Discussion Draft: The Economic Impact at the National Level of the Illegal Conversion of Forests for Export-Driven Industrial Agriculture

Forests & Lands

Between 2000-2012, half of all tropical deforestation was the result of illegal clearing for industrial agriculture (Lawson et al. 2014).  This report aims to characterize the costs of this illegality.  While the impacts are widespread, including global, we focus our analyses on the costs to the countries in which the deforestation occurs.  We hope a broad estimate of financial loss will help convince forest country actors, like Finance Ministers, of the gains to be made by enforcing laws and regulations related to land use for industrial agriculture.

Illegal clearing creates losses by undermining a country’s objectives for the management of its natural resources, like land and forests, which include, inter alia, promoting:

  • Economic activity that generates jobs, investment, as well as tax revenue;
  • Production of timber and non-timber forest products, as well as the maintenance of ecosystem functions like climate stabilization;
  • Contribution to the lives and livelihoods of rural people; and,
  • Protection of the rights of indigenous people, forest-owners, and forest-users.

Governments minimize the risk that these objectives will go unmet by using legislation, where objectives are framed into policy, which is translated into law, then elaborated and implemented through regulation.  When effective—that is, when rational, enforced, and otherwise incentivized—regulations serve as countermeasures against operators pursing private interest counter to national objectives.  When this risk management fails and the ‘rule of law’ is violated, the country’s objectives are not met, and the ‘common good’ suffers.  In this paper we attempt to quantify the costs of these losses.

First, we provide a general legislative framework governing forest management and a typology of violations of this ‘rule of law’ (where illegality is defined broadly as operating without or exceeding authority, and/or evading taxes and fees).  While it is inherently difficult to evaluate the scope of illicit activity like illegal deforestation, it is even more difficult to quantify the costs associated with this illegality.  This is especially true for costs that do not have observable market values, as in the case of many environmental and social externalities.  For example, it is highly likely that deforestation disrupts ecosystem function, but quantifying the cost of such disruption remains an inexact science and attempts to assign a number may risk under-valuing the severity of impact.

We used global averages to calculate three major classes of loss, noting that we do not suggest that only impacts that can be quantified are worth acknowledging and addressing:

  • Tax evasion: conservatively estimated at ~US$2,300/hectare logged, based on case studies;
  • Ecosystem function: ~$1,784/ha/year, based on Costanza et al. (1997) valuation with the contribution of climate stabilization removed ($233/ha/yr) because climate stabilization is more of a global good rather than a national good; and,
  • Conflict with forest communities: ~$113/ha/year, based on the work of the Munden Group (de Leon et al. 2013)—this estimate refers only to decreased agricultural productivity due to conflict, and does not evaluate the costs of conflict to the government, nor the communities themselves. These other costs, though un-quantified, are undoubtedly much larger that the simple loss in production.

We conclude that illegal deforestation costs countries at minimum $4,000/ha.

We then evaluated these costs with case studies from Costa Rica (who, three decades ago, decided to forego altogether deforestation for all agriculture); Liberia (an emerging producer of palm oil—and potentially deforestation); and Indonesia and Brazil—which together comprise more than half of all tropical tree loss. Indeed, Indonesia is now one of the largest emitters of greenhouse gases globally due to the widespread use of fires in land clearing, especially on peatlands.  In contrast, Brazil has reversed course and dramatically reduced deforestation, primarily by engaging supply chains for industrial beef and soy production.  In this reversal, Brazil has done more than any other country to address global climate change.

In summary, we estimate that illegal deforestation for industrial agriculture globally generated losses of more than $17 billion each year during the early 2000s.  It cost Indonesia more than $4.9 billion per year in lost production due to conflict with communities, lost tax revenue, and lost ecosystem function, not to mention some share of the more than $16 billion in lost economic activity and damage to human health from forest fires in 2015, many of which were associated with land clearing for industrial plantations.  Also highly likely but difficult to quantify are costs associated with decreased investment and development assistance due to damage to Indonesia’s reputation caused by this illegal use of fire and the accompanying corruption and other illicit activity, like money laundering.  In contrast, by reducing forest clearing for soy plantations and cattle pastures, Brazil has prevented many of the losses totaling more than $8.4 billion per year associated with previous levels of illegal deforestation.  We note that these detrimental environmental and social impacts drove consumer campaigns that ultimately led to a wave of voluntary corporate zero deforestation commitments in order to maintain market access.  Unaddressed, these severe impacts risk undermining peace, security, and democracy itself, as agri-business corrupts local elections, and plantations generate grievance among locals, often fueling violent conflict.

International carbon markets could provide another major source of income from forest protection that is excluded above.  Even at $5/tonne CO2, forested countries would lose additional billions of dollars per year if illegal deforestation for agriculture continues. These costs would be borne by legal and illegal actors alike, if markets perceive even moderate levels of illegality to suggest the country is too risky or too corrupt for investment.

While the costs of deforestation are substantial, these costs are rarely borne by the agricultural operators themselves.  Yet if they stop illegal land clearing, then they will incur the costs of compliance.  This ‘conflict of interest’ makes enforcement necessary.  But, the lessons from this paper suggest that while necessary, enforcement is rarely sufficient; policing is almost impossible when everyone is violating the law (as was the case in Brazil).  Thus, additional incentives are also necessary.  In Costa Rica, for example, positive incentives, especially payments for environmental services, helped drive change.  And, as mentioned above, in Brazil, consumer-campaigns drove producers to commit to zero-deforestation.  Yet in both cases, most operators still said that without law enforcement, they would have continued clearing forest for expansion.  So in the end, halting illegal forest conversion requires both enforcement and incentives.  Thus, stopping illegal deforestation is an environmental and an economic issue, as well as an enforcement issue.  We conclude that if forest countries follow the lead of Costa Rica and Brazil and engage in aggressive campaigns to halt illegal forest conversion for industrial agriculture, then they would reap major economic benefits and avoid many of the associated costs outlined herein.

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On April 26, 2018

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