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Investing in energy forestry under uncertainty

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  • Di Corato, Luca
  • Gazheli, Ardjan
  • Lagerkvist, Carl-Johan

Abstract

Farmer'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 Info

Article provided by Elsevier in its journal Forest Policy and Economics.

Volume (Year): 34 (2013)
Issue (Month): C ()
Pages: 56-64

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Handle: RePEc:eee:forpol:v:34:y:2013:i:c:p:56-64

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Web page: http://www.elsevier.com/locate/forpol

Related research

Keywords: Real options; Investment analysis; Short-rotation willow coppice; Bioenergy policy;

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References

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  1. Ericsson, Karin & Huttunen, Suvi & Nilsson, L.J.Lars J. & Svenningsson, Per, 2004. "Bioenergy policy and market development in Finland and Sweden," Energy Policy, Elsevier, vol. 32(15), pages 1707-1721, October.
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  4. Mola-Yudego, Blas & Pelkonen, Paavo, 2008. "The effects of policy incentives in the adoption of willow short rotation coppice for bioenergy in Sweden," Energy Policy, Elsevier, vol. 36(8), pages 3052-3058, August.
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  7. Luca Di Corato & Michele Moretto & Sergio Vergalli, 2011. "Land Conversion Pace under Uncertainty and Irreversibility: too fast or too slow?," Working Papers 2011.84, Fondazione Eni Enrico Mattei.
  8. Hildebrandt, Patrick & Knoke, Thomas, 2011. "Investment decisions under uncertainty--A methodological review on forest science studies," Forest Policy and Economics, Elsevier, vol. 13(1), pages 1-15, January.
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  10. Gilbert E. Metcalf & Kevin A. Hassett, 1995. "Investment Under Alternative Return Assumptions: Comparing Random Walks and Mean Reversion," NBER Technical Working Papers 0175, National Bureau of Economic Research, Inc.
  11. G. Cornelis van Kooten & Robert A. Schipper, 2002. "Forest Conservation in Costa Rica when Nonuse Benefits are Uncertain but Rising," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(1), pages 150-160.
  12. Reed, William J., 1993. "The decision to conserve or harvest old-growth forest," Ecological Economics, Elsevier, vol. 8(1), pages 45-69, August.
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