Journal
CANADIAN JOURNAL OF FOREST RESEARCH
Volume 50, Issue 2, Pages 170-184Publisher
CANADIAN SCIENCE PUBLISHING
DOI: 10.1139/cjfr-2019-0270
Keywords
forest carbon payment; economic growth uncertainty; modern portfolio theory; return on investment; spatial variance-covariance
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Funding
- USDA National Institute of Food and Agriculture [RI0018-W4133, 11401442, 111216290]
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The objective of our research is to extend current conservation applications of modern portfolio theory (MPT) to develop a framework for the cost-efficient budget distribution for a forest carbon payment program that optimizes risk-reward trade-offs in the presence of economic growth uncertainty over time. We consider correlation across space and time of the fluctuating opportunity costs of restoring forestland under changing future economic conditions using a case study of eight states in the central and southern Appalachian region of the United States. The findings suggest that optimal budget allocation decisions that ignore the covariance component of the spatial variance-covariance structure of forest carbon returns fail to minimize the true risk of conservation investment for any level of expected return. The importance of incorporating the spatial covariance in targeting conservation payments is made explicit through alternative approaches using multi-objective (mean-variance) optimization and an ex post analysis with and without the covariance component of the spatial variance-covariance structure of forest carbon return on investment (ROI). A comparison of these approaches against our MPT-based approach revealed misleading risk-return expectations if the ROI covariance is ignored in the spatial targeting of forest carbon payments under uncertainty.
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