This paper estimates forest cover in the Brazilian Amazon in terms of carbon—that is, when farmers internalize the social cost of carbon. A dynamic discrete-choice land use model was proposed and estimated 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 carbon 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 livestock-specific tax, a second-best policy, achieves at most 87% of the primary welfare gains.

Researchers: Rafael Araújo, Francisco Costa, Marcelo Sant’Anna
EPGE Brazilian School of Economics and Finance (FGV EPGE)

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