Carbon Offset Provision with Guilt-Ridden Consumers

36 Pages Posted: 13 Mar 2007 Last revised: 26 May 2014

Joshua S. Gans

University of Toronto - Rotman School of Management; NBER

Vivienne Groves

Stanford Graduate School of Business

Date Written: August 12, 2010

Abstract

Carbon offsets allow consumers to mitigate their guilt associated with their electricity emissions. On the one hand, when offsets are purchased in an industry unrelated to electricity, offsets are complements to consumption and the introduction of an offset market causes consumption of electricity to rise. On the other hand, when offsets are purchased in a related industry – namely, to satisfy consumer demand for green electricity – consumption of dirty electricity and offsets are substitutes and dirty electricity consumption falls. In general, however, net emissions decline. We find three exceptions to this rule. When offsets are purchased in an unrelated market, too much consumer confidence in the effectiveness of offsets to sequester carbon from the atmosphere can lead to a rise in net emissions. Similarly, if there is no latent demand for offsets in their absence, the introduction of offsets can potentially cause a rise in net emissions when ‘dirty’ producers have market power. 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.

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

JEL Classification: L94, Q42, Q58

Suggested Citation

Gans, Joshua S. and Groves, Vivienne, Carbon Offset Provision with Guilt-Ridden Consumers (August 12, 2010). Available at SSRN: https://ssrn.com/abstract=969494 or http://dx.doi.org/10.2139/ssrn.969494

Joshua S. Gans (Contact Author)

University of Toronto - Rotman School of Management ( email )

Canada

HOME PAGE: http://www.joshuagans.com

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Vivienne Groves

Stanford Graduate School of Business ( email )

PhD Program
655 Knight Way
Stanford, CA 94305
United States

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