Identifier

1112

Document Type

Discussion Paper

Date of Paper

Spring 3-18-2025

Abstract

We study carbon offsets sold by firms in China under the Clean Development Mechanism (CDM). We find that offset-selling firms, meant to cut carbon emissions, instead increase them by 49% after starting an offset project. In a model of firm investment decisions and offset review, we estimate that CDM firms increase emissions due to both the selection of higher-growth firms into projects (35 pp) and because offset projects themselves boost firm growth and therefore emissions (14 pp). The CDM reduces global surplus by causing damages from increased emissions four times greater than private gains from trade in the offset market.

Acknowledgements

Thank you to Jingze (Alex) Dong, Adaolisa Ezekobe, Jiaqi Huang and Mingyang Wei for excellent Research Assistance. Thank you to seminar participants at Boston University, UCLA, UCSD, Chicago, the Coase Conference, the Asian Econometric Society Meeting at Hangzhou, Georgetown, HEC Montreal, KDI/HAPI Conference, the NBER DEV winter meeting, the University of Massachusetts Amherst, Northwestern, PKU HSBC and Stanford SITE for helpful comments. Nicholas Ryan acknowledges financial support from NSF Career Grant #2143098.

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