The Effect of Fire Risk on the Critical Harvesting Times for Pacific Northwest Douglas-Fir When Carbon Price Is Stochastic
AbstractThe forest ownerâ€™s decision regarding when to harvest, based on forestâ€™s current worth, is analyzed using the real options approach for a representative Pacific Northwest Douglas-fir stand when the carbon price is stochastic and there is a fire risk. The problem is framed as a linear complementarity problem and solved using the fully implicit finite difference method combined with a penalty method. The fire risk results in lower option values and earlier critical harvesting times, whereas a wider carbon price range ($0â€“$100 versus $0â€“$10) produces contrary results and more responsiveness to the parameter changes.
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Bibliographic InfoArticle provided by Northeastern Agricultural and Resource Economics Association in its journal Agricultural and Resource Economics Review.
Volume (Year): 41 (2012)
Issue (Month): 3 (December)
Chicago Climate Exchange Sustainably Managed Forest Project; carbon financial instrument; geometric mean-reverting process; Resource /Energy Economics and Policy; Risk and Uncertainty;
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