Carbon Offsets: Decarbonization or Transition-Washing?

59 Pages Posted: 18 Mar 2024 Last revised: 21 Mar 2024

See all articles by Sehoon Kim

Sehoon Kim

University of Florida - Department of Finance, Insurance and Real Estate

Tao Li

University of Florida - Warrington College of Business Administration; European Corporate Governance Institute (ECGI)

Yanbin Wu

University of Florida - Department of Finance, Insurance and Real Estate

Date Written: January 31, 2024

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

Suggested Citation

Kim, Sehoon and Li, Tao and Wu, Yanbin, Carbon Offsets: Decarbonization or Transition-Washing? (January 31, 2024). Available at SSRN: https://ssrn.com/abstract=4762799 or http://dx.doi.org/10.2139/ssrn.4762799

Sehoon Kim

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

Tao Li (Contact Author)

University of Florida - Warrington College of Business Administration ( email )

308 Stuzin Hall
Gainesville, FL 32601
United States

HOME PAGE: http://https://site.warrington.ufl.edu/tao-li/

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://https://site.warrington.ufl.edu/tao-li/

Yanbin Wu

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

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