Forestry in the Republic of Ireland: Government Policy, Grant Incentives and Carbon Sequestration Value

Abstract

Recent decades have seen a rapid increase in the area of privately owned forest plantations in Ireland. This has been largely driven by grant aid from the government. These forests are significant carbon sinks and as such are delivering added benefit to the country by contributing to greenhouse gas reductions under the Kyoto Protocol. The direct impact of government subvention on the net present value (NPV) for a defined forestry plantation is investigated. The added value of carbon sequestration to forestry investment is also examined using the UK Forestry Commission carbon model. Extending the typical assumption of a constant carbon price for project appraisal purposes, this paper allows carbon prices to evolve randomly according to a flexible stochastic price process. The model chosen is an extended mean-reverting jump-diffusion, with the flexibility to capture the higher-order statistical features (i.e. skewness and kurtosis) of the carbon markets. This allows for an analysis of the risk and uncertainty around the NPV from exposure to stochastic carbon prices. It is shown that government funded grants for afforestation significantly improve the NPV on forestry investment. Carbon sequestration is shown to further add value.