Carbon Offsets: Decarbonization or Transition-Washing?

Using rich hand-collected data, we examine how firms use carbon offset credits issued by third-party developers to claim emission reductions. Guided by a conceptual framework, we show that following an exogenous ESG rating downgrade, firms facing greater internal abatement costs, including those with lower emissions, retire more carbon offsets rather than decarbonize in-house. Firms that lack climate-related governance mechanisms or face limited external scrutiny of climate claims strategically retire larger quantities of low-quality, inexpensive offsets. Our findings are consistent with firms choosing whether to outsource their transition efforts as well as with the strategic use of offsets for "transition-washing" purposes.