Brazil Environmental Economics

Alyssa Cobus Madeline Mitchell Matthew Ferrara Doreen Brown

OUTLINE

I Introduction II Environmental Policies in Brazil III Pollution as Negative Externality IV Incomplete Market V Solution to complete Market VI Pros/Con’s of Environmental Policies VII What’s next?

Area: 8,514,877 sq km Population: 198,739,269 GDP (PPP): $2.025 trillion (2009 est.) $2.029 trillion (2008 est.) $1.931 trillion (2007 est.) (U.S. GDP (PPP) $14.26 trillion (2009 est.) Labor Force: agriculture: 20% (2003 est) industry: 14% services: 66%

Environmental History in Brazil

- Brazilian Amazon region covers an area of 4,000,000 sq km - average loss of the Rainforest is 6,000 sq miles

1995 and 2004 historical records of deforestation

REASONS IMPLICATIONS - Increase in Global warming and Carbon dioxide (CO2) emissions - Decrease of the rainforest causing alterations to the climate - Rainforest once covered 14% of the earth land surface, nowadays 6% years) (est. that the rest is consumed in 40 - Forest fires releases tons of greenhouse gases into atmosphere

Brazil is one of the largest greenhouse gas emitter in the world, but it is also one country with the largest potential to reduce such emission

• • • History of deforestation in international policy 1972 The Stockholm Declaration on the Human Environment (first global environment conference)  Brazil defended its position: cautioned that "environmental protectionism" should not stand in the way of economic development among the less developed countries 1992 UN Conference on Environment and Development also known as “Earth Summit”, in Rio de Janeiro  Brazil committed the nation to lead on efforts to reconcile environmental protection with economic development 2005 Kyoto Protocol  In few years Brazil ramped up a set of policies addressing global warming (deforestation)

•

History of deforestation in national policy

In the 80s, deforestation in the Amazon emerged in the political agenda of the Brazilian government (early reforms were not successful) • First successful deforestation policy launched in 2004 “The Action Plan for the Prevention and Control of Deforestation” (PPCDAm)

PPCDAm

 Improve and increase the use of satellite monitoring  Increase law enforcement  Increase the land under federal and state protection  Establish environmental criteria as pre-requisites for loans for farmers and ranchers  Foster sustainable activities in the region

PPCDAm - Results

• • It helped to reduce deforestation in the Amazon by 74.8 % from 2004-2009 Brazilian policies have prevented the emission of about 2661 million tCO2e between 2005-09

Continued policies and programs decreasing deforestation (emissions)

1. PPCDAm strategies included new initiatives and implementation (2009-2011)  e.g. signing agreements with organizations representing productive sectors – org. pledge not to purchase raw material from illegally deforested area (by Oct. 2009, 62 companies have signed) 2. Public Forest Management Act (2006)  To regulate access and economic exploitation of public forest (launched by state governments) 3. The Plan on Climate Change - PNMC (Dec. 2008)  sets out policies aimed to achieve sustainable development

The Plan on Climate Change goals

• The two main challenges in achieving the objective of reducing greenhouse gas emissions are emissions from land use, land use change and forestry and to follow a low carbon path of development  Under the plan, deforestation is to be reduced by 70% below the 1996 2006 average by 2018, which would avoid 4.8 billion tons of greenhouse gas emissions The plan focuses on 7 areas: 1. Low carbon development 2. Renewable electricity 3. Biofuels 4. Deforestation 5. Forest cover 6. Vulnerability and adaption 7. Research and development

Compensation for avoiding deforestation

• • In regard of the region’s size and complexity of factors that lead to deforestation Brazil will need additional resources to reach its goal and keep permanently the deforestation rate low International framework and financing options e.g

Kyoto protocol (carbon market), Voluntary carbon market, Donor funding (Amazon fund)

Economies and the Environment

•

What are the main issues from an economists perspective?

An Inconvenient Truth

• • • Film by Al Gore exposing progression of pollution and emissions since industrial revolution.

Attempt to raise awareness in society because without public knowledge / support it is much harder to affect change.

But why do we need to be made aware if it is supposedly very important and relevant to us?

• • •

Environmental Degradation = Economic “Externality”

Remember 1101? Externalities are the unaccounted for elements in the economy. Not necessarily always good or bad.

– Examples: Beekeeper bee’s make products he can sell (honey, wax). Externality is the bees pollinating the surrounding areas vegetation.

Climate Change? The Stern Review on the Economics Of Climate Change says "Climate change presents a unique challenge for economics: it is the greatest example of market failure we have ever seen."

Who/What will Save Us?

Al Gore?

• •

…The Economist’s Viewpoint

An inconvenient truth… = an INCOMPLETE market!

Nobel Prize in Economics 2007 for Mechanism Design Theory!

Leonid Hurwicz Roger Myerson Univ of Minnesota Princeton Univ. Eric Maskin Univ. of Chicago

Prize in Economics 2007 for Mechanism Design Theory • “Mechanism design theory, initiated by Leonid Hurwicz and further developed by Eric Maskin and Roger Myerson, (...) allows us to distinguish situations in which markets work well from those in which they do not. It has helped economists identify efficient trading mechanisms, regulation schemes and voting procedures.”

The Royal Swedish Academy of Sciences

Agenda

• Why is there a problem of over‐pollution?

– Cause: Missing market for pollution.

– Solution: Design market for pollution.

Pollution as a negative externality

•Pollution is a negative production externality − Firms don’t include pollution into production • Cleaner Supply Curve – supply curve that includes pollution.

Cleaner Supply

=

Dirty Supply

+

Pollution Cost

Missing Market for Pollution: Price for Pollution Unknown!

• • • Over-pollution is due to firms not internalizing cost of pollution into costs.

Firms have no incentives to internalize pollution costs – Ownership of pollution emission allowances is not well defined Firms don’t know the price of pollution to compute its costs – Ambiguous ownership prevents market from discovering price of pollution.

Cap & Trade Approach

• • • • • • • Also known as “Emissions Trading” Market-based instrument Sets limit of emissions that can be produced Decrease over time Emission levels as credits Can be traded if not needed Creates a market

Trading Credits

• • Polluting and non-polluting groups can purchase credits Environmental groups often purchase these credits and phase them out of the system

2 Sides of Emissions Market

• • •

Supply

Government Providers of CERs Polluters with extra credits • •

Demand

Big polluters Environmentalists

Cap and Trade System in Action

• • • • • • • Price of CO₂ emission allowance= $5 MCA= Marginal cost of emission abatement Firm 1: MCA₁=$2, Firm 2: MCA₂= $6 Each firm emits 1000 tons of CO₂ Each firm gets 900 CO₂ allowances Total CO₂ abatement= 2x(1000-900)=200

Scenario 1: “No Trade”

• • • • • Firms DON’T trade CO₂ emission allowances Each firm reduces emissions by 100 tons Cost for firm 1: 100 x $2= $200 Cost for firm 2: 100 x $6= $600 Total cost of abatement by 200:

$800

Scenario 2: “Trading”

• • • • • • • Firms DO trade CO₂ emission allowances Firm 1 sells 100 allowances to Firm 2 for $5 each Firm 1 cuts emissions by 200 tons Firm 2 continues to emit 1000 tons Cost for firm 1: 200 x $2 –(100 x $5)=-$100= $100 profit Cost for firm 2 : 0 x $6 + (100 x $5)=$500 Total cost of abatement by 200:

$400

What does this mean?

• • • • Creation of market for pollution Efficiency Pollution reduction How has this been applied…?

Kyoto Protocol

• • • • • Adopted in Kyoto, Japan, December 11, 1997 United Nations Framework Convention on Climate Change Ratified by 175 countries (Brazil in 2002) Exceptions made for developing nations Goal: to reduce greenhouse gas emissions to 5.2% below 1990 levels between 2008 and 2012

Mechanisms

• • • Emissions Trading, “Carbon Market” Clean Development Mechanism (CDM) Joint Implementation (JI)

Clean Defense Mechanism (CDM)

• • • • Allows a country w/ emission-reduction commitment under Protocol to implement emission-reduction project in developing countries Projects can earn certified emission reduction (CER) credits Stimulates sustainable development & emission reductions Gives industrialized countries flexibility in how they meet limitation targets

Joint Implementation

• • • Takes place in countries with an emissions limit Annex 1 countries “economies in transition”

Why did some countries NOT sign?

• • • • China, Australia have since signed (2007) US signed, no ratification Congress says…

Brazil and REDD

• • • • Compensation Different from Kyoto plan Difficulties with baseline Brazil’s view

Pros and Cons of Cap and Trade in Brazil

Pros of Cap and Trade in Brazil

• • Decrease of CO 2 emissions – Protect the rain forests – Reduce the effects of climate change – Lean manufacturing: cleaner, reduces waste Raise revenue from selling of carbon credits – Credit auctions – Cost of buying carbon credits vs. reducing emissions – Cap will shrink over time

Pros (cont’d)

• Option to “bank” credits to use for future years’ emissions, rather than selling to developed countries

Cons of Cap and Trade in Brazil

• • • Possibility that other countries won’t participate – Can move production to other countries where it is cheaper Difficulty of enforcing local emissions reductions while selling credits to other countries Price volatility of manufactured products

Another Option

• • • • • Tax on emissions A tax fixes the price of pollution, while a cap controls the quantity Easy to enforce However, a tax only achieves emissions reductions indirectly, through the price Don't really know the appropriate level of the tax necessary to induce the changes that are needed to bring emissions down far enough and fast enough to avoid dangerous climate change

What Are Other Countries Doing?

• • Europe overall: – Covers 45% of the continent’s emissions – Over 10,000 companies Dutch factory that calls itself the greenest plant in the world, but now can't afford to run full-time – Electricity prices are so high that the factory routinely shuts down for part of the day to save money on power – Laid off 40 of its 130 employees and trimmed production – Two customers have turned to cheaper imports from China, which is not covered by Europe's costly regulations

What Are Other Countries Doing?

• • French cement workers fear they're going to lose jobs to Morocco, which doesn't have to meet the European guidelines German homeowners pay 25% more for electricity than they did before, even as their utility companies earn record profits.

What Are Other Countries Doing?

• United States: – Cap and trade for reduction of SO 2 emissions – Reduced 50% from 1980-2007 – Clean Air Act 1990 – Western Climate Initiative (WCI)-greenhouse gas emissions trading system

The Future

• • • • Warmer temperatures Higher sea levels More and stronger earthquakes We can do something about it!