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Carbon Offset Provision with Guilt-Ridden Consumers

Authors


  • We thank to Stephen King, Michael Ryall, two anonymous referees, and a coeditor for helpful comments. Responsibility for all errors and omissions are our own. The latest version of this paper is available at: http://research.joshuagans.com. All correspondence to: J.Gans@unimelb.edu.au.

Abstract

Carbon offsets allow consumers to mitigate their guilt associated with their carbon footprint. On the one hand, when offsets are purchased in an industry unrelated to the consumption activity, offsets are complements to consumption and the introduction of an offset market causes consumption to rise. On the other hand, when offsets are purchased in a related industry, consumption and offsets are substitutes and consumption falls. In general, however, net emissions decline. We find two exceptions to this rule. First, when offsets are purchased in an unrelated market, if there is no latent demand for offsets in their absence, the introduction of offsets can potentially cause a rise in net emissions when producers of “dirty” consumption goods have market power. Second, when offsets are purchased to fund green energy, emissions can rise if “dirty” producers can engage in pre-emptive strategic commitments and the price of offsets is chosen endogenously.

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