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

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  • Golub, Alexander
  • Lubowski, Ruben
  • Piris-Cabezas, Pedro

Abstract

Progressively adjusting climate policies will entail adjustment costs for society. This paper develops a conceptual model and numerical example that illustrate the risk associated with exposure to the high costs of complying with future emissions controls and how this risks trades off against that from potentially premature investment into abatement. We then highlight the potentially unique role of tropical forest protection in helping to manage these risks by providing a cost-effective “buffer” of near term emissions reductions at a globally significant scale. This buffer would provide insurance against the risk of suddenly tightening targets, as well as providing other critical environmental benefits. We further examine how a version of a private finance instrument in the form of long-dated ‘call’ options on verified reductions in emissions from deforestation and forest degradation (i.e. REDD+) can help to operationalize this risk-hedging buffer creation. Options on REDD+ could aid both regulated businesses and tropical nations to manage their respective risks. REDD+ options could deliver sufficient abatement to significantly hedge exposure of regulated entities to potential corrections in climate policy while channeling financial resources to defer deforestation even as climate policies continue to evolve.

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  • Golub, Alexander & Lubowski, Ruben & Piris-Cabezas, Pedro, 2017. "Balancing Risks from Climate Policy Uncertainties: The Role of Options and Reduced Emissions from Deforestation and Forest Degradation," Ecological Economics, Elsevier, vol. 138(C), pages 90-98.
    • Handle: RePEc:eee:ecolec:v:138:y:2017:i:c:p:90-98
    DOI: 10.1016/j.ecolecon.2017.03.013
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    Cited by:

    1. Alexander Golub & Jon Anda & Anil Markandya & Michael Brody & Aldin Celovic & Angele Kedaitiene, 2022. "Climate alpha and the global capital market," Working Papers 2022.19, Fondazione Eni Enrico Mattei.
    2. Piris-Cabezas, Pedro & Lubowski, Ruben N. & Leslie, Gabriela, 2023. "Estimating the potential of international carbon markets to increase global climate ambition," World Development, Elsevier, vol. 167(C).
    3. Shijie Wang & Laijun Zhao & Yong Yang & Chenchen Wang & Jian Xue & Xin Bo & Deqiang Li & Dengguo Liu, 2019. "A Joint Control Model Based on Emission Rights Futures Trading for Regional Air Pollution That Accounts for the Impacts on Employment," Sustainability, MDPI, vol. 11(21), pages 1-17, October.
    4. Regan, Courtney M. & Connor, Jeffery D. & Summers, David M. & Settre, Claire & O’Connor, Patrick J. & Cavagnaro, Timothy R., 2020. "The influence of crediting and permanence periods on Australian forest-based carbon offset supply," Land Use Policy, Elsevier, vol. 97(C).
    5. Golub, Alexander A. & Lubowski, Ruben N. & Piris-Cabezas, Pedro, 2020. "Business responses to climate policy uncertainty: Theoretical analysis of a twin deferral strategy and the risk-adjusted price of carbon," Energy, Elsevier, vol. 205(C).
    6. Lin, Boqiang & Zhao, Hengsong, 2023. "Tracking policy uncertainty under climate change," Resources Policy, Elsevier, vol. 83(C).
    7. Su, Chi Wei & Wei, Shenkai & Wang, Yan & Tao, Ran, 2024. "How does climate policy uncertainty affect the carbon market?," Technological Forecasting and Social Change, Elsevier, vol. 200(C).
    8. Golub, Alexander & Herrera, Diego & Leslie, Gabriela & Pietracci, Breno & Lubowski, Ruben, 2021. "A real options framework for reducing emissions from deforestation: Reconciling short-term incentives with long-term benefits from conservation and agricultural intensification," Ecosystem Services, Elsevier, vol. 49(C).

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