Simply put, a carbon offset is a financial certificate purchased to fund a project that reduces greenhouse gas emissions.

Carbon offsets are measured in metric tons of carbon dioxide, meaning that the purchase of one carbon offset credit reduces the equivalent of one metric ton (2,205 lbs) of carbon dioxide emissions. All greenhouse gases do not have the same warming effect, so for simplicity everything is converted into an equivalent of the warming effect of carbon dioxide. In other words, if you want to offset one metric ton of methane emissions and the warming effect of methane as a greenhouse gas is 21 times greater than carbon dioxide, you must purchase 21 carbon offset credits.

Carbon offsets are sold by developers of projects that reduce greenhouse gas emissions. In order to insure that projects are actually reducing the amount of greenhouse gases that would have been released into the atmosphere, it is becoming accepted practice that:

• an independent third party must verify that a project meets an objective standard of requirements;
• this standard must be set by an independent third party to avoid a conflict of interest.

A carbon offset is called an offset because it is intended to offset a given quantity of greenhouse gas emissions that can't otherwise be reduced. For example, suppose that the only way you can get to work is by driving a car. Unless you are driving an electric car that was charged overnight from a power source that emits no greenhouse gases, this will unavoidably cause greenhouse gas to be emitted. Now let's say your commute to work causes 5 pounds of CO₂ to be emitted into the atmosphere. In addition, let's say that on average producing 1 unit of electricity also releases 5 pounds of CO₂ into the atmosphere. You can offset the emissions from your commute by funding the production of 1 unit of electricity from a clean power source such as wind or solar energy.

The key here is that to count as actually offsetting emissions, the electricity must come from a project that could not have been built without support from the carbon offset market; otherwise the carbon market is not accomplishing anything.

Carbon offsets are intended as a way of using market forces to push industry away from fossil fuels. Emissions trading exchanges such as the Chicago Climate Exchange are being set up to facilitate the buying and selling of carbon credits among industries. In order for this to work properly, limits must be set on greenhouse gas emissions. For example, suppose a coal power plant emits more greenhouse gas than its allowed limit, and the only way for it to stay under the limit is to rebuild the plant with a different technology. Realistically, the owners of the plant can't afford to shut it down and rebuild it. They will then have to buy carbon credits to offset their excess emissions, and these credits will finance the new construction of wind, solar or other methods of power generation that emit less greenhouse gas. This approach to tackling the problem of emissions is known as the cap-and-trade system. The goal is that it will jump-start a transition from non-renewable fossil fuels to sustainable methods of energy production.

There are several different standards for verifying that emissions reductions are real. Three of the most important standards are:

• The Gold Standard
• The Green-e Climate Protocol for Renewable Energy
• The Voluntary Carbon Standard (VCS)

These standards all have the same general principles. They require that a project is new and will result in an overall reduction of emissions, that the reduction is only counted once, that the reductions are additional, and that all of the above are verified by an approved competent and objective third party.

The concept of reductions being additional, which is known as "additionality", is very important. To satisfy the additionality requirement, a project must achieve emissions reductions that are additional to what would have happened without the project. As an example, for a project to satisfy the additionality requirement of the Gold Standard mentioned above, it must be shown that:

• The project would not have occurred without the carbon market¹ due to financial, political or other barriers (i.e. common practices);
• The project goes beyond a "business as usual" scenario;
• Greenhouse gas emissions are lower with the project than they would have been without the project (in other words, project emissions are less than the emissions projected in the baseline scenario).

The purpose of the carbon offset market is to stimulate reductions in emissions that would not have happened otherwise. If the carbon offset market does not create reductions that are additional to "business as usual" it is meaningless.

1. The actual requirement states "The project would not have occurred without the CDM-JI due to financial, political or other barriers (i.e. common practices)". CDM-JI stands for the Clean Development Mechanism and Joint Implementation, which are mechanisms established by the Kyoto Protocol to reduce overall costs of achieving emissions targets. Much more detailed information on this subject can be found here on the Kyoto Protocol website.

There are many different groups offering verification of the standards mentioned above, and each standard has different requirements for who can verify a project. For instance, to qualify for the Gold Standard a project must be verified by a Designated Operational Entity (DOE), which is a firm that has been accredited by the United Nations as a competent project evaluator. The UNFCCC (United Nations Framework Convention for Climate Change) website maintains a list of accredited DOEs here.

The Green-e Climate program verifies if projects meet the Green-e Climate Protocol for Renewable Energy. More information about the Green-e Climate program can be found on their website. The Voluntary Carbon Standard also uses DOEs as verifiers, as well as UNFCCC approved Accredited Independent Entities (AIEs). The UNFCCC website maintains a list of AIEs here. According to their website, the Voluntary Carbon Standard is also considering Certification Bodies (CBs) approved under the Californian Climate Action Registry for approval as verifiers. More information about verification under the VCS can be found here.