How does real option value compare with Faustmann value in the context of the New Zealand Emissions Trading Scheme?

Bruce Manley

Forest Policy and Economics, 2013, vol. 30, issue C, 14-22

Abstract: Stochastic Dynamic Programming is used to determine the expected bare land value under the New Zealand ETS (Emissions Trading Scheme) with both log prices and carbon prices following a random walk. This value is substantially higher than the Faustmann NPV. This is in contrast to the situation without carbon where the difference is small and reduces as log price increases. When carbon is included, the difference in value is also large for existing stands and increases with stand age until at least the minimum harvest age is reached. Additional value comes from the flexibility of when to harvest and hence when carbon units have to be surrendered.

Keywords: Forest valuation; Carbon trading; Stochastic prices; Option value; Faustmann (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:forpol:v:30:y:2013:i:c:p:14-22

DOI: 10.1016/j.forpol.2013.02.001

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