van Kooten GC & de Vries F (2013) Carbon Offsets. In: Shogren J (ed.) Encyclopedia of Energy, Natural Resource, and Environmental Economics, Volume 1: Energy. Amsterdam: Elsevier Science, pp. 6-8. http://dx.doi.org/10.1016/B978-0-12-375067-9.00165-0
A carbon offset is a reduction in CO2 emissions, or an equivalent removal of CO2 from the atmosphere, that is realized outside a compliance market and can be used to counterbalance greenhouse gas emissions from a capped entity. Carbon offsets reduce emitters' costs of complying with emission reduction targets while buying time to enable them to develop and adopt emission-reducing technologies. However, because offsets lower the cost of emitting CO2, they also reduce incentives to invest in such technologies. Further, carbon offsets are fraught with problems related to uncertainty. Projects to create carbon offsets may not be additional - proponents are paid for activities they would have undertaken in any event. Projects that reduce CO2 emissions, or increase removals from the atmosphere, could increase emissions elsewhere; such leakages are difficult to measure. Any project that removes CO2 from the atmosphere will eventually release stored CO2 - a problem of duration; the timing of both is uncertain, and it is therefore prohibitively difficult to determine how many offsets are created. Yet, by allowing questionable offsets into the compliance market, the corresponding carbon price does not reflect its true value, resulting in inefficiencies and opening the door to rent-seeking and corruption.
Additionality; Carbon trading; Double-dipping; Duration; Leakage; Sequestration; Voluntary emissions reductions