Using portfolio theory in spatial targeting of forest carbon payments: An effective strategy to address spatiotemporal variation in land use opportunity costs?

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.The accepted manuscript in pdf format is listed with the files at the bottom of this page. The presentation of the authors' names and (or) special characters in the title of the manuscript may differ slightly between what is listed on this page and what is listed in the pdf file of the accepted manuscript; that in the pdf file of the accepted manuscript is what was submitted by the author