Irreversibility and uncertainty in species valuation
This paper incorporates an option value into deforestation policy analysis. Similar to an option value in finance, the option value here reflects the advantage to delaying irreversible species extinction until more information about the uncertain value of species is known. The return from species is...
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| Format: | Working Paper |
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MIT Center for Energy and Environmental Policy Research
2009
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| Online Zugang: | http://hdl.handle.net/1721.1/50220 |
| _version_ | 1826198471096401920 |
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| author | Brooks, Eileen L. |
| author2 | Massachusetts Institute of Technology. Center for Energy and Environmental Policy Research. |
| author_facet | Massachusetts Institute of Technology. Center for Energy and Environmental Policy Research. Brooks, Eileen L. |
| author_sort | Brooks, Eileen L. |
| collection | MIT |
| description | This paper incorporates an option value into deforestation policy analysis. Similar to an option value in finance, the option value here reflects the advantage to delaying irreversible species extinction until more information about the uncertain value of species is known. The return from species is modeled as a stochastic flow of benefits which ceases if policy makers choose to deforest. Deforestation produces known profits from wood, and agriculture or ranching. Model variations include using geometric Brownian motion and a Poisson jump process to model the variation in species values, and the effect of considering whether "harvesting" of species can occur during deforestation. The model demonstrates that uncertainty over the value of species should encourage forest protection beyond what present discounted value comparisons (traditional cost-benefit analysis) would imply. Data from studies of Brazil's Amazonia region are used to provide numerical examples of the differences between traditional cost-benefit methods and the option-theoretic approach described here. |
| first_indexed | 2024-09-23T11:05:28Z |
| format | Working Paper |
| id | mit-1721.1/50220 |
| institution | Massachusetts Institute of Technology |
| last_indexed | 2024-09-23T11:05:28Z |
| publishDate | 2009 |
| publisher | MIT Center for Energy and Environmental Policy Research |
| record_format | dspace |
| spelling | mit-1721.1/502202019-04-11T05:55:48Z Irreversibility and uncertainty in species valuation Brooks, Eileen L. Massachusetts Institute of Technology. Center for Energy and Environmental Policy Research. This paper incorporates an option value into deforestation policy analysis. Similar to an option value in finance, the option value here reflects the advantage to delaying irreversible species extinction until more information about the uncertain value of species is known. The return from species is modeled as a stochastic flow of benefits which ceases if policy makers choose to deforest. Deforestation produces known profits from wood, and agriculture or ranching. Model variations include using geometric Brownian motion and a Poisson jump process to model the variation in species values, and the effect of considering whether "harvesting" of species can occur during deforestation. The model demonstrates that uncertainty over the value of species should encourage forest protection beyond what present discounted value comparisons (traditional cost-benefit analysis) would imply. Data from studies of Brazil's Amazonia region are used to provide numerical examples of the differences between traditional cost-benefit methods and the option-theoretic approach described here. Supported by the MIT Center for Energy and Environmental Policy Research, the National Science Foundation, and the Undergraduate Research Opportunities Program at MIT. 2009-12-16T00:01:38Z 2009-12-16T00:01:38Z 1994 Working Paper 94007 http://hdl.handle.net/1721.1/50220 35721623 MIT-CEEPR (Series) ; 94-007WP. 33 p application/pdf MIT Center for Energy and Environmental Policy Research |
| spellingShingle | Brooks, Eileen L. Irreversibility and uncertainty in species valuation |
| title | Irreversibility and uncertainty in species valuation |
| title_full | Irreversibility and uncertainty in species valuation |
| title_fullStr | Irreversibility and uncertainty in species valuation |
| title_full_unstemmed | Irreversibility and uncertainty in species valuation |
| title_short | Irreversibility and uncertainty in species valuation |
| title_sort | irreversibility and uncertainty in species valuation |
| url | http://hdl.handle.net/1721.1/50220 |
| work_keys_str_mv | AT brookseileenl irreversibilityanduncertaintyinspeciesvaluation |