Permits vs. Offsets Under Investment Uncertainty

23 Pages Posted: 7 Jan 2016  

Nicolas Koch

Mercator Research Institute on Global Commons and Climate Change; University of Hamburg

Wolf Heinrich Reuter

Vienna University of Economics and Business

Sabine Fuss

Mercator Research Institute on Global Commons and Climate Change (MCC); International Institute for Applied Systems Analysis (IIASA)

Godefroy Grosjean

Potsdam-Institut für Klimafolgenforschung (PIK)

Date Written: January 5, 2016

Abstract

A global crediting mechanism would enable developing countries without binding emissions reduction targets to participate in the international carbon market. Linking the framework on Reducing Emissions from Deforestation and Forest Degradation (REDD) as an offset program to major cap-and-trade programs is a particularly promising approach to increase both climate finance and cost-efficiency. However, the coexistence of permits and offsets also creates a classic case of interaction effects. In this paper, we explore how the availability of multiple compliance instruments affects energy investment incentives. Alternative trading and linkage schemes are compared using a real options model of firm-level investment decisions under stochastic prices and the ability to delay investments. We first isolate the critical design factors that drive private investments in the energy sector. We then identify policy regimes that balance the different concerns in the polarized debate for and against the inclusion of forest carbon offsets.

Keywords: cap-and-trade; REDD; offsets; real option; investment

JEL Classification: Q58; Q48; Q56; Q23

Suggested Citation

Koch, Nicolas and Reuter, Wolf Heinrich and Fuss, Sabine and Grosjean, Godefroy, Permits vs. Offsets Under Investment Uncertainty (January 5, 2016). Available at SSRN: https://ssrn.com/abstract=2711321 or http://dx.doi.org/10.2139/ssrn.2711321

Nicolas Koch (Contact Author)

Mercator Research Institute on Global Commons and Climate Change ( email )

Torgauer Straße 12-15
Berlin, 10829
Germany

University of Hamburg ( email )

Von-Melle-Park 9
Hamburg, 20146
Germany

Wolf Heinrich Reuter

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

Sabine Fuss

Mercator Research Institute on Global Commons and Climate Change (MCC) ( email )

Torgauer Straße 12-15
Berlin, 10829
Germany
49303385537224 (Phone)
303385537224 (Fax)

HOME PAGE: http://www.mcc-berlin.net

International Institute for Applied Systems Analysis (IIASA) ( email )

Schlossplatz 1
Laxenburg, 2361
Austria

HOME PAGE: http://www.iiasa.ac.at

Godefroy Grosjean

Potsdam-Institut für Klimafolgenforschung (PIK) ( email )

Telegrafenberg 31
Potsdam, Brandenburg 14473
Germany

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