So, your CEO has caught the sustainability bug and now you’re personally on the hook to reduce energy consumption, waste, and greenhouse emissions.

You’ve started by implementing some easy eco-fixes with your internal operations, but your factories are still spewing more smoke than a bachelor party at a cigar bar. Retrofitting your old production equipment to be eco-friendly will take years and millions (if not billions) of dollars. And your overzealous CEO has told the street your company will cut its environmental footprint within the next three years.

What do you do to bridge the gap until your operations catch up with your CEO’s ambitious sustainability goals? Businesses and governments around the world believe they have an answer: carbon offsets. In the most basic terms, carbon offsets allow companies to compensate for their own emission lapses by buying green credits from other companies that have done a much better job at lowering their greenhouse gas output. And, by the market reaction, they seem to be onto something.

New research indicates that the market for voluntary carbon offsets grew 200% last year to more than $90 million. And that doesn’t even include the carbon offset exchanges run by governmental agencies, such as the European Union or the Northeastern states coalition here in the U.S.

At first blush, carbon offsets may appear to be a cop out, merely allowing larger, inefficient companies to continue to spew pollution. However, a new article in Fast Company magazine correctly indicates that the free market system will soon increase the cost of carbon offsets to a level that will force even the most reluctant companies to embrace more efficient and environmentally friendly operations.

According to the article, “Carbon taxes, government-mandated carbon-trading markets (such as the EU market, or the regional initiative in the northeast United States), and voluntary offsets are designed to channel money toward the low-hanging fruit. As the cheap reductions are achieved, the price of carbon, and carbon offsets, will go up. That’s the point of the market-based system.”

That said, the article suggests that achieving a true market-based system will require some enhancements to the current carbon offset programs. Yet, the improvements should be forthcoming. Congress has requested that the Environmental Protection Agency beging developing standards to measure and validate claimed offset savings. And an independent group, such as the Center for Resource Solutions is developing certification program for offset providers.

Upshot: carbon offsets are a near-term fix to help reduce the aggregate amount of greenhouse gas emissions in the world. Yet, over the longhaul, the rising cost of offset credits will force companies to overhaul their operations to become more efficient and eco-friendly. Polluters that don’t, will pay a steep price that will eat into profits and overall market value.

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