Carbon Offsetting with Eco-Conscious Consumers

In this paper, we model a firm that can reduce its carbon footprint in the presence of a segment of eco-conscious consumers, who consider the product's carbon footprint when making purchasing decisions. The firm can reduce its controllable emissions, at increased fixed and variable costs, and it can also buy carbon offsets for both its controllable and uncontrollable emissions in the supply chain. A key insight of our model is that the availability of offsets allows a firm to pursue eco-conscious consumers, which then gives the firm a further incentive to reduce its controllable emissions. If offsets are ruled out, then the firm might simply give up on the eco-conscious segment altogether. We find that it may be optimal for a firm to both reduce its controllable emissions and purchase offsets, and such instances are relatively common. Second, a firm's decision to buy carbon offsets depends not only on the offset price but also on the correlation between consumers' preferences for the product function and for its environmental attributes, and this has implications for non-governmental organizations (NGOs) selling offsets. Specifically, NGOs should price offsets as low as possible when selling to firms with products displaying negative correlation between the two types of product preferences, such as traditional fast food chains. If the products have positive preference correlation, such as in healthy foods, there are instances where a premium pricing strategy may be more effective in promoting lower carbon footprint products