Does Conservation Work in General Equilibrium?

Abstract

Deforestation and the subsequent use of deforested land for agricultural activities account for roughly 20% of the global CO2-equivalent emissions in the past two decades. Despite the global scope of the consequences of deforestation, public policies and private initiatives to reduce deforestation are often spatially targeted: they intensify environmental protection in specific ecosystems, making agricultural land scarcer. While potentially effective at a local level, their global effectiveness may be attenuated in general equilibrium, due to resulting increases in the demand for agricultural land in non-targeted areas, i.e. deforestation leakage. To quantify leakage, we build a quantitative spatial equilibrium model of the Brazilian economy where agricultural land is the output of a costly process of deforestation, firms produce goods that are differentially land-demanding, and there is costly trade and migration. Our main findings are that (i) targeting the regions with highest deforestation levels can be an effective tool to curb aggregate deforestation in Brazil, and (ii) leakage increases significantly when considering a longer time-horizon. After one year, 2-3% of the deforestation reductions are outdone by leakage. Simulating the model forward for 10 years, this number goes up to 10%. The relatively small leakage is driven by agricultural intensification, including more crop farming, increased worker and cattle density per pasture, and shifts of production towards more productive regions.