Carbon Trading and Carbon Offsets

The carbon trade involves the exchange of either emission allowances or carbon offsets. An allowance is a right to emit a unit of greenhouse gases (GHGs)—typically defined as 1 metric ton of carbon dioxide (tCO2) or equivalent quantity of other GHGs. An offset is created when a project or policy achieves a reduction of GHG emissions relative to a baseline scenario (defined as emissions that would have occurred if no project or policy was undertaken). Both allowances and offsets are accepted, through various institutional arrangements, such as fungible units of trade. These forms of exchange have been introduced to facilitate GHG emission reductions through the use of market mechanisms. In creating these markets, society has placed a price on CO2 and related pollutants, which are ...