Valuation of Carbon Forestry and the New Zealand Emissions Trading Scheme: A Real Options Approach Using the Binomial Tree Method

Under the New Zealand Emissions Trading Scheme, forests planted on or after 1st January 1990 earn carbon credits. These credits have to be repaid when the forest is harvested. This paper analyses the effects of this scheme on the value of bareland on which radiata pine is to be planted. A real options method is developed and applied, assuming stochastic carbon and timber prices. We find that land value increases by about 73%, with the rotation age lengthened. The optimal harvest price thresholds are useful in deciding whether to harvest or to wait.