Real Options Analysis of Carbon Forestry Under the New Zealand Emissions Trading Scheme

In 2008, the New Zealand government passed climate change legislation called the New Zealand Emissions Trading Scheme (NZETS), designed to create a carbon price in the economy. Under the NZETS, new forests planted on and after 1st January 1990 (known as post-1989 forests) are eligible to earn carbon credits and sell them domestically and internationally, with a condition that the credits will have to be repaid back upon harvest of the forests. The amount of credits that have to be surrendered is proportionate to the extent that carbon stocks decrease in the forest land. This research explores the effects of the NZETS on new post-1989 forests. The NPV/LEV and the Real Options valuation methods are respectively employed to analyze fixed harvest and flexible harvest forest management decisions. This approach is applied to study the cases of timber-only forestry (i.e. no NZETS) and carbon forestry (i.e. with NZETS). The major advance of this research is the development of a double Random Variable Real Options methodology that incorporates both stochastic timber and stochastic carbon prices into the calculation of the bareland forestry investment opportunity under the NZETS. Through the work of this thesis, it is shown that the NZETS increases the valuation of bareland on which radiata pine is to be planted with a single rotation or a perpetual series of rotations, especially for the case of flexible harvest forest management. The NZETS will very likely lengthen the rotation age of forests and increase forest carbon sequestration, which contributes positively towards climate change mitigation in New Zealand. The Real Options valuation method can generate optimal harvest price thresholds that help forest owners to decide when to harvest. This thesis concludes with a scenario analysis of potential implications of lengthening the forest rotation age on carbon stock management in New Zealand

Hobby Farms and British Columbia’s Agricultural Land Reserve

Agricultural land protection near the urban-rural fringe is a goal of many jurisdictions, including British Columbia, Canada, which uses a provincial-wide zoning scheme to prevent subdivisions and non-agricultural uses of the land. Preferential taxes are also used to encourage agricultural use of the land. Small scale hobby farmers are present at the urban fringe near Victoria (the capital), both inside and outside of the Agricultural Land Reserve (ALR). The goal of this paper is to investigate whether hobby farms create problems for agricultural land preservation. We make use of a GIS (geographic information system) model to construct detailed spatial variables and analyse our parcel-level data set using an hedonic pricing model and a limited dependent variable model. The results show that hobby farmers tend to select small parcels that are near open space and relatively close to the city and they tend to support horses and other livestock. In terms of price, farmland is worth more per ha the smaller the parcel is and the closer it is to the city. In general farmland is worth more when it is less fragmented but this appears to be reversed for hobby farms – indicating that hobby farmers may be better adapted to surviving in the urban fringe than conventional farmers. The conclusions drawn from the results in this paper would likely apply to other jurisdictions which seek to protect agricultural land in the urban fringe.Hobby farmers, Agricultural Land Reserve, Geographical Information System, urban-rural fringe, zoning systems, farmland fragmentation

Carbon markets, institutions, policies, and research

The scale of investment needed to slow greenhouse gas emissions is larger than governments can manage through transfers. Therefore, climate change policies rely heavily on markets and private capital. This is especially true in the case of the Kyoto Protocol with its provisions for trade and investment injoint projects. This paper describes institutions and policies important for new carbon markets and explains their origins. Research efforts that explore conceptual aspects of current policy are surveyed along with empirical studies that make predictions about how carbon markets will work and perform. The authors summarize early investment and price outcomes from newly formed markets and point out areas where markets have preformed as predicted and areas where markets remain incomplete. Overall the scale of carbon-market investment planned exceeds earlier expectations, but the geographic dispersion of investment is uneven and important opportunities for abatement remain untapped in some sectors, indicating a need for additional research on how investment markets work. How best to promote the development and deployment of new technologies is another promising area for study identified in the paper.Carbon Policy and Trading,Energy and Environment,Environment and Energy Efficiency,Climate Change,Transport and Environment

Financial Investment Management for Forest Sustainability

This is paper is discussion about main problems of forest management, whether financial investment has a substantial impact on the long term perspective of forest landscape restoration and, more specifically, what strategy and what financial options are available to make the forest projects more sustainable. A few relevant questions to ask are: who are the main actors in the implementation of FLR projects; which steps have to be taken; and, which financial options would more suitable and would be feasible to implement. There are three main parts of this research to be investigated: forest issues along with their respective solutions, financial investment as an operational tool, and financial mechanisms for sustainable forestry. The description of the global problem of deforestation in the period of the end of the last century and the current time is area of interest, as well as, the influence of the deforestation on the environment and implementation of financial tools to make environmental management more sustainable. The main two subjects or themes that are going to be explored are: the problem of deforestation and the implementation of innovative financial tools to help in solving environmental issues. In recent years, interest in impact investing has grown substantially. Socially, oriented organizations are pursuing innovative financial solutions that address complex social problems. It requires great collaboration among philanthropists, government, and private investors. Financial investment is a representation of the significant and growing input of capital that can fund programs to address social or environmental problems and get effective sustainable output. While investing in the business, most investors would like to get their financial return in a short period of time. However, this tendency is gradually changing. A growing number of investors want to use their capital to make positive social and environment changes and is becoming a main stream financial approach (Rockefeller Philanthropy Advisors, 2009). This paper shows the possibility of implementation different types of methods of the real options approach to forestry investment analysis. The main objectives are to discuss the theory of real option and describe methods which can be applicable for uncertainty and managerial flexibility in forest management and investment. In addition, we will use the simulation method as a most flexible method to calculate the option values of timber contracts what could help managers of forest projects to make the proper decision. One of the main focus in current research paper is to implementation of the methodology which is applicable to value of the scale sale harvest contract. The value of a harvest contract with stochastic timber prices can be considered as expected cash flow as well as discounted profit from the forest yields at the optimal time (Petrasek & Perez- Garcia, 2010)

Climate scenario analysis:An illustration of potential long-term economic & financial market impacts

This paper illustrates the potential impacts of climate change on financial markets, focusing on their long-term significance. It uses a top-down modelling tool developed by Ortec Finance in partnership with Cambridge Econometrics that combines climate science with macro-economic and financial effects to examine the possible impacts of three plausible (not extreme) climate pathways. The paper first considers the impact on gross domestic product (GDP), finding that GDP is lower in all three pathways, with the most severe reduction in the Failed Transition Pathway where the Paris Agreement climate targets are not met. The model then translates these GDP impacts into financial market effects. In the Failed Transition Pathway, cumulative global equity returns are approximately 50% lower over the period 2020–2060 than in the climate-uninformed base case. For the other two pathways where the Paris Agreement targets are met, the corresponding figures are 15% and 25% lower returns than in the base case. Results are provided for other asset classes too. These demonstrate that climate change represents a significant market risk, with implications for financial planning, modelling and regulation