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An Optimal Management Strategy of Carbon Forestry with a Stochastic Price

Author

Listed:
  • Sora Yoo

    (Estimates and Tax Analysis Department, National Assembly Budget Office, Seoul 07233, Korea)

  • Yong-sung Cho

    (Department of Food and Resource Economics, Korea University, Seoul 02841, Korea)

  • Hojeong Park

    (Department of Food and Resource Economics, Korea University, Seoul 02841, Korea)

Abstract

An analysis for the value of carbon forestry needs to be provided for the successful establishment of the carbon offset market in Korea. We present an optimal management strategy for a forest owner who participates in the offset market. Given a stochastic process of the timber price following a geometric Brownian motion, the profit maximization problem of the forest owner is solved. The model finds an optimal harvest time in the presence of the carbon and timber revenues with opposing time effects. Sensitivity analysis is performed with respect to the volatility rate of the timber price and the discount rate. The presented model is applied to the study of the Korean larch case to identify the threshold timber price above which it is optimal to harvest trees.

Suggested Citation

  • Sora Yoo & Yong-sung Cho & Hojeong Park, 2018. "An Optimal Management Strategy of Carbon Forestry with a Stochastic Price," Sustainability, MDPI, vol. 10(9), pages 1-13, September.
    • Handle: RePEc:gam:jsusta:v:10:y:2018:i:9:p:3290-:d:169917
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    References listed on IDEAS

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    1. James Tee & Riccardo Scarpa & Dan Marsh & Graeme Guthrie, 2014. "Forest Valuation under the New Zealand Emissions Trading Scheme: A Real Options Binomial Tree with Stochastic Carbon and Timber Prices," Land Economics, University of Wisconsin Press, vol. 90(1), pages 44-60.
    2. Lee, Sangmin, 2011. "Optimal Forest Management Schemes with Carbon Storage Value Included," Journal of Rural Development/Nongchon-Gyeongje, Korea Rural Economic Institute, vol. 34(4), October.
    3. Min, Kyungtaek, 2011. "An Analysis of Forest Cutting Age with Consideration of Forest Carbon Sequestration," Journal of Rural Development/Nongchon-Gyeongje, Korea Rural Economic Institute, vol. 34(5), December.
    4. Chang, Fwu-Ranq, 2005. "On the elasticities of harvesting rules," Journal of Economic Dynamics and Control, Elsevier, vol. 29(3), pages 469-485, March.
    5. Graeme Guthrie & Dinesh Kumareswaran, 2009. "Carbon Subsidies, Taxes and Optimal Forest Management," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 43(2), pages 275-293, June.
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    Cited by:

    1. Lee, Jaehyung & Jang, Heesun, 2022. "A real options study on cook stove CDM project under emission allowance price uncertainty," Journal of Asian Economics, Elsevier, vol. 80(C).

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