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

Alexander Golub, Ruben Lubowski and Pedro Piris-Cabezas

Ecological Economics, 2017, vol. 138, issue C, 90-98

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.

Keywords: Carbon market; Climate policy; Deforestation; Emissions trading; Options trading; REDD+; Uncertainty (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0921800916304645
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolec:v:138:y:2017:i:c:p:90-98

DOI: 10.1016/j.ecolecon.2017.03.013

Access Statistics for this article

Ecological Economics is currently edited by C. J. Cleveland

More articles in Ecological Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().