Does policy uncertainty affect landowners' willingness to engage in afforestation schemes? - A stated preference study among Danish landowners

Voluntary subsidy schemes are widely used to reach national and supranational environmental goals. In Denmark a policy objective of increasing the forest cover by 38% in 20 years, primarily through voluntary schemes, highlights the importance of understanding landowners’ decision making. In this context, afforestation entails a statutory prohibition against any future land-use change. This may be a barrier, as the future is uncertain and we don’t know which land-uses will become more attractive. Despite many studies investigating preferences for contract designs for agri-environmental schemes, few address the option value related to permanent land use changes. We use a choice experiment with a split design, to investigate the size of such an option value among Danish landowners. We find that the compensation needed estimated as willingness to accept (WTA) for entering an afforestation contract generally is higher than the opportunity cost of such afforestation. A large share of this can be explained by the option value which accounts for 21-66% of the compensation. Hence, reducing policy uncertainty can reduce the WTA. We also find that property size and required enrollment size matter, leading to higher per hectare compensation for large landowners and large land areas.