Modeling economic impacts of environmental policies: the case of PES and Climate Regulation legal framework in Goias 9th AgroEnviron - Goiânia, August 4th 2014

Summary of presentation 1.Snapshot on Goias development process and on GHG emissions profile 2.Research question: how climate policies are expected to impact Goiás’ economy? 3.Intro to CGE method 4.Scenarios 5.Results 6.Discussion

Summary of presentation 1.Snapshot on Goias development process and on GHG emissions profile 2.Research question: how climate policies are expected to impact Goiás’ economy? 3.Intro to CGE method 4.Scenarios 5.Results 6.Discussion

Snapshot on Goiás' development process and on GHG emissions profile Goiás share its economic history with the process of occupation of Brazilian Savannah (Cerrado). Its GHG emissions profile derives from this process. Occupation started during the 1700’s. Gold cycle lasted about 50 years, and agriculture and Livestock remained as the most important economic sectors for the next 250 years. Urbanization gained momentum from 1940, but from 1980 onwards, the state has passed through quik industrialization process.

Snapshot on Goiás' development process and on GHG emissions profile

Currently, Goiás is a modern region, having the 9 th biggest economy of Brazil, with largest participation of services (59% of GDP) and industry sectors (27% of GDP). Goiás is now more urbanized than the average of Brazil. Economic growth was above national average over the last 15 years, lead primary by transformation Industry, in special:  Food  Ethanol  Automobiles  Chemistry and pharmaceutics

Snapshot on Goiás' development process and on GHG emissions profile Agriculture and Livestock currently contributes with only 14% of Goiás’ GDP, but these are the key sectors for Goias’s Climate Policy:  Hold strong Input-putput relationships with industry and services sectors  Are sensible to policies that restrict land use  GHG emissions occur through several process (75% of Brazilian GHG emissions occur in the AFOLU sector). In 2010, GHG emissions estimatives for Goias: o N2O emissions due to use of fertilizers: 1,3 Gg CO2e o CH4 emissions due to enteric fermentation: 25 Gg CO2e o CO2 emissions due to cerrado deforestation: 5 Gg CO2 o Total (non-exaustive): 31,3 Gg CO2e. o During the same period, all emissions in the capital of the state summed 2,98 Gg CO2e. Note: 1Gg = 1 million ton

Summary of presentation 1.Snapshot on Goias development process and on GHG emissions profile 2.Research question: how climate policies are expected to impact Goiás’ economy? 3.Intro to CGE method 4.Scenarios 5.Results 6.Discussion

Research Question Given that:  Due to the emissions profile, GHG mitigation strategy should focus on Agriculture, Forestry and Other Land Use sector (AFOLU),  Economic structure of Goias is currently based on Services and Industry. AFOLU accounts for only 14% of GDP. But when we look into the Services and Industry economic sectors, we see that there are important input-output relationships with AFOLU. So, what will be the impact of controlling deforestation to the economy of Goiás?

Summary of presentation 1.Snapshot on Goias development process and on GHG emissions profile 2.Research question: how climate policies are expected to impact Goiás’ economy? 3.Intro to CGE method 4.Scenarios 5.Results 6.Discussion

Intro to CGE method Introduction to Computable General Equilibrium method  Method that describes the behavior of economic agents: companies combine production factors (capital, land and labor) to produce commodities, and families receive salaries and consume commodities.  Policy analysis is conducted by shocking an economic variable and observing how the economy adjusts.  The model was developed at University of São Paulo by Prof. Joaquim Bento Ferreira Filho, and uses data from Brazilian Input-Output Table and is disaggregated at the state level.

Summary of presentation 1.Snapshot on Goias development process and on GHG emissions profile 2.Research question: how climate policies are expected to impact Goiás’ economy? 3.Intro to CGE method 4.Scenarios 5.Results 6.Discussion

SIMULAÇÃO Simulated scenarios : Scenario 1: Extreme scenario  complete halting deforestation Scenario 2: Brazilian NAMA  progressive control of deforestation until achieving the target of National Climate Policy (reducing 40% of historical rate of deforestation by 2020) Scenario 3: how much education and R&D we need?  how much more productive should land and labor be in order to offset economic losses occurred in Scenario 2?

Summary of presentation 1.Snapshot on Goias development process and on GHG emissions profile 2.Research question: how climate policies are expected to impact Goiás’ economy? 3.Intro to CGE method 4.Scenarios 5.Results 6.Discussion

Results – Baseline This graph shows how deforestation in Goiás is expected to happen in the baseline: 2 million hectare of non anthropized land would be converted between 2013 and 2025 to the following land uses: Beef Cattle (1,1 million ha) Dairy cattle (0,27 million ha) Soybeans (0,33 million ha) Maize (0,1 million ha) Other food commodities (0,1 million ha) Forestry (0,01 million ha) Simulated scenarios represent policy shocks on the expected deforestation

RESULTS – Sc. 1: zero deforestation Activity Absolute Change (R$ million) % Change Mining241.5% Transformation industry (except Food processing) % Transportation160.4% Pigs, poultry, egg and fish30.3% Service1080.2% Other processed food % Dairy % Beef % Commerce % Sugar and Ethanol % Vegetable Oils % Forestry % Other food commodities % Maize % Dairy cattle % Beef Cattle % Soybeans % Sugar Cane % Total % This table shows that if deforestation is completely halted in Goiás during the next 13 years, the accumulated Value of its Production is expected to be only 0.9% lower than in the baseline over this period (due to the constrain in land supply). Although CGE models react negatively to a constraint in a production factor, our results shows that some activities will actually benefit from the policy (as capital and labor move to these sectors).

RESULTS – Sc. 1: zero deforestation This graph shows differences in macroeconomic variables between Scenario 1 and the baseline. Halting deforestation is expected to cause small negative impacts in Goias macroeconomy: -0.26% in Employment -0.94% in GDP -1.12% in Salaries -1.35% in Consumption

RESULTS – Sc. 1: zero deforestation This graph shows the difference in price index per social stratum between Scenario 1 and the baseline. POF 1: families with income between 1-2 minimum wages … POF 10: families w/ income above 30 minimum wages Halting deforestation is expected to impact more the wealthier than the poorer. Indicates a progressive policy in terms of income distribution.

RESULTS – Sc. 2: Brazilian NAMA Scenario 2 simulates the achievement of a Brazilian Climate Change Nationally Appropriate Mitigation Action for deforestation, that is, the voluntary target to reduce the deforestation of Cerrado biome by 40% in Results are similar to Scenario 1 but a bit softer (as it can be understand as a relaxation of the strictness of land supply imposed in Scenario 1).

RESULTS – Sc. 3: productivity increase Scenario 3 aimed at calculating by how much the productivity of land and labor would have to increase in order to neutralize the reduction of GDP observed in Scenario 2. We calculated that only a small increase in productivity is sufficient to offset economic losses, only 6% higher than the average of the historical increase of such factor productivity in agriculture in Brazil.

Summary of presentation 1.Snapshot on Goias development process and on GHG emissions profile 2.Research question: how climate policies are expected to impact Goiás’ economy? 3.Intro to CGE method 4.Scenarios 5.Results 6.Discussion

RESULTS – Final remarks The objective of the present work was to support the establishment of a legal framework on Climate Change and Payment for Ecosystem Services by the Government of the State of Goiás, by simulating the economic impacts caused by the restriction of new land supply. This analysis was deemed necessary as, even though only 14% of Goiás GDP is attributed to the primary sector, there are still strong input-output relationships between Agriculture and Livestock and Industry and Services sectors. The results indicate that the economic impacts caused by the restriction of new land supply are negative but generally negligible.

RESULTS – Final remarks The results indicate that the economic impacts caused by the restriction of new land supply are negative but generally negligible. However, sectorial impacts caused by the policy are quite heterogeneous. Policy makers should be sensible to the presence of both winners and losers Sectors that are expected to be more negatively affected include: soybeans, beef and dairy cattle and commerce. Sectors that will actually benefit from the intersectorial movement of capital and labor caused by the policy include: services, transformation industry, and transportation. Finally, it should be highlighted that CGE methodologies do not take externalities into account. Hence, positive impacts of the Environmental Services could offset the subtle economic losses that were calculated in this study.

Thank you, Matheus Alves de Brito Fabio Weikert Bicalho Patrícia Vargas Oliveira Prof. Joaquim Bento Ferreira Filho Denise Daleva Costa Smantha Catein Stephania Brandão Susete Pequeno Graziela Fonseca