What is a “carbon offset”?

A carbon offset, also called a “carbon credit”, is a financial asset that can be bought and sold freely. One carbon offset equals one metric ton (approx. 2,200 lbs) of carbon dioxide. To picture what a metric ton of carbon dioxide would look like, picture a block of dry ice (which is frozen carbon dioxide) that is approximately the size of a full-size refrigerator.  In gas form, one ton of carbon dioxide would fill a balloon 30 feet in diameter. Burning 120 gallons of gasoline releases one metric ton of carbon dioxide into the atmosphere.  A carbon offset is generated by reducing or displacing carbon dioxide or other greenhouse gas emissions.  This reduction can come from either preventing the gases from being emitted in the first place – for example by replacing coal-fired energy with wind energy  - or from sustainable practices that promote the growth of plant life and root systems.  Plant life such as trees, grasses, and crops naturally consume carbon dioxide and stores it in the form of biomass.  This process is called carbon sequestration.

What is “carbon sequestration”?

Carbon sequestration is the process of removing carbon dioxide from the air naturally, where as “carbon capture” is the process of doing it artificially. Trees, plants, and grass naturally absorb carbon dioxide through photosynthesis. To give an example, an acre of well-managed, non-grazed grassland can sequester about 1 metric ton of carbon dioxide per year.

Where are carbon offsets bought and sold?

The main buyers of carbon offsets are large emitters of carbon dioxide, methane, and other greenhouse gases (GHGs), such as power plants and oil refineries. In the U.S., these buyers purchase carbon offsets through both mandatory (in 11 U.S. states) and voluntary programs at state and federal levels. Mandatory carbon reduction programs have also been implemented in Europe and around the world.

SunOne Solutions is a member of the California Climate Action Reserve (CAR) and the Chicago Climate Exchange (CCX), which are two of the U.S.’s leading voluntary carbon offset registries. SunOne also actively develops projects for the Voluntary Carbon Standard (VCS) and the American Carbon Registry (ACR). Almost all transactions currently done in the U.S. take place through one of these four offset registries.

California is the largest mandatory market in the North America. A carbon cap-and-trade system was approved by the California Legislature and signed into law in 2006. This cap-and-trade system was reaffirmed by the voters in the November 2010 election and the State’s carbon accounting is set to begin in 2013 (carbon offset purchases have already began). The goal of the system is to reduce GHG emissions to 1990 levels by 2020, representing a 25% reduction statewide.

To reach this goal, the California State Government will allocate annual GHG emission allowances to companies such as utilities and refineries. Each year the amount of allocated allowances is reduced, which incentivizes companies to invest in emission reduction projects. If an emitting company is over its allowance “cap,” it may comply in one of two ways: (i) by purchasing carbon allowances from an emitting company that is under its cap or (ii) by purchasing carbon “offset” credits from projects that reduce GHGs. As a result of California’s new statewide program, tens of millions of offsets will be purchased every year by California emitting companies. Other states have already begun to follow California’s precedent as well.

Eligible carbon offset projects must follow California State project rulebooks (called “protocols”). Specifically, the California Air Resources Board (“ARB”), the agency that is administering the cap-and-trade program, has approved protocols for (i) Avoided Forestry Conversion, (ii) Improved Forest Management, (iii) Afforestation, (iv) Agriculture Methane, (v) Ozone Depleting Substances, and (vi) Urban Forestry projects. The California State Government is also in the process of reviewing protocols for farmland and rangeland. Projects do not have to be located in California to be eligible to sell their offsets into the California market.