$$\hbox {CO}_2$$ CO 2 -intensive power generation and REDD-based emission offsets with a benefit-sharing mechanism

Abstract

We propose and explore financial instruments supporting programs for reducing emissions from deforestation and forest degradation (FI-REDD). Within a microeconomic framework we model interactions between an electricity producer (EP), electricity consumer (EC), and forest owner (FO). To keep their profit at a maximum, the EP responds to increasing CO 2 prices by adjusting electricity quantities generated by different technologies and charging a higher electricity price to the EC. The EP can prepare for future high (uncertain) CO 2 prices by employing FI-REDD: they can purchase an amount of offsets under an unknown future CO 2 price and later, when the CO 2 price is discovered, decide how many of these offsets to use for actually offsetting emissions and sell the rest on the market, sharing the revenue with the FO. FI-REDD allows for optional consumption of emission offsets by the EP (any amount up to the initially contracted volume is allowed), and includes a benefit-sharing mechanism between the EP and FO as it regards unused offsets. The modeling results indicate that FI-REDD might help avoid bankruptcy of CO 2 -intensive producers at high levels of CO 2 prices and therefore serve as a stabilizing mechanism during the transition of energy systems to greener technologies. The analytical results demonstrate the limits for potential market size explained by existing uncertainties. We illustrated that when suppliers and consumers of REDD offsets have asymmetric information on future CO 2 prices, benefit-sharing increases the contracted REDD offsets quantity.

Recent Deforestation Pattern Changes (2000–2017) in the Central Carpathians: A Gray-Level Co-Occurrence Matrix and Fractal Analysis Approach

“…Deforestation causes significant perturbations in the integrity of forest ecosystems. The fragmentation of forests due to deforestation causes flash floods [11,12], landslides [13][14][15], soil degradation [5,16], loss of biodiversity [17,18] and increases in CO 2 emissions [19][20][21]. Deforestation may be the result of logging and harvesting practices or can be a permanent conversion to other land uses (i.e., fires, agriculture, and development of human settlements) [22].…”

Flexible Options for Greenhouse Gas-Emitting Energy Producer

“…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.…”

“…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.…”

“…Indifference prices in the FI-REDD model with flobsions. Comparison of risk-neutral case (N) with risk-averse cases: A1, A2 and A3, for benefit-sharing parameter δ = 0.5, strike price p min = 20 US$/MtCO 2 , CO 2 distribution(19) and opportunity cost(20) with K = 0.9. Blue curves correspond to indifference prices of the electricity producer and red curves of the forest owner.…”

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

“…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.…”