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

Brent D. Matthies, Tuomo Kalliokoski, Tommi Ekholm, Hans Fredrik Hoen, Lauri T. Valsta

Research output: Contribution to journalArticleScientificpeer-review

22 Citations (Scopus)

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
Pages (from-to)1-12
JournalEcosystem Services
Volume16
DOIs
Publication statusPublished - 2015
MoE publication typeA1 Journal article-refereed

Fingerprint

Reward
ecosystem service
ecosystem services
Biodiversity
Ecosystem
reward
biodiversity
Costs and Cost Analysis
pricing
conservation
diversification
portfolio-theory
price level
marginal costs
Climate Change
forest inventory
landowner
carbon emission
Climate
equity

Keywords

  • payment for ecosystem services
  • modern portfolio theory
  • forestland
  • risk
  • investment

Cite this

Matthies, Brent D. ; Kalliokoski, Tuomo ; Ekholm, Tommi ; Hoen, Hans Fredrik ; Valsta, Lauri T. / Risk, reward, and payments for ecosystem services : A portfolio approach to ecosystem services and forestland investment. In: Ecosystem Services. 2015 ; Vol. 16. pp. 1-12.
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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.",
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Risk, reward, and payments for ecosystem services : A portfolio approach to ecosystem services and forestland investment. / Matthies, Brent D.; Kalliokoski, Tuomo; Ekholm, Tommi; Hoen, Hans Fredrik; Valsta, Lauri T.

In: Ecosystem Services, Vol. 16, 2015, p. 1-12.

Research output: Contribution to journalArticleScientificpeer-review

TY - JOUR

T1 - Risk, reward, and payments for ecosystem services

T2 - A portfolio approach to ecosystem services and forestland investment

AU - Matthies, Brent D.

AU - Kalliokoski, Tuomo

AU - Ekholm, Tommi

AU - Hoen, Hans Fredrik

AU - Valsta, Lauri T.

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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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