Assessment of uncertain returns from investment in short rotation coppice using risk adjusted discount rates

The increasing demand for renewable energy resources increases interest in the use of short rotation coppice (SRC) as alternative land use activity. The high uncertainty attached to returns from SRC is one of the key adoption barriers to farmers. One possibility to account for the role in investment assessments is the use of project specific risk adjusted discount rates (RADR). In this article, we revisit the theoretical background of RADR and illustrate different assumptions using an example of poplar based SRC. Time-invariant RADR used in the current literature on SRC assessment are found to over-emphasize the role of risk for project assessment and usually give to little weights to returns in future periods, which are of particular relevance for long-term investments in SRC. Thus, the use of time invariant RADR is found to lead to biased recommendations towards the attractiveness of SRC and optimal policy support.