Management flexibility, price uncertainty and the adoption of carbon forestry

A price on carbon has the potential to drive significant land use change through reforestation. Understanding the likely locations and extent of these changes is therefore a key focus for researchers and policy makers. Models of reforestation based on net present values (NPV) typically compare the economic returns of carbon forestry to alternative land uses. However, these models often neglect the impact of uncertainty. Two sources of uncertainty highly relevant to carbon forestry are the opportunity cost of the land on which the trees are established (i.e. future returns from alternative land uses) and carbon prices. In addition to foregoing the current land use, a landowner making a permanent land use change such as carbon forestry is also giving up the opportunity to change management in the future, for example by changing crop mix in response to commodity price changes. We develop a Monte Carlo model to demonstrate the value of management flexibility, based on a case study property in Australia. While in the absence of management flexibility carbon forestry is more profitable than the current land use, under uncertain future commodity prices it is less attractive to a landowner. We go on to show that, even if the returns from carbon exceed those from more flexible agricultural land use, uncertainty over future carbon prices is likely to delay the adoption of carbon forestry. Overall the models presented in this paper demonstrate that the adoption of carbon forestry is likely to be substantially lower, and slower, than models based on static values would suggest.