Carbon Footprinting and Pricing Under Climate Concerns

Abstract

This article studies how organizations should design a product by choosing the carbon footprint and price in a market with climate concerns. The authors first show how the cost and demand effects of reducing the product carbon footprint determine the profit-maximizing design. Paradoxically, they find that stronger climate concerns may increase the overall corporate carbon footprint, even if the product itself is greener. Next, the authors establish that offsetting carbon emissions can create a win-win outcome for the firm and the climate if the cost of compensation is sufficiently low. Third, the authors show how regulation in the form of a cap-and-trade scheme or a carbon tax affects product design, firm profitability, and green technology adoption. Finally, the authors extend the analysis to a competitive scenario. Overall, these results can help marketing professionals by offering insight into how to address climate concerns through improved product design.