S7 Ep53: The price of deforestation

Episode Summary

Executive Summary: This episode examines the economics of deforestation in Brazil’s Amazon, arguing that reforestation can be rational at surprisingly low carbon prices. Economist Jose Schenkman explains how satellite and census data are used to estimate the value of forest carbon, biodiversity, rainfall regulation, and local production, concluding that paying Brazil to preserve and restore forests could deliver major climate benefits at modest cost.

Main Topics: What tropical rainforests are and why they matter (Priority: 5/5): Schenkman defines tropical forests by their tropical location, enclosed canopy, and high biodiversity, then explains their role in carbon storage, rainfall regulation, and climate stability. Brazilian Amazon deforestation and land-use incentives (Priority: 5/5): The discussion details how the Brazilian Amazon has lost substantial forest cover, largely through conversion to low-productivity cattle ranching on public lands, with deforestation historically encouraged by policy. Estimating the shadow price of the Amazon (Priority: 5/5): The team’s model values the Amazon at about $7 per ton of carbon from Brazil’s perspective, reflecting local economic benefits and services, which helps explain why deforestation persisted. Carbon pricing and reforestation as a policy tool (Priority: 5/5): Schenkman argues that a payment of roughly $25 per ton of carbon could make reforestation and forest preservation economically attractive, especially if credits are tradable internationally. Climate and biodiversity spillovers (Priority: 4/5): Beyond carbon, the episode stresses that reforestation helps preserve biodiversity and sustain rainfall across South America through recycled moisture from the Amazon. Policy barriers and international trade inconsistency (Priority: 4/5): The conversation criticizes current climate policy for allowing some carbon-offsetting trades while excluding Brazilian forest carbon credits, calling this economically inconsistent. Extending the approach to other tropical forests (Priority: 3/5): The model could apply to places like Indonesia, but only if comparable local economic and land-use data are available.

Key Arguments: Tropical forests are valuable not only for biodiversity but also because they store vast amounts of carbon and regulate rainfall across regions and globally. Brazilian Amazon deforestation has been driven by policy incentives that favored occupation and low-productivity cattle production on public land. The estimated local shadow price of carbon in Brazil is about $7/ton, indicating that Brazil historically undervalues the Amazon relative to international carbon markets. A payment of about $25/ton for carbon capture could make reforestation economically rational and generate major transfers to Brazil, especially to the Amazon region. Under the model, Brazil could gain around 15 gigatons of carbon capture over 30 years if paid $25/ton, versus roughly 17 gigatons of additional emissions under the current $7 valuation. The effective social cost of the policy would be around $9/ton because society gets both avoided deforestation and additional captured carbon. International climate policy is inconsistent: European firms can get credit for replacing coal with gas, but cannot buy credits from Brazilian forest carbon capture. Reforestation would not only capture carbon but also preserve and restore biodiversity and improve rainfall patterns, producing additional but unpriced benefits. The approach depends on detailed satellite and agricultural census data, which are available in Brazil but may be harder to obtain in other countries. Low farm wages and modest local incomes mean compensation and transition policies for workers and landowners may be cheaper than expected.

Data Points: Brazilian Amazon share of the Amazon: 60% - Schenkman notes that the Brazilian Amazon makes up roughly 60% of the Amazon basin. Trees lost in the Brazilian Amazon: 15% - He states the Brazilian Amazon has lost about 15% of its trees. Amazon carbon stock vs. U.S. historical emissions: As much carbon as all historical U.S. emissions - Used to convey the Amazon’s enormous carbon storage potential. Amazon biodiversity share: 10% - The Amazon contains about 10% of biodiversity among trees and vertebrates. Species abundance concentration: 50% of trees from 2% of species - Illustrates that a small fraction of species accounts for a large share of forest biomass. Carbon shadow price in Brazil: $7 per ton - Estimated value Brazilians implicitly place on the Amazon and its services. European ETS carbon price: ~100 euros per ton - Used as a benchmark to compare Brazil’s implied valuation with European market pricing. Farm worker wage: $200 per month - Income level cited to show that transition costs may be relatively low. Proposed carbon payment threshold: $25 per ton - Price at which reforestation becomes economically rational in the model. Combined value estimate: $32 per ton - The $7 shadow price plus $25 carbon payment is used to describe total value. Expected additional emissions under current policy: 17 gigatons over 30 years - Projected emissions if Brazil continues with the current low carbon valuation. Expected carbon captured under reforestation policy: 15 gigatons over 30 years - Projected capture if Brazil is paid $25/ton to preserve and restore forest. Net climate change under policy shift: 32 gigatons - Difference between the emissions path and the capture path over 30 years. Global carbon budget for 1.5°C: 200–300 gigatons - Used to show that 32 gigatons is a meaningful share of the remaining budget. Potential short-run climate impact: Two-thirds of 32 gigatons in 15 years - Schenkman says much of the gain would materialize within 15 years. Societal cost of the carbon policy: About $9 per ton - Because Brazil would be paid for captured carbon while avoided deforestation yields extra benefit. Potential annual transfer: $15 billion a year - Early-year payment flow to Brazil if carbon were priced at $25/ton and scaled up. Rain recycled by the Amazon: 40% - He explains that around 40% of a water drop in the Amazon is recycled through forest evapotranspiration.

Pivotal Quotes: "The military government model of occupying the Amazon for farming has been a complete disaster." — Jose Schenkman: He criticizes the historical policy framework that encouraged deforestation through land grants and occupation incentives. "If the price was $25 a ton, that would be enough to make Brazilians much better off." — Jose Schenkman: He explains the carbon price needed to make preservation and reforestation economically attractive. "This is like one of the stupidest policies you can propose." — Jose Schenkman: He condemns the inconsistency of allowing some carbon-related trade credits while barring Brazilian forest carbon credits.

Implications: The episode argues that international carbon markets could finance large-scale Amazon preservation at relatively low cost, delivering major climate and biodiversity gains. It also suggests current policy rules are inconsistent and miss one of the cheapest opportunities for emissions reduction.