Sources of carbon offsets

The CDM identifies over 200 types of projects suitable for generating carbon offsets, which are grouped into broad categories. These project types include renewable energy, methane abatement, energy efficiency, reforestation and fuel switching.

Renewable energy

Renewable energy offsets commonly include wind power, solar power, hydroelectric power and biofuel. Some of these offsets are used to reduce the cost differential between renewable and conventional energy production, increasing the commercial viability of a choice to use renewable energy sources.

Renewable Energy Credits (RECs) are also sometimes treated as carbon offsets, although the concepts are distinct. Whereas a carbon offset represents a reduction in greenhouse gas emissions, a REC represents a quantity of energy produced from renewable sources. To convert RECs into offsets, the clean energy must be translated into carbon reductions, typically by assuming that the clean energy is displacing an equivalent amount of conventionally produced electricity from the local grid. This is known as an indirect offset (because the reduction doesn't take place at the project site itself, but rather at an external site), and some controversy surrounds the question of whether they truly lead to "additional" emission reductions and who should get credit for any reductions that may occur.

Methane collection and combustion

Some offset projects consist of the combustion or containment of methane generated by farm animals (by use of an anaerobic digester), landfills or other industrial waste. Methane has a global warming potential (GWP) 23 times that of CO₂; when combusted, each molecule of methane is converted to one molecule of CO₂, thus reducing the global warming effect by 96%.

An example of a project using a anaerobic digester can be found in Chile where in December 2000, the largest pork production company in Chile, initiated a voluntary process to implement advanced waste management systems (anaerobic and aerobic digestion of hog manure), in order to reduce greenhouse gas (GHG) emissions.

Energy efficiency

While carbon offsets which fund renewable energy projects help lower the carbon intensity of energy supply, energy conservation projects seek to reduce the overall demand for energy. Carbon offsets in this category fund projects of several types:

1. Cogeneration plants generate both electricity and heat from the same power source, thus improving upon the energy efficiency of most power plants which waste the energy generated as heat.
2. Fuel efficiency projects replace a combustion device with one which uses less fuel per unit of energy provided. Assuming energy demand does not change, this reduces the carbon dioxide emitted.
3. Energy-efficient buildings reduce the amount of energy wasted in buildings through efficient heating, cooling or lighting systems. In particular, the replacement of incandescent light bulbs with compact fluorescent lamps can have a drastic effect on energy consumption. New buildings can also be constructed using less carbon-intensive input materials.

Destruction of industrial pollutants

Industrial pollutants such as hydrofluorocarbons (HFCs) and perfluorocarbons (PFCs) have a GWP many thousands of times greater than carbon dioxide by volume. Because these pollutants are easily captured and destroyed at their source, they present a large and low-cost source of carbon offsets. As a category, HFCs, PFCs, and N₂O reductions represent 71% of offsets issued under the CDM.

Land use, land-use change and forestry

Land use, land-use change and forestry (LULUCF) projects focus on natural carbon sinks such as forests and soil. Deforestation, particularly in Brazil, Indonesia and parts of Africa, account for about 20% of greenhouse gas emissions. Deforestation can be avoided either by paying directly for forest preservation, or by using offset funds to provide substitutes for forest-based products. There is a class of mechanisms referred to as REDD schemes (Reducing emissions from deforestation and forest degradation), which may be included in a post-Kyoto agreement. REDD credits provide carbon offsets for the protection of forests, and provide a possible mechanism to allow funding from developed nations to assist in the protection of native forests in developing nations.

Almost half of the world's people burn wood (or fiber or dung) for their cooking and heating needs. Fuel-efficient cook stoves can reduce fuel wood consumption by 30 to 50%, though the warming of the earth due to decreases in particulate matter (i.e. smoke) from such fuel-efficient stoves has not been addressed. There are a number of different types of LULUCF projects:

• Avoided deforestation is the protection of existing forests.
• Reforestation is the process of restoring forests on land that was once forested.
• Afforestation is the process of creating forests on land that was previously unforested, typically for longer than a generation.
• Soil management projects attempt to preserve or increase the amount of carbon sequestered in soil.

Purchase of carbon allowances from emissions trading schemes

Voluntary purchasers can offset their carbon emissions by purchasing carbon allowances from legally mandated cap-and-trade programs such as the Regional Greenhouse Gas Initiative or the European Emissions Trading Scheme. By purchasing the allowances that power plants, oil refineries, and industrial facilities need to hold to comply with a cap, voluntary purchases tighten the cap and force additional emissions reductions.

Voluntary purchases can also be made through small-scale and sometimes uncertified schemes such as those offered at South African based Promoting Access to Carbon Equity Centre (PACE), which nevertheless offer clear services such as poverty alleviation in the form of renewable energy development. Also, as "easy carbon credits are coming to an end", these projects have the potential to develop projects that are either too small or too complicated to benefit from legally mandated cap-and-trade programs.

Links with emission trading schemes

Once it has been accredited by the UNFCCC a carbon offset project can be used as carbon credit and linked with official emission trading schemes, such as the European Union Emission Trading Scheme or Kyoto Protocol, as Certified Emission Reductions. European emission allowances for the 2008-2012 second phase were selling for between 21 and 24 Euros per metric ton of CO₂ as of July 2007.

The voluntary Chicago Climate Exchange also includes a carbon offset scheme that allows offset project developers to sell emissions reductions to CCX members who have voluntarily agreed to meet emissions reduction targets.

The Western Climate Initiative, a regional greenhouse gas reduction initiative by states and provinces along the western rim of North America, includes an offset scheme. Likewise, the Regional Greenhouse Gas Initiative, a similar program in the northeastern U.S., includes an offset program. A credit mechanism that uses offsets may be incorporated in proposed schemes such as the Australian Carbon Exchange.

Other

A UK offset provider set up a carbon offsetting scheme which set up a secondary market for treadle pumps in developing countries. These pumps are used by farmers, using human power, in place of diesel pumps. However, given that treadle pumps are best suited to pumping shallow water, while diesel pumps are usually used to pump water from deep boreholes, it is not clear that the treadle pumps are actually achieving real emissions reductions. Other companies have explored and rejected treadle pumps as a viable carbon offsetting approach due to these concerns.

Carbon Retirement

Carbon retirement involves retiring allowances from emission trading schemes as a method for offsetting carbon emissions. Under schemes such as the European Union Emission Trading Scheme, EU Emission Allowances (EUA’s), which represent the right to release carbon dioxide into the atmosphere, are issued to all the largest polluters. The theory is that by buying these allowances and permanently removing them, the price of EUAs increases and provides an incentive for industrial companies to reduce their emissions.