Carbon Offsets: Decarbonization or Transition-Washing?

57 Pages Posted: 18 Mar 2024 Last revised: 23 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 - Department of Finance, Insurance and Real Estate

Yanbin Wu

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

Date Written: January 31, 2024

Abstract

Carbon offsets enable firms to lower their carbon footprints by purchasing and retiring credits issued by other entities that reduce emissions. These financial instruments have emerged as a tool to aid corporate carbon-transition efforts. Using rich hand-collected data, we provide the first systematic evidence on the landscape of carbon offset projects and the determinants of carbon offset usage by publicly listed firms around the world. Consistent with offsets being a transition tool, larger firms with higher institutional ownership and net-zero commitments are more likely to use offsets to reduce their carbon footprints. However, offsets are used intensively by firms in low-emission industries. We provide causal evidence that after an exogenous ESG rating downgrade, triggered by a leading ESG rating agency's methodology change, low-emission firms in industries with small emission gaps retire larger quantities of cheap, low-quality offset credits. In contrast, high-emission firms in large-gap industries reduce their own emissions directly rather than use offsets, and become more likely to retire high-quality offsets when they use offsets. Our results are inconsistent with the notion that carbon offsets enable high-emission firms to transition to low-carbon business models, but more consistent with firms using these instruments 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 - Department of Finance, Insurance and Real Estate ( email )

Warrington College of Business
Gainesville, FL 32611
United States

HOME PAGE: http://warrington.ufl.edu/contact/profile.asp?WEBID=7628

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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