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Investing in energy forestry under uncertainty

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

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/forpol

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  9. 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.
  10. 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.
  11. Pennings, Enrico, 2000. "Taxes and stimuli of investment under uncertainty," European Economic Review, Elsevier, vol. 44(2), pages 383-391, February.
  12. Isik, Murat & Yang, Wanhong, 2004. "An Analysis of the Effects of Uncertainty and Irreversibility on Farmer Participation in the Conservation Reserve Program," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 29(02), August.
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