An Analytical Optimal Strategy of the Forest Asset Dynamic Management under Stochastic Timber Price and Growth: A Portfolio Approach

Jianwu Xiao,Shaohua Yin,Wenxing Kang,Hong Zhai

doi:10.4236/lce.2010.11004

Jianwu Xiao, Shaohua Yin + Show 2 more

Open Access

https://doi.org/10.4236/lce.2010.11004

Copy DOI

Abstract

Considering the valuation of forest stands based on revenue from wood sales, concession policy (such as carbon sub- sidies) and associated costs, the paper focuses on the stochastic control model to study the forest asset dynamic manage- ment. The key contribution is to find the optimal dynamic strategy about harvesting quantity in the continual and multiple periods in conditions of stochastic commodity price and timber growth by using portfolio approach. Finally, an analytical optimal strategy is obtained to analyze the quantification relations through which some important conclusions about the optimal forest management can be drawn.

Highlights

Forest ecosystem harbors a large potential for carbon sequestration and biomass production
Considering the valuation of forest stands based on revenue from wood sales, concession policy and associated costs, the paper focuses on the stochastic control model to study the forest asset dynamic management
We found an analytical optimal dynamic strategy about harvesting quantity in conditions of stochastic commodity price and timber growth under the buying scheme by using portfolio approach [2]

Summary

Introduction

Forest ecosystem harbors a large potential for carbon sequestration and biomass production. Graeme Guthrie and Dinesh Kumareswaran [1] considered the effect of carbon credit payment schemes on forest owners’ harvest decisions by using a real options model They studied two possible payment schemes: one where the government rents the carbon sink, in which case the carbon credit payment is proportional to the current carbon stock and another where the government buys the carbon sink, in which case the carbon credit payment will be proportional to the change in the carbon. They referred to rental scheme as the tree-based carbon credit payment scheme but did not give the detail of contrast According to this classification, we found an analytical optimal dynamic strategy about harvesting quantity in conditions of stochastic commodity price and timber growth under the buying scheme by using portfolio approach [2].

The Stochastic Prices

The Stochastic Growth

The Value Function

An Analytical Solution

Conclusions