The global economy is driven by the production of goods and services. Due to the world's reliance on fossil fuels, the majority of these goods and services generate greenhouse gas emissions. In order to combat climate change we need to decouple economic growth from greenhouse gas emissions so that businesses can continue to produce the goods and services required for social and economic well-being while not polluting the environment.

Reducing emissions in the United States is vitally important to achieving this decoupling. Unfortunately, even with a concerted national effort to capture all the benefits of energy efficiency and low-carbon technologies, the U.S. is projected to reduce its greenhouse gas emissions by only 3 gigatons of carbon dioxide equivalent (CO2e) in 2030, according to a recent McKinsey study. This would put U.S. emissions slightly above 1990-levels, making the necessary 80 percent reduction required by 2050, which is called for by the world's leading climate scientists, nearly impossible.

Given the nature of business and human behavior, without incentives or penalties, the vast majority of these gains will not be realized. State, federal and international regulation will ultimately be needed to drive emissions from the economy. The political will to impose pain on our fragile economy, however, is scarce. Yet scientists are calling for urgent action.

Enter carbon offsets. Offsets are real and permanent greenhouse gas reductions -- they just happen outside a company or individual's direct control.

Offsets address two critical needs: (i) incentivizing corporate and individual behavior and (ii) helping create projects that reduce emissions cost effectively. Here's how:

-- Offsets expand the range of reduction opportunities for achieving stretching targets while reducing the cost burden of doing so. Recent economic analyses (January 2008) prepared by the U.S. Environmental Protection Agency (EPA) point to the effectiveness of offsets in containing costs. An analysis of the Low Carbon Economy Act of 2007 (S. 1766, a.k.a. the Bingaman-Specter cap-and-trade bill) concludes that allowing the use of unlimited international credits and offset projects lowers the cost of achieving emissions goals by 65 percent while the effect of climate change reductions on GDP improves by 60 percent.

-- Carbon credits create a source of financing for technologies and projects whose sole purpose is to reduce greenhouse gas emissions. Given the limited opportunity for generating revenues, these projects would likely not get built without this economic incentive.   

-- For projects whose primary purpose is something other than reducing emissions, such as generating electricity, carbon credits incentivize companies and developers to design projects in a way more favorable to the environment. A project that might otherwise be built "brown" (i.e. a coal-fired power plant) can be built "green" (i.e. a wind turbine) because the economics make sense due to the market for carbon credits.