Credit Buyers Research Articles

A holistic approach to assessing REDD+ forest loss baselines through ex post analysis

Abstract The implementation of REDD+ (Reducing Emissions from Deforestation and Forest Degradation) projects has become a key Nature Based Solutions (NBS) strategy to protect at-risk forests using the sale of verified emission reductions (carbon credits) as financing, generated by reducing forest loss against counterfactual baseline scenarios. Controversy over the reasonableness of such baseline scenarios has thrown this nascent market mechanism into disarray. While new technical approaches to baseline-setting that promise wider market acceptance are set to roll out in the coming years, existing projects are becoming unviable, as carbon credit buyers reduce investment due to lost confidence in the integrity of emissions reduction claims. Transparent, reproducible methods to assess existing REDD+ project baselines are needed in order to provide a clearer picture of the real impact of projects, and provide an objective basis on which investment decisions can be made today. Here we introduce such a method. .. In contrast to existing studies which utilize only one method to create a single “control,” we integrate actual forest loss rates from a variety of control sites to establish a “zone of reasonable accuracy (or ZORA)”. Application of our method in Cambodia, using two geospatial datasets (one global and one locally calibrated), shows that all three project baselines fall within or below ZORA. This approach is fully reproducible, and provides a transparent way for analysts to assess REDD+ baselines during this critical time when investment in forest protection must increase dramatically and without delay.

Do individual PES buyers care about additionality and free-riding? A choice experiment

Based on a survey of the French population, this study investigates consumer preferences for forest ecosystem services (FES) provision towards efficiency and equity in the context of additionality, and differences in willingness to pay (WTP) for FES between a tax-based and a donation-based payments for ecosystem services (PES) scheme. We show that consumers prefer equity to strict additionality adherence, with this preference being significantly stronger among females. However, consumer preferences are heterogeneous, and respondents with a closer connection to forests express the opposite preference. Regarding WTP, we find no systematic difference between the two payment vehicles, though WTP does vary depending on how respondents perceive potential free-riding. When considering that non-contributors also benefit from a particular PES scheme, a small group perceived this as unfair and reacted by reducing their contribution. A second, significantly larger group interpreted this as an opportunity to contribute to the common good and showed a higher WTP, indicating a markedly altruistic attitude towards FES provision in French society. We conclude by discussing the role of altruism in PES, the dilemma posed by the partial economic and legal incompatibilities of additionality and equity, and the environmental impact of environmental credits when credit buyers do not account for additionality.

Ecosystem service benefits to water users from perennial biomass production

Although many agree that a transition to renewable energy sources is needed to avoid the climate consequences of continued reliance on fossil sources, price is a barrier. For renewable energy sources, including bioenergy, penetrating energy markets depends on lowering prices to compete with the price of fossil sources, but the tools used in decision making, such as supply curves, exclude non-market benefits from ecosystem services. Here, we extend the economic concept of an economic supply curve to account for ecosystem services co-produced with perennial biomass. We developed three new types of supply curves to visualize the increased supply of biomass (‘sustainable supply’) with sufficient water-quality benefits to offset biomass production costs. Using these tools, we show that the value of water-quality improvements could significantly reduce the break-even price of perennial feedstocks if it were available to farmers. In the most optimistic case, nearly half of potential biomass supply in a large tributary of the Mississippi river basin carried water purification value exceeding the cost of biomass production. Furthermore, adding the value to swimmers and waders offset production cost for over 90% of potential supply. Simulated benefits were context specific. For example, total value for water drinkers peaked at an intermediate level of fertilizer application. Geographically, benefits were highest in the eastern portion of the river basin. This research shows where the sustainable supply is needed and can generate value; the next step is to match this supply with credit buyers. Efforts to internalize the values of ecosystem services into biomass prices could help to meet Biden administration targets to meet 100% of sustainable aviation fuels.

The performance of multi-type environmental credit trading markets: Lab experiment evidence

We experimentally compare the performance of two multi-type environmental credit trading markets. The first trading market is called the multiple market (MM) institution, which allows the providers to sell jointly produced credits of all types. The second trading market is called the single market (SM) institution, where the providers of jointly produced credits can only choose one type of credit to sell. We investigate several key indicators, including the trading price, quantity, and net social benefit, to compare the performance of the SM and MM institutions. We find that the trading prices are significantly lower in MM compared to SM, indicating that MM potentially benefits the credit buyers. We also find that SM leads to more credit productions. Since not all credits can be traded in SM, the increase in the production cost outweighs the increase in the total social benefit. As a result, the net social benefit is lower in SM compared to MM. We expand the literature by firstly designing a market platform for multi-type credit trading and then assessing their performance with lab experiment evidence.

Trade Credit Insurance: Operational Value and Contract Choice

Trade credit insurance (TCI) is a risk management tool commonly used by suppliers to guarantee against payment default by credit buyers. TCI contracts can be either cancelable (the insurer has the discretion to cancel this guarantee during the insured period) or noncancelable (the terms cannot be renegotiated within the insured period). This paper identifies two roles of TCI: the (cash flow) smoothing role (smoothing the supplier’s cash flows) and the monitoring role (tracking the buyer’s continued creditworthiness after contracting, which enables the supplier to make efficient operational decisions regarding whether to ship goods to the credit buyer). We further explore which contracts better facilitate these two roles of TCI by modeling the strategic interaction between the insurer and the supplier. Noncancelable contracts rely on the deductible to implement both roles, which may result in a conflict: a high deductible inhibits the smoothing role, whereas a low deductible weakens the monitoring role. Under cancelable contracts, the insurer’s cancelation action ensures that the information acquired is reflected in the supplier’s shipping decision. Thus, the insurer has adequate incentives to perform its monitoring function without resorting to a high deductible. Despite this advantage, we find that the insurer may exercise the cancelation option too aggressively; this thereby restores a preference for noncancelable contracts, especially when the supplier’s outside option is unattractive and the insurer’s monitoring cost is low. Noncancelable contracts are also relatively more attractive when the acquired information is verifiable than when it is unverifiable. This paper was accepted by Vishal Gaur, operations management.

Water quality trading opportunities in two sub-watersheds in the northern Lake Okeechobee watershed

For decades, the increase of nutrient enrichment has threatened the ecological integrity and economic sustainability of many rivers, lakes, and coastal waters, including Lake Okeechobee, the second largest freshwater lake in the contiguous United States. Water quality trading programs have been an area of active development to both, reduce nutrient pollution and minimize abatement costs. The objective of this study was to apply a comprehensive modeling framework, integrating a hydrologic-water quality model with an economic model, to assess and compare the cost-effectiveness of a water quality trading program over a command-and-control approach in order to reduce phosphorus loadings to Lake Okeechobee. The Upper Kissimmee (UK) and Taylor Creek/Nubbin Slough (TCNS) sub-watersheds, identified as major sources of total phosphorus (TP) loadings to the lake, were selected for this analysis. The effect of different caps on the market potential was assessed while considering four factors: the least-cost abatement solutions, credit prices, potential cost savings, and credit supply and demand. Hypothetical trading scenarios were also developed, using the optimal caps selected for the two sub-watersheds. In both sub-watersheds, a phosphorus credit trading program was less expensive than the conventional command-and-control approach. While attaining cost-effectiveness, keeping optimal credit prices, and fostering market competition, phosphorus reduction targets of 46% and 32% were selected as the most appropriate caps in the UK and TCNS sub-watersheds, respectively. Wastewater treatment facilities and urban areas in the UK, and concentrated animal feeding operations in the TCNS sub-watershed were identified as potential credit buyers, whereas improved pastures were identified as the major credit sellers in both sub-watersheds. The estimated net cost savings resulting from implementing a phosphorus trading program in the UK and TCNS sub-watersheds were 76% ($ 34.9 million per year) and 45% ($ 3.2 million per year), respectively. It is important to note that the realization of the environmental and economic benefits of this market-based alternative is also contingent on other important factors, such as the market structure, the specific program rules, the risk perception, and the education and outreach to develop trusted relationships among regulatory agencies, the public sector, and other stakeholders. Nevertheless, this research provided the foundation for stakeholders to better understand whether water quality trading has the potential to work in the Lake Okeechobee watershed and to facilitate the development of a pilot program.

Bridging organizations in agricultural carbon markets and poverty alleviation: An analysis of pro-Poor carbon market projects in East Africa

Abstract International agricultural carbon market projects face significant challenges in delivering greenhouse gas mitigation objectives whilst also seeking to provide additional benefits for poverty alleviation. The carbon credit producer (the smallholder farmer) and carbon credit buyer in the carbon market transaction typically operate at different spatial and temporal scales. Buyers operate at a global scale, responding to opportunities for financial speculation and both private and public climate action plans. Farmers operate within households, farms, and immediate agricultural landscapes, pursuing livelihood and food security needs. These different scales often result in mismatches of timing, payment, and knowledge in market transactions and can be partially rectified by project developers who serve to broker the relationship between the farmers and the buyers. We examined eight East African agricultural carbon market projects to determine how project developers function as bridging organizations and minimize the mismatches between these actors. Results show that projects better bridged the timing and payment gap between buyers and producers when project developers provided non-monetary benefits or direct monetary assistance to farmers. However, knowledge gaps remained a significant barrier for farmers wishing to participate in the market. We discuss how project developers brokered relationships in ways that reflected their interests and highlight the limitations, trade-offs, and challenges that must be overcome if win-win outcomes of poverty alleviation and climate change mitigation are to be realized.

Using Tradable Credits for Revenue-Neutral Pricing of a Bottleneck with Heterogeneous User Preferences and Value of Time

In this research, we develop an optimal credit-based pricing scheme for a single bottleneck with time-dependent demand and heterogeneous user preferences. For this purpose, we first propose an analytical model for dynamically pricing the bottleneck. Accounting for the independent distributions of the schedule penalty factors and the value of time of the commuters can significantly improve the accuracy of the pricing strategy. Moreover, implementing such a strategy using a revenue-neutral credit-based pricing scheme allows the value of the credits to be determined by the interaction between the users in the equilibrium condition of the market. Hence, there would be no need to charge all commuters over the peak period. Instead, the proposed strategy allocates the money raised from the “credit buyers” to subsidize the commutes of the “credit sellers” in order to incentivize the commuters to form a uniform distribution of arrival times over the peak period. Using tradable credits to design a revenue-neutral pricing strategy for the bottleneck can raise public support by improving the social welfare of the users. The proposed credit-based pricing strategy also have broad applications for optimizing the urban networks using the concept of the macroscopic fundamental diagram (see Amirgholy et al., 2017).

Attenuation coefficients for water quality trading.

Water quality trading has been proposed as a cost-effective approach for reducing nutrient loads through credit generation from agricultural or point source reductions sold to buyers facing costly options. We present a systematic approach to determine attenuation coefficients and their uncertainty. Using a process-based model, we determine attenuation with safety margins at many watersheds for total nitrogen (TN) and total phosphorus (TP) loads as they transport from point of load reduction to the credit buyer. TN and TP in-stream attenuation generally increases with decreasing mean river flow; smaller rivers in the modeled region of the Ohio River Basin had TN attenuation factors per km, including safety margins, of 0.19-1.6%, medium rivers of 0.14-1.2%, large rivers of 0.13-1.1%, and very large rivers of 0.04-0.42%. Attenuation in ditches transporting nutrients from farms to receiving rivers is 0.4%/km for TN, while for TP attenuation in ditches can be up to 2%/km. A 95 percentile safety margin of 30-40% for TN and 6-10% for TP, applied to the attenuation per km factors, was determined from the in-stream sensitivity of load reductions to watershed model parameters. For perspective, over 50 km a 1% per km factor would result in 50% attenuation = 2:1 trading ratio.

Modeling a phosphorus credit trading program in an agricultural watershed

Water quality and economic models were linked to assess the economic and environmental benefits of implementing a phosphorus credit trading program in an agricultural sub-basin of Lake Okeechobee watershed, Florida, United States. The water quality model determined the effects of rainfall, land use type, and agricultural management practices on the amount of total phosphorus (TP) discharged. TP loadings generated at the farm level, reaching the nearby streams, and attenuated to the sub-basin outlet from all sources within the sub-basin, were estimated at 106.4, 91, and 85 mtons yr−1, respectively. Almost 95% of the TP loadings reaching the nearby streams were attributed to agriculture sources, and only 1.2% originated from urban areas, accounting for a combined TP load of 87.9 mtons yr−1. In order to compare a Least-Cost Abatement approach to a Command-and-Control approach, the most cost effective cap of 30% TP reduction was selected, and the individual allocation was set at a TP load target of 1.6 kg ha−1 yr−1 (at the nearby stream level). The Least-Cost Abatement approach generated a potential cost savings of 27% ($1.3 million per year), based on an optimal credit price of $179. Dairies (major buyer), ornamentals, row crops, and sod farms were identified as potential credit buyers, whereas citrus, improved pastures (major seller), and urban areas were identified as potential credit sellers. Almost 81% of the TP credits available for trading were exchanged. The methodology presented here can be adapted to deal with different forms of trading sources, contaminants, or other technologies and management practices.

What Factors Influence Sellers’ Trade Credit Contract Terms and Buyers’ Trade Credit Payment Behavior?

What Factors Influence Sellers’ Trade Credit Contract Terms and Buyers’ Trade Credit Payment Behavior?

The Clean Development Mechanism and Technology Transfer to China

In this study we analyse the role of the Clean Development Mechanism (CDM) established by the Kyoto Protocol in channelling foreign technology to China. The descriptive analysis investigates the sources and the determinants of foreign technology transfer based on the examination of 1,355 registered projects. As key features, we show the prominence of German firms as technology providers and the absence of a strong relationship between technology suppliers and credit buyers. We also discuss the role of leading Chinese and foreign consultants and of major credit buyers. The econometric analysis finds that project size and cost, project location, credit buyers’ and consultants’ characteristics, as well as technology diffusion are all relevant factors in determining the probability of having a foreign supplier of technology in the respective project.

Water Quality Credit Trading: Developments in 2011

Water quality credit trading is being used in a number of watersheds throughout the country in a variety of forms and with a menagerie of rules, which vary based upon the state jurisdiction. October marked the end of the second year of active nutrient credit trading in Pennsylvania and the Pennvest public auction platform. This article provides the latest information on the use of water quality credits in Pennsylvania in 2011. A free commodity market like Pennsylvania's credit trading market can be a good tool to match price with demand, except when speculators enter the market, as we experienced this year. Discussion in this article includes results from the November 2 Pennvest auction, analysis of most current trends and unexpected challenges encountered this year by credit buyers and sellers in the Commonwealth.

Urban Forests and Carbon Markets: Buyers' Perspectives

Abstract Currently, carbon credit prices frequently do not reflect the type and location of offset projects. Because of the social image and ancillary benefits, buyers may place higher value on credits sourced from certain types of projects such as urban forestry. This study surveyed carbon credit buyers participating in the Chicago Climate Exchange to assess their preferences for credits from various offset projects. Specifically, it evaluated the desirability of carbon credits sourced from urban forestry projects and analyzed buyers' preferences, motivations, and attitudes toward a price premium for credits from urban forests. Results indicate that the buyers are largely interested in knowing the type and location of offset projects. Locally generated credits were strongly preferred to those produced farther away, and credits sourced from urban forestry projects were more desirable than those sourced from other common projects currently in the market, such as methane capture or agriculture. Buyers indicated environmental and social benefits, offset quality, environmental responsibility, and public image as motivations for preferring credits sourced from urban forestry projects, for which they were also willing to pay a modest price premium. Furthermore, significant differences in preferences and willingness to pay were observed between buyers with different corporate goals, emission levels, and geographical scope of operation.

Classifying carbon credit buyers according to their attitudes towards and involvement in CDM sustainability labels

Carbon markets are increasingly conscious of the social and environmental ‘quality’ of credits delivered by CDM projects. Consequently carbon credits are no longer viewed as a homogenous good and buyers now differentiate between credits supplied by different types of CDM project. The objective of this paper is to classify CER buyers according to their attitudes towards and preferences for CDM sustainability labels. K-means clustering was used to segment a sample of buyers into two clusters. The results indicate that two clear clusters exist with distinct profile patterns. Moreover, the results of discriminant analysis confirmed that the two-cluster solution was valid. Finally, the results of the chi-square analysis and a cross-tabulation showed that these two clusters were significantly different in: organization type; level of paid up capital; perception of sustainable development benefits; perception of return on investment; perception of image of the sustainability labeling; participation in the voluntary market; the project priority; knowledge in the sustainability label; attitude towards the host country's duty; and their willingness to pay.

Quality of urban forest carbon credits

While the urban forest is considered an eligible source of carbon offset credits, little is known about its market potential and the quality aspects of the credits. As credit suppliers increase in number and credit buyers become more interested in purchasing carbon credits, it is unclear whether and how urban forest carbon credits can perform relative to the other types of carbon credits available in the market. Delivering quality credits would be crucial especially in voluntary markets such as the U.S., where buyers are more likely to be committed to reducing their GHGs emissions and maintaining a positive public image, than just abiding by regulations. Utilizing the results of a nationwide survey of local governments, this study takes a first step toward evaluating the quality aspects of urban forest carbon credits. We conclude that the local municipalities and cities in the U.S., acting as sellers of carbon credits, have the resources and capacity to be competitive in carbon credit markets. In addition, they have capacity and resources to implement carbon projects that will meet the key quality criteria (e.g., additionality, permanence, and verification).

On the Determination of Contract Price in Credit Sales Transaction: Exchange Option Approach*

Conditions for credit sales transactions vary to a great degree depending upon characteristics of the commodity, the buyer, and the seller. In this paper, we analyzed the buyer’s right to return purchased commodities and void his or her financial obligations as an exchange option written by the seller and held by the credit buyer. The value of this exchange option is determined by the value of supplied goods and their volatility, the value of bonds and their volatility, and the correlation between the values of the commodity and the bonds. As a result, this paper was able to derive a model that could explain the impact of: (i) characteristics of the commodities; (ii) characteristics of the buyer; (iii) characteristics of the seller; and (iv) changes in market conditions. Besides the progress stated above, we also derived the necessary condition for both the buyer and the seller to be satisfied in a credit sales transaction. Based on this model, a number of empirical hypotheses were made.

Does Emissions Trading Encourage Innovation?

This article questions the conventional theory purporting to establish that emissions trading encourages innovation better than comparable traditional regulation. conventional theory relies upon the incentive emissions trading creates for polluters to make additional reductions in order to sell credits. But emissions trading also creates incentives for half of the pollution sources (the credit buyers) to make less reductions than they would under a traditional regulation. By focusing analysis only upon the sellers of credits, the traditional theory systematically biases results. induced innovation hypothesis - that innovation occurs in response to high costs - would suggest that emissions trading would tend to discourage innovation by lowering the cost of compliance through conventional techniques. Even innovation that costs a lot now can prove economically and environmentally superior over the long run, because innovation can make costs of new techniques fall over time and some innovations provide very wide ranging environmental benefits. But emissions trading encourages selection of the techniques with the cheapest current cost, not the cheapest long-term cost or the greatest long-term value. This article forms part of a larger project arguing for an economic dynamic approach to environmental law and law and economics. author's forthcoming book, The Economic Dynamics of Environmental Law (MIT Press 2003) sets out the full theory.

Design, Trading, and Innovation

This article questions the conventional theory purporting to establish that environmental benefit trading encourages innovation better than comparable traditional regulation. It argues that the induced innovation hypothesis, that high costs encourage innovation, suggests that trading would lessen incentives for innovation by lowering the cost of complying with conventional approaches. The conventional theory relies upon the incentive emissions trading creates for polluters to make additional reductions in order to sell credits. But emissions trading also creates incentives for half of the pollution sources (the credit buyers) to make less reductions than they would under a traditional regulation. By focusing analysis only upon the sellers of credits, the traditional theory systematically biases results. Trading's inferiority is especially apparent with respect to high-cost innovation. Even innovation that costs a lot now can prove economically and environmentally superior over the long run, because innovation can make costs of new techniques fall over time and some innovations provide very wide ranging environmental benefits. But trading encourages selection of the techniques with the cheapest current cost, not the cheapest long-term cost or the greatest long-term value. It also argues that design variables, such as the stringency of regulation and the quality of monitoring play an important role in encouraging (or failing to encourage) innovation. And it argues that neither traditional regulation nor environmental benefit trading stimulate innovation especially well, because government often regulates weakly. The article suggests an alternative economic incentive program that would maximize incentives for innovation and progress on environmental problems. This article forms part of a larger project arguing for an economic dynamic approach to environmental law and law and economics. The author's book, The Economic Dynamics of Environmental Law (MIT Press 2003), sets out the full theory.

The Clean Development Mechanism and the international diffusion of technologies: An empirical study

The Clean Development Mechanism (CDM) is expected to stimulate the North–South transfer of climate-friendly technologies. This paper provides an assessment of the technology transfers that take place through the CDM using a data set of 644 registered projects. It provides a detailed description of the transfers (frequency, type, by sector, by host country, etc.). It also includes an econometric analysis of their drivers. We show that transfer likeliness increases with the size of the projects. The transfer probability is 50% higher in projects implemented in a subsidiary of Annex 1 companies while the presence of an official credit buyer has a lower—albeit positive—impact. The analysis also yields interesting results on how technological capabilities of the host country influence technology diffusion in the CDM.