A more thorough explanation:

Carbon offsets are credits that represent the removal of one ton of carbon dioxide from the atmosphere. These credits can be obtained through activities such as planting trees or carbon capture. They 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.

For example, a company that emits a lot of carbon dioxide can purchase carbon offsets to balance out their emissions. They might buy credits from a company that has planted a lot of trees, which absorb carbon dioxide from the atmosphere.

Carbon offsets are particularly relevant in cap-and-trade programs. These programs regulate the maximum amount of pollution for a given period of time. 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 gases within the atmosphere.

However, the lack of regulation in the carbon offset market 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.