As market-based instruments, emissions trading systems (ETSs)1 are inherently flexible, as entities can decide to reduce their own emissions or buy emissions allowances from the market. Carbon offsets2 (or simply ‘offsets’) are a tool to further increase flexibility in reaching climate targets under ETSs, as they offer sectoral and geographical flexibility for jurisdictions to reduce greenhouse gas (GHG) emissions outside of the scope of their ETS. This paper gives an overview of offset provisions in several major ETSs around the world and provides an outlook for offsets in the years to come.3 Offsets represent emissions reductions and emissions removals resulting from projects undertaken outside the scope of an ETS.4 Offsets are generated by crediting mechanisms, which ensure adherence to specific requirements and issue the units. In some cases, using offsets can allow emissions from sources covered by the ETS to exceed the ETS cap while ensuring aggregate emissions are kept constant. This is because any excess of emissions covered by the ETS are balanced out by reductions generated by offset projects outside of the ETS scope.

Depending on the provisions of an ETS, offsets can originate from projects either within or outside the geographical boundaries of the ETS jurisdiction, usually termed ‘domestic’ or ‘international’ offsets respectively.5 Domestic offsets have been used in a range of ETS jurisdictions, such as California, the Regional Greenhouse Gas Initiative (RGGI), and China, whilst international offsets have historically played a greater role in Europe, New Zealand, and South Korea. The main international offsets used in ETSs to date have been generated under the Kyoto Protocol’s flexibility mechanisms, in particular Certified Emissions Reductions (CERs) of the Clean Development Mechanism (CDM), and Emissions Reduction Units (ERUs) of the Joint Implementation Mechanism (JI). A range of other independently established crediting mechanisms also exist, such as the Verified Carbon Standard (VCS, managed by Verra), Gold Standard, the American Carbon Registry (ACR), and the Climate Action Reserve (CAR). Although ETSs have historically not relied on offsets from independent mechanisms, a few existing and upcoming ETSs are considering doing so.