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Risk, reward, and payments for ecosystem services: A portfolio approach to ecosystem services and forestland investment

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  • Matthies, Brent D.
  • Kalliokoski, Tuomo
  • Ekholm, Tommi
  • Hoen, Hans Fredrik
  • Valsta, Lauri T.

Abstract

This study examines the risks and returns associated with payments for ecosystem services (PES) for private forestland using modern portfolio theory. PES schemes for biodiversity conservation and climate change mitigation were considered. Pricing data for European carbon emissions offsets and the Finnish biodiversity conservation scheme ‘Trading in Natural Values’, and Finnish forest inventory data were used to model ex-post empirical results. The forest owner's portfolio could be comprised of either current forest management or a PES scheme with postponed harvesting; considerations for investing harvest income in equities and bonds were included. The correlation between a PES scheme's return series and timber returns was higher for the biodiversity scheme leading to relatively limited financial diversification benefits under current prices. Increasing the biodiversity conservation price level reduced this effect. For the climate scheme, removing the declining linear trend from the pricing data did not reduce the relatively greater diversification benefits. Overall these benefits were also greater on fertile forest site types than lower quality sites. These results indicate that the policy implications of designing socially efficient PES pricing include an important trade-off between increasing price risks for private landowners and decreasing marginal costs for society.

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  • Matthies, Brent D. & Kalliokoski, Tuomo & Ekholm, Tommi & Hoen, Hans Fredrik & Valsta, Lauri T., 2015. "Risk, reward, and payments for ecosystem services: A portfolio approach to ecosystem services and forestland investment," Ecosystem Services, Elsevier, vol. 16(C), pages 1-12.
  • Handle: RePEc:eee:ecoser:v:16:y:2015:i:c:p:1-12
    DOI: 10.1016/j.ecoser.2015.08.006
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    5. Alvarez, Sergio & Larkin, Sherry L. & Ropicki, Andrew, 2017. "Optimizing provision of ecosystem services using modern portfolio theory," Ecosystem Services, Elsevier, vol. 27(PA), pages 25-37.
    6. Ochoa. M, W. Santiago & Härtl, Fabian H. & Paul, Carola & Knoke, Thomas, 2019. "Cropping systems are homogenized by off-farm income – Empirical evidence from small-scale farming systems in dry forests of southern Ecuador," Land Use Policy, Elsevier, vol. 82(C), pages 204-219.
    7. Min Fan & Li Chen & Qing Wang, 2019. "Assessing the high impacts of land use change: spatial characteristics of land uses and ecological compensation based on payment for ecosystem services model in a mountainous area, China," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 24(8), pages 1431-1460, December.
    8. Roos, Anders & Eggers, Jeannette & Mark-Herbert, Cecilia & Lindhagen, Anders, 2018. "Using von Thünen rings and service-dominant logic in balancing forest ecosystem services," Land Use Policy, Elsevier, vol. 79(C), pages 622-632.
    9. Sheng, Wenping & Zhen, Lin & Xie, Gaodi & Xiao, Yu, 2017. "Determining eco-compensation standards based on the ecosystem services value of the mountain ecological forests in Beijing, China," Ecosystem Services, Elsevier, vol. 26(PB), pages 422-430.
    10. Dragicevic, Arnaud Z., 2019. "Rethinking the forestry in the Aquitaine massif through portfolio management," Forest Policy and Economics, Elsevier, vol. 109(C).
    11. van den Belt, Marjan & Stevens, Sharon M., 2016. "Transformative agenda, or lost in the translation? A review of top-cited articles in the first four years of Ecosystem Services," Ecosystem Services, Elsevier, vol. 22(PA), pages 60-72.
    12. Cubbage, Frederick & Kanieski, Bruno & Rubilar, Rafael & Bussoni, Adriana & Olmos, Virginia Morales & Balmelli, Gustavo & Donagh, Patricio Mac & Lord, Roger & Hernández, Carmelo & Zhang, Pu & Huang, J, 2020. "Global timber investments, 2005 to 2017," Forest Policy and Economics, Elsevier, vol. 112(C).
    13. Fraschini, Filippo & Hunt, Alistair & Zoboli, Roberto, 2022. "Decision tools for adaptation to climate change: Portfolio analysis of tea plantation investments in Rwanda," Ecological Economics, Elsevier, vol. 200(C).
    14. Huang, Lin & Shao, Quanqin & Liu, Jiyuan & Lu, Qingshui, 2018. "Improving ecological conservation and restoration through payment for ecosystem services in Northeastern Tibetan Plateau, China," Ecosystem Services, Elsevier, vol. 31(PA), pages 181-193.
    15. Matthies, Brent D. & Valsta, Lauri T., 2016. "Optimal forest species mixture with carbon storage and albedo effect for climate change mitigation," Ecological Economics, Elsevier, vol. 123(C), pages 95-105.

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