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

Published online by Cambridge University Press:  26 October 2010

SABINE FUSS
Affiliation:
International Institute for Systems Analysis, Schlossplatz 1, A-2361 Laxenburg, Austria. Tel: +43 2236 807 550, Fax: +43 2236 807 500. Email: fuss@iiasa.ac.at
JANA SZOLGAYOVA
Affiliation:
International Institute for Systems Analysis, Schlossplatz 1, A-2361 Laxenburg, Austria; and Department of Applied Mathematics and Statistics, Faculty of Mathematics, Physics and Informatics, Comenius University, Bratislava, Slovakia. Email: szolgay@iiasa.ac.at
ALEXANDER GOLUB
Affiliation:
Environmental Defense Fund, Washington, 1875 Connecticut Avenue, NW, Washington, DC 20009, USA. Email: agolub@edf.org
MICHAEL OBERSTEINER
Affiliation:
International Institute for Systems Analysis, Schlossplatz 1, A-2361 Laxenburg, Austria. Email: oberstei@iiasa.ac.at

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.

Type
Research Article
Copyright
Copyright © Cambridge University Press 2010

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