This article was originally published on VoxDev.
“…Deforestation cost studies have ignored the likelihood and possible economic impact of a large-scale forest dieback, therefore underestimating the ‘true’ social cost of deforestation. Amazon countries have faced the risk of an unexpected forest-savannah transition, which will result in dramatic losses of ecosystem services and benefits.
In Franklin and Pindyck (2018), we explore the implications of a forest-savannah critical transition, and propose an alternative framework for calculating the economic value of a standing tropical forest. Because forest resilience is a function of rainfall patterns, and the Amazon rainfall patterns are in large part maintained by the forest itself, forest resilience can be represented as a function of the proportion of deforested area at any time. We show that when the possibility of a tipping point is taken into account, the social cost of deforestation can be much higher than the foregone economic benefits from deforestation, and greater payments for ecosystem services may be necessary to avoid a catastrophic loss of those services and benefits.
Figure 1 shows, from the perspective of the Amazon region, how the marginal social cost of deforestation varies with the proportion of deforested area, ignoring and then taking into account a tipping point. First, ignoring the tipping point (as prior cost studies do), the foregone economic benefits from one hectare of deforestation remain roughly constant until the proportion of deforested area reaches some critical threshold that triggers a large-scale forest-savannah transition, at which point the foregone economic benefits jump to US$5 trillion. On the other hand, taking into account the existence of a forest-savannah tipping point, we can observe rapid increases in damages once the forest area is reduced below some critical point, which may function as an early warning to stop deforestation. Figure 2 shows, from the Brazilian perspective, how the marginal social cost of deforestation varies with the proportion of deforested area, when the other Amazon countries convert 20% and 40% of their forest areas to alternative land uses. The existence of a forest-savannah tipping point implies that each Amazon country observes a marginal social cost of deforestation that largely depends on the land-use policy adopted by the others. This gives rise to coordination problems among Amazon countries that have been largely ignored…”
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