Investing in energy forestry under uncertainty
AbstractFarmer's decisions to invest in renewable energy sources can contribute to lower greenhouse gas and mitigate climate change. However, it remains unclear how associated high sunk establishment costs, long-term commitment, highly uncertain net returns, and policy induced incentives could drive farmer's decision to afforest agricultural land. A real option model is used to theoretically frame the decision to switch from agriculture to energy forestry. Optimal investment timing is modeled and the functioning of government subsidies offered to speed up the switch to energy forestry is analyzed. The empirical analysis examines the establishment of new short-rotation coppice willow stands in Central East Sweden. It is shown that in the presence of volatile agricultural profits and high establishment costs, subsidies are needed to accelerate investment. We then examine the case of the municipality of Enköping and show that the combination of governmental subsidies for energy forestry with compensation for sewage sludge treatment provides an effective stimulus to investment in new willow stands which also has environmental benefits.
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Bibliographic InfoArticle provided by Elsevier in its journal Forest Policy and Economics.
Volume (Year): 34 (2013)
Issue (Month): C ()
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Web page: http://www.elsevier.com/locate/forpol
Real options; Investment analysis; Short-rotation willow coppice; Bioenergy policy;
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- Q23 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Forestry
- Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
- Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
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