Determination of optimal rotation period under stochastic wood and carbon prices

The valuation of forest stands is traditionally based on a profit calculus involving revenue from wood sales and associated costs. Currently, the role of carbon management in forests is actively discussed. In a stochastic setting we extend the analysis of the optimal rotation period by considering uncertain revenue streams from carbon trading. We develop a real options model given uncertainties in future wood and CO2 price behaviour. A detailed sensitivity analysis of the numerical results for both cases – with and without carbon sequestration – is provided. We find that optimal rotation periods vary considerably with (i) the type of price process, (ii) the way how carbon income is defined, and (iii) the selection of discount rates.