A carbon credit, often referred to as a carbon allowance, is essentially a permit that allows the holder to emit a certain amount of carbon dioxide or other greenhouse gases; it can be bought and sold in regulatory markets, often under cap-and-trade programs. When a company or entity emits less than their allotted amount, they can sell their excess credits to others who need to exceed their limits.

Carbon offsets represent a reduction or removal of emissions achieved through projects such as reforestation, renewable energy, or energy efficiency measures, which can be purchased by individuals or companies to compensate for their own emissions. These offsets are typically transacted in voluntary markets and are not limited by regulatory caps.