Balancing Risks from Climate Policy Uncertainties: The Role of Options and Reduced Emissions from Deforestation and Forest Degradation

Golub, Alexander; Lubowski, Ruben N.; Piris-Cabezas, Pedro

doi:10.1016/j.ecolecon.2017.03.013

Cited by 21 publications

(12 citation statements)

References 14 publications

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“…Financing offers a set of tools to deal with these risks. For example, in the Reduced Emissions from Deforestation and Degradation (REDD+) context, it has been proposed to work with call options [87]. A financial call option represents the right, but not the obligation, to buy a pre-specified amount of a particular commodity or financial instrument at the expiration date for an agreed strike price.…”

Section: Promotion Of Inter-agency Cooperation and Coordinationmentioning

confidence: 99%

A Holistic View of Soils in Delivering Ecosystem Services in Forests: A Case Study in South Korea

Vicente-Vicente

Fuss

Song

et al. 2019

Forests

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In 1955, after the Korean War, only 35% of the national land area in South Korea was covered by forests. In the 1960s, the Korean Government implemented the national forestation program in order to increase the extent of the forest surface and thereby counteract the negative ecological consequences from deforestation, such as erosion and ground instability. According to previous studies, this led to an increase in carbon (C) accumulated in the forest biomass of 1.48 Gt CO 2 (0.40 Gt C) in the period 1954-2012. However, these studies did not take into account the amount of soil organic carbon (SOC) that was accumulated during that period and the influence of management practices on soil ecosystem services. Currently, South Korean authorities are considering the idea of implementing some forest management practices in order to increase timber extraction (e.g., by reducing the cutting age of the trees or by applying thinning and tending measures). In this study, we assess the influence of these management regimes on SOC dynamics and propose a theoretical framework to assess the influence of forest management practices on three ecosystem services, namely, C sequestration, water supply, and biomass production, while considering soil functioning, and especially SOC, as a group of supporting services underpinning the three named ecosystem services. We find that, in terms of SOC sequestration, reducing the cutting age from 80 to 40 years would be suitable only in the case of high biomass production forests, whereas in the case of lower biomass production forests reducing the cutting age would achieve very low SOC levels. However, we propose that increasing tree species diversity, even though it would not lead to a direct increase in the SOC content, could help to lessen the negative effects of reducing the cutting age by improving other soil properties, which in turn positively affect soil functioning (e.g., soil biodiversity, nutrient availability) and the resilience of the forest ecosystem. Finally, we discuss potential policy approaches to incentivize sustainable management practices in South Korean forests from a soil protection perspective.

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Section: Promotion Of Inter-agency Cooperation and Coordinationmentioning

confidence: 99%

A Holistic View of Soils in Delivering Ecosystem Services in Forests: A Case Study in South Korea

Vicente-Vicente

Fuss

Song

et al. 2019

Forests

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“…However, most research has not considered a combination of emission rights and futures, options, or other financial instruments. In addition, futures and options can also be used to hedge against trading risk [32,33], and assist in price discovery [34]. Therefore, trading in emission rights futures and options is a promising form of market mechanism that can support the administrative means to strengthen the effect of joint control.…”

Section: Literature Reviewmentioning

confidence: 99%

“…The trading of emission rights futures in different regions leads to cost reduction for air pollution control as well as increase in employment. Moreover, it helps to avoid the risk caused by price fluctuation of emission rights in the future due to the future market functions of avoiding risk [32,33] and price discovery [34]. The futures price of emission rights is the expected equilibrium price formed by people according to the supply and demand of spot emission rights.…”

Section: Calculation Of the Spot Price For Emission Rightsmentioning

confidence: 99%

A Joint Control Model Based on Emission Rights Futures Trading for Regional Air Pollution That Accounts for the Impacts on Employment

et al. 2019

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To reduce air pollutant control costs and solve the problem of decreased employment caused by air pollution control, we established a double-objective optimization Joint Control Model (JCM) based on emission rights futures trading. The JCM calculates the spot price of emission rights, classifies regions in the trading market for emission rights into buyers and sellers, and calculates the optimal cooperative pollution abatement quantity. Compared with a non-cooperative control mode, the JCM generated benefits of US$2485.19 × 10 6 . We then used a Game Quadratic Programming (GQP) method to distribute the benefits, and applied the JCM to a case study of the abatement of sulfur dioxide in China's Shanxi, Henan, and Shaanxi provinces. We found that: (i) Compared with a JCM that does not account for employment, employment under the JCM increased by 3.20 × 10 3 people, and the pollution control cost decreased by US$11.20 × 10 6 under the JCM that considered employment. The effect of the latter model is better than that of the former. (ii) Employment under the JCM increased by 18.80 × 10 4 people compared with that under a territorial control mode, reducing the cost by US$99.73 × 10 6 . The JCM is helpful for all participating regions to balance environmental and livelihood issues in the process of air pollution control to achieve sustainable development.

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“…First, it could reduce long-term emission reduction costs, providing about 10%-50% of required abatement by mid-century and offering a channel for emerging countries to participate in carbon trading, raising more finance to support their national strategies (Bosetti et al 2011;Lubowski and Rose 2013). Second, it could provide a "reserve" to accommodate future adjustments to lower emissions targets, thereby reducing the mid-term cost of switching abatement pathways (Golub et al 2017;Houghton et al, 2015;Golub 2010). As the window of opportunity narrows to avoid dangerous increases in global temperatures, such a buffer is needed to keep the option open to meet more ambitious emissions reduction goals in the future.…”

Section: Introductionmentioning

confidence: 99%

“…In this paper, we pull together insights from recent literature on the economics of climate change that highlights the impact of regulatory uncertainties and identifies financial tools and approaches to help manage these risks. We build our policy analysis upon a macroeconomic analysis of the potential role of REDD+ in emerging carbon markets presented in Golub et al (2017). Starting from this broader economic perspective, we analyze the significant financial risks facing greenhouse-gas-emitting firms and the potential financial and policy solutions for private companies to use REDD+ to manage these risks.…”

Section: Introductionmentioning

confidence: 99%

Escaping the climate policy uncertainty trap: options contracts for REDD+

et al. 2018

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Climate policy uncertainty significantly hinders investments in low-carbon technologies, and the global community is behind schedule to curb carbon emissions. Strong actions will be necessary to limit the increase in global temperatures, and continued delays create risks of escalating climate change damages and future policy costs. These risks are system-wide, long-term and largescale and thus hard to diversify across firms. Because of its unique scale, cost structure, and nearterm availability, Reducing Emissions from Deforestation and Degradation (REDD+) has a significant potential to help manage climate policy risks and facilitate the transition to lower greenhouse gas emissions. 'Call' options contracts in the form of the right but not the obligation to buy high-quality emissions reduction credits from jurisdictional REDD+ programs at a predetermined price per ton of CO2 could help unlock this potential despite the current lack of carbon markets that accept REDD+ for compliance. This approach could provide a globally important cost-containment mechanism and insurance for firms against higher future carbon prices, while channeling finance to avoid deforestation until policy uncertainties decline and carbon markets scale up. Key policy insights:  Climate policy uncertainty discourages abatement investments and hampers demand for mitigation in general, exposing firms to an escalating systemic risk of future rapid increases in emission control expenditures;  This situation poses a risk of an abatement 'short squeeze,' paralleling the case in financial markets when prices jump sharply as investors rush to square accounts on a widely 'shorted' investment, one they have bet against and promised to repay later in anticipation of falling prices.  There is likely to be a willingness to pay for mechanisms that hedge the risks of abruptly rising carbon prices, in particular for 'call' options, the right but not the obligation to buy high-quality emissions reduction credits at a predetermined price, due to the significantly lower upfront capital expenditure compared to other hedging alternatives.  Establishing rules as soon as possible for compliance market acceptance of high-quality emissions reductions credits from REDD+ would facilitate REDD+ transactions, including via options-based contracts, which could help fill the gap of uncertain climate policies and incipient carbon markets in the short and medium term.  Options on emissions reductions from REDD+ could unlock private capital and create a sizable emissions reductions pool that could mitigate large future adjustment costs for business and society while channeling investments for climate mitigation, forest conservation, and green growth in tropical developing countries.

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Balancing Risks from Climate Policy Uncertainties: The Role of Options and Reduced Emissions from Deforestation and Forest Degradation

Cited by 21 publications

References 14 publications

A Holistic View of Soils in Delivering Ecosystem Services in Forests: A Case Study in South Korea

A Holistic View of Soils in Delivering Ecosystem Services in Forests: A Case Study in South Korea

A Joint Control Model Based on Emission Rights Futures Trading for Regional Air Pollution That Accounts for the Impacts on Employment

Escaping the climate policy uncertainty trap: options contracts for REDD+

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