The carbon offset market has been showing some progress recently. As the name suggests, it is a way to compensate for any carbon emitted by a company.
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In simple words, carbon offset means to compensate for the emissions of greenhouse gases (GHG). It is a form of trade where the carbon dioxide or other GHG emitted are compensated through various initiatives. This can be funding a project to reduce GHG emissions in the form of supporting forestation or investing in renewable energy.
Carbon offset encourages industries to produce less carbon. Once a company reaches its limit of allowed carbon emissions, then it needs to use carbon offset as compensation.
Carbon offsets are quantified in tonnes of carbon dioxide-equivalent (CO2e). One tonne of carbon offset implies reducing one tonne of carbon dioxide or other GHG.
There are two types of carbon offset market. The first one is large, and operators need to comply with the set rules. Here, businesses and governments have a set limit for emission.
However, the 2nd type of market is small and voluntarily, where individuals, companies or government buy carbon offset voluntarily to mitigate their emissions produced by transportation, electricity use or any other source.
A carbon offset is offered in the form of certificates that show one tonne of carbon emissions are reduced. Businesses purchase them to create a green image of their brand.
Emission reduction projects reduce the amount of GHG emissions by
Some environmentalists doubt the effectiveness of carbon offsets, arguing that would give excuses to industries to overindulge and not feeling guilty about the emissions.
The diagram shows the cap and trade approach in the carbon market.
(Source: RBC Capital Market)