REDD options hedge carbon price risk in energy sector

An Ecosystems Services and Management (ESM) study on carbon price risks in the energy sector quantified the benefits and the role of financial instruments (options on REDD+ emission offsets) within available strategies to cope with the potential carbon price increase.

© Costa007 | Dreamstime

© Costa007 | Dreamstime

The benefits that REDD-based risk-hedging is able to deliver include drastic reduction of deforestation, lower long-term operating risks for energy producers, and lower electricity price for consumers [1] [2].

Note: Reducing Emissions from Deforestation and Forest Degradation (REDD) is an effort to create a financial value for the carbon stored in forests. It offers incentives for developing countries to reduce emissions from forested lands and invest in low-carbon paths to sustainable development.

Figure 1. Impact of REDD-based financial instrument on distributions of profits of electricity producer in the model of fairly priced CO2 offsets (click on image to enlarge).

References

[1] Szolgayova J, Golub A, Fuss S (2014). Innovation and risk-averse firms: Options on carbon allowances as a hedging tool. Energy Policy, 70:227-235 (July 2014) (Published online 18 April 2014).

[2] Krasovskii AA, Khabarov N, Obersteiner M (2014). Impacts of the fairly priced REDD-based CO2 offset options on the electricity producers and consumers. Economy of Region, 3(2014):273-288.

Collaborators

Mercator Research Institute on Global Commons and Climate Change, Germany

American University Washington D.C., USA


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Last edited: 21 April 2015

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Nikolay Khabarov

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Ecosystems Services and Management

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