Climate Shield or Illusion? The Impact of Carbon Pricing and Offsets on Carbon Misrepresentation

This paper investigates the impact of internal carbon pricing, emissions trading, and carbon offsets on corporate carbon misrepresentation (carbonwashing), and examines the role of three mechanisms that moderate the effect of carbon offset. Using an international sample of 13,486 firms across 12 countries (2010–2023), we find that internal carbon pricing and emissions trading reduce carbonwashing, while carbon offsets exacerbate it. We also find that mechanisms such as emission management training, ESG-linked executive compensation, and ESG audits moderate the relationships between carbon offsets and carbonwashing, transforming carbon offsets into a credible carbonwashing mitigation tool. Our findings remain consistent across several contexts, countries with high and low social sensitivity to climate mitigation, mandatory and voluntary ESG disclosure environments, America and the rest of the world, and high and low emission intensive industries. Our results remain robust across alternative fixed effects and clustering specifications, different measures of carbonwashing and control variables, and multiple endogeneity tests, including a quasi-experimental approach (difference-in-differences), Heckman selection models, propensity score matching, and lagged independent variables to address reverse causality. These results have critical implications for firms, investors, and regulators, emphasizing the need for stronger climate governance to ensure the credibility of corporate decarbonization efforts.