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The Effect of Fire Risk on the Critical Harvesting Times for Pacific Northwest Douglas-Fir When Carbon Price Is Stochastic

Published online by Cambridge University Press:  15 September 2016

Selmin F. Creamer ,
Alan Genz  and
Keith A. Blatner
Selmin F. Creamer
Affiliation:
Human Dimensions Research Unit at Cornell University in Ithaca, New York
Alan Genz
Affiliation:
Department of Mathematics and the Department of Natural Resource Sciences, respectively, at Washington State University in Pullman, Washington
Keith A. Blatner
Affiliation:
Department of Mathematics and the Department of Natural Resource Sciences, respectively, at Washington State University in Pullman, Washington
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Abstract

The forest owner's decision regarding when to harvest, based on forest's current worth, is analyzed using the real options approach for a representative Pacific Northwest Douglas-fir stand when the carbon price is stochastic and there is a fire risk. The problem is framed as a linear complementarity problem and solved using the fully implicit finite difference method combined with a penalty method. The fire risk results in lower option values and earlier critical harvesting times, whereas a wider carbon price range ($0–$100 versus $0–$10) produces contrary results and more responsiveness to the parameter changes.

Keywords

Chicago Climate Exchange Sustainably Managed Forest Projectcarbon financial instrumentgeometric mean-reverting process
Type
Contributed Papers
Information
Agricultural and Resource Economics Review , Volume 41 , Issue 3 , December 2012 , pp. 313 - 326
Copyright
Copyright © 2012 Northeastern Agricultural and Resource Economics Association 

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