Opportunity costs and offsets acceptance in FI-REDD model

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WP-17-019.pdf

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WP-17-019.pdf

http://eprints.org/relation/isVersionOf https://pure.iiasa.ac.at/id/document/79408 http://eprints.org/relation/isVolatileVersionOf https://pure.iiasa.ac.at/id/document/79408 http://eprints.org/relation/isCoversheetVersionOf https://pure.iiasa.ac.at/id/document/79408 archive 353 disk0/00/01/48/76 2017-10-10 06:57:44 2021-08-27 17:29:28 2017-10-10 06:57:44 monograph show 1 Krasovskii A. 8266 0000-0003-0940-9366 Khabarov N. 1850 0000-0001-5372-4668 Michael Obersteiner, Program Director Ecosystems Services and Management Opportunity costs and offsets acceptance in FI-REDD model pub prog_esm 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. 2017-10 WP-17-019 164 151 public working_paper IIASA, Laxenburg, Austria FALSE no info:eu-repo/semantics/book