Cost Benefit Analysis and the Brazilian Rainforests

Reports all around suggest fires are raging around all over in the Brazilian rainforest. The Amazon rainforests seem to be headed towards deforestation and destruction. Unlike the forest fires of Australia or California or South East Asia, the fires in the Amazon are not due to natural causes but seemingly man made. Apparent encouragement of manmade fires to clear vast swathes of land for cattle grazing to agriculture to possible industrialization is adding to the woes. The global community seems to be overworked especially given the pandemic originating in Wuhan. The government in Brazil is apparently encouraging these fires. Brazil’s President Jair Bolsanaro is perhaps a bete noire to the left liberal chatterati across the world and this has given just another opportunity to go hammer and tongs at him. Woke entails articulation and perhaps practice at least symbolic of environmental protection and towards minimizing pollution. Anything contrary is frowned upon.

 

It is a different matter there are structural asymmetries that exist in historical pollution patterns. Kuznet’s curve posits an inverse relation between the GDP growth rate of a country and pollution levels. At lower GDP growth rate for developing countries, the only way they can boost their growth is certain tolerance of pollution. For developed countries, they can afford to emphasize environment protection sacrificing some growth and further given the access to technologies that enable clean production. These technologies given their cost structure are not affordable to the developing world unless heavily subsidised by the advanced West. Yet the environmental protocols, negotiations and agreements all tend to focus on uniformity in pollution reduction targets. They proceed on an assumption that all countries have equal responsibility to reduce emissions without factoring in the current state of growth and the rate of growth that is essential for becoming a developed country sometime in the future.

 

US might afford to talk of environmental protection and emission reduction though in practice, the evidence often portrays a contrary picture. President Trump of course is anti-woke and thus anti-environment. Bolsanaro too follows his footsteps. In India, Prime Minister Modi is an environmental conservative in contrast to these two leaders. President Bolsanaro therefore has adopted an approach that seeks to trade off Amazon forests with agricultural land. Expanding agricultural production and animal husbandry entails some destruction or rather to use a more polite word clearing of Amazonian rainforests. To woke, any compromise is impossible and gets framed in the climate change debate. To people in the region, it is an existential survival and words like climate change that apparently might be visible in the distant future might not be appealing.

 

Incidentally, in this context, it would be worthwhile to recollect John Keynes. To Keynes, in the long run everyone is dead, so therefore why worry about the same? This put forth a strong opposition to the classical economic theories that focused on saving and thus shifted the debate towards consumption and investment led growth. Similarly, to many in the rainforest region, climate change is perhaps so long away that apparently there need not worry at this stage and instead focus on the survival in the present. The present demands clearing of land to produce food and rear animals. It is thus obvious that their priorities in contrast to woke seem right.

 

Recently, there was a podcast from Freaknonomics on this rainforest issue. The podcast was titled “The Simple Economics of Saving Rainforests”. Without doubt, the podcast did touch upon the livelihood issues and emphasized the current incentive structure favouring the clearing of the forest. The deforestation was reversed from around 2002 onwards before in the last few years, the rise of Jair Bolsanaro to power has reversed the tide yet again. The solutions the podcast seem to revolve around carbon credits lost etc and heavily loaded with jargons. These of course merit deeper discussion over the feasibility and practicality. Yet, there was one statistic that managed to catch the eye.

 

It suggested to an average Brazilian cattle rancher, clearing one hectare of a forest in the Amazon region boosted the value apparently by $1,000. The podcast suggested that in the event of preserving the rainforest, every hectare would generate a benefit of $28,000 to the global economy at a conservative estimate. This was based on the carbon this would absorb in the forests. The added externalities would be the tourism and biodiversity growth which would further boost the value.

 

There is no doubt that every hectare of forest planted or preserved adds up the carbon absorbed which otherwise would be released into the atmosphere. The carbon emission have their impact on the health of the population thus reducing possibly productivity while increasing the health care expenses. However, this analysis misses a very simple point. As with any discussion in economics, this too could be understood through measuring costs and benefits.

 

Every hectare cleared generates a marginal benefit of $1,000 to the cattle rancher. This benefit is to the rancher her/himself and thus people would respond to the incentives the outcome being clearing of the forests. There is an opportunity cost to the same which the podcast suggested as $28,000. The $28000 realization to the global economy in terms of carbon absorption is being sacrificed to benefit a cattle rancher to the worth of $1000. Prima facie, this seems a bad deal. Just that in the actual calculations this is not a bad deal to the rancher. The cost benefit analysis extends to a discussion on the beneficiaries and those who pay the costs. It is about individual benefit and individual cost.

 

To an individual, the benefit is obviously $1000 and thus concentrated. Yet the opportunity cost is not specific to individual rancher but to the global society as a whole. The costs thus are borne by the society as a whole. Assume for the moment this is the cost that is borne by the population of Brazil or maybe the South Americans in general. The population of Brazil is estimated to be around 210 million. If we consider the South American population, it would be around 420 million. These marginal costs of $28000 per hectare lost is not borne by the rancher alone but by these 210 or 420 million living in Brazil or the continent. This would work out the average cost in few pennies thus the people simply would not bother. The benefits are concentrated, the costs are diffused thus the ecosystem gets threatened. Unfortunately, in the quest for jargons and high worded measures and metrics, the simple cost benefit analysis logic gets side-lined and ignored. Any solution to the deforestation in the Brazilian rainforest must factor this inequity in diffusion of benefits and costs. The solution must rework the benefits and the costs wherein the individual clearing the forest must bear the costs also. Unless this simple economic proposition is tested, factored and applied it is unlikely the debate will be solved anytime soon.