Carbon sequestration and biofuel production on forestland under three stochastic prices

Abstract

Forests can mitigate climate change by sequestrating carbon in tree growth or producing energy wood. In this study, the impact of joint production of timber, carbon, and biofuel on forest management is evaluated with the Faustmann model and real options theory. The prices of the three outputs are allowed to evolve stochastically over time. The method is illustrated with a numerical application on pine forests in the southern United States. The analyses reveal that stochastic prices generally motivate landowners to harvest trees earlier, give them more speculation opportunities in the market, and bring higher land values with some uncertainty. Nonetheless, the quantity of carbon sequestered may not be optimized for the purpose of mitigating climate change when landowners maximize their profits. Policies related to forests and climate change will need to be assessed with a consideration of both the financial return to landowners and the welfare to the general public.