Forest valuation under the New Zealand Emissions Trading Scheme: a real options binomial tree with stochastic carbon and timber prices

Tee, J.; Scarpa, R.; Marsh, D.; Guthrie, G.

Abstract

Under the New Zealand Emissions Trading Scheme, forests planted on or after January 1, 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 optimal rotation age substantially lengthened. The derived optimal harvest price thresholds are useful in deciding whether to harvest or to wait. (JEL Q23, Q28)

Citation

Tee, J., Scarpa, R., Marsh, D., & Guthrie, G. (2014). Forest valuation under the New Zealand Emissions Trading Scheme: a real options binomial tree with stochastic carbon and timber prices. Land Economics, 90(1), 44-60. https://doi.org/10.3368/le.90.1.44

• Journal Article Type: Article
• Acceptance Date: Oct 30, 2012
• Publication Date: Feb 1, 2014
• Deposit Date: Jan 21, 2015
• Journal: Land Economics
• Print ISSN: 0023-7639
• Electronic ISSN: 1543-8325
• Publisher: University of Wisconsin Press
• Peer Reviewed: Peer Reviewed
• Volume: 90
• Issue: 1
• Pages: 44-60
• DOI: https://doi.org/10.3368/le.90.1.44
• Public URL: https://durham-repository.worktribe.com/output/1438355