A carbon credit is a permit that allows the holder to emit one ton of carbon dioxide or its equivalent in other greenhouse gases. Governments create them under cap-and-trade systems. Companies buy and sell them. The total number of credits is limited, so the price rises when demand is high and falls when it is low.

A related concept is the carbon offset. An offset represents a reduction or removal of emissions somewhere else, often in a developing country. Planting trees, building solar farms, or capturing methane from landfills can generate offsets. Companies buy them to claim carbon neutrality without cutting their own emissions.

Offsets are controversial. Some projects are real and verifiable. Others are not. A forest that would have been protected anyway generates a credit for doing nothing. A solar project that was already profitable claims credit for emissions it did not reduce. Verification bodies have improved, but fraud and exaggeration persist. Buyers should look for high-quality certifications.

Key points

• One credit equals one ton of CO2
• Created by caps or offset projects
• Traded on compliance and voluntary markets
• Quality varies widely
• Verification matters