Permanent forest investment in a climate of uncertainty

Abstract

Forestry investment involves long time horizons, and planting decisions must be made amidst a range of uncertainties. In the context of these uncertainties, we analyse investment decisions that involve plantation of existing grazing land in exotic versus indigenous forest species. We discuss how investment irreversibility coupled with uncertainty (and the ability to learn about the uncertain factors prior to making an investment decision) impact on the forestry investment decision. The twin features of investment irreversibility plus uncertainty are particularly relevant in relation to the new “permanent forest” category under New Zealand’s Climate Change Response (Emissions Trading Reform) Amendment Act 2020. We provide background to the new regime by reviewing the permanent forest category, and we also review relevant investment theories. The issues facing investors are illustrated with reference to a recent study that explored the role of climate uncertainty for forestry investment decisions.