Value of a Flexible Forest Harvest Decision with Short Period Forest Carbon Offsets: Application of a Binomial Option Model

Abstract

Forest carbon offset programs have suffered from low landowner uptake, in large part to their long duration. A recent innovation in forest carbon offsets is the use of short period delays to harvest, which extend the rotation age of the stand beyond what is optimal for timber alone and increase sequestered carbon. Here, we assess the economic value of a short period delay “option pricing” in forest harvest with price uncertainty using a binomial option approach, accounting both for timber and carbon. Results from an option pricing model showed that landowners can generate considerably higher revenue with managerial flexibility along with the additional revenue from carbon offset programs. These results can help forest landowners make proper ownership decisions to withstand the risk and uncertainty associated with stumpage prices, while benefiting from carbon offset revenues.