Check out this article from the July 2008 edition of Fast Company, Can Carbon Credits Slow Global Warming? byAnya Kamenetz. It’s a bit lengthy, soIve pulled snippets from the article and broken it down to answer the key questions I had about this topic. If you have a few extra minutes, its definitely a good read and I would encourage you to read the article in its entirety.

How did Carbon Offsetting get started?

Back in the late 1980s, AES began planting trees and preserving existing forests in Central America, and calculating the CO2 that would be absorbed from the air as a result. “We did those as social-responsibility projects,” says Bill Lyons, now president of AES’s Climate Solutions Business.

By last year, the company had entered into a partnership with GE to bring the largest single portfolio of carbon credits to market: 10 million tons, expected to grow to 34 million by 2012. The credits come from offset projects around the world, including trapping methane from animal waste, landfill gas, and palm-oil mill effluent; lighting efficiency (in India); and coal-mine ventilation (in Africa and Asia). “We view this as a long-term business,” Lyons says.

How do you know that your purchase of carbon offsets will make a difference?

“You can create carbon credits by raising plantations of trees, but the destruction of the world’s existing forests, particularly tropical forests, accounts for some 20% of greenhouse-gas emissions.

A certification standard called Reduced Emissions from Deforestation and Degradation, or REDD, project involves buying forest land in a developing country, or making a deal with its owners, and creating a nature preserve. You attempt to prevent logging or slash-and-burn agriculture by hiring guards or offering the locals a better living doing something else. Then you sell carbon credits based on the deforestation thus avoided.”

What does this have to do with Investment firms?

The theory is that the invisible hand of the markets will find the fastest, cheapest, most efficient way to make the necessary reductions in greenhouse gases.

Under a cap-and-trade system, pioneered in the United States for acid rain, a government sets a national ceiling on emissions (the cap), which lowers annually. The clever CEO will, in principle, figure out a way to reduce her company’s emissions to below her allotment. By carefully measuring how much carbon dioxide she’s saving, she can sell the difference to someone who is unable or unwilling to meet his own goal (the trade).

Investment firms have already started buying, selling, managing, and advising on hundred-million-dollar portfolios of carbon-offset projects. U.S. trade in offsets doubled in 2005 and 2006, and nearly tripled in 2007 to a total of $330 million. The worldwide market in carbon, dominated by Europe, already tops $64 billion.”

Why are companies voluntarily participating in this market?

Its only a matter of time before there are legal limits in the U.S. on carbon. U.S. companies have been voluntarily buying carbon credits to avoid potential liability, creating a carbon-offset market here.

The United States is responsible for about a fifth of the world’s greenhouse-gas emissions. A serious carbon cap here at home — 80% below 1990 levels by 2050 is widely considered the minimum to avoid the worst consequences of global warming — is therefore crucial.

The more offsets a company like AES creates in faraway lands, the less it invests in upgrading or replacing its coal-fired power plants here at home, as it might if it had to pay a carbon tax or reduce its emissions directly. That’s why rich corporations are so interested in offsets in the first place — they’re less of a threat to business as usual.

Looking to shape national policy, a coalition of powerful corporations — heavy hitters such as Alcoa, BP America, GE, and Shell — have formed the United States Climate Action Partnership, joining with big enviro organizations to lobby for cap and trade.

My words of advice for you, take a few minutes to make sure your donations are being put to use in a way that you feel is most beneficial in impacting the environment. If not, Id recommend finding other ways to reduce your own footprint or that of others as a way of creating your own personal offset.