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resources applied and some purposeful action taken. An important feature of the resources and the action is that that they are “additional” to normal business-as-usual (BAU) behavior.37

Perhaps the most important distinction to draw with respect to offsets concerns the motivation that gives rise to the offset—that is, the motivation that causes resources to be devoted to an action to reduce GHGs. The motivations arise from an economic return that can be earned by selling the offset (reflecting a ton of reduced emissions) to a buyer. There generally are two classes of buyers: those who do not have any legal obligation to reduce emissions and choose to buy offsets for other reasons, and those who do have legal obligations and can meet those obligations by purchasing offsets.

The greatest popular press attention has focused on the first class of offsets that reside in what might be termed the “voluntary market.” Examples of these voluntary offsets are sold by companies like Terrapass.38 An individual who is concerned about his or her GHG emissions due to personal behavior—for example, air and auto travel—can purchase offsets equal to the emissions the individual seeks to offset. The same is true for private business. Firms that have no legal commitments to reduce GHGs may still undertake projects to reduce their own emissions or purchase offsets from entities like Terrapass or on commercial exchanges like the Chicago Climate Exchange.39

The volume of voluntary offsets has been growing over time, and a small industry of offset developers and third-party verifiers has been established to support this growth. However, it is unlikely that motivations for voluntary investments in such offsets, either by private individuals or corporations, will ever be so large as to require the modeling community to incorporate them in analysis of mitigation efforts. Therefore, the paper does not consider them further.

Compliance entities are those with a legal obligation to reduce their GHG emissions. Should a cap-and-trade system for GHGs be deployed in countries like the United States,40 the market for compliance offsets can be quite large if obligations can be met with these purchased offsets. Countries are compliance entities with respect to the Kyoto Protocol, private businesses are compliance entities in the European Union Emission Trading Scheme (EU-ETS)41 and within the United States under provisions of H.R. 2454,42 and proposals exist for individual carbon trading, where the compliance obligations rest with individuals (Roberts and Thumim 2006).

The obligations of entities can vary. Countries under the Kyoto Protocol must keep their emissions under their Kyoto limits or purchase either Certified Emission Reductions Units (CERUs,43 in the form of Clean Development Mechanism (CDM) credits) or Emission Reduction Units (ERUs,44 quantified emissions-limitation and -reduction commitments from other Annex 1 Kyoto parties). Private firms under domestic cap-and-trade programs like the EU-ETS and H.R. 2454 must hold allowances in amounts equal to their emissions. Or, they may buy domestic and international offset credits45 or purchase international emissions allowances.46 Volumes of CERUs, ERUs, U.S. GHG market allowances, EU-ETS allowances, other international emissions allowances, and domestic and international offsets credits can be expected to be large and therefore important to modeling efforts.


Additionality plays an important role in the generation of an offset. For example, suppose a new office building is being constructed, and the plans call for water heating via natural gas as the least-cost option. Combustion of the natural gas will cause GHG emissions. Suppose someone comes to the building owner and agrees to pay the added cost of rooftop solar panels to heat the water in lieu of natural gas. Use of the solar panels will eliminate the GHG emissions, but importantly, if this individual did not compensate the building owner for the added cost of the solar panels, the owner would use natural gas, and emissions would take place. Thus, the purposeful action—providing the additional resources to the building owner to install rooftop solar—was additional. Because the solar installation would not have occurred under business as usual, the GHGs that were not emitted due to the solar panels are “additional” and could be valid offset credits.


See (accessed April 2010).


See (accessed April 2010).


EIA (2009) suggests that 1.2 billion tons of domestic and international offsets would be traded in the U.S. market in 2020.


See (accessed April 2010).


American Clean Energy and Security Act of 2009, passed by the U.S. House of Representatives in the 111th Congress, (accessed April 2010).


Article 12 of the Kyoto Protocol to the United Nations Framework Convention on Climate Change, (accessed April 2010).


Article 3 of the Kyoto Protocol to the United Nations Framework Convention on Climate Change, (accessed April 2010).


H.R. 2454, Part D.


H.R. 2454, Part C, Section 728.

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