Valuation of Carbon Forestry and the New Zealand Emissions Trading Scheme: A Real Options Approach Using the Binomial Tree Method James Tee1, Riccardo Scarpa1, Dan Marsh1 and Graeme Guthrie2 1 Department of Economics, University of Waikato, New Zealand. 2 School of Economics and Finance, Victoria University of Wellington, New Zealand. Please kindly address all correspondences to
[email protected] Selected Paper prepared for presentation at the International Association of Agricultural Economists (IAAE) Triennial Conference, Foz do Iguaçu, Brazil, 18-24 August, 2012. Reference number: 16930 Copyright 2012 by James Tee, Riccardo Scarpa, Dan Marsh and Graeme Guthrie. All rights reserved. Readers may make verbatim copies of this document for non-commercial purposes by any means, provided that this copyright notice appears on all such copies. Abstract Under the New Zealand Emissions Trading Scheme, new forests planted on/after 1st January 1990 can earn carbon credits. These credits have to be repaid upon forest harvest. This paper analyses the effects of this carbon scheme on the valuation of bareland, on which radiata pine is to be planted. NPV/LEV and Real Options methods are employed, assuming stochastic timber and carbon prices. Valuation increases significantly and rotation age is likely to be lengthened. We include a scenario analysis of potential implications of rotation age lengthening on carbon stock management in New Zealand. 1 Introduction In order to meet New Zealand’s Kyoto Protocol commitments, its government passed cap-and-trade legislation, called the New Zealand Emissions Trading Scheme (NZETS), to create a carbon price and put in place incentives for businesses and consumers to change their behaviour.