Risk, reward, and payments for ecosystem services: A portfolio approach to ecosystem services and forestland investment

Research output: Contribution to journalArticleScientificpeer-review

Abstract

This study examines the risks and returns associated with payments for ecosystem services (PES) for private forestland using modern portfolio theory. PES schemes for biodiversity conservation and climate change mitigation were considered. Pricing data for European carbon emissions offsets and the Finnish biodiversity conservation scheme ‘Trading in Natural Values’, and Finnish forest inventory data were used to model ex-post empirical results. The forest owner's portfolio could be comprised of either current forest management or a PES scheme with postponed harvesting; considerations for investing harvest income in equities and bonds were included. The correlation between a PES scheme's return series and timber returns was higher for the biodiversity scheme leading to relatively limited financial diversification benefits under current prices. Increasing the biodiversity conservation price level reduced this effect. For the climate scheme, removing the declining linear trend from the pricing data did not reduce the relatively greater diversification benefits. Overall these benefits were also greater on fertile forest site types than lower quality sites. These results indicate that the policy implications of designing socially efficient PES pricing include an important trade-off between increasing price risks for private landowners and decreasing marginal costs for society.
Original languageEnglish
JournalEcosystem Services
Volume16
Pages (from-to)1-12
Number of pages12
ISSN2212-0416
DOIs
Publication statusPublished - 21 Aug 2015
MoE publication typeA1 Journal article-refereed

Fields of Science

  • 4112 Forestry

Cite this

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title = "Risk, reward, and payments for ecosystem services: A portfolio approach to ecosystem services and forestland investment",
abstract = "This study examines the risks and returns associated with payments for ecosystem services (PES) for private forestland using modern portfolio theory. PES schemes for biodiversity conservation and climate change mitigation were considered. Pricing data for European carbon emissions offsets and the Finnish biodiversity conservation scheme ‘Trading in Natural Values’, and Finnish forest inventory data were used to model ex-post empirical results. The forest owner's portfolio could be comprised of either current forest management or a PES scheme with postponed harvesting; considerations for investing harvest income in equities and bonds were included. The correlation between a PES scheme's return series and timber returns was higher for the biodiversity scheme leading to relatively limited financial diversification benefits under current prices. Increasing the biodiversity conservation price level reduced this effect. For the climate scheme, removing the declining linear trend from the pricing data did not reduce the relatively greater diversification benefits. Overall these benefits were also greater on fertile forest site types than lower quality sites. These results indicate that the policy implications of designing socially efficient PES pricing include an important trade-off between increasing price risks for private landowners and decreasing marginal costs for society.",
keywords = "4112 Forestry",
author = "Matthies, {Brent David} and Kalliokoski, {Tuomo Kalevi} and Tommi Ekholm and Hoen, {Hans Fredrik} and Valsta, {Lauri Tapani}",
year = "2015",
month = "8",
day = "21",
doi = "10.1016/j.ecoser.2015.08.006",
language = "English",
volume = "16",
pages = "1--12",
journal = "Ecosystem Services",
issn = "2212-0416",
publisher = "Elsevier Scientific Publ. Co",

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Risk, reward, and payments for ecosystem services: A portfolio approach to ecosystem services and forestland investment. / Matthies, Brent David; Kalliokoski, Tuomo Kalevi; Ekholm, Tommi; Hoen, Hans Fredrik; Valsta, Lauri Tapani.

In: Ecosystem Services, Vol. 16, 21.08.2015, p. 1-12.

Research output: Contribution to journalArticleScientificpeer-review

TY - JOUR

T1 - Risk, reward, and payments for ecosystem services: A portfolio approach to ecosystem services and forestland investment

AU - Matthies, Brent David

AU - Kalliokoski, Tuomo Kalevi

AU - Ekholm, Tommi

AU - Hoen, Hans Fredrik

AU - Valsta, Lauri Tapani

PY - 2015/8/21

Y1 - 2015/8/21

N2 - This study examines the risks and returns associated with payments for ecosystem services (PES) for private forestland using modern portfolio theory. PES schemes for biodiversity conservation and climate change mitigation were considered. Pricing data for European carbon emissions offsets and the Finnish biodiversity conservation scheme ‘Trading in Natural Values’, and Finnish forest inventory data were used to model ex-post empirical results. The forest owner's portfolio could be comprised of either current forest management or a PES scheme with postponed harvesting; considerations for investing harvest income in equities and bonds were included. The correlation between a PES scheme's return series and timber returns was higher for the biodiversity scheme leading to relatively limited financial diversification benefits under current prices. Increasing the biodiversity conservation price level reduced this effect. For the climate scheme, removing the declining linear trend from the pricing data did not reduce the relatively greater diversification benefits. Overall these benefits were also greater on fertile forest site types than lower quality sites. These results indicate that the policy implications of designing socially efficient PES pricing include an important trade-off between increasing price risks for private landowners and decreasing marginal costs for society.

AB - This study examines the risks and returns associated with payments for ecosystem services (PES) for private forestland using modern portfolio theory. PES schemes for biodiversity conservation and climate change mitigation were considered. Pricing data for European carbon emissions offsets and the Finnish biodiversity conservation scheme ‘Trading in Natural Values’, and Finnish forest inventory data were used to model ex-post empirical results. The forest owner's portfolio could be comprised of either current forest management or a PES scheme with postponed harvesting; considerations for investing harvest income in equities and bonds were included. The correlation between a PES scheme's return series and timber returns was higher for the biodiversity scheme leading to relatively limited financial diversification benefits under current prices. Increasing the biodiversity conservation price level reduced this effect. For the climate scheme, removing the declining linear trend from the pricing data did not reduce the relatively greater diversification benefits. Overall these benefits were also greater on fertile forest site types than lower quality sites. These results indicate that the policy implications of designing socially efficient PES pricing include an important trade-off between increasing price risks for private landowners and decreasing marginal costs for society.

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