Model Uncertainty, Ambiguity and the Precautionary Principle: Implications for Biodiversity Management

We analyze ecosystem management under `unmeasurable' Knightian uncertainty or ambiguity which, given the uncertainties characterizing ecosystems, might be a more appropriate framework relative to the classic risk case (measurable uncertainty). This approach is used as a formal way of modelling the precautionary principle in the context of least favorable priors and maxmin criteria. We provide biodiversity management rules which incorporate the precautionary principle. These rules take the form of either safety margins and minimum safety standards or optimal harvesting under precautionary approaches.Knightian uncertainty, ambiguity, risk, precautionary principle, biodiversity management, optimal harvesting, robust control

Climate Change Mitigation Policy: The Effect of the New Zealand Emissions Trading Scheme on New Radiata Pine Forest Plantations in New Zealand

Climate change is one of the toughest challenges facing the world today. Putting a price on carbon emissions is an important step towards climate change mitigation. A cap and trade system is one of the ways to create a carbon price. The New Zealand Emissions Trading Scheme (NZETS) is the world’s first economy-wide cap and trade system that covers all sectors and all 6 greenhouse gases. Forestry is a major part of the NZETS, allowing foresters to earn carbon credits for new forests planted on and after 1st January 1990 (afforestation and reforestation). At the same time, the NZETS also makes foresters liable for harvesting new forests planted on and after 1st January 1990, and deforesting forests existing on and before 31st December 1989. In this paper, we perform an economic analysis of how a carbon price will likely affect the returns and forestry management behaviour in new forests in New Zealand. Previous works have used the NPV/LEV (fixed harvesting) analysis where the forest is assumed to be harvested (in future) at the estimated optimal rotation age regardless of timber prices at that time. Other works have employed the Real Options approaches (flexible harvesting) where sophisticated models such as Partial Differential Equations and simulations analyse the effects of bringing forward the harvest decision if timber prices are favourable, and deferring the harvest decision if timber prices are unfavourable. Often, these methods tend to have higher data requirements, employ different assumptions and are much more complex to estimate. Because of these differences, it may be difficult to compare the results of NPV/LEV analysis with Real Options. Our work here applies the binomial tree method, which is a relatively simple method that can generate both LEV (fixed harvesting) and Real Options (flexible harvesting) results on a common model with the same data requirements and assumptions. This allows for better comparability of forestry management behaviour and effects of carbon price. The forestry valuations are analysed under a stochastic timber price and a constant carbon price. This paper concludes with some implications on policy in New Zealand.Environmental Economics and Policy,

A Binomial Tree Approach to Valuing Fixed Rotation Forests and Flexible Rotation Forests Under a Mean Reverting Timber Price Process

NPV and LEV are established and common approaches to valuing single rotation and infinite rotation forests respectively, when the rotation age is fixed in advanced. More recently, Real Options approaches have been employed to value single and infinite rotation forests with a flexible harvest age. Under a stochastic timber price process, it has been shown that the valuation of a flexible rotation forest is equal or higher than that of a fixed rotation forest, because a flexible harvest regime delays the harvest if the timber price is not favourable, whereas a fixed harvest regime would proceed to harvest regardless of the price. Often, valuation of fixed and flexible rotation ages are compared using 2 different methods – NPV (or LEV) and Real Options. The latter tends to have higher data requirements, employ different assumptions and is much more complex to estimate. Because of these differences, it may be difficult to isolate the cause of the increased valuation. In this work, we apply a relatively simple Binomial Tree method from Guthrie (2009) to value both fixed rotation and flexible rotation forests. This method uses the same data, with the same assumptions for both valuations. By holding everything equal, the difference in valuation is solely attributable to the fixed versus flexible harvesting decisions. Original results for both single and infinite rotations are presented using New Zealand Radiata Pine data. Under a mean reverting timber price process, the Binomial Tree approach offers useful insights on the increased valuation due to flexible harvest decisions.NPV, LEV, Real Options, Optimal Harvest Decision, Agribusiness, Crop Production/Industries, Environmental Economics and Policy, Land Economics/Use,

Taxes vs. Quotas for Regulating Fisheries Under Uncertainty: A Hybrid Discrete-Time Continuous-Time Model

There is a wide variety of regulatory instruments available for achieving economic efficiency in markets where externalities exist. All of them, when correctly designed, are equally effective, provided that complete information is available and that adjustments to the level of the instruments can be made costlessly. However, with the presence of uncertainty, it is well known that one instrument or another may produce a higher expected present value of net social benefits than the others. How uncertainty affects the choice of instrument specifically in fishery management and in other dynamic optimization settings is less well known. A combination discrete-time and continuous-time stochastic model of a dynamic fishery is used to compare the relative performance of a per unit tax and a quota in this paper. The analysis confirms the conclusion reached in the general literature on optimal instrument choice under uncertainty: which instrument performs most efficiently depends on the specific fishery being regulated.Environmental Economics and Policy, Resource /Energy Economics and Policy, Risk and Uncertainty,

Modeling and control of complex dynamic systems: Applied mathematical aspects

The concept of complex dynamic systems arises in many varieties, including the areas of energy generation, storage and distribution, ecosystems, gene regulation and health delivery, safety and security systems, telecommunications, transportation networks, and the rapidly emerging research topics seeking to understand and analyse. Such systems are often concurrent and distributed, because they have to react to various kinds of events, signals, and conditions. They may be characterized by a system with uncertainties, time delays, stochastic perturbations, hybrid dynamics, distributed dynamics, chaotic dynamics, and a large number of algebraic loops. This special issue provides a platform for researchers to report their recent results on various mathematical methods and techniques for modelling and control of complex dynamic systems and identifying critical issues and challenges for future investigation in this field. This special issue amazingly attracted one-hundred-and eighteen submissions, and twenty-eight of them are selected through a rigorous review procedure

Modeling Uncertainty in Large Natural Resource Allocation Problems

The productivity of the world's natural resources is critically dependent on a variety of highly uncertain factors, which obscure individual investors and governments that seek to make long-term, sometimes irreversible investments in their exploration and utilization. These dynamic considerations are poorly represented in disaggregated resource models, as incorporating uncertainty into large-dimensional problems presents a challenging computational task. This study introduces a novel numerical method to solve large-scale dynamic stochastic natural resource allocation problems that cannot be addressed by conventional methods. The method is illustrated with an application focusing on the allocation of global land resource use under stochastic crop yields due to adverse climate impacts and limits on further technological progress. For the same model parameters, the range of land conversion is considerably smaller for the dynamic stochastic model as compared to deterministic scenario analysis. The scenario analysis can thus significantly overstate the magnitude of expected land conversion under uncertain crop yields

Managing the Black Sea Anchovy Fishery with Nutrient Enrichment and a Biological Invader

Many marine systems are subject to high nutrient loadings together with invasions by exotic species. Devising appropriate management responses is an increasing concern and one that has received relatively little attention from researchers. This paper considers the Black Sea anchovy fishery, which has benefited from the relaxation of a nutrient constraint, but has suffered from competition and predation by an invading comb-jelly (Mnemiopsis leidyi). We examine alternative hypotheses about the mechanism triggering outbreaks of the invader (sea temperatures versus nutrients), and the severity of these outbreaks, to see whether a constant escapement policy might be optimal for this fishery. If nutrient levels serve as the triggering mechanism, we argue a mixed blessing effect may be present, so that the effects of nutrient abatement for the anchovy fishery are uncertain. We specify our model empirically and show that a constant escapement policy would be viable under a scenario of reduced impacts from outbreaks of the invader and that nutrient abatement could be beneficial if nutrients trigger outbreaks.Mnemiopsis leidyi, nutrient abatement, stochastic bioeconomic model, biological invasion, Resource /Energy Economics and Policy, O3, O41, Q2, Q20, Q22,