🤖 AI Summary
This study addresses the uncertainty surrounding the real-world impacts of carbon offset policies on aggregate emissions and welfare, which stems in part from conventional carbon accounting metrics’ inability to capture general equilibrium spillovers. The authors develop an analytical general equilibrium model incorporating carbon offsets to systematically evaluate the effects of changes in offset prices and identify four marginal mechanisms through which offsets influence outcomes—one of which is a novel channel uncovered in this work. By integrating two dominant carbon accounting approaches into both parameterization and theoretical analysis, the study demonstrates that raising offset prices yields ambiguous effects on total emissions and welfare, suggesting that offset efficacy may be systematically over- or underestimated. These findings underscore the critical importance of incorporating general equilibrium considerations into offset policy design.
📝 Abstract
We construct an analytical general equilibrium model of an economy with carbon offsets, and show that increasing the carbon offset price has an ambiguous effect on aggregate emissions and welfare. Using two carbon accounting metrics, we demonstrate that offsets are over-credited under many parameterizations; however, offset under-crediting can also occur. Due to general equilibrium effects, neither carbon accounting metric is a sufficient statistic for welfare. Furthermore, we define four margins whereby offsets can respond to payments, including a margin not previously identified. Our results suggest that market spillover effects warrant consideration when evaluating carbon offset policies.