carbon offset

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 that 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 levels 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 was historically subject to little regulation . This lack of regulation led to skepticism regarding whether the supposed climate benefits of carbon offsets were playing out in practice. In September of 2024, the Commodity Futures Trading Commission (CFTC) approved final guidance on the listing of voluntary carbon credit derivative contracts for trading. In December of 2024, the CFTC announced its first actions addressing fraud in voluntary carbon credit markets .

[Last reviewed in December of 2024 by the Wex Definitions Team ]

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