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

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

Ecosystem Services, 2015, vol. 16, issue C, 1-12

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.

Keywords: Payment for ecosystem services; Modern portfolio theory; Forestland; Risk; Investment (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecoser:v:16:y:2015:i:c:p:1-12

DOI: 10.1016/j.ecoser.2015.08.006

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