Internal reductions or carbon offset: How to achieve triple benefits in a consumer market with environmental concerns

Abstract

Green and low-carbon production and operation methods have steadily emerged as one of the primary determinants of the enterprise's competitiveness in a consumer market concerned with environmental issues. This study examines a company that manufactures a single product and has the option of internal reductions only or purchasing carbon offsets along with internal reductions to reduce the product's carbon footprint. We developed a model to characterize the dynamic properties of the product's carbon footprint. The study finds that the consumer's level of environmental concern and the price of carbon offset are the main considerations for the firm's decision to develop carbon reduction methods. Interestingly, internal reductions and the purchasing carbon offset are not simple substitutions. When the price of carbon offset is extremely low, the firm purchases carbon offsets instead spur greater internal reductions. Another counterintuitive finding is that the firm with higher initial greenhouse gases from the product has relatively lower mitigation efforts. In addition, we obtain conditions under which the firm realizes economic, social, and environmental benefits from carbon footprint reduction methods. Finally, we extend our analysis to a scenario of duopoly competition and obtain similar conclusions.