A carbon offset neutralises a ton of CO2e released in one location by avoiding the emission of a ton of CO2e elsewhere, or sequestrating a ton of C02e that would have otherwise remained in our planet's atmosphere. Carbon offsets are formed through various types of projects, such as renewable energy, energy efficiency, destruction of the main industrial gases and carbon sequestration underground or in soils and forests.
Greenhouse gas offset projects in turn generate Carbon / GHG Credits or Emission Reductions, which can be purchased by individuals or organisations to neutralise their greenhouse gas emissions.
For example, if a company emits 30,000 tCO2e per year it could negate its emissions by planting a certain number of trees that would effectively absorb 30,000 tCO2e per year, or alternatively invest in a wind farm or a project distributing energy efficient cooking facilities to deprived communities in developing countries. By compensating for its annual carbon emissions through carbon offset projects, the company essentially becomes carbon neutral. Ideally the company would first reduce its overall emissions by lowering its energy consumption or by using renewable energy and only then purchase carbon credits to offset the emissions that cannot be avoided through other means.
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The defining characteristic of carbon offsets is Additionality. Additionality means that the emissions reductions must be additional to those that would have otherwise occurred under a business-as-usual scenario. In other words, if a wind farm would have been built or the trees planted regardless of the sale of the carbon credits then those projects are not additional and cannot be counted as carbon offsets. Additionality can be demonstrated in various ways, such as showing that a project would not be profitable enough without the sale of the carbon credits or that a certain technology would not have otherwise been adopted. Additionality is extremely important to the environmental integrity of the mechanism as loose additionality requirements could result in a host of projects receiving carbon financing without actually reducing greenhouse gas emissions into the atmosphere.