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A “Stock­Flow­with Targets” Mechanism  for Distributing Incentive Payments  to Reduce Emissions from Deforestation  

The value of an option depends heavily upon the price of its underlying stock. As previously explained, if the price of the stock is above a call option's strike price, the call option is said to be in-the-money. Likewise, if the stock price is below a put option's strike price, the put option is in-the-money. The difference between an in-the- money option's strike price and the current market price of a share of its underlying security is referred to as the option's intrinsic value. Only in-the-money options have intrinsic value. For example, if a call option's strike price is $45 and the underlying shares are. | 1 For Immediate Release - December 2009 The Woods Hole Research Center A Stock-Flow-with Targets Mechanism for Distributing Incentive Payments to Reduce Emissions from Deforestation Introduction Reducing greenhouse gas emissions from deforestation and forest degradation is increasingly recognized as an important option in the policy toolkit for mitigating climate change. In the process the debate has shifted from whether to pursue the reduction of emissions from deforestation and forest degradation REDD to how to implement it and the challenges involved. As part of a broader climate agreement the Subsidiary Body for Scientific and Technical Advice SBSTA of the UNFCCC is focusing on methodological issues relating to reference levels of emissions from deforestation and degradation under REDD. The design of these reference levels will determine a REDD mechanism s overall reductions in emissions from deforestation effectiveness reductions per dollar spent efficiency and distribution of REDD revenue across countries and regions equity Stern 2007 Angelsen 2008 . This policy brief refines the stock-flow approach submitted jointly by the Woods Hole Research Center WHRC and by the Amazon Institute for Environmental Research IPAM to the UNFCCC in August 2008 on how to distribute across countries the potential incentive payments to reduce emissions from deforestation and forest degradation REDD . We provide an overview of the stock-flow approach extend it using targets and then present simulation results on how it performs in terms of environmental effectiveness economic efficiency and equity of REDD payments relative to opportunity costs of participation. The evolution of the stock-flow approach presented here was inspired and made possible by the development of the Open Source Impacts of REDD Incentives Spreadsheet OSIRIS Busch et al. 2009 as a powerful tool to improve our understanding of REDD mechanism design.1 REDD design reference levels and the stock-flow approach A .