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

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  • FUSS, SABINE
  • SZOLGAYOVA, JANA
  • GOLUB, ALEXANDER
  • OBERSTEINER, MICHAEL

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.

Suggested Citation

  • Fuss, Sabine & Szolgayova, Jana & Golub, Alexander & Obersteiner, Michael, 2011. "Options on low-cost abatement and investment in the energy sector: new perspectives on REDD," Environment and Development Economics, Cambridge University Press, vol. 16(4), pages 507-525, August.
    • Handle: RePEc:cup:endeec:v:16:y:2011:i:04:p:507-525_00
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    Cited by:

    1. Golub, Alexander A. & Lubowski, Ruben N. & Piris-Cabezas, Pedro, 2020. "Business responses to climate policy uncertainty: Theoretical analysis of a twin deferral strategy and the risk-adjusted price of carbon," Energy, Elsevier, vol. 205(C).
    2. Alexander Golub & Jon Anda & Anil Markandya & Michael Brody & Aldin Celovic & Angele Kedaitiene, 2022. "Climate alpha and the global capital market," Working Papers 2022.19, Fondazione Eni Enrico Mattei.
    3. Krasovskii, Andrey & Khabarov, Nikolay & Obersteiner, Michael, 2016. "Fair pricing of REDD-based emission offsets under risk preferences and benefit-sharing," Energy Policy, Elsevier, vol. 96(C), pages 193-205.
    4. Golub, Alexander & Lubowski, Ruben & Piris-Cabezas, Pedro, 2017. "Balancing Risks from Climate Policy Uncertainties: The Role of Options and Reduced Emissions from Deforestation and Forest Degradation," Ecological Economics, Elsevier, vol. 138(C), pages 90-98.
    5. Szolgayová, Jana & Golub, Alexander & Fuss, Sabine, 2014. "Innovation and risk-averse firms: Options on carbon allowances as a hedging tool," Energy Policy, Elsevier, vol. 70(C), pages 227-235.
    6. Koch, Nicolas & Reuter, Wolf Heinrich & Fuss, Sabine & Grosjean, Godefroy, 2017. "Permits vs. offsets under investment uncertainty," Resource and Energy Economics, Elsevier, vol. 49(C), pages 33-47.

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