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How does real option value compare with Faustmann value in the context of the New Zealand Emissions Trading Scheme?

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  • Manley, Bruce

Abstract

Stochastic Dynamic Programming is used to determine the expected bare land value under the New Zealand ETS (Emissions Trading Scheme) with both log prices and carbon prices following a random walk. This value is substantially higher than the Faustmann NPV. This is in contrast to the situation without carbon where the difference is small and reduces as log price increases. When carbon is included, the difference in value is also large for existing stands and increases with stand age until at least the minimum harvest age is reached. Additional value comes from the flexibility of when to harvest and hence when carbon units have to be surrendered.

Suggested Citation

  • Manley, Bruce, 2013. "How does real option value compare with Faustmann value in the context of the New Zealand Emissions Trading Scheme?," Forest Policy and Economics, Elsevier, vol. 30(C), pages 14-22.
    • Handle: RePEc:eee:forpol:v:30:y:2013:i:c:p:14-22
    DOI: 10.1016/j.forpol.2013.02.001
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    References listed on IDEAS

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    1. Manley, Bruce & Maclaren, Piers, 2012. "Potential impact of carbon trading on forest management in New Zealand," Forest Policy and Economics, Elsevier, vol. 24(C), pages 35-40.
    2. Manley, Bruce & Niquidet, Kurt, 2010. "What is the relevance of option pricing for forest valuation in New Zealand?," Forest Policy and Economics, Elsevier, vol. 12(4), pages 299-307, April.
    3. Chladna, Zuzana, 2007. "Determination of optimal rotation period under stochastic wood and carbon prices," Forest Policy and Economics, Elsevier, vol. 9(8), pages 1031-1045, May.
    4. Graeme Guthrie & Dinesh Kumareswaran, 2009. "Carbon Subsidies, Taxes and Optimal Forest Management," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 43(2), pages 275-293, June.
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    Cited by:

    1. Arthur Grimes & Sandra Cortés Acosta, 2021. "Permanent forest investment in a climate of uncertainty," Working Papers 21_04, Motu Economic and Public Policy Research.
    2. Manley, Bruce & Niquidet, Kurt, 2017. "How does real option value compare with Faustmann value when log prices follow fractional Brownian motion?," Forest Policy and Economics, Elsevier, vol. 85(P1), pages 76-84.

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