What exactly is a carbon offset? In theory it's reduction in carbon emissions somewhere - through some action like planting a tree or paying for the spinning of a wind turbine - equal to your own emissions. Sounds easy, but the reality is very messy since the mechanisms for creating and buying emissions reductions and credits are incredibly varied. Here are four key questions to ask as you begin to think about your strategic choices in the (as-yet) mainly voluntary world of carbon offsets. By Andrew Winston

#1: What Should You Offset?

How much of your value chain impact should you try to offset? The GHG Protocol Initiative is one well-regarded set of standards that can help you define your boundaries. Your own direct emissions are defined as "Scope 1" emissions, for example, while Scopes 2 and 3 cover areas like indirect emissions from your utility and your supply chain emissions. Most companies focus on Scope 1 and some have made large renewables purchases to cover their direct footprint (the EPA keeps a running list of the biggest renewables buyers). A few companies look at all three Scopes and beyond. Fiji Water, with some guidance from Conservation International, is measuring all emissions from production of packaging materials, to manufacturing, transport, and even employee travel. The company has set a goal to go "carbon negative," offsetting 120% of these already expansively defined emissions.

#2: How Should You Offset?

The gold standard is buying renewable energy directly, but that really works only for your own operations (Scope 1). Take the example of U.K. cable company BskyB. As director of corporate responsibility Ben Simson tells me, the company has committed to buying the entire output of a new wind farm on the Isle of Sky (a coincidental name that Simson jokes is "a branding person's dream"). The 11 turbines will offset 80% of the company's direct emissions. But BskyB isn't stopping there, trying out innovative initiatives to reduce and offset indirect and value chain emissions: Each employee gets a "carbon credit card" and earns points for biking to work, teleconferencing, and so on; in a test program, the cable installers gave homeowners three energy-saving CFL bulbs to offset the energy use of the cable box - customers loved it, and more importantly, they got it. The company is also using its considerable media assets to promote awareness through programming.

#3: Who Is Doing the Offsetting?

To put it bluntly, who's paying? It's usually the company, from utility PG&E handing out 1 million CFL's to Allstate offering to offset drivers' auto emissions. But other companies are offering customers a way to pitch in. Dell's Plant a Tree program lets buyers offset the energy-related emissions of the Dell products they select. And some big car rental companies are mixing methods, charging for the offset but matching the donation as well. It's a fine line between placing the burden on customers and driving customer engagement, but it's a good practice to raise awareness.

#4: How Are Communicating Your Results?

How are you verifying and reporting the outcome of your carbon offset program? More to the point, are you verifying at all? (I recommend it highly.) Fiji, like other companies, is using an external consultant to verify the value chain analyses. But the big topic du jour is how companies report and market their claims. As fellow SLM contributor Will Sarni wrote in a recent editorial, "companies eager to flaunt 'carbon neutral' programs are on a collision course with the Federal Trade Commission, NGOs, and a public increasingly skeptical on the value of carbon offsets." It's the Wild West out there right now, but some protocols are gaining ground as safe havens for confused companies. Watch this ever-evolving space - regulations may be tightening soon.

There are dozens of types of offsets with a corresponding alphabet soup of acronyms that tie to regulated trading markets (some FAQs on the EU's system here (PDF), voluntary markets (Chicago Climate Exchange), or other amorphous actions companies take. I won't attempt to explain it all (and couldn't if I tried). There are plenty of reports (PDF) and many good articles that lay out the options, mainly for consumers, for measuring and paying for offsets (see one no-nonsense take here).

But keep this in mind: Offsets should be used as a last resort. The first steps in reducing your company's climate impact should be to look at your footprint, create solid metrics, redesign processes and products, and so on...all to cut emissions aggressively (and create a ton of value by the way). Then buy or install renewable energy on your facilities where possible. Then worry about carbon offsets for the remainder. Until unified standards emerge, carbon offsets are best reserved for the emissions that are left after you reduce as much as you can.

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Andrew Winston is founder of Winston Eco-Strategies and co-author of the best-selling Green to Gold. Read his "Eco-Advantage" blog here.

Note: This article has been adapted from Eco-Advantage Strategies, Andrew Winston's regular newsletter on how to build value and competitive advantage by innovating for sustainability.