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Optimal Investment in Ecological Rehabilitation under Climate Change

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  • Anke D Leroux
  • Stuart M Whitten

Abstract

Ecological rehabilitation is subject to a variety of risks affecting the likely return on investment. We propose a real options approach to valuing and ranking individual rehabilitation projects, accounting for irreversible investment and the effects of climate change on species loss, future rehabilitation benefits and frequency of catastrophic events. The allocation of voluntary rehabilitation contracts on the basis of option pricing results in significantly greater value for money for the Government as compared with the conventional cost-effectiveness criterion as is illustrated for the case of Box Gum Grassy Woodland rehabilitation in Australia.

Suggested Citation

  • Anke D Leroux & Stuart M Whitten, 2014. "Optimal Investment in Ecological Rehabilitation under Climate Change," Monash Economics Working Papers 04-14, Monash University, Department of Economics.
    • Handle: RePEc:mos:moswps:2014-04
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    File URL: http://www.buseco.monash.edu.au/eco/research/papers/2014/0414optimallerouxwhitten.pdf
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    Keywords

    real options; biodiversity; irreversibility; risk; extinction debt; Box Gum Grassy Woodlands;
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