Carbon reduction or carbon offset? Optimal low‐carbon strategy under demand uncertainty and information asymmetry

Abstract

As environmental awareness grows, companies are rolling out emission‐reduction initiatives to offer more low‐carbon products. The two commonly adopted strategies for companies are direct carbon reduction investment (R strategy) and carbon offset (O strategy), and they differ in costs and consumer perception of their effects: the former requires substantial upfront technological investment and is therefore highly sensitive to demand fluctuations, whereas the latter involves demand‐dependent costs but may suffer from credibility concerns. The choice between them is further complicated by demand uncertainty, which is often amplified by information asymmetry, as retailers typically possess more accurate demand information. We develop a game‐theoretic model in which a manufacturer chooses a low‐carbon strategy, while a retailer decides whether to share demand information. Our results show that the optimal strategy depends jointly on market potential demand, consumer acceptance of carbon offsets, and information availability. Carbon reduction is preferred when demand is sufficiently high or consumer acceptance of offsets is low, whereas carbon offset becomes more attractive under weak demand due to lower downside risk. Information sharing reduces demand uncertainty and lowers the threshold for manufacturers to adopt carbon reduction, thereby promoting genuine emission abatement. Moreover, under a hybrid strategy, the presence of an offset mechanism encourages deeper carbon‐reduction efforts by mitigating investment risk and strengthening incentives for technological abatement.