Market-based mechanisms are needed to transfer the moral ownership of forests to private individuals so as to encourage sustainable land use and hunting practices, and to assure local populations of the consequent benefits. This chapter develops and demonstrates the use of a real option model to encourage the plantation of new, biologically diverse forests, and to help preserve existing forests standing on private land. Retaining the option to harvest encourages cultivation of forest stands on private lands, and periodical purchases of the option keep the stand intact, thus contributing to a greater good. Each period, the “option to harvest” is bought out by timber suppliers, with a view to preventing potentially steep declines in spot timber prices from excess supply, or by other agencies, namely, conservationists with an interest in keeping the stand intact. The incentive structure is simplified to include the interest foregone on the terminal value, less the nonconsumptive and existential value derived from such delay.
The real-option model employing bounded random walk projections is applied to a registered CDM project and two counterfactual scenarios developed: The break-even option premiums are found to be 6.57 and 3.84 %, respectively, of the previous year’s market value of timber for a base-case discount rate of 10 %. Suggestions are offered on institutional structures to help transfer such option premiums from the agents who harvest their stand to those who choose not to.
Option Price Private Land Revenue Stream Option Contract Timber Price
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