Price trends and volatility scenarios for designing forest sector transformation

Lochhead, K., Ghafghazi, S., Havlik, P. ORCID: https://orcid.org/0000-0001-5551-5085, Forsell, N., Obersteiner, M. ORCID: https://orcid.org/0000-0001-6981-2769, Bull, G., & Mabee, W. (2016). Price trends and volatility scenarios for designing forest sector transformation. Energy Economics 57 184-191. 10.1016/j.eneco.2016.05.001.

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Abstract

Potential scenarios for the forest bioeconomy are heavily reliant on price assumptions; in particular, any abrupt changes in prices have a profound impact the relevancy of any sector analysis. The objective of this paper was to demonstrate a new forest sector approach for incorporating price uncertainties in order to improve our assessment of investment decision making alternatives. Methodologically, we linked a multivariate generalized autoregressive conditional heteroscedasticity model (mGARCH (1,1)) with three global land use scenarios that are of strategic importance to the forest bioeconomy. The three scenarios were formulated as i) a business as usual scenario, ii) a high biomass usage scenario and iii) a no-growth scenario. Our results indicate an upward trend in prices over time for all three scenarios and for most woody biomass commodities. Under all scenarios, price volatility in the forest sector would be smaller than that for the fossil fuel energy (i.e. oil and natural gas). Price volatilities from fossil fuel markets are positively influencing woody biomass price volatility and positively influencing pulp volatility. These results are discussed in the context of a case study describing investment alternatives for a district heating facility with options for: woody biomass, natural gas, or heating oil.

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