General Equilibrium Effects of Carbon Offsets
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.