Fair pricing of REDD-based emission offsets under risk preferences and benefit sharing

We consider risk-aware forest owners and electricity producers evaluating the Reduced Emissions from Deforestation and Degradation (REDD)-based offsets with a benefitsharing mechanisms under uncertain CO2 prices. For a range of CO2 prices and respective risks perceived by the forest owner (seller) and electricity producer (buyer), we apply a model of fair (indifference) pricing. Parties’ risk preferences are reflected by exponential utility functions. The potentially contracted amounts of REDD offsets are analyzed under various risk preferences and for different benefit sharing opportunities. Our results show that a risk-averse attitude considerably increases the contracted amounts of REDD offsets (compared to risk-neutral case) and, therefore, creates a higher potential for REDD implementation. We demonstrate possible situations, when parties could agree on a certain range of REDD contracts, e.g. smaller amounts of REDD offsets are traded for higher prices, and larger amounts – for lower prices, although contracting a moderate amount at a moderate price is impossible. The suggested benefit sharing mechanism can help increase contracted offset amounts. Our modeling results highlight two ways to promote higher REDD participation: (i) increasing risk aversion of the energy producers, and (ii) implementing the mechanism of benefit/risk sharing between the REDD consumer and supplier.