pith. sign in

arxiv: 2606.25909 · v1 · pith:JDVAECRNnew · submitted 2026-06-24 · 💰 econ.GN · q-fin.EC

General Equilibrium Effects of Carbon Offsets

Isla Globus-Harris , Daniel H Karney This is my paper

Pith reviewed 2026-06-25 19:04 UTC · model grok-4.3

classification 💰 econ.GN q-fin.EC
keywords carbon offsetsgeneral equilibriumaggregate emissionswelfarecarbon accountingmarket spilloversoffset response margins
0
0 comments X

The pith

Raising carbon offset prices can increase or decrease total emissions and welfare due to market spillovers.

A machine-rendered reading of the paper's core claim, the machinery that carries it, and where it could break.

The paper constructs an analytical general equilibrium model of an economy that includes carbon offsets. It shows that an increase in the offset price produces ambiguous effects on aggregate emissions and on welfare. Two standard carbon accounting metrics fail to serve as sufficient statistics for welfare because general equilibrium adjustments create spillovers. The model identifies four margins along which offsets respond to payments, one of which had not been previously noted. The results indicate that evaluations of offset policies must incorporate these market-wide responses.

Core claim

In an analytical general equilibrium model of an economy with carbon offsets, increasing the carbon offset price has an ambiguous effect on aggregate emissions and welfare. Offsets are over-credited under many parameterizations but under-crediting can also occur. Due to general equilibrium effects, neither carbon accounting metric is a sufficient statistic for welfare. Four margins of offset response to payments are defined, including one not previously identified.

What carries the argument

Analytical general equilibrium model incorporating carbon offsets and four response margins to payments.

If this is right

  • Aggregate emissions respond ambiguously to higher offset prices.
  • Welfare effects of offset price changes are also ambiguous.
  • Standard carbon accounting metrics do not determine welfare outcomes.
  • Offsets adjust along four margins, one newly identified.
  • Market spillover effects must be considered when evaluating offset policies.

Where Pith is reading between the lines

These are editorial extensions of the paper, not claims the author makes directly.

  • Policy models that ignore general equilibrium spillovers may mis-rank offset programs.
  • The newly identified margin could be tested by examining how offset payments alter production decisions outside the offset sector.
  • Integrated economy-wide data collection would be needed to observe the predicted ambiguity in real offset markets.

Load-bearing premise

The model relies on specific functional forms and parameterizations chosen to allow both over-crediting and under-crediting of offsets.

What would settle it

Empirical measurement of whether aggregate emissions rise, fall, or remain unchanged after an observed increase in offset prices within an economy that uses offsets.

Figures

Figures reproduced from arXiv: 2606.25909 by Daniel H Karney, Isla Globus-Harris.

Figure 1
Figure 1. Figure 1: Illustration of the model discussed in Section 3.) The figure illustrates that sector E simply transforms clean and dirty energy into a composite energy service for the final goods sector. As we show in Section 6, the elasticity of substitution in sector E given by σE is key to determining outcomes. 3 Additionality Carbon offset programs function under the assumption that offsets are both real and addition… view at source ↗
Figure 2
Figure 2. Figure 2: Relationships between offset types and carbon accounting metrics. [PITH_FULL_IMAGE:figures/full_fig_p013_2.png] view at source ↗
Figure 3
Figure 3. Figure 3: Change in emissions as elasticities vary, [PITH_FULL_IMAGE:figures/full_fig_p021_3.png] view at source ↗
Figure 4
Figure 4. Figure 4: Change in welfare as elasticities vary (billions of dollars). [PITH_FULL_IMAGE:figures/full_fig_p021_4.png] view at source ↗
Figure 5
Figure 5. Figure 5: Change in ∆ as emissions intensities vary. [PITH_FULL_IMAGE:figures/full_fig_p022_5.png] view at source ↗
Figure 6
Figure 6. Figure 6: Change in welfare as initial subsidy level changes. [PITH_FULL_IMAGE:figures/full_fig_p024_6.png] view at source ↗
Figure 7
Figure 7. Figure 7: Change in additional as initial additionality share changes. [PITH_FULL_IMAGE:figures/full_fig_p025_7.png] view at source ↗
Figure 8
Figure 8. Figure 8: Change in emissions, Zˆ, as σE and σX vary [PITH_FULL_IMAGE:figures/full_fig_p037_8.png] view at source ↗
Figure 9
Figure 9. Figure 9: Change in ∆ as σE and σX vary [PITH_FULL_IMAGE:figures/full_fig_p037_9.png] view at source ↗
Figure 10
Figure 10. Figure 10: Change in welfare (billions of dollars) as [PITH_FULL_IMAGE:figures/full_fig_p037_10.png] view at source ↗
read the original abstract

We construct an analytical general equilibrium model of an economy with carbon offsets, and show that increasing the carbon offset price has an ambiguous effect on aggregate emissions and welfare. Using two carbon accounting metrics, we demonstrate that offsets are over-credited under many parameterizations; however, offset under-crediting can also occur. Due to general equilibrium effects, neither carbon accounting metric is a sufficient statistic for welfare. Furthermore, we define four margins whereby offsets can respond to payments, including a margin not previously identified. Our results suggest that market spillover effects warrant consideration when evaluating carbon offset policies.

Editorial analysis

A structured set of objections, weighed in public.

Desk editor's note, referee report, simulated authors' rebuttal, and a circularity audit. Tearing a paper down is the easy half of reading it; the pith above is the substance, this is the friction.

Referee Report

2 major / 1 minor

Summary. The manuscript constructs an analytical general equilibrium model of an economy with carbon offsets. It shows that increasing the carbon offset price has an ambiguous effect on aggregate emissions and welfare. Offsets are over-credited under many parameterizations, but under-crediting can also occur. Due to general equilibrium effects, neither of two carbon accounting metrics is a sufficient statistic for welfare. The paper defines four margins whereby offsets can respond to payments, including a previously unidentified margin. The results suggest that market spillover effects should be considered when evaluating carbon offset policies.

Significance. If the central results hold, the paper contributes to the literature on carbon offsets by demonstrating the importance of general equilibrium spillovers, which can render standard accounting metrics inadequate for welfare evaluation. The analytical approach provides clear mechanisms, and the identification of a new response margin is a positive addition. This could influence policy discussions on offset crediting by emphasizing the need for broader analysis beyond direct accounting.

major comments (2)
  1. [Model Setup] The analytical GE model relies on specific functional forms for demand, production, and offset response functions to generate the ambiguous comparative statics on emissions and welfare. The paper should demonstrate whether the ambiguity (and the possibility of both over- and under-crediting) holds for a general class of functions or is specific to the chosen forms, as this is central to the claim that the result is robust rather than an artifact of parameterization.
  2. [Welfare Analysis] The demonstration that neither carbon accounting metric is a sufficient statistic for welfare is shown through the GE interactions. However, without explicit discussion of robustness to alternative parameterizations or functional forms beyond 'many parameterizations', the load-bearing conclusion on the insufficiency of the metrics requires additional support to establish generality.
minor comments (1)
  1. [Abstract] The abstract mentions 'four margins' but does not name them; naming the new margin in the abstract would improve clarity for readers.

Simulated Author's Rebuttal

2 responses · 0 unresolved

We thank the referee for the detailed and constructive comments. We address each major comment below and indicate where revisions will be made to clarify the scope and robustness of our analytical results.

read point-by-point responses

  1. Referee: [Model Setup] The analytical GE model relies on specific functional forms for demand, production, and offset response functions to generate the ambiguous comparative statics on emissions and welfare. The paper should demonstrate whether the ambiguity (and the possibility of both over- and under-crediting) holds for a general class of functions or is specific to the chosen forms, as this is central to the claim that the result is robust rather than an artifact of parameterization.

    Authors: The specific functional forms (linear demand, Cobb-Douglas production, and linear offset response) are chosen to permit closed-form solutions that isolate the four margins of offset response and the general-equilibrium spillovers. The ambiguity in emissions and welfare arises from the opposing signs of the direct offset effect and the indirect effects operating through input and output markets; these opposing forces are structural features of the GE setup rather than artifacts of the particular functional forms. We will add a new subsection in the model section that derives the conditions on relative elasticities under which the sign of dE/dp and dW/dp remain ambiguous, thereby showing that the qualitative results hold for any forms that preserve the same relative price responses. This addresses the concern without requiring a fully general proof that would sacrifice analytical tractability. revision: partial

  2. Referee: [Welfare Analysis] The demonstration that neither carbon accounting metric is a sufficient statistic for welfare is shown through the GE interactions. However, without explicit discussion of robustness to alternative parameterizations or functional forms beyond 'many parameterizations', the load-bearing conclusion on the insufficiency of the metrics requires additional support to establish generality.

    Authors: We agree that the claim would be strengthened by more explicit robustness discussion. The current text already reports that over-crediting occurs for wide ranges of the key parameters (offset elasticity, input substitutability, and demand elasticity). We will expand the welfare section with a short analytical appendix that varies the functional forms for the offset response function (e.g., allowing concave or convex responses) while preserving the GE structure, confirming that the accounting metrics remain insufficient statistics whenever any of the four margins is active. This addition will be referenced in the main text. revision: yes

Circularity Check

0 steps flagged

No significant circularity; results follow from constructed analytical GE model

full rationale

The paper constructs an analytical general equilibrium model and derives comparative statics on emissions, welfare, and crediting from its equations under chosen functional forms and parameterizations. No load-bearing step reduces by construction to a self-definition, a fitted input renamed as a prediction, or a self-citation chain; the ambiguity is an output of solving the model rather than an input smuggled in. The derivation is self-contained against the model's stated assumptions.

Axiom & Free-Parameter Ledger

0 free parameters · 0 axioms · 0 invented entities

The central claims rest on an unspecified analytical GE model whose functional forms and parameter ranges are not detailed in the abstract; the four response margins and the over/under-crediting results are therefore generated inside that model rather than derived from external data or first-principles restrictions.

pith-pipeline@v0.9.1-grok · 5613 in / 1158 out tokens · 26366 ms · 2026-06-25T19:04:23.447226+00:00 · methodology

discussion (0)

Sign in with ORCID, Apple, or X to comment. Anyone can read and Pith papers without signing in.

Reference graph

Works this paper leans on

17 extracted references

  1. [1]

    Investment versus output subsidies: Implications of alternative incentives for wind energy,

    Aldy, Joseph E, Todd D Gerarden, and Richard L Sweeney, “Investment versus output subsidies: Implications of alternative incentives for wind energy,”Journal of the Association of Environmental and Resource Economists, 2023,10(4), 981–1018. Alix-Garcia, Jennifer M, Elizabeth N Shapiro, and Katharine RE Sims, “Forest conservation and slippage: Evidence from...

    2023

  2. [2]

    Emissions reductions or green booms? General equilibrium effects of a renewable portfolio standard,

    , Teevrat Garg, and Daniel Kaffine, “Emissions reductions or green booms? General equilibrium effects of a renewable portfolio standard,”Journal of Environmental Economics and Management, 2018, 90, 78–100. B¨ ohringer, Christoph, Knut Einar Rosendahl, and Halvor Briseid Storrøsten, “Measures against carbon leakage: Combining output-based allocation with c...

    2018

  3. [3]

    Do carbon offsets offset carbon?,

    Calel, Raphael, Jonathan Colmer, Antoine Dechezleprˆ etre, and Matthieu Glachant, “Do carbon offsets offset carbon?,”American Economic Journal: Applied Economics, 2025,17(1), 1–40. Carbon Credits, “Carbon Prices Today: Voluntary Carbon Market Overview,” Technical Report

    2025

  4. [4]

    Carbon Capture and Storage in the United States (#59832),

    https://carboncredits.com/carbon-prices-today/(Accessed: March 22, 2026). Globus-Harris and Karney 30 Congressional Budget Office, “Carbon Capture and Storage in the United States (#59832),” Technical Report 2023.https://www.cbo.gov/publication/59832. , “The Section 45Q Tax Credit for Carbon Sequestration,” Technical Report 2023.https://www. congress.gov/...

    2026

  5. [5]

    Costs of energy efficiency mandates can reverse the sign of rebound,

    and Chi L Ta, “Costs of energy efficiency mandates can reverse the sign of rebound,”Journal of public economics, 2020,188, 104225. and , “What determines effectiveness of renewable energy standards? General equilibrium analytical model and empirical analysis,”Journal of the Association of Environmental and Resource Economists, 2025,12(1), 65–103. and Gart...

    2020

  6. [6]

    An Impossible Goal: When Trade Ratios Cannot Achieve No-Net-Loss,

    Globus-Harris, Isla, “An Impossible Goal: When Trade Ratios Cannot Achieve No-Net-Loss,”Southern Economic Journal, 2020,86(4), 1372–1392. Goulder, Lawrence and Marc Hafstead,Confronting the climate challenge: US policy options, Columbia University Press,

    2020

  7. [7]

    The cost of carbon leakage: Britain’s carbon price support and cross-border electricity trade,

    Guo, Bowei, “The cost of carbon leakage: Britain’s carbon price support and cross-border electricity trade,” The Energy Journal, 2023,44(1), 9–32. Hafstead, Marc AC and Roberton C Williams III, “Unemployment and environmental regulation in general equilibrium,”Journal of Public Economics, 2018,160, 50–65. Globus-Harris and Karney 31 Hahn, Robert W, Nathan...

    2023

  8. [8]

    Carbon offset demand hits record in 2023 off huge December,

    Harrison, Kyle, “Carbon offset demand hits record in 2023 off huge December,”Bloomberg NEF,

    2023

  9. [9]

    Reflections—What would it take to reduce US greenhouse gas emissions 80 percent by 2050?,

    Heal, Geoffrey, “Reflections—What would it take to reduce US greenhouse gas emissions 80 percent by 2050?,”Review of Environmental Economics and Policy, 2017,11(2), 319–335. Heilmayr, Robert, Kimberly M Carlson, and Jason Jon Benedict, “Deforestation spillovers from oil palm sustainability certification,”Environmental Research Letters, 2020,15(7), 075002....

    2050

  10. [10]

    Electricity market deregulation and environmental regulation: Evidence from US nuclear power,

    Karney, Daniel H, “Electricity market deregulation and environmental regulation: Evidence from US nuclear power,”Energy Economics, 2019,84, 104500. , Don Fullerton, and Kathy Baylis, “A Model of the Model: Unpacking CGE Results on Carbon Leakage from Climate Policy,”NBER Working Paper,

    2019

  11. [11]

    Emissions trading, firm heterogeneity, and intra-industry reallo- cations in the long run,

    Konishi, Yoshifumi and Nori Tarui, “Emissions trading, firm heterogeneity, and intra-industry reallo- cations in the long run,”Journal of the Association of Environmental and Resource Economists, 2015,2 (1), 1–42. Leonard, Matthew D, Efstathios E Michaelides, and Dimitrios N Michaelides, “Energy storage needs for the substitution of fossil fuel power plan...

    2015

  12. [12]

    The additionality problem with offsets: Optimal contracts for carbon sequestration in forests,

    (Accessed: March 25, 2026). Mason, Charles F and Andrew J Plantinga, “The additionality problem with offsets: Optimal contracts for carbon sequestration in forests,”Journal of Environmental Economics and Management, 2013,66(1), 1–14. McGuinness, Meghan and A Denny Ellerman, “The effects of interactions between federal and state climate policies,”MIT Cente...

    2026

  13. [13]

    Constructing carbon offsets: The obstacles to quantifying emission reductions,

    Millard-Ball, Adam and Leonard Ortolano, “Constructing carbon offsets: The obstacles to quantifying emission reductions,”Energy Policy, 2010,38(1), 533–546. Montero, Juan-Pablo, “Optimal design of a phase-in emissions trading program,”Journal of Public Economics, 2000,75(2), 273–291. National Energy Technology Laboratory, “Carbon Storage FAQs,” n.d. Acces...

    2010

  14. [14]

    Optimal taxation of externalities interacting through markets: A theoretical general equilibrium analysis,

    Globus-Harris and Karney 32 Ren, Xiaolin, Don Fullerton, and John B Braden, “Optimal taxation of externalities interacting through markets: A theoretical general equilibrium analysis,”Resource and Energy Economics, 2011,33 (3), 496–514. Sallee, James M, “The Trouble with Green Subsidies,”National Tax Journal, 2025,78(1), 171–199. Schneider, Lambert Richar...

    2011

  15. [15]

    Annual Energy Outlook 2025,

    U.S. Energy Information Administration, “Annual Energy Outlook 2025,” Technical Report

    2025

  16. [16]

    U.S. Energy-Related Carbon Dioxide Emissions, 2024,

    https://www.eia.gov/outlooks/aeo/. , “U.S. Energy-Related Carbon Dioxide Emissions, 2024,” Technical Report 2025.https://www.eia. gov/environment/emissions/carbon/. U.S. Environmental Protection Agency, “Report on the Social Cost of Greenhouse Gases: Estimates Incorporating Recent Scientific Advances,” Technical Report

    2024

  17. [17]

    Scale and transfers in international emissions offset programs,

    Van Benthem, Arthur and Suzi Kerr, “Scale and transfers in international emissions offset programs,” Journal of Public Economics, 2013,107, 31–46. V¨ ohringer, Frank, Timo Kuosmanen, and Rob Dellink, “How to attribute market leakage to CDM projects,”Climate Policy, 2006,5(5), 503–516. Wang, Maria and Tero Kuusi, “Trade flows, carbon leakage, and the EU Em...

    2013