An Optimal Management Strategy of Carbon Forestry with a Stochastic Price

Sora Yoo,Hojeong Park,Yong-Sung Cho

doi:10.3390/su10093290

Abstract

An analysis for the value of carbon forestry needs to be provided for the successful establishment of the carbon offset market in Korea. We present an optimal management strategy for a forest owner who participates in the offset market. Given a stochastic process of the timber price following a geometric Brownian motion, the profit maximization problem of the forest owner is solved. The model finds an optimal harvest time in the presence of the carbon and timber revenues with opposing time effects. Sensitivity analysis is performed with respect to the volatility rate of the timber price and the discount rate. The presented model is applied to the study of the Korean larch case to identify the threshold timber price above which it is optimal to harvest trees.

Highlights

The anthropogenic carbon dioxide occurred during the last 40 years accounts for about half of the anthropogenic CO2 accumulated between 1750 and 2010, its direct sources being energy supply, industry, transport and buildings, according to IPCC (Intergovernmental Panel on Climate Change) 5th assessment report
The emission trading scheme is a market where the trade of carbon permits occur between the sellers who reduce carbon emission below the baseline and the buyers who emit excessively, and has been designed to provide economic incentives for industrial sectors to participate in emission reduction and to minimize the economic inefficiency derived by controls
In the emission trading scheme, a carbon offset system in which tradable permits are issued by the amount of carbon offset has a critical role in achieving the emission reduction goal by using carbon sinks, and sustaining economic growth

Summary

Introduction

The anthropogenic carbon dioxide occurred during the last 40 years accounts for about half of the anthropogenic CO2 accumulated between 1750 and 2010, its direct sources being energy supply, industry, transport and buildings, according to IPCC (Intergovernmental Panel on Climate Change) 5th assessment report. The policies for the mitigation of temperature rise and the accompanying climate change focus on controlling carbon emissions and utilizing artificial carbon sinks. Industrial sectors have shown a resistance to emission reductions for the environment believing that they limit profitability and growth, protecting the environment is essential, even for sustainable economic growth. The emission trading scheme is a market where the trade of carbon permits occur between the sellers who reduce carbon emission below the baseline and the buyers who emit excessively, and has been designed to provide economic incentives for industrial sectors to participate in emission reduction and to minimize the economic inefficiency derived by controls. In the emission trading scheme, a carbon offset system in which tradable permits are issued by the amount of carbon offset has a critical role in achieving the emission reduction goal by using carbon sinks, and sustaining economic growth

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