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

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  • Krasovskii, Andrey
  • Khabarov, Nikolay
  • Obersteiner, Michael

Abstract

We consider a risk-aware forest owner and electricity producer evaluating the Reduced Emissions from Deforestation and Degradation (REDD)-based offsets with a benefit-sharing mechanism under uncertain CO2 prices. For a range of CO2 prices and respective risks perceived by the forest owner (seller) and electricity producer (buyer), we apply a model of fair (indifference) pricing. Parties’ risk preferences are reflected by exponential utility functions. The potentially contracted amounts of REDD offsets are analyzed under various risk preferences and for different benefit-sharing opportunities. Our results show that a risk-averse attitude considerably increases the contracted offset amounts (compared to risk-neutral case) and, therefore, creates a higher potential for REDD implementation. We demonstrate possible situations, when parties could agree on a certain range of REDD contracts, e.g. smaller amounts of REDD offsets are traded for higher prices, and larger amounts – for lower prices, although contracting a moderate amount at a moderate price is impossible. The suggested benefit-sharing mechanism can help increase contracted offset amounts. Our modeling results highlight two ways to promote higher REDD participation: (i) strengthening the carbon price signal to reveal risk-averse behavior of energy producers, and (ii) implementing the mechanism of benefit/risk sharing between the REDD consumer and supplier.

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  • Krasovskii, Andrey & Khabarov, Nikolay & Obersteiner, Michael, 2016. "Fair pricing of REDD-based emission offsets under risk preferences and benefit-sharing," Energy Policy, Elsevier, vol. 96(C), pages 193-205.
  • Handle: RePEc:eee:enepol:v:96:y:2016:i:c:p:193-205
    DOI: 10.1016/j.enpol.2016.05.040
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    1. 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.
    2. Andrey Krasovskii & Nikolay Khabarov & Ruben Lubowski & Michael Obersteiner, 2019. "Flexible Options for Greenhouse Gas-Emitting Energy Producer," Energies, MDPI, vol. 12(19), pages 1-20, October.
    3. Nikolay Khabarov & Ruben Lubowski & Andrey Krasovskii & Michael Obersteiner, 2019. "Flobsion—Flexible Option with Benefit Sharing," IJFS, MDPI, vol. 7(2), pages 1-16, April.
    4. Sheng, Jichuan & Qiu, Hong, 2018. "Governmentality within REDD+: Optimizing incentives and efforts to reduce emissions from deforestation and degradation," Land Use Policy, Elsevier, vol. 76(C), pages 611-622.

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