Using carbon markets to tackle climate change and protect forests

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 [1]. 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.