When we wake up of a morning and brush our teeth, take a shower, boil the kettle for a coffee, our a bowl of cornflakes, iron the shirt and hop in the car to drive to work, we are with each action adding a tiny amount to global greenhouse gas emissions.  Almost every product we consume or use in our daily lives is the result of some form of production or manufacturing process, which used power, mainly electric power.
The production of power using fossil fuels and certain manufacturing processes such as metallurgy and chemical production, along with methane release from organic waste deteriorating and carbon release from deforestation, are the principle sources of greenhouse gases globally.  It is these greenhouse gases which lead to global warming, the major threat to the world’s ecosystems and sea-levels upon which we depend.

Carbon-offsetting is the practice of limiting the scale of these greenhouse gas emissions.  There are four principle gases which are classed as greenhouse gases and two gases which are produced by them (carbon dioxide, methane, nitrous oxide and sulphur hexafluoride + hydroflourocarbons and perflourocarbons)

When we talk of carbon-offsetting, what is in fact referred to is the offsetting of all of those greenhouse gases (GHG).  For the sake of simplicity, these are all broken down to the equivalent of one metric ton of carbon dioxide. For example, Sulfur hexafluoride, or SF6, is the most potent greenhouse gas in existence. With a global warming potential 23,900 times greater than carbon dioxide, one pound of SF6 has the same global warming impact of 11 tons of carbon dioxide.  So, a relatively small amount of SF6 would be referred to as a single unit of carbon-offsetting.
Carbon offsetting is not quite the same as carbon reduction or carbon capping.  Carbon capping is the process of reducing the GHG emissions from a particular industrial process which produces them.  This is done through the use of investing in technology such as filter systems, and improving production efficiency.  For certain industries, the capture and subsequent storage of these emissions can be either technologically impossible, at least to the required levels, or prohibitively costly.  In this case, in order to meet legal limitations on their GHG emission levels, they resort to carbon-offsetting.
Carbon offsetting is the reduction or prevention of emissions of greenhouse gases in one location or process, in order to compensate for those in another.  Carbon offsets are measured in units, for ease of accountability.  Each unit, as earlier described, is the equivalent of one metric ton of carbon dioxide.
In order to qualify as a carbon offset, the prevention of emissions must be shown to be additional, or above the baseline.  The regulatory body must be able to confirm that without the existence of the process that has led to the carbon offset, there would have been an extra ton of carbon emitted into the atmosphere.   According to the Stockholm Environment Institute, additionality must answer a simple question: Would the emissions reductions have occurred, all else being equal, if the process which the offsets are a result of was not implemented as an offset project? Would the project have happened anyway? If the answer to that is yes, the project is not additional.
In the case that the answer is that the project would not have been financially feasible on its own without being able to raise money through the sale of carbon offsets, then additionality is valid, as are the carbon offsets produced.

Carbon-Offsetters

As has already been covered, the largest carbon-offsetters are dirty industry.  This is for the simple reason that they are by far the largest individual emitters of greenhouse gases (GHGs).
Dirty industries are those that are high energy intensive or emit toxic gases, such as power generation using fossil fuels, metallurgy and chemical plants.  Within the EU, airlines have also recently been brought under the compliance regime with a carbon tax applied as of 2012, and plans are in place to include the shipping industry also.
Industrialised developed countries which are signatories of the Kyoto Protocol are included in Annex 1 of the agreement.  These countries have made a legally binding agreement to reduce their emission of GHGs by 5.2% below 1990 levels by 2020.  This is the figure which has been evaluated as necessary to prevent a potentially catastrophic rise in average global temperatures.  Each nation is set a gradually decreasing cap on emissions which it then passes on to its major emitters, in the form of individual caps per industrial installation of industry.  These are allocated by the national regulatory bodies according to national allocation plans, or NAP.
Exactly which emitters or industries form the compliance regime for carbon offsetting varies from country to country.  The EU Emissions Trading Scheme is the world’s most developed compliance regime and directly controls the widest range of industries.  As mentioned earlier commercial transport is now being targeted with airlines being forced to comply with emissions taxes as of 2012 as well shipping being targeted for the future.  Petrochemicals, ammonia and aluminium industries as well as additional gases will also be obliged to carbon offset in 2013.
Other parties which buy carbon offsets are those that are not a part of the compliance regime but choose to offset their carbon footprint voluntarily.   They may be direct emitters but not considered large enough to warrant inclusion within the compliance regime, or indirect emitters.  Indirect emitters, which is in effect any business or individual, use power or products and services, which lead to power consummation at some point within the production process.
These parties are generally businesses and individuals in the most part, without going into NGOs etc.  Private business, particularly large corporates, are increasingly active in voluntary carbon offsetting.   Public opinion, particularly in the western world, has advanced in recent years to the point that having a ‘socially responsible’ image is a market necessity.  A major factor in what that means is being seen to be environmentally friendly to an acceptable level.  As a result, publicly displayed efforts towards reducing their carbon footprint through the purchase of carbon offsets is becoming more and more common.
Green-minded individuals, households and small companies are also becoming more aware of carbon-offsetting.  Individuals and companies who buy carbon offsets do so in two ways.  Those who are willing to put the time and effort into doing so may contact a broker or project and purchase a small number of offsets annually, directly.  This gives them a choice with regard to their personal preferences on the source.
What is probably more common, is for consumers to opt for a supplement towards their charge, for carbon offsetting.  Many airlines and train operators offer this option, as well as energy providers.   It is gradually becoming a more common optional supplement by many service providers.
The question as to whether the cost of carbon-offsetting should be passed on to the minority of clients who will voluntarily pay more, or whether this should be automatically incorporated into prices to spread the burden equally amongst all users is valid.  However, we will not attempt to answer it here.
Carbon offsetting is becoming more and more a fact of life through both compliance regimes and through raised awareness of voluntary carbon offsets.  It will certainly be interesting to see how much further it develops in the coming years.  Will we be paying an obligatory contribution towards carbon offsets each time we fill our car up with petrol?  It’s certainly possible.

Carbon offsets as a commodity?

carbon offsets

The accountancy of greenhouse gases as a derivative unit of one carbon offset has created a new international financial commodity.  A standardised quantity (one metric ton) and minimum quality, with international standards verified by approved third-party accreditors has been established.  One unit is interchangeable with the other with a fluctuating market value, and international registries and trading exchanges have been established.  In short, a carbon offset is now a financial commodity.
The essential purpose of a carbon offset is for a greenhouse gas emitter to pay for it, and retire it, thus compensating for the equivalent of one metric ton of their greenhouse gas emissions.  However, as carbon offsets have matured as a commodity, so have trading patterns involving them.  It is no longer the case that companies who are obliged to offset their emissions simply purchase the relevant number of carbon offsets and then retire them.  In the same way as energy companies trade in energy, looking to gain a financial advantage by playing the energy markets, the same thing is now happening with carbon offsets.
Trading departments have been set up in companies who are obliged to purchase large quantities of carbon offsets.  They practice spot-trading, buying and selling, playing the small changing margins on large quantities of offsets over a period of time, like currency traders or spread betters.  But carbon offsets as a commodity also now exist in the form of other financial instruments such as futures and forwards contracts, which are also traded in the same way as traditional commodities.
And as with traditional commodities, it’s not only the companies which are a part of the compliance markets which trading them, but the financial institutions and investment banks such as Barclay's Capital and Morgan Stanley, brokerage houses and private investors..  Another sign of a maturing commodity market, Lloyd’s insurer Kiln has underwritten the first insurance product designed to cover carbon credit eligibility risk.
The policy, put together in conjunction with specialist coverholder Parhelion, was written on behalf of a major international bank, and designed to provide more certainty and stability to financial institutions trading carbon offsets on the global exchanges.
Carbon offsets are traded both over-the-counter (OTC) and via exchanges.  Major exchanges for carbon offsets are the European and Chicago Climate Exchanges, owned by Intercontinental Exchange, the futures exchange group, as well as Blue Next, the French exchange.  Montreal, Australia, Africa, Brazil etc. have all recently developed climate exchanges for the trading of carbon offsets and their derivatives.  Offsets are also tracked via registries, often connected to exchanges, from inception to retirement.
The oft quoted “Carbon will be the world’s biggest commodity market, and it could become the world’s biggest market over all”, attributed to Barclays Capital may sound, and probably is, faintly ridiculous.  Nonetheless, it is certainly a maturing and quickly growing commodity.  The compliance market is growing quickly and will have another huge jump in 2012 when California implements it’s state-wide carbon offsetting scheme.  With the voluntary market also going from strength to strength, for now, the carbon offset as a commodity has a bright future.
Why was the commodity established?
Carbon offsets as a commodity was established as a result of the Kyoto Protocol of 1997.  The defining issue was the acceptance of the grave danger that global warming posed to the environment, and subsequently, dramatic as it may sound, human society as a whole.
The majority of greenhouse gases are produced by the burning of fossil fuels, with a significant contribution made by decomposing organic waste and certain other highly toxic gases used in modern technology and production.  Carbon released as large swathes of rainforest are logged also contributes around 20% of annual global carbon emissions.
The recent period of human history has shown, within the space of a couple of hundred years, and particularly within the last fifty, a phenomenal trajectory of growth.  In terms of industrialisation and the economy, the amount of products and services consumed which use high power intensity and so have high emission levels, has mushroomed.   Simultaneously, with the advances in sanitation, nutrition and medication that have happened over the same period the human population has had a phenomenal trajectory of growth.

So, despite the obvious international variations, we have a case where the average carbon footprint per human is vastly in excess of what it was even fifty years ago, and out of sight of that a hundred years ago.  And we have a population that has also grown exponentially over roughly the same period.  The result is that the greenhouse gases being released into the atmosphere have been rocketing forward at a quickly accelerating rate.

Carbon emissions

Population Growth

Scientific opinion discussed at Kyoto in 1997 was that the environmental effects that current rates of greenhouse gas emissions would result in, was average global temperatures of up to 2 degrees higher than otherwise.  The result of this would be climatic changes resulting in the gradual melting of the polar ice caps and rising sea levels.  Low-lying land, including whole nations would be in danger.  Increased extreme weather conditions such as droughts and floods would also severely impact food production.
Without wishing to paint a picture akin to a Hollywood disaster movie, the danger was, and is, accepted by mainstream scientific opinion as very real and present.
Signatories of the agreement reached in Kyoto in 1997, which as of 2010 was 191 nations, agreed to the scientific council of the need to reduce their carbon emissions drastically.  They have committed to achieving a 5% reduction on 1990 greenhouse gas emission levels by 2020.  This is a figure regarded as sufficient to avert dangerous climate change.
The most realistic way of achieving this target was viewed as not attempting to affect drastic changes in production and the economy, but in building in mechanisms to existing structures.  The two pillars of the modern industrialised economy are the technology of the production process, and the financial structures that underpin it.
Carbon emissions are a product of the industrial process.  Before Kyoto, the production of carbon was a simple side effect.  Establishing it as an obligatory raw material, as it were, to the production process, with a cost, was the great innovation.
The fact of the matter is that carbon offsets, as a commodity, are an entirely fabricated instrument, created by the powers that be to achieve an end which they is necessary for the practical function of human society in its present form.  Detractors of carbon offsets, as a commodity, a conceived financial instrument put this forward as their central argument.
We are all familiar with the expression that the only things in life which are certain are death and taxes.  Taxes, as a financial mechanism, are no less or more real, as a concept than the carbon market.  And really, the carbon market is just another tax.  We have road tax because we have a road network, which requires maintenance or modern society would collapse.  We will pay for carbon offsets, because we live in an industrialised world which emits greenhouse gases which require control.