Afforestation as a real option with joint production of environmental services

TY - JOUR

T1 - Afforestation as a real option with joint production of environmental services

AU - Strange, Niels

AU - Jacobsen, Jette Bredahl

AU - Thorsen, Bo Jellesmark

PY - 2019

Y1 - 2019

N2 - Real option applications in conservation have showed that with irreversibility and uncertainty about the value of preservation decisions may change. More specifically, returns must be high enough to also pay out the value of waiting if conversion into more intensive land uses is to become optimal. However, many environmental policies today focus on nature restoration, where conversion has previously taken place. In this study, we therefore reverse the problem and ask when to afforest productive agricultural land, when we face uncertainty about the value of ecosystem services delivered by afforestation. Furthermore, projects such as afforestation are often associated with joint production of forest products and environmental goods, like biodiversity, hunting, groundwater production, carbon storage, recreation etc. Thus, we extend state-of-the-art models to handle two additive ecosystem services, which both are uncertain and may be correlated. The joint production aspect increases the value of conversion, the stopping value, and hence the incentives to afforest. Increasing uncertainty decreases this incentive, as expected. However, contrary to the existing literature evaluating exclusive options, less than perfect correlation between the values of future ecosystem services decreases the value of the real option and increases the set of states, where afforestation is the preferred decision. This causes afforestation to be attractive for a wider set of states of the world than otherwise and has implications where joint production is feasible. We discuss these findings and the potential application of this analysis for handling real options with joint production in other research domains.

AB - Real option applications in conservation have showed that with irreversibility and uncertainty about the value of preservation decisions may change. More specifically, returns must be high enough to also pay out the value of waiting if conversion into more intensive land uses is to become optimal. However, many environmental policies today focus on nature restoration, where conversion has previously taken place. In this study, we therefore reverse the problem and ask when to afforest productive agricultural land, when we face uncertainty about the value of ecosystem services delivered by afforestation. Furthermore, projects such as afforestation are often associated with joint production of forest products and environmental goods, like biodiversity, hunting, groundwater production, carbon storage, recreation etc. Thus, we extend state-of-the-art models to handle two additive ecosystem services, which both are uncertain and may be correlated. The joint production aspect increases the value of conversion, the stopping value, and hence the incentives to afforest. Increasing uncertainty decreases this incentive, as expected. However, contrary to the existing literature evaluating exclusive options, less than perfect correlation between the values of future ecosystem services decreases the value of the real option and increases the set of states, where afforestation is the preferred decision. This causes afforestation to be attractive for a wider set of states of the world than otherwise and has implications where joint production is feasible. We discuss these findings and the potential application of this analysis for handling real options with joint production in other research domains.

KW - Additive real options

KW - Afforestation

KW - Irreversibility

KW - Nature conservation

KW - Uncertainty

KW - Value of waiting

U2 - 10.1016/j.forpol.2019.04.015

DO - 10.1016/j.forpol.2019.04.015

M3 - Journal article

AN - SCOPUS:85065022832

SN - 1389-9341

VL - 104

SP - 146

EP - 156

JO - Forest Policy and Economics

JF - Forest Policy and Economics

ER -