This paper estimates forest cover in the Brazilian Amazon in terms of carbon—that is, when farmers internalize the social cost of carbon. We propose a dynamic discrete-choice land use model and estimate it using a panel of land use and carbon stock data covering 5.7 billion pixels between 2008 and 2017. The current scenario implies an inefficient release of 42 billion tons of CO₂ in the long run, resulting from deforestation of an area twice the size of France. A carbon tax that leads farmers to internalize the social cost of carbon would implement the efficient allocation and generate welfare gains exceeding $1.6 trillion. Responses to a carbon tax are highly convex: a tax of just $10/ton would preserve 95% of the efficient carbon stock. A special tax on cattle consumption, a second-best policy, achieves at most 87% of the first-best welfare gains.

Researcher: Marcelo Sant’Anna
EPGE Brazilian School of Economics and Finance (FGV EPGE)

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