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Permanent forest investment in a climate of uncertainty

Author

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  • Arthur Grimes

    (Motu Economic and Public Policy Research)

  • Sandra Cortés Acosta

    (Motu Economic and Public Policy Research (at time of publication))

Abstract

Forestry investment involves long time horizons, and planting decisions must be made amidst a range of uncertainties. In the context of these uncertainties, we analyse investment decisions that involve plantation of existing grazing land in exotic versus indigenous forest species. We discuss how investment irreversibility coupled with uncertainty (and the ability to learn about the uncertain factors prior to making an investment decision) impact on the forestry investment decision. The twin features of investment irreversibility plus uncertainty are particularly relevant in relation to the new “permanent forest” category under New Zealand’s Climate Change Response (Emissions Trading Reform) Amendment Act 2020. We provide background to the new regime by reviewing the permanent forest category, and we also review relevant investment theories. The issues facing investors are illustrated with reference to a recent study that explored the role of climate uncertainty for forestry investment decisions.

Suggested Citation

  • Arthur Grimes & Sandra Cortés Acosta, 2021. "Permanent forest investment in a climate of uncertainty," Working Papers 21_04, Motu Economic and Public Policy Research.
    • Handle: RePEc:mtu:wpaper:21_04
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    References listed on IDEAS

    as
    1. Monge, Juan J. & Daigneault, Adam J. & Dowling, Leslie J. & Harrison, Duncan R. & Awatere, Shaun & Ausseil, Anne-Gaelle, 2018. "Implications of future climatic uncertainty on payments for forest ecosystem services: The case of the East Coast of New Zealand," Ecosystem Services, Elsevier, vol. 33(PB), pages 199-212.
    2. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    3. Manley, Bruce, 2013. "How does real option value compare with Faustmann value in the context of the New Zealand Emissions Trading Scheme?," Forest Policy and Economics, Elsevier, vol. 30(C), pages 14-22.
    4. Guthrie, Graeme, 2009. "Real Options in Theory and Practice," OUP Catalogue, Oxford University Press, number 9780195380637.
    5. Manley, Bruce & Niquidet, Kurt, 2010. "What is the relevance of option pricing for forest valuation in New Zealand?," Forest Policy and Economics, Elsevier, vol. 12(4), pages 299-307, April.
    6. 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.
    7. Sandra Cortés Acosta & Arthur Grimes & Catherine Leining, 2020. "Decision trees: Forestry in the New Zealand Emissions Trading Scheme post-2020," Working Papers 20_11, Motu Economic and Public Policy Research.
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    Cited by:

    1. Kaine, Geoff & Edwards, Peter & Polyakov, Maksym & Stahlmann-Brown, Philip, 2023. "Who knew afforestation was such a challenge? Motivations and impediments to afforestation policy in New Zealand," Forest Policy and Economics, Elsevier, vol. 154(C).

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    More about this item

    Keywords

    Permanent forest; indigenous forest; emissions trading scheme; climate change; uncertainty;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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