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Balancing agricultural development and deforestation in the Brazilian Amazon

Publication date:
A. Cattaneo
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Using a computable general equilibrium (CGE) model this report identifies the links among economic growth, poverty alleviation, and natural resource degradation in Brazil. It ex- amines the effects of a major devaluation of the Brazilian real (R$); improvements of infrastructure in the Amazon to link it with the rest of Brazil and bordering countries; modification of land tenure regimes in the Amazon agricultural frontier; adoption of technological change in agriculture both in- side and outside the Amazon; and fiscal mechanisms to reduce deforestation.By modelling land use, land cover and agricultural activities land uses, incomes, wage rates, and other aspects of the economy are estimated in 4 regions. The report finds that In the Amazon a devaluation of 40 percent has these results:Deforestation rates would vary depending on the government’s crisis plan. If the government balances reduction of private consumption, government demand, and investment, deforestation rates would decline by 10 percent in the short run and by 2 percent in the long run. However, government inaction and capital flight would lead to a 6 percent increase in deforestation in the short run and 20 percent in the long run.Logging would increase by 16 to 20 percent depending on government action.The Amazon would fill the domestic demand gap created as other regions move toward tradables. Following the devaluation, agricultural expansion in the Amazon would centre on production of a variety of annual crops and livestockThe analysis finds that improved infrastructure would result in:A 20 percent reduction in transportation costs for all agricultural products from the Amazon causing increased deforestation of 15 percent in the short run and by 40 percent in the long runRising returns to arable land (and resulting deforestation) would lead to a 24 percent increase in production by smallholders and a 9 percent increase by large farms. Nationally, this would have little effect on welfare, because the increase in production in the Amazon would replace production from other regions.Regulating tenure regimes is one of the best options for reducing deforestation in the Amazon according to the authors who find that removing the speculative incentive to deforest could reduce the deforestation rate by 23 percent.According to the model the impact of improvements in agricultural technologies in the Amazon varies:Livestock technology - improvements appear to yield the greatest returns for all agricultural producers in the Amazon and should improve food security in the region, but deforestation increases dramatically in the long run.Perennial crop technology - improvements could theoretically reduce deforestation rates considerably, but this is unlikely to happen. Small farmers stand to gain the most from such improvements, but they are averse to the risks inherent in perennial crops. Annual crop technology appears to have little potential. Income gains would be quite small. Before reaching the high land intensity required to reduce deforestation rates, there would almost certainly be a period in which deforestation would increase substantially.To take into account the nonmarket benefits and costs stemming from different land uses, the report considers both taxes and transfer payments. The author argues that in spite of the link between logging and deforestation, applying a logging tax in the Amazon would not lead to a decrease in the deforestation rate, but it would negatively affect the logging industry. A tax on deforestation activities, however, would reduce deforestation with logging only minimally affected. Such a tax would, however, have a substantial negative effect on small farmers in the Amazon. An alternative scenario suggested in the report would be to subsidise forest conservation. From a welfare standpoint, the Amazon would benefit directly from a subsity of this kind, and the other regions would also gain by taking up the slack in the volume of wood. Market benefits accrued nationwide would exceed the subsidy expenditures. The subsidy could be funded internationally if Brazil were compensated for reducing deforestation under carbon trading arrangements with other countries.[based on IFPRI summary]