IAS Gyan

Daily News Analysis


20th April, 2023 Environment

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  • Buying offsets is a way to "compensate" for environmental damage.
  • Companies make a financial contribution to projects that reduce the amount of carbon dioxide in the atmosphere, and in exchange can keep polluting themselves.

What are carbon offsets?

  • Carbon offsets are tradable “rights” or certificates linked to activities that lower the amount of carbon dioxide (CO2) in the atmosphere.
  • By buying these certificates, a person or group can fund projects that fight climate change, instead of taking actions to lower their own carbon emissions.
  • In this way, the certificates “offset” the buyer’s CO2emissions with an equal amount of CO2 reductions somewhere else.

How does buying carbon offsets keep CO2 out of the atmosphere?

  • Carbon offsets fund specific projects that either lower CO2 emissions, or “sequester” CO2, meaning they take some CO2 out of the atmosphere and store it.
  • Carbon offsets are granted to project owners, who sell them to third parties like companies that want to balance the CO2 they put into the atmosphere by paying to remove CO2 from somewhere else.

Benefits and challenges


  • The advantages of carbon offsets may outweigh their challenges.
  • For example, imagine a company trying to switch from a process that emits a lot of CO2to a carbon-free, but expensive, technology. If the company can issue a carbon offset for each ton of CO2 its new technology keeps out of the air, selling these offsets may help finance the investment.


  • To issue carbon offsets, a project needs to prove it will actually reduce emissions.
  • The amount of CO2being kept out of the atmosphere also needs to be accurately measured.
  • This process requires well-documented standards and protocols, as well as a trusted way to verify that the project is doing everything it claims.
  • These procedures can be expensive and specific to one type of project. But without them, we cannot trust that buying carbon offsets really lowers the amount of CO2in the atmosphere.

United Nations Offset Mechanisms

Offset Mechanisms under the Kyoto Protocol

  • The Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC) established a cap-and-trade system that imposes national caps on the greenhouse gas emissions of high-income countries that ratified the Protocol (called Annex B countries).
  • Each participating country is assigned an emissions target and the corresponding number of allowances – called Assigned Amount Units (AAUs).
  • Under the treaty, a group of industrialized countries and countries with economies in transition (EIT) had legally binding commitments to reduce their overall GHG emissions to 5% below 1990 levels during the period 2008–2012. Each country within the group also has a separate target that ranges between an 8% reduction to a 10% cap on increases in emissions.
  • To generate offset credits, the Kyoto Protocol established project-based offset mechanisms: the Clean Development Mechanism (CDM) and Joint Implementation (JI).
    • JI is the instrument for offset projects taking place within countries with binding emission commitments under the Kyoto Protocol (most high-income countries), while the CDM is for offset projects in countries without such commitments (most low or middle-income countries).
    • In addition to economic efficiency, the CDM has the objective of promoting sustainable development and technology transfer in host countries.

What is a Renewable Energy Certificate?

  • A Renewable Energy Certificate (REC) can be issued when one (net) megawatt-hour of electricity is generated and supplied to the grid from an eligible renewable energy resource.
  • RECs are tradable environmental commodities that can be traded separately from wholesale electricity markets.
  • In Europe, an analogous environmental instrument is referred to as a Guarantee of Origin (GO).

What are Power Purchase Agreements?

  • This option for claiming emission reductions is different from the previous ‘RECs by themselves’ option in that the RECs involved here remained “bundled” with an underlying wholesale power purchase agreement (PPA).

What is an Allowance?

  • Carbon allowances are issued by a government under an emissions cap-and-trade regulatory program.
  • Each allowance (or emissions permit) typically allows its owner to emit one tonne of a pollutant such as CO2e.
  • Under a cap-and-trade system, the supply of GHG allowances is limited by the mandated ‘cap’.
  • Allowances can be allocated freely by the governing program, be purchased when auctions are held, or be purchased from other entities that have excess.

What is an Energy Efficiency Certificate?

  • Energy Efficiency Certificates (EECs), or “white tags,” are a tradable environmental commodity that represents an MWh of energy consumption reduced through an energy efficiency activity.
  • In theory, EECs are analogous with carbon offset credits but are denoted in units of energy reductions rather than emission reductions.

Indian Scenario

  • To help India achieve its Nationally Determined Contribution (NDC) goals, the Indian government is trying to create a market for carbon credits.
  • India has updated its NDC goals recently to reflect reducing emissions by 45%, generating 50% of power from renewable energy sources and reaching net zero emissions by 2070.
  • In the past, India has made investments in producing carbon credits and exporting them to international enterprises.
  • Between 2010 and June 2022, India issued 35.94 million carbon credits or nearly 17% of all voluntary carbon market credits issued globally. 
  • The market for carbon credits increased by 164% globally in 2021. It is anticipated to reach $100 billion by 2030.
  • However, the government now intends to forbid its exports, guarantee the expansion of a local domestic market for carbon credits, and increase its internal trade.
  • Energy Conservation (Amendment) Bill, 2022, outlined the general parameters of a voluntary trading system for carbon credits. The Union government or any approved agency is given the authority to issue “carbon credit certificates” for the reduction of carbon emissions to registered enterprises under Section 14. The market can then be used to sell these credits. 

Offsetting in practice

  • Offset projects can be broadly split into two categories: removals and avoidances.
  • Removal describes actions which actively take carbon out of the air and store it permanently, such as by planting trees or direct air capture — which is not a technology available at scale.
  • Avoidance offsets are from projects that stop the release of greenhouse gases, such as protecting trees from being logged.


Q) Offsets have come under fire as a way for companies to compensate for carbon emissions through eco projects elsewhere. Examine the validity of this statement. (150 words)