Hostname: page-component-586b7cd67f-t8hqh Total loading time: 0 Render date: 2024-11-27T23:12:47.191Z Has data issue: false hasContentIssue false
  • English
  • Français

Options on low-cost abatement and investment in the energy sector: new perspectives on REDD

Published online by Cambridge University Press:  26 October 2010

SABINE FUSS ,
JANA SZOLGAYOVA ,
ALEXANDER GOLUB  and
MICHAEL OBERSTEINER
SABINE FUSS
Affiliation:
International Institute for Systems Analysis, Schlossplatz 1, A-2361 Laxenburg, Austria. Tel: +43 2236 807 550, Fax: +43 2236 807 500. Email: [email protected]
JANA SZOLGAYOVA
Affiliation:
International Institute for Systems Analysis, Schlossplatz 1, A-2361 Laxenburg, Austria; and Department of Applied Mathematics and Statistics, Faculty of Mathematics, Physics and Informatics, Comenius University, Bratislava, Slovakia. Email: [email protected]
ALEXANDER GOLUB
Affiliation:
Environmental Defense Fund, Washington, 1875 Connecticut Avenue, NW, Washington, DC 20009, USA. Email: [email protected]
MICHAEL OBERSTEINER
Affiliation:
International Institute for Systems Analysis, Schlossplatz 1, A-2361 Laxenburg, Austria. Email: [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

Deforestation is one of the major sources of carbon emissions, but the Kyoto Protocol presently excludes avoiding these emissions to fulfill stabilization targets. Since the need for policy incentives for the reduction of emissions from deforestation and degradation (REDD) was officially recognized in 2007, the focus of this debate has shifted to issues of implementation. Concerns about the effects that the availability of low-cost REDD credits might have on energy investments, and the development of clean technology constitute the main motivation of this paper. We analyze the production side of the problem with the help of a real options model with an option to invest in less carbon-intensive energy technology and an option to purchase credits on REDD, which will (or will not) be exercised in the future. Unresolved questions can thus still be addressed later, while producers and investors hold REDD options to maintain flexibility for later decisions.

Type
Research Article
Information
Environment and Development Economics , Volume 16 , Special Issue 4: REDUCING EMISSIONS FROM DEFORESTATION AND FOREST DEGRADATION (REDD) , August 2011 , pp. 507 - 525
Copyright
Copyright © Cambridge University Press 2010

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Black, F. and Scholes, M. (1973), ‘The pricing of options and corporate liabilities’, Journal of Political Economy 81: 637–654.CrossRefGoogle Scholar
Bosetti, V., Lubowski, R., Golub, A. and Markandya, A. (2011), ‘Linking reduced deforestation and a global carbon market: impacts on costs, financial flows, and technological innovation’, Environment and Development Economics forthcoming.Google Scholar
Dixit, A. and Pindyck, R. (1994), Investment under Uncertainty, Princeton: University Press.Google Scholar
Eliasch, J. (2008), ‘The Eliasch Review, Climate Change: financing global forests’, available from the Office of Climate Change, HM Government, UK (www.occ.gov.uk).Google Scholar
Golub, A., Greenberg, N., Anda, J., and Wang, J.S. (2010), ‘Low-cost offsets and incentives for new technologies’, in Golub, A. and Markandya, A. (eds), Modeling Environment-Improving Technological Innovations under Uncertainty, London: Routledge.Google Scholar
International Energy Agency (2005), Projected Costs of Generating Electricity – 2005 Update, Paris: OECD/IEA.Google Scholar
International Energy Agency (2006), Energy Technology Perspectives – Scenarios and Strategies to 2050, Paris: OECD/IEA.Google Scholar
International Institute for Applied Systems Analysis (2010), ‘GGI Scenario Database’ [Online], http://www.iiasa.ac.at/Research/GGI/DB/.Google Scholar
Kindermann, G., Obersteiner, M., Sohngen, B., Sathaye, J., Andrasko, K., Rametsteiner, E., Schlamadinger, B., Wunder, S., and Beach, R. (2008), ‘Global cost estimates of reducing carbon emissions through avoided deforestation’, Proceedings of the National Academy of Sciences 105 (30): 10302–10307.CrossRefGoogle ScholarPubMed
Nepstad, D., Soares-Filho, B., Merry, F., Moutinho, P., Rodrigues, H.O., Bowman, M., Schwartzman, S., Almeida, O., and Rivero, S. (2007), ‘The Costs and Benefits of Reducing Carbon Emissions from Deforestation and Forest Degradation in the Brazilian Amazon’, The Woods Hole Research Center, United Nations Framework Convention on Climate Change (UNFCCC) Conference of the Parties (COP), 13th session, 3–14 December.Google Scholar
Pindyck, R. (1993), ‘Investments of uncertain cost’, Journal of Financial Economics 34: 53–76.Google Scholar
Reinelt, P.S. and Keith, D.W. (2007), ‘Carbon capture retrofits and the cost of regulatory uncertainty’, Energy Journal 28: 101–127.CrossRefGoogle Scholar
Riahi, K., Grübler, A., and Nakicenovic, N. (2007), ‘Scenarios of long–term socio–economic and environmental development under climate stabilization’, Technological Forecasting and Social Change 74: 887–935.CrossRefGoogle Scholar
Rockafellar, R. and Uryasev, S. (2000), ‘Optimization of conditional value at risk’, Journal of Risk 2: 21–42.CrossRefGoogle Scholar
Rockafellar, R. and Uryasev, S. (2002), ‘Conditional value at risk for general loss distributions’, Journal of Banking and Finance 26: 1443–1471.CrossRefGoogle Scholar
Schwartzman, S., Nepstad, D., Golub, A., and Moutinho, P. (2008), ‘Getting REDD Right: Reducing Emissions from Forest Degradation in the UNFCCC’, EDF Policy Brief, [Online], http://www.whrc.org/resources/published_literature/pdf/SchwartzmanetalREDD.WHRC.07.pdf.Google Scholar
Sedjo, R., Sohngen, B., and Mendelsohn, R. (2001), ‘Estimating Carbon Supply Curves for Global Forests & Other Land Uses’, Discussion Paper dp-01-19, Resources For the Future, Washington, DC.CrossRefGoogle Scholar
Szolgayová, J., Fuss, S., and Obersteiner, M. (2008), ‘Assessing the effects of CO2 price caps on electricity investments – a real options analysis’, Energy Policy 36: 3974–3981.Google Scholar
Szolgayová, J., Golub, A., Fuss, S., and Obersteiner, M. (2010), ‘Innovation & risk-averse firms: options on carbon allowances as a hedging tool’, Working Paper January 2010.Google Scholar