Carbon offsets are credits representing the removal of one ton of carbon dioxide from the atmosphere. These offsets are obtainable through activities such as planting trees or carbon capture and legally offset the amount of carbon that a polluting entity has emitted. Once obtained, carbon offsets can be sold to other parties as authorized by the Kyoto Protocol.
Carbon offsets are particularly relevant in cap-and-trade programs where regulations cap the maximum amount of pollution for a given period of time and entities wishing to emit pollution level greater than the cap must purchase the unused pollution credits of others. In theory, carbon offsets in combination with cap-and-trade programs can help reduce the amount of greenhouse gasses within the atmosphere.
Although a robust market exists for the purchase of carbon offsets, the field is subject to little regulation. This lack of regulation has led to skepticism regarding whether the supposed climate benefits of carbon offsets are playing out in practice. As of 2022, the United States Commodity Future Trading Commission (CFTC) began investigating whether carbon offsets should be regulated under existing securities law.
[Last updated in July of 2022 by the Wex Definitions Team]