What exactly are you doing when you buy carbon credits?

Not sure if we are talking about the same thing but purchasing carbon offsets is sort of (but not completely like) buying indulgences from the church.

The way it works is you figure up your carbon footprint (google carbon footprint calculator) and then go to one of many web sites and give them money to plant trees or some other carbon reducing project. They will tell you how much carbon was offset through your donation.

This means that it becomes okay for someone to live while polluting since he bought his way out of it.

It’s not as cut and dry as “you pollute x amount and so you buy this and now some factory reduces is CO2 output by that amount and all is well.”
From what I can tell, when you purchase something like a TerraPass you are indeed purchasing some CO2 output from places that have an excess for whatever reason (they have figured out how to pollute less or the money they get from the rights to pollute is a greater some then they could have produced with the factors of production that create that pollution). However, a good chunk of that money is also going to fund things like renewable energy research, which is also a good thing.
While buying carbon credits is a great way to help out, matching it up with trying to pollute less is by far the better answer. It will cost you less money as well…

Wasting your time and money.

There’s pretty much no accountability for private offset programs; you may be buying nothing at all. You’d be getting more for your money off donating to advocacy groups or people working on direct abatement of emissions.

This BBC article is a good resource:

http://news.bbc.co.uk/2/hi/uk_news/politics/6378471.stm