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Daniel Yi Xu (Duke University): Firm Selection and Growth in Carbon Offset Markets: Evidence from the Clean Development Mechanism in China

Abstract: Carbon offsets could reduce the global costs of carbon abatement, but there is little evidence on whether they truly reduce emissions. We study carbon offsets sold by manufacturing firms in China under the United Nations’ Clean Development Mechanism (CDM). We find that offset-selling firms increase carbon emissions by 49% in the four years after starting an offset project, relative to a matched sample of non-applicants. We explain this increase in emissions by jointly modeling the firm decision to propose an offset project and the UN’s decision of whether to approve. In estimates of our model, CDM firms increase emissions due to both the selection of higher-growth firms into project investment (40 pp of the total) and the causal effect of higher efficiency, post investment, on firm scale and therefore emissions (9 pp).