Flexible Options for Greenhouse Gas-Emitting Energy Producer

Andrey Krasovskii, Nikolay Khabarov, Ruben Lubowski and Michael Obersteiner
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Andrey Krasovskii: Ecosystems Services and Management (ESM) Program, International Institute for Applied Systems Analysis (IIASA), 2351 Laxenburg, Austria
Nikolay Khabarov: Ecosystems Services and Management (ESM) Program, International Institute for Applied Systems Analysis (IIASA), 2351 Laxenburg, Austria
Ruben Lubowski: Environmental Defense Fund, Washington, DC 20009, USA
Michael Obersteiner: Ecosystems Services and Management (ESM) Program, International Institute for Applied Systems Analysis (IIASA), 2351 Laxenburg, Austria

Energies, 2019, vol. 12, issue 19, 1-20

Abstract: 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 CO 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 CO 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 CO 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 CO 2 price distributions foreseen by both parties; the flobsion pricing under asymmetric information could be considered in the future.

Keywords: optimal energy mix; CO 2 emissions; REDD offsets; risk-adjusted utility (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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