Forest Carbon Sequestration and Optimal Harvesting Decision Considering Southern Pine Beetle (Spb) Disturbance: A Real Options Approach

Abstract

This study evaluates the forest management decision making of loblolly pine forest in the southern U.S. using the real option approach. The study incorporates three uncertainties that forest owners have faced including timber price volatility, forest carbon sequestration, and impacts of insect outbreaks into the real option model to investigate the relationship between such uncertainties and forest bare land value and tree rotation age. The results show that forest owners can face a mixed outcome of these uncertainties when they make forest management decisions, and the real option approach helps the forest managers consider future consequence through allowing the flexible harvest decision. Generally, a higher bare land value is generated if a flexible harvest decision making (real option) is allowed compared to a fixed harvest. The standing tree sequestrates CO2, and the forest’s role of carbon sequestration could generate extra value in the forest while insect outbreaks reduce the bare land value. The increasing social cost of carbon tends to call for increasing the bare land value of forest tree rotation age.

Therefore, as climate change becomes more looming due to CO2 concentration in the atmosphere, the value of standing forests would increase due to enhancing opportunity cost of carbon sequestration in forests. Continuous efforts of pest management for forests are necessary since a higher insect risk tends to reduce the bare land value of forests. Also, employing marketable climate policy such as emissions trading is necessary to create a market carbon price and offset extra cost to keep the forest.