Using carbon markets to tackle climate change and protect forests
Under the UN program on Reducing Emissions from Deforestation and Forest Degradation (REDD), forest owners can pledge to protect their forest, and sell those pledges to electricity producers to offset their emissions. A clear indication that the price of carbon emissions will rise in the future, combined with a benefit-sharing mechanism that ensures forest owners will not lose out under rising carbon prices, could increase participation in the scheme, IIASA research has shown.
The UN REDD program aims to mitigate climate change through protecting forests in developing countries. Halting deforestation in this way means that the important carbon storage that forests provide is protected. Under REDD, a forest owner is given a certificate for each hectare of forest that they protect from logging (therefore avoiding CO2 emissions). These can be sold to carbon emitters, such as energy producers, who can use them to offset their emissions.
At the moment, because the price for carbon emissions is very low, the best strategy for an electricity producer is to buy the bare minimum number of certificates. However, if they suspect that the price of carbon will increase, they may choose to buy more than they need, selling any excess at a profit in the future.
Researchers from the IIASA Ecosystems Services and Management Program investigated how to improve participation in the REDD certification program, by forest owners (sellers) and electricity producers (buyers) alike . In particular they examined the impacts of a ‘benefit-sharing mechanism.’ Under such a scheme the forest owner would share in the profits that are made if the certificates are sold by the electricity producer at a profit. This reduces the forest owner’s risk, since they do not lose out if the certificates are sold on at a much higher profit in the future.
The results showed that risk-averse attitudes could help get the scheme off the ground. This is because a cautious electricity producer would want to protect themselves against a rise in the price of carbon emissions by buying certificates. And a benefit sharing scheme could encourage a risk-averse forest owner to sell their certificates, since they will not lose out under a price hike for emissions.
To bring out these behaviors policymakers should give a clear indication that carbon prices will increase, and implement a benefit/risk sharing mechanism, the researchers conclude.
The impact of the benefit-sharing ratio on the contracted amount of REDD offsets. At every value of benefit-sharing ratio expected utilities of the forest owner and electricity producer stay the same, but the contracted amounts (blue line) and equilibrium prices (green line) differ.
 Krasovskii A, Khabarov N, & Obersteiner M (2016). Fair pricing of REDD-based emission offsets under risk preferences and benefit-sharing. Energy Policy 96: 193-205.
 Krasovskii A, Khabarov N, & Obersteiner M (2016). CO2 -intensive power generation and REDD-based emission offsets with a benefit-sharing mechanism. Energy Systems: 1-27.
- Environmental Defense Fund, USA
- Mercator Research Institute on Global Commons and Climate Change, Germany
- London School of Economics, UK
- Delivering Incentives to End Deforestation: NORAD DITED project
- The project “Options Market and Risk-Reduction Tools for REDD+” is funded by the Norwegian Agency for Development Cooperation under agreement number QZA-0464QZA-13/0074
- EU’s Seventh Framework Programme grant agreement no. 603906 (ECONADAPT).