Regulating Deforestation Through Supply Chains – Evidence from the Amazon

Brazil is the world's largest exporter of beef products, much of which originates in the Amazon region and raises worldwide environmental concerns. Indeed, 92% of recent deforestation in the Brazilian Amazon is driven by pasture for beef cattle. Despite contributing less than 0.05% of global GDP, beef from the Amazon is responsible for 1.5% of global greenhouse gas (GHG) emissions. Regulating deforestation is challenging due to the sheer vastness of the Amazon. There is a trade-off between administrative feasibility and the effectiveness of environmental policy. This project investigates how market structure in the beef supply chain affects optimal environmental policy in the Amazon. The optimal, “first-best” policy may be administratively and politically infeasible, so the project also examines alternative policies under different constraints, and contrasts their relative efficiencies.

In Brazil there are many farmers upstream who raise cattle and many consumers downstream who purchase beef products, yet the production goes through relatively few intermediaries: slaughterhouses. Relationships between slaughterhouses and farmers are regional and imperfectly competitive. To study how this market concentration influences how one must think about environmental policy, the researcher develops a quantitative spatial model of the beef supply chain. The model includes farmer deforestation decisions, slaughterhouse sourcing in an oligopsony environment, and international trade. He estimates it using high-resolution land transition data, cattle movement records and customs data. Future work will enrich this model by incorporating new facets of deforestation and the cattle supply chain.

Recent progress on this project has showed that slaughterhouse market power leads to an incomplete pass-through of the carbon tax to farmers, resulting in only half the deforestation reductions which would occur under full pass-through. This result also comes with great spatial heterogeneity because pass-through rates vary in space even under the same tax. By incorporating new aspects of slaughterhouse sourcing, this project aims to inform how policymakers can think about targeting environmental policies.