Are short rotation coppices an economically interesting form of land use? A real options analysis |
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| Institution: | 1. Institute for Public Goods and Policies (IPP), Spanish National Research Council (CSIC), C/ Albasanz 26-28, 28037 Madrid, Spain;2. Centre for the Study of Choice (CenSoC) and Department of Marketing, University of Technology Sydney (UTS), PO Box 123, Broadway NSW 2007, Australia;3. Forest Research Centre (CIFOR), National Institute for Agriculture and Food Research and Technology (INIA), Ctra. de La Coruña km. 7,5, 28040 Madrid, Spain;4. Sustainable Forest Management Research Institute, University of Valladolid-INIA, Avda. de Madrid 57, 34004 Palencia, Spain;1. Division III/6 Milk, Risk Management and Value Chain, Federal Ministry of Agriculture, Forestry, Environment and Water Management, Vienna, Austria;2. Federal Institute of Agricultural Economics, Vienna, Austria;1. Department of Architecture and Civil Engineering, City University of Hong Kong, Hong Kong;2. Faculty of Architecture, The University of Hong Kong, Hong Kong;3. Department of Architecture, Tongji University, Shanghai, China;4. Department of Urban Planning, Tongji University, Shanghai, China;1. Agricultural & Resource Economics, University of Tennessee, Knoxville, USA;2. International Monetary Fund, Washington D.C, USA;3. Agricultural, Food and Resource Economics at Michigan State University, USA;1. Department of Resource Management and Geography, University of Melbourne, 221 Bouverie Street, Parkville 3010, Australia;2. Cooperative Research Centre for Forestry, College Road, Sandy Bay, Tasmania Private Bag 12, Hobart, Tasmania 7001, Australia |
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| Abstract: | Short rotation coppice (SRC) is intensively discussed as being an economical and ecological advantageous alternative to traditional agricultural land use. In various countries, farmers have been encouraged through incentives to cultivate SRC. Nevertheless, they often do not switch from conventional land use to SRC, even if SRC is relatively beneficial according to the net present value (NPV) rule. Therefore, farmers do not follow the classical investment theory. A relatively new theory is the real options approach (ROA). The ROA takes further aspects like irreversibility of the investment costs, flexibility regarding investment timing, and uncertainty of the investment returns into account, which the NPV rule ignores. In the case of SRC, investment (conversion) triggers when a farmer should switch to SRC following the ROA can be higher than those following the NPV rule. As it is often the case in real options applications, decision makers’ possibility to disinvest in general and farmers’ possibility to reconvert, in particular within the useful lifetime of SRC, is not considered. We build a model to calculate the conversion triggers for switching from annual crop production to SRC following the ROA. We consider the opportunity to reconvert the land and evaluate the respective effects on the conversion triggers according to the ROA. Furthermore, we analyze the effect of a former governmental incentive, in terms of an investment subsidy, on the conversion triggers of both theories. Our calculations show that following the ROA, a farmer should change land use to SRC more slowly than when following the NPV rule. Furthermore, neglecting the reconversion possibility would cause considerable bias amongst the results. The consideration of investment subsidies diminishes the conversion triggers of both theories. We conclude that the ROA can at least partially explain farmers’ inertia of converting to SRC. |
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| Keywords: | Land conversion Short rotation coppice Real options approach Net present value Genetic algorithms Investment subsidy |
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