In the era of growing environmental awareness, businesses are increasingly challenged to align their operations with sustainability goals. One critical aspect of this endeavor is the reduction of carbon footprints. In this paper, we present a model that explores the strategies available to a firm seeking to minimize its carbon footprint while catering to a segment of eco-conscious consumers who prioritize environmental concerns when making purchasing decisions. The firm has the option to reduce its controllable emissions at additional fixed and variable costs and can also purchase carbon offsets, priced by a non-governmental organization (NGO), to compensate for both controllable and uncontrollable emissions in its supply chain.
The Complex Relationship Between Emission Reduction Methods:
One of the central findings of our research is that the firm should not view emission reduction methods as simple substitutes for each other. Specifically, as the price of carbon offsets decreases, the firm may be inclined to invest more in reducing its controllable emissions. This observation challenges the common notion that firms view carbon offsets as an alternative to emission reduction efforts. Instead, the two methods are complementary, and their interplay is influenced by market dynamics.
Consumer Preferences and Pricing Strategies:
The eco-conscious segment of consumers plays a pivotal role in shaping the firm’s strategies for emission reduction. The degree to which consumers value a product’s environmental attributes versus its core functionality greatly influences the firm’s decisions. If eco-conscious consumers assign a significantly higher value to the product itself, the firm may be willing to invest more in reducing emissions, even in the presence of lower offset prices.
The role of NGOs in setting the price of carbon offsets also comes into focus. While NGOs are generally encouraged to price offsets as low as possible to promote the adoption of lower carbon footprint products, our research identifies instances where a premium pricing strategy might be more effective. This is especially true when the segment of eco-conscious consumers exhibits a substantially higher willingness to pay for the product compared to consumers who are less concerned about the environment. In such cases, the firm may be inclined to invest more in emission reduction methods and may be willing to pay a premium for carbon offsets to signal their commitment to environmental responsibility.
In an era where sustainability is a growing concern, firms must carefully consider their strategies for reducing their carbon footprints, particularly when catering to eco-conscious consumers. The findings of this paper shed light on the intricate relationship between emission reduction methods, consumer preferences, and the pricing strategies of NGOs offering carbon offsets.
Gao, Fei and Souza, Gilvan, Carbon Offsetting with Eco-Conscious Consumers (April 20, 2020). Kelley School of Business Research Paper No. 19-41, Available at SSRN: https://ssrn.com/abstract=3440652 or http://dx.doi.org/10.2139/ssrn.3440652