Opportunity costs and offsets acceptance in FI-REDD model

Krasovskii A & Khabarov N (2017). Opportunity costs and offsets acceptance in FI-REDD model. IIASA Working Paper. IIASA, Laxenburg, Austria: WP-17-019

[img]
Preview
Text
WP-17-019.pdf - Published Version
Available under License Creative Commons Attribution.

Download (771kB) | Preview

Abstract

In previous studies, we have proposed financial instruments supporting REDD (FI-REDD). Within a microeconomic framework we modeled interactions between an electricity producer (EP), electricity consumer (EC), and forest owner (FO). FI-REDD allows for optional consumption of emission offsets by the EP (any amount up to the initially contracted volume is allowed), and includes a benefit-sharing mechanism between the EP and FO as it regards unused offsets. The modeling results indicated that FI-REDD might help avoid bankruptcy of CO2-intensive producers at high levels of CO2 prices. We demonstrated the impact of benefit-sharing and risk preferences on the contracted REDD offsets quantity.

Here, we further develop the FI-REDD model by introducing two modifications. Firstly, we add opportunity cost of the forest owner, i.e. forest value alternative to REDD. This change leads to a realistic risk-adjusted supply curves for REDD, which are generated by the indifference (fair) pricing model and calculated for all possible benefit-sharing ratios. Secondly, we introduce an uncertainty associated with acceptance (fungibility) of REDD offsets in the second stage of the model. Modeling results demonstrate in a quantitative way the impact of fungibility uncertainty and positive effects of the benefit-sharing mechanism. An optimal value of the benefit-sharing ratio can be found that guarantees contracting the highest amounts of offsets at the low equilibrium price. This qualitative feature of the benefit-sharing mechanism is robust with respect to the uncertainty parameters in the model. We also undertake an in-depth analysis of decision making of the electricity producer using 3D visualization tools.

Item Type: Monograph (IIASA Working Paper)
Research Programs: Ecosystems Services and Management (ESM)
Depositing User: Luke Kirwan
Date Deposited: 10 Oct 2017 06:57
Last Modified: 10 Oct 2017 11:19
URI: http://pure.iiasa.ac.at/14876

Actions (login required)

View Item View Item

International Institute for Applied Systems Analysis (IIASA)
Schlossplatz 1, A-2361 Laxenburg, Austria
Phone: (+43 2236) 807 0 Fax:(+43 2236) 71 313