Flobsion—Flexible Option with Benefit Sharing
Global environmental goals and the Paris agreement declared the need to avoid dangerous climate change by reducing emissions of greenhouse gases with an ultimate goal to transform today’s policies and reach climate neutrality before the end of the century. In the medium to long-term, clima...
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doaj-4f9464d9d6334fd19204f38d5264ea4e2020-11-25T01:08:40ZengMDPI AGInternational Journal of Financial Studies2227-70722019-04-01722210.3390/ijfs7020022ijfs7020022Flobsion—Flexible Option with Benefit SharingNikolay Khabarov0Ruben Lubowski1Andrey Krasovskii2Michael Obersteiner3Ecosystems Services and Management Program (ESM), International Institute for Applied Systems Analysis (IIASA), Schlossplatz 1, A-2361 Laxenburg, AustriaEnvironmental Defense Fund, 1875 Connecticut Ave NW #600, Washington, DC 20009, USAEcosystems Services and Management Program (ESM), International Institute for Applied Systems Analysis (IIASA), Schlossplatz 1, A-2361 Laxenburg, AustriaEcosystems Services and Management Program (ESM), International Institute for Applied Systems Analysis (IIASA), Schlossplatz 1, A-2361 Laxenburg, AustriaGlobal environmental goals and the Paris agreement declared the need to avoid dangerous climate change by reducing emissions of greenhouse gases with an ultimate goal to transform today’s policies and reach climate neutrality before the end of the century. In the medium to long-term, climate policies imply rising CO<inline-formula> <math display="inline"> <semantics> <msub> <mrow></mrow> <mn>2</mn> </msub> </semantics> </math> </inline-formula> price and consequent financial risk for carbon-intensive producers. In this context, there is a need for tools to buffer CO<inline-formula> <math display="inline"> <semantics> <msub> <mrow></mrow> <mn>2</mn> </msub> </semantics> </math> </inline-formula> prices within the period of transition to greener technologies when the emission offsetting markets expose high volatility. Contracts for optional future purchase of carbon credits could provide emitters with a cost-efficient solution to address existing regulatory risks. At the same time, this would help to create much needed financing for the projects generating carbon credits in the future. This work presents the concept of a <i>flobsion</i>—a flexible option with benefit sharing—and demonstrates its advantages in terms of risk reduction for both seller and buyer as compared to both a “do nothing„ strategy (offsetting at future market price) and a traditional option with a fixed strike price. The results are supported analytically and numerically, employing as a benchmark the dataset on historical CO<inline-formula> <math display="inline"> <semantics> <msub> <mrow></mrow> <mn>2</mn> </msub> </semantics> </math> </inline-formula> prices from the European Emission Trading Scheme. Flobsion has the potential to extend the traditional option in financial applications beyond compliance markets.https://www.mdpi.com/2227-7072/7/2/22CO<sub>2</sub>emissions offsettingoptionsfinancial riskbenefit sharingclimate policy |
collection |
DOAJ |
language |
English |
format |
Article |
sources |
DOAJ |
author |
Nikolay Khabarov Ruben Lubowski Andrey Krasovskii Michael Obersteiner |
spellingShingle |
Nikolay Khabarov Ruben Lubowski Andrey Krasovskii Michael Obersteiner Flobsion—Flexible Option with Benefit Sharing International Journal of Financial Studies CO<sub>2</sub> emissions offsetting options financial risk benefit sharing climate policy |
author_facet |
Nikolay Khabarov Ruben Lubowski Andrey Krasovskii Michael Obersteiner |
author_sort |
Nikolay Khabarov |
title |
Flobsion—Flexible Option with Benefit Sharing |
title_short |
Flobsion—Flexible Option with Benefit Sharing |
title_full |
Flobsion—Flexible Option with Benefit Sharing |
title_fullStr |
Flobsion—Flexible Option with Benefit Sharing |
title_full_unstemmed |
Flobsion—Flexible Option with Benefit Sharing |
title_sort |
flobsion—flexible option with benefit sharing |
publisher |
MDPI AG |
series |
International Journal of Financial Studies |
issn |
2227-7072 |
publishDate |
2019-04-01 |
description |
Global environmental goals and the Paris agreement declared the need to avoid dangerous climate change by reducing emissions of greenhouse gases with an ultimate goal to transform today’s policies and reach climate neutrality before the end of the century. In the medium to long-term, climate policies imply rising CO<inline-formula> <math display="inline"> <semantics> <msub> <mrow></mrow> <mn>2</mn> </msub> </semantics> </math> </inline-formula> price and consequent financial risk for carbon-intensive producers. In this context, there is a need for tools to buffer CO<inline-formula> <math display="inline"> <semantics> <msub> <mrow></mrow> <mn>2</mn> </msub> </semantics> </math> </inline-formula> prices within the period of transition to greener technologies when the emission offsetting markets expose high volatility. Contracts for optional future purchase of carbon credits could provide emitters with a cost-efficient solution to address existing regulatory risks. At the same time, this would help to create much needed financing for the projects generating carbon credits in the future. This work presents the concept of a <i>flobsion</i>—a flexible option with benefit sharing—and demonstrates its advantages in terms of risk reduction for both seller and buyer as compared to both a “do nothing„ strategy (offsetting at future market price) and a traditional option with a fixed strike price. The results are supported analytically and numerically, employing as a benchmark the dataset on historical CO<inline-formula> <math display="inline"> <semantics> <msub> <mrow></mrow> <mn>2</mn> </msub> </semantics> </math> </inline-formula> prices from the European Emission Trading Scheme. Flobsion has the potential to extend the traditional option in financial applications beyond compliance markets. |
topic |
CO<sub>2</sub> emissions offsetting options financial risk benefit sharing climate policy |
url |
https://www.mdpi.com/2227-7072/7/2/22 |
work_keys_str_mv |
AT nikolaykhabarov flobsionflexibleoptionwithbenefitsharing AT rubenlubowski flobsionflexibleoptionwithbenefitsharing AT andreykrasovskii flobsionflexibleoptionwithbenefitsharing AT michaelobersteiner flobsionflexibleoptionwithbenefitsharing |
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