Modeling the Marginal Value of Rainforest Losses : A Dynamic Value Function Approach
A rainforest can be modeled as a dynamic asset subject to various risks, including risk of fire. Any small part of the forest can be in one of two states: either untouched by forest fire, or already damaged by fire, in which case there is both a lo...
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| Format: | Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2015
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| Online Access: | http://documents.worldbank.org/curated/en/2015/10/25167334/modeling-marginal-value-rainforest-losses-dynamic-value-function-approach http://hdl.handle.net/10986/22876 |
| Summary: | A rainforest can be modeled as a dynamic
asset subject to various risks, including risk of fire. Any
small part of the forest can be in one of two states: either
untouched by forest fire, or already damaged by fire, in
which case there is both a local forest loss and increased
dryness over a broader area. In this paper, two Bellman
equations are constructed, one for unharmed forest and a
second for already burnt forest. The analysis solves the two
equations for the total expected asset values in each of the
two states, assuming that asset returns have a constant
growth rate over time. The equations are used for deriving
the marginal value of standing (unburnt) rainforest,
equivalent to the expected discounted value loss when losing
a small additional forest patch. The paper shows that
marginal forest value is increased by the additional dryness
and forest fire risk that follow from forest fragmentation
when additional forest is lost locally. Both forest fires
and dryness here serve as “multipliers” to the basic
services return loss, within and outside the forest. The
paper also presents a framework for calibrating the impact
of the forest fire risk component on forest value. |
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