Freakonomics Radio - 428. The Simple Economics of Saving the Amazon Rain Forest

Episode Date: July 30, 2020

Everyone agrees that massive deforestation is an environmental disaster. But most of the standard solutions — scolding the Brazilians, invoking universal morality — ignore the one solution that might actually work

Hey everyone, this is Steve Levitt. Dubner has taken the week off and handed the microphone over to me. And that gives me the chance to investigate something that's really been troubling me. It seems like ages ago, with all that's happened since, but do you remember the headlines back last summer? Fires are raging across Brazil's Amazon rainforest. The world's largest rainforest is being destroyed at an alarming rate. Much of the blame is being heaped on Brazil's far-right president, Jair Bolsonaro. I'd never given much thought to the Amazon rainforest.

All the media coverage, though, of the wildfires got me wondering. Is it really true that the Amazon rainforest is being destroyed? Should I be upset about that happening, or is it no big deal? If it is a big deal, is there some way we could save it? Ecologists, environmentalists, and politicians have strong opinions about the answers to those questions. The economics of the Amazon, however, are barely discussed in the public debate. As I soon came to realize, that's a huge mistake. On today's episode, we will explore the simple economics fueling one of the world's most dangerous ecological disasters.

It is a great example of a market failure. The reasons for that failure. You know, you have to put yourself in the shoes of the Brazilians. It's their forest. And the remarkably straightforward solution that nobody seems to be talking about. My worry is whether we can do this quickly enough. From Stitcher and Dubner Productions, this is Freakonomics Radio, the podcast that explores the hidden side of everything, with today's special guest host, Stephen Levitt.

The Amazon rainforest covers roughly one-third of South America, stretching across parts of nine different countries, but lying primarily in Brazil. It's by far the world's largest forest, and it is home to roughly 10% of all the species on the planet. The vast interior is relatively untouched, but deforestation has already shrunk the forest by almost 20%, primarily in the Brazilian Amazon, where the great majority of the 30 million people living near the Amazon reside.

Daniel Nepsted is an ecologist who studied the Amazon rainforest for over 30 years and written more than 100 scholarly articles on the subject. I asked him, what would happen to the global environment if we woke up tomorrow and the Amazon was gone? The prospect of avoiding the more catastrophic dimensions of climate change would be virtually gone. Nepstead runs the Earth Innovation Institute. We're a small non-profit research and action group with offices in Brazil, Peru, Colombia, Indonesia, on the ground trying to move forward large-scale strategies to solve tropical deforestation as we deliver benefits for indigenous people and other rural communities. Nefstad has earned himself a nickname in the field of ecological research. People call me the tree-killing ecologist.

In one experiment, he covered the forest floor with 6,000 plastic panels to find the drought threshold beyond which trees begin to die. In another experiment, he burned 100-acre plots of forest at different intervals to ascertain the rainforest's resilience. He's willing to kill some trees along the way because he knows how important preserving the Amazon is for fighting climate change. If we take the 100 billion tons of carbon stored in the trees of the Amazon, that going into the atmosphere is about 400 billion tons of CO2.

And that's 10 years worth of global, humanity-wide emissions of CO2. Any economic discussion of the Amazon has to start with the fact that the amount of carbon stored in the Amazon is truly immense, over 70 times greater than the annual U.S. output of greenhouse gases. Destroying the Amazon and releasing that amount of extra carbon into the atmosphere would utterly swamp everything society's been doing to reduce emissions. Although it didn't attract much international attention, between 1970 and 2005,

Brazil seemed to be doing everything it could to destroy the forest. Almost one-fifth of the Brazilian Amazon was deforested over that period. On average, an area of forest the size of the state of Connecticut disappeared each year. But in the 2000s, under the guidance of President Lula da Silva, things started to improve. The Brazilian government is really a hero in terms of strategies for slowing deforestation. President Lula was in his second year in office. He launched a program, a strategy, that cut across more than a dozen ministries, including the central bank,

to basically control deforestation. The strategy that was implemented, it was very heavy on sticks and very light on carrots. Sting operations against illegal operators. Hundreds of people put in jail, including government officials, fines levied, suspending access to public farm credit in counties that were on the blacklist because of their high deforestation rates. And that was put in place in 2005. By 2012, deforestation had declined almost 80% across the entire Brazilian Amazon. Phenomenal success. A new Brazilian government led by Jair Bolsonaro took office in 2019.

Facing an unemployment rate over 12% and sluggish economic growth, Bolsonaro made good on his campaign promises to scale back the Amazon protections and regulations put in place in 2005. Deforestation is now back on the rise. This last year, there was a 30% increase. Over the prior year, we're at about half of the historical average. And so 20,000 square kilometers of forest tend to fall, you know, in pre-2005. We're now at 10,000, and all signs are that it's continuing to grow. Indeed, the New York Times recently reported that deforestation between January and April 2020 was 55% greater than the same period in 2019. COVID-19 appears to be contributing to

the increase, with law enforcement efforts hobbled by the pandemic. The international community has condemned the rollback of protections, and countries like Germany and Norway have even cut aid payments to Brazil. It's easy to understand the backlash, but it's just as easy to understand why people cut down the forest. The regions in and around the Amazon are among the poorest in Brazil, a relatively poor country to begin with. Cleared land provides an immediate economic benefit to the owner. Land in the Amazon is deforested for a variety of uses, but one particular industry dominates.

Cattle ranching is really the way that people use the land. 70% or so of the cleared land in the Amazon is in cattle pasture. Cattle ranching is really the way that people use the land. 70% or so of the cleared land of the Amazon is in cattle pasture. Now, there are 75 million cattle in the Amazon, but it's really not that great a place to raise cattle, from what I understand. Neither the soil, it's also far away from places where people want to eat beef. The productivity of cattle ranching in the Amazon is notoriously low. Why are we raising cattle in the Amazon? There's one Amazon, and there's a million places to raise cattle.

It is a great example of a market failure, I think, where converting a 300-ton forest that would have, you know, 200 tree species and tons of unknown other species for a weak cattle pasture that will give you maybe 30, 50 kilos of beef a year is one of the worst trade-offs, I think, in the world. While the news coverage of the Amazon fires last summer seemed to suggest they were wildfires, a product of nature. That's not what Nefsted says. First of all, it wasn't a severely dry year, so most of the intact forests were not vulnerable to fire. Second, there were very few reports of fire getting into forests, mostly around the edges. What we were seeing is a big uptick in the amount of chainsaw deforestation plots being burned.

Those are sections of the forest being first chopped down with chainsaws and then intentionally set on fire to clear land for cattle. For many, the natural reaction has been to protest, demoralize, to blame the Brazilian government. Those are all reasonable reactions, but the fact is that the people doing the burning are mostly decent people trying to scratch out a living, responding to the incentives given to them. If we want to solve the problem, we need to change those incentives. And who better to think about that challenge than an

economist? I'm Michael Greenstone. I was a chief economist for the Council of Economic Advisors in the first year of the Obama administration. Greenstone is now back as my colleague at the University of Chicago. But while he was in government, one of his jobs was coming up with environmental regulations. And the trick of doing things through regulations is that they have to go through a cost-benefit analysis. And any regulation that reduces carbon is going to have some costs that are going to be measured in dollars. And it's going to have some benefits, which are going to be measured in dollars, and it's going to have some benefits which are going to be measured in CO2. Dollars are always going to beat CO2 because people don't know what CO2 is. And so my idea, which I started with my friend Cass Sunstein, was to come up with a unified number called the social

cost of carbon for the U.S. government. And that was a way to monetize the damages of the release of an additional ton of CO2. Before you went to create that number, how did the U.S. government, and that was a way to monetize the damages of the release of an additional ton of CO2. Before you went to create that number, how did the U.S. government think about the social cost of carbon? It was completely incoherent. You had some agencies, let's call them agencies that shall remain nameless but maybe think there should be more transportation in the world, thought that the cost should be effectively $1 or $2 per ton of CO2. You had other agencies who thought that the environment was their mission, and they thought it was basically infinity. To determine where between $1 per ton and infinity the cost of carbon was,

Greenstone relied on what economists call integrated assessment models, IAMs. And they are very high-level models that basically go from a puff of CO2 into the air to how that's going to affect atmospheric concentrations of CO2, to how it's going to affect temperature, to how that's going to affect economic activity and human well-being. Those models were almost all developed in the 1990s when computers were not very good and we didn't have access to a lot of data. And so they, by necessity, were very assumption-driven. What has happened since then has been an explosion in computing power and an explosion in access to data. And we're now beginning to be able to build an empirical foundation for what the damages of climate

change might look like. I think probably the average outcome is that it's going to be able to build an empirical foundation for what the damages of climate change might look like. I think probably the average outcome is that it's going to be painful and cause damages, and we'll learn to adapt from them. But there's a pretty wide set of unknowns, and buried in those unknowns are some things that would be much worse. One key metric used by economists to measure the negative consequences of climate change is the number of, quote, 90-degree days per year. A 90-degree day is a day where the average of that day's high and low temperature is at least 90 degrees. That is roughly the temperature level that turns out to be dangerous for both people and crops.

But how dangerous? That depends on where you live. If you're sitting in the United States, higher temperatures, we've got really good systems in place to deal with them. India is really like ground zero for climate damages, I think, because it's relatively poor. It's not easy for them to protect themselves.

Further temperature increases there would have big impacts on crop yields, big impacts on health. Some of my own research suggests that without adaptation, an extra 90 degree day in India will kill 20 times as many people as it does in the U.S., precisely because they're relatively poor and not well-equipped to handle it. A key decision that Greenstone faced when trying to quantify the social cost of carbon was whether to consider only the impact on Americans or to take into account the global impact.

There's something intuitively appealing about not counting damages that occur outside the United States, and many people have that reaction. My view, ultimately our judgment, was that since CO2, wherever it's released, has impacts around the planet, we cared about other countries reducing emissions as well. And so that in a kind of international negotiation sense, every time we reduce a ton of CO2, we're providing benefits for the Chinese and Indians. But every time they reduce a ton of CO2, they're producing benefits for us. And so the idea was by using a global value, you could induce reactions that would

reduce emissions that would benefit people in the U.S. Taking all of these variables into account, Greenstone and his team concluded that the social cost of carbon is $50 per ton of CO2. The average man, woman, child in the United States emits about 16 metric tons per CO2 per year. So you could think of yourself or the average person as doing about $800 of climate damages per year. Greenstone's hope was that putting a price on carbon and ensuring that that price had legitimacy would lead to more thoughtful policy, although this hasn't been 100% successful. In some sense, climate change is a super boring economics problem in that it's very easy to

figure out what to do globally. That is, you should set a price on carbon, and then you should fund R&D and green energy. Super easy. Those turn out to be pretty politically challenging to do. And so effectively in the U.S., what we've been doing are a bunch of kind of mandate-style policies that aim for reductions in particular places in the economy. Regulations on auto emissions, for instance. Another politically popular policy is what's known as an offset. An offset is that I, the state of California or some institution, your Chicago or Goldman Sachs, would like to reduce my carbon footprint. And I could do that by reducing my own carbon emissions, or I could scour the planet and find someone somewhere else, some person or some institution, who could reduce their carbon emissions by whatever amount I wanted to, and I would just pay them for that.

And how have offsets worked in practice according to the research? I think to date, the story of offsets has been very disappointing. And the reason is it's been very difficult to monitor them and very difficult to verify that the claimed reductions in CO2 actually happened or that they were additional. For economists, this disappointing result is pretty unsurprising. Imagine that I pay a cement manufacturer not to make cement. As long as

the demand for cement remains unchanged, that production of cement just shifts to another manufacturer, and in the end, nothing has really changed. If the use of offsets hasn't proven very effective, what about the strategy of just telling people they should use less carbon? When you tell people you should just use less carbon, I think what you're doing is you're sliding into making it a moral issue. And once it's a moral issue, it's very murky waters. One number that gets stuck in my head, as I do a lot of research in the state of Bihar in India, per capita electricity consumption there on an annual basis is about 270 kilowatt hours per person per year. That's like running two 60-watt bulbs six hours a day. In the United States, it's like 13,000 kilowatt hours per person per year.

If you're sitting in Bihar, it's a totally unacceptable situation to have that level of electricity. And they have to improve their lives, and electricity allows them to do that. And so trying to express this as a moral issue to them, the moral issue to them is that there are 270 kilowatt hours per person. If you really want to talk about morals, like, think about Bihar. Or think about Brazil. To the poor farmer in the Amazon, it isn't about morality. It's about survival. This is one particular case in which we don't need moral arguments

because the economic arguments are so overwhelmingly persuasive. A hectare of Amazon land cleared for raising cattle, a hectare is just under two and a half acres, sells for less than $1,000. With a social cost of carbon of $50 per ton of CO2 and a current best estimate of the carbon stored in the Amazon, each hectare of land preserved as forest is worth over $28,000 based on the carbon alone. That isn't even putting a value on biodiversity or tourism. When land is worth almost 30 times more to all of humankind as forest, but instead people cut it down to grow cattle, that is the absolute definition of a market failure.

A market failure with a very straightforward remedy. There is a strong economic case for the world subsidizing the protection of the Amazon. Coming up after the break, would it actually work to pay people to preserve the rainforest? My worry is whether we can do this quickly enough. Also, this is my third time guest hosting, and I've really enjoyed the experience, enough so that I've decided to host my own show, full-time. It's called People I Mostly Admire,

where I'll interview smart, interesting, unconventional people about the smart, interesting, and unconventional things they do and think about. Launching on August 21st. So you've, as an ecologist, become friends with economists and have learned to think in many ways like an economist, but that can't be a very popular stance among ecologists more generally, is it? Well, things are changing. That's the

ecologist Gretchen Daly. Initially, people thought teaming up with economists was sort of selling out, but now people are getting more sophisticated in their thinking on the science side of things and recognizing that economics has incredibly powerful ways of understanding why people make the choices they do. Daily Works at Stanford. brainwashed by people in economics and feel there's so much potential in working together to begin to capture the values of nature in our minds, on our balance sheets. At Stanford, Daly is co-founder and director of the Natural Capital Project. So natural capital is kind of a dry-sounding term, but it's basically earth's lands, waters, and the biodiversity, all the life. We don't think much about natural capital, and we pay a lot of attention to financial capital that sort of keeps everything flowing. And your point is that there's other inputs into our economy, and one of those

is nature. And the term natural capital is designed to integrate into our economic thinking the role that nature is playing in how the economy functions, not only today, but also in the future. often and value of these other forms of capital and the immense payoff from investing in them. And it's just now that we're starting to recognize the scarcity of natural capital. The modern metric for calculating the health of a country's economy is gross domestic product. And it's traditionally been based solely on the market value of all the goods and services produced in a country over a period of time. Daly and her team want to extend that notion to encompass environmental factors, what they have termed gross ecosystem product, or GEP. What's really motivated development of GEP is recognition that we're really in the great degradation of natural capital. So it was during the Great Depression that GDP was developed. And nowadays, it's the great degradation of natural capital

that is driving development of GEP. So GEP was actually called for by leadership in China, where they recognized that even with all the success they'd had in highest GDP growth rates in the world and lifting so many millions of people out of poverty more successfully than any other country has done, that actually it came at this devastating cost. According to the EPA, China is responsible for 30% of the world's CO2 emissions and is the world's biggest source of CO2 by a wide margin. The U.S., at 15%, is number two. Air and water pollution are estimated to cause over 1.5 million premature deaths per year in China. One of the main catalysts for China was the biblical- scale flooding that happened in 1998. It was traced to

dramatic deforestation that had occurred over some years before in the upper reaches of the Yangtze River system. And that deforestation made downstream people much more vulnerable to devastating flooding. And the reason is that forests are like a sponge. But in 1998, the deforestation had been really extensive. The rains were much heavier than usual. And that just spelled disaster and millions of people were affected. The total costs were estimated kind of at a lower bound at about $35 billion. And rapidly, as China is noted for making rapid responses, the government called for all the evidence and a systematic understanding of the situation and said, okay, there's only one way out of this. There's no way we can substitute using physical infrastructure for all the flood control services that the Yangtze River provides to hundreds of millions of people downstream. We have to restore that forest. And they launched the biggest reforestation program that Earth has ever seen,

paying about 120 million households to protect existing forest or restore forest. And the payments over the past decade or so have amounted to about $150 billion. China's Grain for Green program has been ongoing since 1999. The payouts are relatively small on a per capita basis, but for a small amount of money per capita, there's been a massive increase in flood security. The program has seen large successes. Daly found that a decade after the program was implemented and millions of hectares were reforested, there were improvements in soil retention, carbon sequestration, flood mitigation, and even sandstorm prevention. But China was not the first country to come to the conclusion that a cheap, effective way to preserve a threatened ecosystem was to simply make payouts. So Costa Rica had had a deforestation rate of over 4% per year through multilateral development banks,

really incentivizing conversion of forest to farmland and pasture. So recognizing all that, leaders in Costa Rica decided to put a price on rainforest. That was in 1996. And it was basically the first time that that was done in policy and finance. And what they launched was a payment system, the first ever at a country scale, where they said, if you protect or restore rainforest on your property, we'll pay you. And the payments were pretty low, but it was amazing. They were about, I think, $50 per hectare, or roughly $20 per acre per year. And that payment was enough

to really slow and actually reverse deforestation rates. So what should we do about the Amazon? As you think about deforestation, especially if you're making moral arguments against it, you shouldn't forget about the not-too-distant past. Daniel Nepstead again. Every developed country in the world, maybe with the exception of the northern countries that have huge areas aboard a forest, like Canada and Russia, has basically pushed their forest, whittled them down to very small areas, and then put boundaries around parks and protected areas. Take the northeastern U.S. as a small-scale example. At one point in our history, forest cover had shrunk by as much as 90%

compared to pre-colonial times, though much of that has now been reforested. And that is not lost at all on Brazilians. Some folks feel like no matter what Brazil does, there will always be international criticism. If you look at the Amazon, more than half of the remaining forests of the Amazon are in some form of protection.

Parks or reserves or indigenous territories. You know, there's a frustration that whatever Brazil does, it's never enough. I think an enormous off-ramp for being effective in dealing with the climate change problem is veering onto the moral lane. The economist Michael Greenstone, again. And, you know, you have to put yourself in the shoes of the Brazilians. It's their forest. It should be a good deal for them if they're going to do it. And the moral part is just, Brazilian morals about Brazil's forest are very different than the Norwegian's morals about Brazil's forest. And I think that off-ramp just goes nowhere in the end.

There is this concern in Brazil, and it's not ubiquitous, that there's an international plot to take over the Amazon. And that resurfaces every now and then. You know, there was a document produced in the United States called Farms Here, Forests There. It's easy to see how Brazilians could become paranoid. One passage from the document Nepstad mentioned reads, quote, the U.S. agriculture and forest products industries stand

to benefit financially from conservation of tropical forests through climate policy. Ending deforestation through incentives in the United States and international climate action would boost U.S. agricultural revenue by an estimated $190 to $270 billion between 2012 and 2030, end quote. When Brazilian farmers stop farming, U.S. farmers benefit. That is supply and demand in action. It was a well-intended document, but it fueled this conspiracy theory that's attached to a sovereignty argument, a sovereignty concern. You know, if Brazil owns two-thirds of the Amazon forest, it's up to Brazil to do what it wants with it. So that's one dimension of it. Another dimension really is, it's an amazingly inexpensive

venture to think of paying off all of those landholders in Brazil for the foregone profits from converting forests to cattle. And the key would be to have a real financial proposition on the table that compensates Brazilian farmers and compensates Brazil. Despite all the political bluster about infringement on its sovereignty, the Brazilian government has actually signaled its willingness to trade preservation of the Amazon for cash from other countries. In an interview with the Financial Times, Brazil's Minister of the Environment, Ricardo Salles, said, quote, The opportunity cost must be paid by someone, and someone means those who have the funds or the necessary sources of finance for that. He estimated the cost to be $120 per hectare, or about $12 billion a year. By my calculations, from a purely economic perspective, Brazil should be willing to stop

deforestation for $1 to $2 billion per year. The rich nations of the world should be willing to pay up to $40 billion. That's a lot of room for bargaining, and the $12 billion number that the Brazilian minister threw out doesn't seem crazy. The presumptive Democratic nominee for president, Joe Biden, brought up the idea in a debate with Bernie Sanders. I would be right now organizing the hemisphere and the world to provide $20 billion for the Amazon, for Brazil, no longer to burn the Amazon. However, Biden makes no mention of such a policy on his campaign site,

nor does he propose a plan for how such a payment would work. One country, Norway, has already shown a willingness to pay to try to preserve the Amazon, providing roughly $100 million per year for more than a decade to support a nonprofit-profit dedicated to reducing Amazon deforestation. After the fires last summer, however, even Norway stopped contributing. I asked Gretchen Daly about the viability of other countries paying Brazil to stop deforestation. There's a big question as to whether these approaches to valuing nature, and especially to paying people to protect or restore nature, whether they can be scaled up and implemented, especially at one level, if we had ample time, that this movement is going to keep going and growing.

My worry is whether we can do this quickly enough. And I think that's the general worry, that we're really in a race. We don't have very much time. I may never go to the Arctic and see a polar bear, and I may never go to the Arctic and see a polar bear and I may never go to the Amazon, but I feel good that they exist. And it's not just that I feel good, I'd be willing to pay something for it. And that is like an adder to the instrumental value of the Amazon. The value of preserving Amazon is large enough that it should be easy to pay off the ranchers and still preserve the Amazon.

Thanks to Michael Greenstone, Gretchen Daly, and Daniel Nepstad for appearing on today's show. Thanks especially to Steve Levitt for filling in as host. Remember, Levitt will soon be launching his own podcast called People I Mostly Admire. It's an interview show with Levitt talking to all sorts of people from academics to athletes, from actresses to inventors. People I Mostly Admire will debut on August 21st

as the latest addition to the Freakonomics Radio Network. Freakonomics Radio is produced by Stitcher and Dubner Productions. This episode was produced by Zach Lipinski. Our staff also includes Allison Craiglow, Greg Rippin, Daphne Chen, Matt Hickey, Mary Duduke, and Corinne Wallace. Our intern is Emma Terrell. And we had help this week from James Foster. Our theme song is Mr. Fortune by the Hitchhikers. All the other music was composed by Luis Guerra.

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