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Loans tied to environmental compliance reduced Amazon deforestation by 15%

Mato Grosso, Brazil

A rural credit law that ties loans to environmental compliance made a significant contribution to reducing deforestation in the Brazilian Amazon between 2008 and 2011, argues a study published by the Climate Policy Initiative (CPI).

Does Credit Affect Deforestation? Evidence from a Rural Credit Policy in the Brazilian Amazon looks at the impact of Brazil’s Resolution 3545, a 2008 law that restricts access to subsidized credit for rural farmers and ranches who fail to provide proof of compliance with environmental laws. The study concludes that Resolution 3545 resulted in the withholding of 2.9 billion Brazilian reals ($1.4 billion) in rural credit between 2008 and 2011, preventing 2,700 square kilometers of deforestation. The area represents 15 percent of the decline in forest clearing observed during the period.

The impact was the strongest in areas where cattle ranching — by far the biggest direct driver of deforestation in the Brazilian Amazon — is the main economic activity, rather than production of crops like soy, maize, rice, and sugar cane. According to CPI, the finding “suggests that cattle ranchers are credit-constrained and responded more to changes in the availability of subsidized credit, or that crop farmers may use the subsidies to intensify productivity instead of expand their production frontier.”

The paper also found that “large producers were more affected than small producers, who had less stringent requirements and more exemptions.”

Juliano Assunção, director of CPI Rio and professor at the Department of Economics at the Pontifical Catholic University of Rio de Janeiro (PUC-Rio), says the results show that Brazil’s policy interventions are having a significant impact on reducing deforestation, which has fallen sharply since the government launched the Plano de Ação para a Prevenção e o Controle do Desmatamento na Amazônia Legal (PPCDAm) program to cut forest loss in 2004.

“It’s clear from our analysis that Brazil’s rural credit policy is helping to reduce deforestation,” Assunção said in a statement. “We also see, however, that design and implementation details matter.”

An earlier analysis by CPI estimated that about half the observed drop in Amazon deforestation could be attributed to government government conservation. Other factors behind the nearly 80 percent drop in the annual deforestation rate since 2004 include macro-economic factors, changing consumer preference, and private sector initiatives.

Brazil accounts for more than 60 percent of the Amazon and over 30 percent of the world’s tropical rainforest cover.

Juliano Assunção, Clarissa Gandour, Romero Rocha, and Rudi Rocha. Does Credit Affect Deforestation? Evidence from a Rural Credit Policy in the Brazilian Amazon. Climate Policy Initiative. January 2013

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