The Impact of Climate Change Policy on Forest Value and Dairy Conversion Rates

Abstract

The conversion of forest land into dairy farms has recently increased worsening New Zealand's greenhouse gas emissions under the Kyoto Protocol. Climate change policies can affect both forest value and optimal forest management as they relate to and affect future decisions regarding the conversion of forest land into dairying. These decisions are also affected by uncertainty in climate change policy and uncertainties in the prices of timber milk and carbon dioxide. Conventional discounted cash flow valuation techniques cannot model these contingent future decisions and uncertainties so an alternative valuation approach based on real options techniques is required. This shows that climate change policies either adopted or being considered in New Zealand do indeed affect both forest value and the rate at which forests are likely to be converted into dairying but not always as expected.