The History of Carbon Offsetting: The Big Picture

The History of Carbon Offsetting: The Big Picture

Grace Smoot

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Carbon offsets are a way to reduce our carbon emissions and our carbon footprint to ensure a sustainable planet for future generations. The voluntary carbon market is the current method of purchasing carbon credits that are used to offset emissions occurring elsewhere. But how exactly did carbon offsets come to be?

Carbon offsetting began in 1989 with an agriforest in Guatemala. Its short history involves three development phases spurred by policy and corporations committing to carbon neutrality. Key events include the 1995 Kyoto Protocol, the 2005 EU Emissions Trading Scheme, and the 2015 Paris Agreement.

With the current global climate crisis threatening Earth’s environmental, economic, and social health, the time to act is now. And one method of action is carbon offsetting. Keep reading to learn how carbon offsetting came to be, who and what pioneered its development, how effective carbon offsetting has been thus far, and what the future of offsetting could entail. 

Here’s the History of Carbon Offsetting in a Nutshell

Carbon offsets play an important role in mitigating the effects of global climate change by reducing carbon emissions beyond what we each can achieve through individual actions. 

Carbon Offset: a way for a company or person to reduce the level of carbon dioxide for which they are responsible by paying money to a company that works to reduce the total amount produced in the world, for example by planting trees”

Oxford Dictionary

When you hear the words “carbon offset”, think about the term “compensation”. Essentially, carbon offsets are reductions in carbon emissions that are used to compensate for emissions occurring elsewhere. They are measured in tons of carbon dioxide equivalents and are bought and sold through international brokers, online retailers, and trading platforms

Carbon Offset MilestonesHistorical Event
The first carbon offset project1989: Applied Energy Services offset a coal-fired power plant by financing an agriforest
The three development phasesEarly market formation and innovation
Consolidation and strengthening
Key policy developments1997: Kyoto Protocol
2005: EU Emissions Trading Scheme
2009: Copenhagen Climate Change Conference
2012: Sustainable Development Goals (SGD #13)
2015: Paris Agreement
2020: UN Carbon Offset Platform
2023: The Core Carbon Principles (CCPs)
Major companies that pioneered the voluntary carbon market (VCM)2006: Sky media becomes the world’s first carbon-neutral media company
2007: Google becomes carbon neutral
2019: EasyJet becomes the first major airline to offset all jet fuel emissions

To understand the current voluntary carbon market (VCM), we must first outline the history of how the VCM got started and what key events led to its development.

When and How Did Carbon Offsetting Get Started

The term “offset” has been used since the 1970s as part of the Clean Air Act, and “carbon offsets” became popularized in the first decade of the 21st century as concerns grew about human-induced climate change via the release of greenhouse gases. 

1989 – The First Carbon Offset Project: Applied Energy Services, an American electric power company, decided to finance an agriforest in Guatemala to offset the emissions of their new, coal-fired power plant in Connecticut. This was 8 years before the signing of the Kyoto Protocol and 16 years before the creation of The EU Emissions Trading Scheme (EU ETS), making it the first carbon offset program to exist

1997 – The Kyoto Protocol: An international treaty linked with the United Nations Framework Convention on Climate Change (UNFCCC) that mandated industrialized countries and economies to limit and reduce greenhouse gases (GHG) emissions. It was the original compliance carbon market that included carbon offsets, set to be replaced by the Paris Agreement in 2020. Countries that adopted the treaty were assigned maximum carbon emission levels and were penalized if they went above these levels. 

Here you can view the legendary speech of then-United Nations Secretary-General Mr. Kofi Annan on the Kyoto Protocol:

Celebrate 20 Years of the Kyoto Protocol

When carbon offsets first entered the market they weren’t well known, but over time they have expanded to far reaches of the market.

How Has Carbon Offsetting Developed Over Time

Carbon offsets are not a new concept. In fact, they have been around for about 20 years. When they first started, carbon offsets were directed towards the environmentally conscious individual. Over time, they have come to target businesses and corporations, and now 70-75% of offsets are directed towards businesses. Carbon offsetting has gone through three distinct development phases in its development over the last thirty years. 

  • Consolidation and strengthening: The development of best management practices, engagement of the private sector, ratification of new projects and methodologies, increased 
  • Mainstreaming: Market growth, corporate awareness, and validation of voluntary market standards by compliance systems

Each development phase also contains key policy milestones and market developments that aided in the advancement of the VCM.   

What Are Milestones in Carbon Offsetting Development 

Over the years, certain policies have fueled the development of the VCM. In addition to policy developments, certain entities have paved the way for the VCM by committing to carbon neutrality and even net-zero emissions. Below we’ve also listed some of the major businesses and corporations that have pioneered the VCM.

2005 – The EU Emissions Trading Scheme (EU ETS): The cornerstone of the European Union’s (EU) policy to fight climate change and the world’s first and biggest carbon market. It uses a “cap and trade system” to limit emissions from ~10,000 installations plus airlines, covering roughly 40% of all EU greenhouse gas emissions.   

2006Sky becomes the world’s first carbon-neutral media company. Starting in 2019 they made all of their productions carbon neutral, and they are committed to being net-zero by 2030. 

2007Google became carbon neutral in 2007, matched their energy use with 100% renewable energy in 2017, and is committed to operating on carbon-free energy by 2030.

2009 – Copenhagen Climate Change Conference: Raised climate change policy to the highest political level and produced the Copenhagen Accord, which established the long-term goal of limiting the maximum global average temperature increase to no more than 2 degrees Celsius above pre-industrial levels. It also encouraged countries to set emission limitations and increase the frequency of reporting emissions inventories.

2021: The total market value of the VCM reaches $2 billion, a quadruple increase from 2020.

2023: The Integrity Council for the Voluntary Carbon Market (IC-VCM) releases the Core Carbon Principles (CCPs) in an effort to streamline the carbon offset industry. The CCPs are a global benchmark for carbon offsets that set rigorous thresholds for project transparency, verification, environmental integrity, adherence to the sustainable development goals.

You can view the then President Obama address the issues of climate change at the Copenhagen Climate Change Conference (COP15) morning plenary session:

President Obama at Copenhagen Climate Change Conference-Morning Plenary Session

2012 – The Sustainable Development Goals (SGD #13): The 2030 Agenda for Sustainable Development outlines 17 Sustainable Development Goals which are urgent calls to action for future peace and prosperity. Number 13 is the call to take urgent action to combat climate change and its impacts

2015 – The Paris Agreement: The most well-known piece of legally binding, international climate mitigation legislation, with 196 member countries. Its goal is to limit global warming to below 2 degrees celsius (C), preferably to 1.5C, compared to pre-industrial levels. Every 5 years, member countries submit nationally determined contributions (NDCs) which outline their plans for climate action. 

Check out the highlights of the 2015 COP21 directly from the UN Climate Change channel:

Two Weeks of COP 21 in 10 Minutes

2019: EasyJet airlines became the first major airline to offset all jet fuel emissions from all flights across all operations.

2020 – The UN Carbon Offset Platform (UNCOP): The UNCOP has certified projects that reduce, avoid, or remove GHG emissions from our atmosphere. In 2020 they reached 2 million Certified Emission Reductions (CERs) purchased and canceled since 2015. This equates to roughly $2 million in climate investments to fight climate change. 

How Has the Carbon Offsetting Market Developed Over Time

In recent years, the voluntary carbon market (VCM) has seen growth in both the amount of CO2 offset and the value of the market:

The global carbon offset market is estimated at a value anywhere between $40 billion and $120 billion. As of 2020, more than 1,100 companies globally have committed to achieving net-zero CO2 emissions by 2050.

In Comparison: How Have Carbon Emissions Developed Over Time

The COVID-19 pandemic triggered the largest decrease in energy-related carbon emissions since World War II, a decrease of 2 billion tons. However, emissions rebounded quickly at the end of 2020, with levels in December ending 60 million tons higher than those in December 2019. This indicates that the earth is still warming at an accelerated rate, and not enough is being done to implement clean energy practices. 

What Is the Present Status of Carbon Offsetting

Globally, we pump over 36 billion tons of CO2  into the atmosphere every year which causes climate change, air pollution, acid rain, ocean acidification, and the melting of glaciers and polar ice. To ensure a healthy planet for future generations, we must reduce our CO2 emissions. And one way to do this is by using carbon offsets.

Illustration of annual CO2 emissions
Our World in Data: Annual CO2 Emissions

To date, credits for ~1 billion tons of CO2 have been listed for sale on the voluntary market. But the number of sellers exceeds the buyers by about 600-700 million tons. Meaning that only about 300-400 million tons of CO2 offsets actually get realized.

When compared to global annual carbon emissions, offsets represent only a fraction of reductions. To be precise, only about 0.8 – 1 % of the annual CO2 emissions are offset.

But offsets have increased in just the last few years, and this trend is expected to continue as more education and research is devoted to our climate crisis. 

What Are the Most Common Carbon Offsetting Projects

Carbon offsets can range anywhere from a couple of hundred tons of CO2 per program per year to thousands of tons of CO2 per program per year. Travel, renewable energy, energy efficiency, and carbon sequestration are just some of the areas that provide carbon offset projects.

Carbon offsets have the potential to instigate meaningful environmental change, but to make the greatest impact we must understand both their benefits AND drawbacks.

What Are the Most Common Pros and Cons of Carbon Offsetting

Carbon offsets have benefits and drawbacks that are important to understand before you decide whether or not to purchase them. Supporters tout their ability to improve environmental health while opposers assert that they don’t really work.

What Are the Main Benefits of Carbon Offsets

If carbon offsets are both additional and permanent, then carbon offsets can help reduce your overall GHG emissions to balance off your personal carbon footprint to fight climate change – at least in the short term

Carbon footprint: the amount of greenhouse gases and specifically carbon dioxide emitted by something (such as a person’s activities or a product’s manufacture and transport) during a given period”

Merriam Webster

But the benefits of carbon offsets go beyond that.

  1. Improves air quality: Degradation of air quality as a result of carbon emissions is a serious issue. Reducing C02 emissions would lead to improved public health in terms of asthma, respiratory allergies, airway diseases, and lung cancer.  
  1. Protects ecosystems: Protecting forest habitats, agricultural land, aquatic ecosystems, and biodiversity has been linked with improved human health and cleaner air, water, and food
  1. Supports green jobs: The renewable energy sector employed 11.5 million people worldwide in 2019, with job growth expected to continue to increase as we realize just how beneficial renewable energy is for our environment. 

If used correctly, carbon offsets can provide environmental, economic, and social benefits that go beyond reducing GHG emissions.

What Are the Main Drawbacks of Carbon Offsets

The main argument against carbon offsets is that they don’t really work. Instead of substituting offsetting carbon emissions, we should instead cut the emissions directly at the source. Other arguments against offsets include: 

  1. Planting trees can’t replace cutting CO2 emissions: To offset even a fraction of our global CO2 emissions, we would have to wait at least 20 years from planting to see carbon reduction benefits AND protect a massive number of trees from droughts, wildfires, tree diseases, and deforestation for decades. 
  1. Carbon offsetting plans are PR plans: Voluntary market offsets are often unregulated and come from a wide range of sources. Companies may advertise a specific program, but it may be just for public attention. 
  1. Climate colonization: Most of the available land for carbon offset programs is located in poor countries. Powerful countries sometimes exploit this land, leaving native peoples to face food scarcity and eviction

As with most things, carbon offsets have drawbacks that need to be understood before enrolling in a program. But proper verification and documentation can help ensure that the benefits of carbon offsets outweigh the drawbacks.  

How Will the Future of Carbon Offsetting Look Like

Some businesses have pledged to increase their carbon offset programs, while others have recognized that carbon offsets are merely an interim solution as new ways to eliminate emissions are being developed. 

How Carbon Offsetting Will Likely Develop in the Future

When implemented properly, offset programs can reduce carbon emissions, which improves air quality, protects ecosystems, and supports green jobs. The problem with the current VCM is the fact that it is fragmented and complex, which leads to confusion, inconsistencies, and general distrust of the system. This is why it has not worked, to date, to significantly reduce carbon emissions. 

To make carbon offsetting a viable mechanism in global carbon reduction, the VCM needs to be restructured and refined in the following ways:

Area of Improvement Method of Action
Creating shared principles for defining and verifying carbon creditsStandardizing credits through common features
Developing contracts with standardized termsDeveloping of a clear daily market price
Establishing trading and post-trade infrastructureConsolidation of data from multiple registries into a master registry
Creating consensus about the proper use of carbon creditsEstablishment of clear guidance on what constitutes an environmentally sound offsetting program that actually reduces carbon emissions
Installing mechanisms to safeguard the market’s integrityImplementation of guidelines to stop fraud, and the creation of a governance body to check the eligibility of market participants
Transmitting clear signals of demandUniform guidelines on accepted uses for carbon credits, increased industry-wide collaboration, and better standards for the development and sale of carbon credits

Revamping the current VCM to make it more understandable, consistent, and trustworthy could increase the value of the VCM and encourage more people to offset their carbon footprint through the use of offsets. 

How CO2 Reduction Will Likely Develop in the Future

Right now we do not pay a monetary price for emitting carbon. But we do pay an environmental price, in the form of climate change. If we truly want to reduce CO2  emissions and mitigate the effects of climate change, we must implement what is known as carbon pricing

Put a price on emitting carbon can be achieved in two ways:

  • Cap and trade: A maximum level of pollution is defined and licenses are required for polluters to emit carbon, the price to emit changes over time.
  • Carbon tax: A tax is placed on all goods and services that lead to the emission of carbon.

The idea behind these methods is simple. Goods and services that create lots of carbon emissions, like air travel or coal-powered energy, become more expensive over time. Goods and services with a low carbon footprint become comparatively less expensive over time. This reduces carbon emissions because it incentivizes consumers to opt for the low-carbon emission option, and it incentivizes producers to develop low-carbon alternatives in markets where they are not yet available. 

Carbon pricing is different from carbon offsetting because, unlike carbon offsetting, carbon pricing forces those who cause the carbon emissions to pay for them. Because emissions rise with income, the rich would be the ones paying the most

Carbon pricing is also more effective than carbon offsetting because it does not rely on a central authority to maintain standards, registries, and guidelines. Because everyone is incentivized to save money, everyone is incentivized to reduce their individual carbon emissions. The result? A global reduction of carbon emissions that mitigates climate change and carves a path of sustainability for future generations. 

The countries that have already implemented carbon pricing are seeing results that are in alignment with the Law of Demand. As the price to emit carbon increases, consumption of carbon-intensive goods and services decreases. Without hampering their GDP per capita growth.

Illustration of carbon price decoupling across various countries
Our World in Data: Carbon price

Final Thoughts

Carbon offsetting has a relatively short history that saw it rise to popularity at the beginning of the 21st century as concern grew over the crisis of climate change. There have been many policies and companies that have proved instrumental in developing the VCM into what it is today. And the VCM is poised to see continued growth in the future as we look to reduce emissions to levels stated in the Paris Agreement. 

Offsetting carbon is beneficial, but it should not be used as a panacea for climate change. When you buy a carbon offset, you are paying someone else to cut their emissions so you don’t have to cut your own emissions. This is why offsetting alone will not be enough to reduce global carbon emissions.

In the near future, we could see a shift away from carbon offsets and towards carbon pricing. With this method, we would be cutting emissions from the source by incentivizing a decrease in carbon consumption.

Stay impactful,

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