On the option value of old-growth forest

Abstract

The option value of an old-growth forest is determined when the net value of timber is known and non-timber amenity value evolves according to geometric Brownian motion. The model permits the derivation of a critical barrier or boundary on amenity value, denoted A*. Specifically, A* is the minimum amenity value necessary to justify continued preservation. The model is applied to the Headwaters Forest, the last privately-owned stand of old-growth coast redwood, containing timber with a net value between $500 and $600 million. Estimates of the mean drift and variance rates for the amenity value of the headwaters are obtained under the assumption that amenity value is proportional to the visitation rate at the Redwood National Park (50 miles north of the Headwaters Forest). For base-case parameters, the amenity value of the Headwaters must exceed $5.008 million per year to justify continued preservation.