The Effect of Fire Risk on the Critical Harvesting Times for Pacific Northwest Douglas-Fir When Carbon Price Is Stochastic

Selmin F. Creamer, Alan Genz and Keith A. Blatner

Agricultural and Resource Economics Review, 2012, vol. 41, issue 3, 313-326

Abstract: The forest owner's decision regarding when to harvest, based on forest's current worth, is analyzed using the real options approach for a representative Pacific Northwest Douglas-fir stand when the carbon price is stochastic and there is a fire risk. The problem is framed as a linear complementarity problem and solved using the fully implicit finite difference method combined with a penalty method. The fire risk results in lower option values and earlier critical harvesting times, whereas a wider carbon price range ($0–$100 versus $0–$10) produces contrary results and more responsiveness to the parameter changes.

Date: 2012
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