A real options-net present value approach to assessing land use change: A case study of afforestation in Canada

Geographically explicit land use change models based on net present value have been criticized for not reflecting the breadth of economic considerations relevant to private land use decisions. An alternative approach is to econometrically estimate land allocations from historical transactions, but this approach requires extensive historical econometric data sets, which may not be available, and may be difficult to model spatially. We show that a geographically explicit net present value approach inclusive of an option value to defer land conversion can be a viable and insightful alternative to econometric approaches. The model is applied to Alberta, Canada where historical land use change data are not available. The elasticity estimates of converting agricultural land to afforestation, 0.21 to 0.37, are similar to other North American estimates from econometric studies.