Fair pricing of REDD-based emission offsets under risk preferences and benefit-sharing

Krasovskiĭ, A. A.; Khabarov, Nikolay; Obersteiner, Michael

doi:10.1016/j.enpol.2016.05.040

Cited by 7 publications

(18 citation statements)

References 20 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…In this paper we further develop the FI-REDD model established in our previous work [19,20]. The model takes into account the potential market power of energy producers, which gives them flexibility in their decision-making under uncertain emission costs.…”

Section: Methodsmentioning

confidence: 99%

“…The indifference price is defined as the price of the derivative toward which the investor is indifferent whether to use the derivative to maximize their expected utility or not to use it [29]. We use fair prices to evaluate REDD offsets [19] under future CO 2 price uncertainty. In the first stage (period), where details about the future REDD offsets market are uncertain, the parties (supplier and consumer of REDD offsets) assign their offset prices (buying and selling) in such a way that their profits or, generally, their utilities, stay the same in the second period (in which the REDD offsets price is revealed) no matter whether they have contracted REDD offsets in the first period or not.…”

Section: Methodsmentioning

confidence: 99%

“…The first optimization problem is decision-making under the realized CO 2 price without REDD offsets, that is, flobsions in this study. The electricity producer can modify its technological mix to reduce emissions or raise the electricity price, thus making the consumer bear some of the costs [19]. The second problem is complemented by REDD-offsets flobsions.…”

Section: Decision-making Of the Electricity Producermentioning

confidence: 99%

“…Accepting existing uncertainties, we explore bilateral interaction between a REDD supplier and a greenhouse gas (GHG)-emitting energy producer in the context of an incomplete REDD offsets market. We develop the FI-REDD model established in a series of publications [19,20]. FI-REDD is a two-stage stochastic technological portfolio optimization model describing an interaction between the REDD-offsets supplier, electricity producer and consumers.…”

Section: Introductionmentioning

confidence: 99%

See 3 more Smart Citations

Flexible Options for Greenhouse Gas-Emitting Energy Producer

et al. 2019

Self Cite

View full text Add to dashboard Cite

The reduction of emissions from deforestation and forest degradation (REDD) constitutes part of the international climate agreements and contributes to the Sustainable Development Goals. This research is motivated by the risks associated with the future C O 2 price uncertainty in the context of the offsetting of carbon emissions by regulated entities. The research asked whether it is possible to reduce these financial risks. In this study, we consider the bilateral interaction of a REDD supplier and a greenhouse gas (GHG)-emitting energy producer in an incomplete emission offsets market. Within this setting, we explore an innovative financial instrument—flobsion—a flexible option with benefit-sharing. For the quantitative assessment, we used a research method based on a two-stage stochastic technological portfolio optimization model established in earlier studies. First, we obtain an important result that the availability of REDD offsets does not increase the optimal emissions of the electricity producer under any future C O 2 price realization. Moreover, addressing concerns about a possible “crowding–out” effect of REDD-based offsets, we demonstrate that the emissions and offsetting cost will decrease and increase, respectively. Second, we demonstrate the flexibility of the proposed instrument by analyzing flobsion contracts with respect to the benefit-sharing ratio and strike price within the risk-adjusted supply and demand framework. Finally, we perform a sensitivity analysis with respect to C O 2 price distributions and the opportunity costs of the forest owner supplying REDD offsets. Our results show that flobsion’s flexibility has advantages compared to a standard option, which can help GHG-emitting energy producers with managing their compliance risks, while at the same time facilitating the development of REDD programs. In this study we limited our analysis to the case of the same C O 2 price distributions foreseen by both parties; the flobsion pricing under asymmetric information could be considered in the future.

show abstract

Section: Methodsmentioning

confidence: 99%

Section: Methodsmentioning

confidence: 99%

Section: Decision-making Of the Electricity Producermentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Flexible Options for Greenhouse Gas-Emitting Energy Producer

et al. 2019

Self Cite

View full text Add to dashboard Cite

show abstract

“…With a relatively high future purchase price, sellers also retain the ability to sell credits on the market directly if a REDD+ market materializes but actual carbon prices turn out below the strike price. A benefit-sharing arrangement based on the ultimate market price (Krasovskii et al, 2016a(Krasovskii et al, , 2016b or an indexed annual payment (Engel et al 2015) could also provide more attractive alternatives to a fixed strike price.…”

Section: Call Options On Redd+ and Other Cost-effective Emissions Redmentioning

confidence: 99%

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

et al. 2018

Self Cite

View full text Add to dashboard Cite

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.

show abstract