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A real option approach to the protection of a habitat dependent endangered species

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  • Ben Abdallah, Skander
  • Lasserre, Pierre
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    Abstract

    We use a real option approach to determine when a social planner has to stop or resume logging in situations where an endangered species relies on forest habitat for its survival. Logging affects the stochastic process followed by the habitat of the endangered species, which disappears irreversibly if its habitat reaches a critical extinction level. As long as the endangered species is still in existence, the social planner manages logging in such a way as to balance the risk of extinction against the benefits from commercial wood exploitation. The model incorporates economic, ecological, and social features. It is solved analytically to characterize the optimal forest management rule. Then it is applied to the case of the Rangifer tarandus caribou, an endangered species in Central Labrador (Canada). The parameters of the habitat process are estimated by Monte Carlo methods. The policy implied by the model – alternatively banning and resuming logging according to appropriate habitat threshold levels – turns out to be quite attractive; it does not require long banning periods while it drastically reduces the extinction risk and increases forest value.

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    Bibliographic Info

    Article provided by Elsevier in its journal Resource and Energy Economics.

    Volume (Year): 34 (2012)
    Issue (Month): 3 ()
    Pages: 295-318

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    Handle: RePEc:eee:resene:v:34:y:2012:i:3:p:295-318

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    Web page: http://www.elsevier.com/locate/inca/505569

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    1. Pindyck, Robert S., 1998. "Irreversibilities and the timing of environmental policy," Working papers WP 4047-98., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    2. Conrad, Jon M., 2000. "Wilderness: options to preserve, extract, or develop," Resource and Energy Economics, Elsevier, vol. 22(3), pages 205-219, July.
    3. Dixit, A., 1988. "Entry And Exit Decisions Under Uncertainty," Papers 91, Princeton, Department of Economics - Financial Research Center.
    4. Kassar, Ilhem & Lasserre, Pierre, 2004. "Species preservation and biodiversity value: a real options approach," Journal of Environmental Economics and Management, Elsevier, vol. 48(2), pages 857-879, September.
    5. Saphores, Jean-Daniel M. & Shogren, Jason F., 2005. "Managing exotic pests under uncertainty: optimal control actions and bioeconomic investigations," Ecological Economics, Elsevier, vol. 52(3), pages 327-339, February.
    6. Insley, Margaret, 2002. "A Real Options Approach to the Valuation of a Forestry Investment," Journal of Environmental Economics and Management, Elsevier, vol. 44(3), pages 471-492, November.
    7. Saphores, Jean-Daniel, 2003. "Harvesting a renewable resource under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 28(3), pages 509-529, December.
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