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Valuation of Carbon Forestry and the New Zealand Emissions Trading Scheme: A Real Options Approach Using the Binomial Tree Method

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  • Tee, James
  • Scarpa, Riccardo
  • Marsh, Dan
  • Guthrie, Graeme

Abstract

Under the New Zealand Emissions Trading Scheme, forests planted on or after 1st January 1990 earn carbon credits. These credits have to be repaid when the forest is harvested. This paper analyses the effects of this scheme on the value of bareland on which radiata pine is to be planted. A real options method is developed and applied, assuming stochastic carbon and timber prices. We find that land value increases by about 73%, with the rotation age lengthened. The optimal harvest price thresholds are useful in deciding whether to harvest or to wait.

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Bibliographic Info

Paper provided by International Association of Agricultural Economists in its series 2012 Conference, August 18-24, 2012, Foz do Iguacu, Brazil with number 131066.

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Date of creation: Aug 2012
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Handle: RePEc:ags:iaae12:131066

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Keywords: Emissions Trading Scheme (ETS); Climate change policy; Kyoto Protocol; Real options; carbon forestry; tradable permits; Environmental Economics and Policy; Land Economics/Use; Q23; Q28; Q54;

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  1. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
  2. Duku-Kaakyire, Armstrong & Nanang, David M., 2004. "Application of real options theory to forestry investment analysis," Forest Policy and Economics, Elsevier, vol. 6(6), pages 539-552, October.
  3. Meade, Richard & Fiuza, Gabriel & Lu, Andrea & Boyle, Glenn & Evans, Lewis, 2009. "Forest and Forest Land Valuation: How to Value Forests and Forest Land to Include Carbon Costs and Benefits," 2009 Conference (53rd), February 11-13, 2009, Cairns, Australia 48163, Australian Agricultural and Resource Economics Society.
  4. 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.
  5. Clarke, Harry R. & Reed, William J., 1989. "The tree-cutting problem in a stochastic environment : The case of age-dependent growth," Journal of Economic Dynamics and Control, Elsevier, vol. 13(4), pages 569-595, October.
  6. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
  7. Olschewski, Roland & Benítez, Pablo C., 2010. "Optimizing joint production of timber and carbon sequestration of afforestation projects," Journal of Forest Economics, Elsevier, vol. 16(1), pages 1-10, January.
  8. Graeme Guthrie & Dinesh Kumareswaran, 2009. "Carbon Subsidies, Taxes and Optimal Forest Management," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 43(2), pages 275-293, June.
  9. 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.
  10. Thomas A. Thomson, 1992. "Optimal Forest Rotation When Stumpage Prices Follow a Diffusion Process," Land Economics, University of Wisconsin Press, vol. 68(3), pages 329-342.
  11. Brent Sohngen & Robert Mendelsohn, 2003. "An Optimal Control Model of Forest Carbon Sequestration," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 85(2), pages 448-457.
  12. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  13. Jasmina Behan & Kieran McQuinn & Maurice J. Roche, 2006. "Rural Land Use: Traditional Agriculture or Forestry?," Land Economics, University of Wisconsin Press, vol. 82(1), pages 112-123.
  14. Rajendra Prasad Khajuria & Shashi Kant & Susanna Laaksonen-Craig, 2009. "Valuation of Timber Harvesting Options Using a Contingent Claims Approach," Land Economics, University of Wisconsin Press, vol. 85(4), pages 655-674.
  15. Margaret Insley & Kimberly Rollins, 2005. "On Solving the Multirotational Timber Harvesting Problem with Stochastic Prices: A Linear Complementarity Formulation," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(3), pages 735-755.
  16. Miller, Robert A. & Voltaire, Karl, 1983. "A stochastic analysis of the tree paradigm," Journal of Economic Dynamics and Control, Elsevier, vol. 6(1), pages 371-386, September.
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