Carbon Offset Provision with Guilt-Ridden Consumers

Abstract:     
Consumers who wish to mitigate their emissions can purchase carbon offsets. In a model where consumer guilt drives the demand for such offsets, it is shown that offsets are complements to ‘dirty’ consumption and the introduction of an offset market can cause ‘dirty’ consumption to increase. Net emissions are shown generally to decline, however, regardless of whether electricity prices are regulated or chosen strategically or whether offset prices are exogenously or endogenously determined. We find two exceptions to this rule. It is demonstrated, that when there is no latent demand for offsets, the introduction of offsets can potentially cause a rise in net emissions when ‘dirty’ producers have market power. Similarly, emissions can rise if ‘dirty’ producers can engage in pre-emptive strategic commitments to deter investment in offset markets.

Keywords: carbon offsets, greenhouse gases, electricity markets, strategic behaviour

JEL Classifications: L94, Q42, Q58

Working Paper Series