Additionality of Carbon Offsets: Project-Specific vs. Standardized Baselines

Problem definition: Developers generate carbon offsets by investing in emissions-reduction projects to receive two sources of revenue: project revenue, for example, from the electricity sold in a renewable energy project, and offset revenue based on offsets issued by a nonprofit carbon registry. The registry ensures additionality, that is, the offset should represent one unit of reduction from the developer’s business-as-usual emissions: what the developer’s emissions would have been without the offset revenue. Although environmental groups raise greenwashing concerns against nonadditional offsets, ensuring additionality is challenging because it requires assessing project revenue, which is the developer’s private information. In practice, the registry assigns a baseline to represent business-as-usual emissions through one of the two methods: Under the project-specific method, a developer self-reports its business-as-usual emissions to the registry, which then inspects the report and assigns reported emissions as the baseline if it accepts the project. Under the standardized method, the registry assigns a common baseline to a group of similar projects. It is unclear which method leads to fewer nonadditional offsets and greater reduction in emissions and should be chosen by a registry. Methodology/results: We analyze these economic and environmental implications by developing a sequential game between a registry and project developers. Managerial implications: We find that project-specific baselines may lead to fewer nonadditional offsets but lower emissions reduction, cautioning environmental groups against simply advocating for the method that leads to fewer nonadditional offsets. We also find that a registry may prefer project-specific baselines even when they result in more nonadditional offsets. Finally, we find that a registry’s preference between the two methods is typically consistent with a corporate buyer’s.

History: This paper was selected as part of the 1RR initiative between the M&SOM journal and the MSOM Society. This paper was part of the 2025 MSOM Sustainable Operations SIG Conference.

Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2025.0755.