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In a cap and trade scheme, such as the one in the EU and the one being developed for California, everyone must adhere to a "cap" on greenhouse gas emissions. If you work it right and come in under that cap, you can take the balance, and sell them on an open market exchange. That balance is considered a credit. They are traded on the European Climate Exchange and the Chicago Climate Exchange, among others.

If you, as a company or entity, are over the "cap" then you must do something to get under the cap. Those include buying those "credits" from the exchange, or engaging in Carbon Offset projects. Carbon offsets are simply projects in 3rd world countries that help them become more efficient, etc. etc. etc. You can buy a stake in one of those projects and thus offset your carbon emissions.

Hope that helps.

"Carbon offsets are simply projects in 3rd world countries that help them become more efficient, etc. etc. etc."

Really, the big carbon credit creditor is not the "third world", but China. The projects/activities earning credits can by mythical, always unaccountable.