensure there is some relation between the green tags and the projects recent bottom line.

Once this green-tag-to-carbon calculation is done, the retailers calculate how much carbon is produced by flights (or other travel, or customers buildings). For air travel, these are done based on how full the average flight is, the average fuel economy of the aviation fleet, and the distance flown. The retailers then match the appropriate amount of green tag purchases with the flights taken.

The other common way to offset carbon is through purchases on the Chicago Climate Exchange (CCX). TerraPass also uses CCX purchases in its offsets. The CCX is a wholesale market that mimics the carbon-trading system in place in the EU, except the EU system is mandatory, whereas the CCX is voluntary. Companies that have been able to validate reductions in the emissions from their operations sell the credits for these reductions on the climate exchange. These emissions credits are purchased by other companies interested in reducing their emissions, or by companies such as TerraPass, who sell them to consumers.

The offsets system we have in place is far from perfect. It has been pointed out that companies that would have reduced their carbon emissions without the CCX market may be the ones most likely to sell into this market. It is also true that expanding electricity production with renewable energy does not necessarily always displace fossil-fired electricity, and that green tags do not often make or break a project.

However, by putting these market mechanisms in place now, we will be ready for a more robust trading and offsets system that will come with mandatory carbon constraints like those of the Kyoto protocol. As law firms with connections at the highest levels of government, this is something you can help with. You can also encourage legislators and regulators to enact laws and rules that will mandate carbon emissions reductions in this country.

See the following two articles for more information:

from Business Week: about major companies that are offsetting their emissions.

http://www.businessweek.com/magazine/content/06_15/b3979106.htm?chan=autos_autos+index+page_news

from Salon.com: some of the plusses (and minuses) of carbon offsets, with a nice detailed description of how it works.

http://www.salon.com/news/feature/2006/05/26/offsets/index.html