Delivery Terms for Voluntary Carbon Offsets

A carbon offset represents one unit of reduction in greenhouse gas emissions that can be used to compensate for emissions that occur elsewhere. Companies can purchase voluntary carbon offsets under two delivery terms. The first is prompt delivery, where a seller first undertakes the investment, then yield uncertainty realizes, based on which the seller determines the price for carbon offsets as a recourse action. The second is forward delivery, where a buyer orders a certain quantity of offsets before the seller invests. Therefore, there is quantity risk due to yield uncertainty because the seller may generate fewer offsets than the buyer's order. Motivated by the importance of choosing the right delivery term for buyers, in this paper, we investigate the economic and environmental implications of these two delivery terms. Our results offer several managerial insights: A buyer should choose prompt delivery for projects with low or high investment costs, but forward delivery for projects with an intermediate investment cost. The delivery term preferred by the buyer typically leads to a higher quantity of delivered offsets, enabling the buyer to offset more of its emissions. However, the buyer may prefer a delivery term that leads to a lower investment by the seller, and thus a lower overall emissions reduction. Accordingly, environmental groups' preference between delivery terms may not be aligned with that of a buyer.