Carbon Offsets: Decarbonization or Transition-Washing?

Abstract

Using rich hand-collected data, we examine how corporations use carbon offset credits issued by third-party developers to claim emission reductions. Larger firms with higher institutional ownership and net-zero commitments tend to use offsets. However, offsets are used intensively in low-emission industries. After an exogenous ESG rating downgrade, triggered by a leading ESG rating agency's methodology change, low-emission firms retire larger quantities of cheap, low-quality offsets while heavy emitters decarbonize more in-house. Our findings are consistent with a separating equilibrium where firms choose whether to outsource their transition efforts, but also with firms using offsets strategically for certification and ranking benefits.

Keywords: Carbon Offsets, Carbon Transition, Climate Change, Greenhouse Gas Emissions, Greenwashing, Net Zero, Sustainability Ratings, Transition-Washing

JEL Classification: D22, G15, G18, G23, G24, G30, M14