The e¤ects of uncertain forest conservation benefits on long-run deforestation in the Brazilian Amazon

Deforestation results from the trade-off between benefits from forest conservation and economic profits associated with land development. However, as net gains are often uncertain, irreversible land development may be later regretted. To better inform conservation policies, we use a real options framework to model irreversible forest conversion under uncertain conservation benefits and determine the associated optimal long-run average rate of deforestation. We then analyze the impact of the demand for agricultural products on the rate of deforestation in the Brazilian Amazon. In a scenario analysis for the nine states of the Brazilian Amazon we calculate the i) expected time for exhaustion of the current forest stock and ii) potential forest coverage for the next 20, 100 and 200 years. Our results suggest that if forest benefits grow over time at a sufficiently high speed, they may significantly slow down deforestation. In contrast, the higher their volatility, the faster deforestation proceeds.