Offset Provision and firms size distribution

What are the economic impacts of using offset credits for meeting regulations? Offset credits (OCs), acting as substitutes for regular permits, have prices determined through private negotiations, potentially favoring lower prices based on firms’ bargaining power. Despite the risk of regulator rejection, I documented that 15-20% of firms opt for OC compliance, with a positive correlation between compliance and the size of firm emissions. Through a comprehensive model of industry dynamics with varied firms, I show that incorporating OCs as a compliance option can improve overall welfare, provided it is effectively enforced, resulting in a Total Factor Productivity (TFP) gain of 0.10%.