What Are Offsets?
In cap-and-trade and other pollution trading regimes, polluters are allowed to satisfy emissions reduction requirements either by directly reducing their emissions, investing in technology to reduce their pollution, or trading emissions credits. Emissions credits are equal to the amount of pollution a company is allowed to emit. Offsets are a “pay-to-pollute” option for meeting emissions reductions. In theory, an offset is a tradable credit representing a pollution reduction from a source outside of a cap-and-trade market. A company can purchase offset credits to reduce emissions outside of the cap, instead of reducing them at the source. For example, say a company is permitted 5,000 tons of carbon dioxide emissions per year, but wants to emit 7,000 tons. Under cap-and-trade, the manufacturer would look to buy 2,000 tons of carbon dioxide emissions credits from another company, or would look to “offset” those 2,000 tons by buying offset credits from someone outside the cap-and-trade regime. The most common offsets are those for carbon emissions; nitrogen and phosphorus in water; and sulfur dioxide.