Changing Climate in Brazil: Key Vulnerabilities and Opportunities

Key Question Being Explored in This Insight:

How vulnerable is the Brazilian economy to climate change, and what are its opportunities for green growth? In this interview, Christina Elisabeth Kolerus explores Brazil's climate risks, particularly in agriculture and hydropower, noting that land-use patterns have heightened these vulnerabilities.

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Institution: International Monetary Fund

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How vulnerable is the Brazilian economy to climate change, and what are its opportunities for green growth? In this interview, Christina Elisabeth Kolerus explores Brazil’s climate risks, particularly in agriculture and hydropower, noting that land-use patterns have heightened these vulnerabilities.

The views expressed in the interview and paper are those of the authors and do not necessarily represent the views of the IMF, its Executive Board or IMF management.

Image courtesy of interviewee. October 24, 2024

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This video discusses the relationship between climate change, food prices, inflation, and Brazil's economy, highlighting a significant increase in electricity costs driven by hydropower's vulnerability to droughts. It identifies three main sectors affected: agriculture, power generation, and the Amazon's ecosystem, emphasizing that changing climate conditions lead to decreased resilience and increased risks across these sectors.

The report identifies key challenges Brazil faces, including stopping deforestation, investing in agricultural adaptation, and modernizing the power sector. Additionally, it notes Brazil's potential for green growth due to its high percentage of renewable energy in power generation.

The document suggests that Brazil's agriculture, vital for the economy and exports, is impacted by climate variability and regional vulnerabilities, particularly in less irrigated northern regions. It also examines how climate volatility affects hydropower capacities, projections of future energy gaps, and their implications for emission targets.

Investment in climate-resilient practices is deemed necessary, suggesting that relatively small GDP investments could significantly mitigate climate impacts on agriculture. The document outlines initiatives aimed at improving financial instruments and credit systems in the context of ecological transformation and sustainability, including mandatory carbon markets and climate finance mechanisms.

This video concludes by advocating for a feedback system integrating penalties for environmentally harmful practices alongside incentives for sustainable agriculture, emphasizing Brazil's competitive advantages, potential for green growth, and alignment with national determined contributions (NDCs) to reduce emissions sustainably.

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Here are five key points from the video:

1. **Impact of Climate Change on Key Sectors**: The video discusses the effects of climate change on Brazil's economy, particularly focusing on agriculture and power generation. It highlights how climate conditions, such as droughts, have disrupted hydropower production (which accounts for about 60% of Brazil’s electricity) and necessitated reliance on more expensive thermal power sources.

2. **Challenges and Opportunities in Sustainability**: Three main challenges are identified: stopping deforestation, investing in agricultural adaptation, and making the power sector resilient for the future. Conversely, significant opportunities exist, such as Brazil’s renewable energy potential (90% of power production) and the emerging carbon market, which could attract climate finance.

3. **Disparities in Agricultural Vulnerability**: The video notes that certain regions in Brazil, particularly the northeast, are more vulnerable to climate impacts due to less irrigation infrastructure and lower insurance coverage. This regional disparity can lead to significant price fluctuations in agricultural products.

4. **Financial Sector Exposure**: Approximately 20% of Brazil's financial sector credit portfolio is exposed to climate-vulnerable sectors, with 12% allocated to agriculture. The video warns that increased climate risk has led to a rise in insurance claims, particularly following drought events, emphasizing the financial sector's need to adapt to these changes.

5. **Regulatory and Market Innovations**: Brazil is implementing new sustainability initiatives, such as a mandatory carbon market targeting large emitters and a rural credit bureau designed to match farmers with credit while ensuring compliance with environmental standards. These measures aim to promote green growth and help Brazil meet its Nationally Determined Contributions (NDCs) for emissions reduction by 2030.

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Here are the key quotes extracted from the video, highlighting the main points and themes discussed:

1. **On Inflation and Climate Conditions**:
- "We were looking at food prices and saw them going up in real times, but we also saw aggregate inflation increasing even more... it was actually electricity."

2. **Impact of Climate on Power Generation**:
- "About 60% of Brazil's electricity generation is coming from hydropower... during the 2021 drought, water levels fell and hydropower production had to be replaced by thermal power production."

3. **Consequences of Climate Change**:
- "The increased frequency of droughts has also diminished the Amazon's resilience to shocks... we risk a profound modification of water cycles, which in turn has an effect on agriculture and hydro power production."

4. **Key Challenges Identified**:
- "The first one is stop deforestation... The second is investing in agriculture... The third challenge is to make the power sector fit for the future."

5. **Opportunities for Brazil**:
- "About 90% of power production is coming from renewables... this gives this lens together with carbon credits, together with climate finance."

6. **Economic Significance of Agribusiness**:
- "Agribusiness... makes up around a quarter of Brazil's economy and about half of Brazil's exports."

7. **Regional Disparities in Agriculture**:
- "Farmers in the northeast are much more vulnerable than farmers in the southern part of the country... this is related to less irrigation systems, but also to insurance coverage."

8. **Predicted Decline in Hydropower Capacities**:
- "Under high emission scenarios, we see a decline in power or hydropower capacities by about 20%."

9. **Financial Sector Exposure to Climate Risk**:
- "About 20% of the financial sector's credit portfolio is exposed to the sectors vulnerable to climate change."

10. **Commitment to Reduce Emissions**:
- "Brazil's nationally determined contributions require reducing emissions by about one third by 2030."

11. **Importance of a Carbon Market**:
- "A mandatory carbon market is being designed... to target the largest emitters in Brazil."

12. **Innovative Financial Initiatives**:
- "The InterAmerican Development Bank is offering credit lines as well as hedging instruments that could attract more financing for green products."

13. **Rural Credit Bureau's Role**:
- "The rural credit bureau... is more like a marketplace where a farmer looks for rural credit and the farmer discloses information about the project..."

14. **Deforestation and Conservation Initiatives**:
- "The Amazon Fund... focuses on projects and initiatives related to law enforcement to bring down the deforestation rate."

15. **Climate Adaptation Investments**:
- "We computed a model... and derived an optimal investment in agriculture that is relatively small, is only 0.5% of GDP."

16. **Feedback System in Agricultural Production**:
- "A fee-based system... would differentiate across agricultural products based on their emission intensity."

These quotes encapsulate the critical insights related to the impact of climate change on Brazil's economy, particularly in agriculture and power generation, as well as the various initiatives and challenges faced in addressing these issues.

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We were looking at food prices

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and saw them going up in real times,

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but we also saw aggregate inflation increasing even more.

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And we are wondering what was driving this.

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And it turned out it was actually electricity.

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So we really wanted to understand better what was going on

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and how climate conditions affected the,

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Brazilian economy at the time.

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Now, we focused on two sectors.

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Um, first one was agriculture,

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and the second is power generation.

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Uh, while the impact

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of climate changing climate conditions on agriculture seems

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pretty straightforward, it's a little bit, trickier

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for power generation.

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So let me unpack the second.

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About 60% of Brazil's water, of,

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of Brazil's electricity,

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generation is coming from hydropower.

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Now, during that 2021, drought water levels fell

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and hydropower production had to be replaced

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by thermal power production.

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This is fueled by gas, and it had to be imported.

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So it is way more expensive than hydropower protection.

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Electricity prices increased,

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the increased dry season length,

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and increased frequency of droughts has also

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diminished the Amazon's resilience to shocks.

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So in addition to these, climate shocks

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that the Amazon is facing, deforestation

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and land use patterns that we have seen are heading on top.

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So what we see is we risk of a profound modification

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of water cycles, which in turn has an effect on agriculture

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and on hyper protection.

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So all the, these three together are intertwined, of course.

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And, changing climate conditions feed

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through these three different sectors

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and affect the economy.

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We identified three challenges.

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Um, the first one is stop deforestation

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and build on this huge success that we've seen in 23.

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So, the rates of deforestation relative

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to 22 were halved, and that was impressive.

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And locking in these policies, that would be fantastic.

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The second, is investing in agriculture,

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so investing in adaptation to adjust the crops as well

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as livestock to the changing conditions.

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And the third challenge, is

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to make the power sector fit for future.

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So to diversify

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and invest in the grips, a lot is happening already.

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But to continue, continue investing in this.

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Um, and let me maybe add also it's the, a final challenge

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that is more positive challenge, which is,

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seize the opportunities that Brazil has by now.

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The about 90% of power production is,

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coming from renewables,

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and thus, this gives this lens

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to green growth opportunities, seizing those opportunities

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together with carbon credits, together with climate finance,

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the interest that is there for carbon credits.

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I think that's, it's a big challenge for Brazil.

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It's a positive challenge. Let me start with agriculture

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and then move to hydro pilot.

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So agribusiness meaning traditional agriculture, as well

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as processing, food processing

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And services related to agriculture.

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Um, make up around a quarter of Brazil's economy

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and about half of Brazil's export.

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So this is significant. Now,

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you might argue Brazil is big geographically, so,

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a disaster or a a natural, the su in one part

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of the country like drought might not hit the other part

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of the country yet.

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When we look at prices and also the impact on GDP, we,

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we do see aggregate impacts.

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Um, for instance, in 20 20 10, another year

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where drought hit Brazil, we saw

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that the price differential between the domestic prices

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and international prices, almost doubled, end up 50%

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for cattle and coffee and a hundred percent for corn.

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So there is an impact on the aggregate, from even from

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regional droughts that we have observed.

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There is regional disparity in terms of vulnerabilities.

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Farmers in the northeast are much more vulnerable than

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farmers in the southern part of the country, for instance,

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this is related to less irrigation systems,

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but also to, insurance coverage,

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which is lower in the northeast relative

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to other parts of the country.

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And hydropower, here, it's not only the single drought

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that matters, but what we've seen for the past decades that,

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higher volatility in temperature or changes in mean

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or deviations from mean temperature have,

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lowered capacity utilization.

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So we were thinking about how does that,

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how does climate change with even more volatility in

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temperatures, how does that impact future

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production of hydropower?

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And here we're basically utilizing different modules

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and different models, to understand power supply,

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power demand, and then to compute the power gaps

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that are arising from climate change.

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The supply power supply we use from the Pacific Northwest

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National Laboratory Model, it shows

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that under high emission scenario, we see a decline in power

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or hydropower capacities by about 20%.

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So we use, projection, long-term projections on this.

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We then, know in terms of power demand that higher

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economic growth as well as more demand

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for cooling will increase,

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our power demand in the future.

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So pulling this together, our power gaps

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that we compute are about 14% of the current supply.

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Simply from using, the standard models

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and relatively conservative assumption on the renewables,

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we know that there's a lot in the pipeline

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in terms of solar and wind.

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So this is more kind of an upper bound of a power gap.

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Yet just to understand that this power gap

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that would arise all else equal would translate into about

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20% higher emissions.

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So that would bring the country actually further away

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from meeting the national.

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The NDCs national contributions, about 20%

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of the financial sector's credit portfolio is exposed

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to the sectors vulnerable to climate change.

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So here we have about 12% of the credit portfolio that is

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Extended to agriculture,

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and about 5% that is extended to the energy sector.

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And the rest is, construction activities.

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So this is a sizable share of the bank's portfolio.

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Um, so far the financial sector,

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Brazil is very sound and is stable.

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Um, and also a mitigating sector could be,

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mid can factor could be that,

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that the credit is pretty short term, so it can be renewed.

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But what, what we've seen in particular in the 21 drought is

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that, in the insurance sector, for instance, emia

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as well as claims have increased, a lot

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during the crisis and they have not come back

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after, after 21.

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Brazil's nationally determined contributions

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require reducing emissions

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by about one third by 2030.

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Now, there are lots of initiatives out there,

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will focus on two main initiatives relative to the economy.

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It's the Ministry of Finances, plan

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for ecological transformation,

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and it's the, central bank sustainability agenda.

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Um, even I know those two, there are lots

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of initiatives that I'll try to focus on.

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The one that are, most interesting.

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Um, let me under, let me explain a little bit on the

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national, like the ecological transformation plan.

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It's the ministry takes a, a holistic view, on how

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to prepare the economy for meeting the NDCs.

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Um, I would say it's, it's kind of promoting a combination

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of promoting green growth while decarbonizing the economy

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and doing this in an equitable way.

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And let me ask, let me, let me give you a few examples

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that are being rolled out.

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So now, one is the carbon market.

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So here in a mandatory carbon market, is being designed

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as being, rolled out over the coming years.

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Uh, that would, target the largest emitters,

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in Brazil.

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Uh, it would compliment

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or it could be complimentary to a voluntary market of,

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carbon credits.

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And here, it's really important to get the design rights

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to get the institution right,

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the market infrastructure right, to make sure

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that this is not a greenwashing event,

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that this is true additionality

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and the authorities are very much interested in,

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in building such kind of market.

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Um, that is the sound carbon market to address,

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meeting the NDCs over the longer term.

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Let me also take the example of climate finance credit lines

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that they're currently rolling out.

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Um, so here, in order to attract a longer term financing,

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including from abroad, the ministry in corporation

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with the InterAmerican Development Bank,

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is offering credit lines as well as hedging instruments,

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that could lead to

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or attract more financing for green products.

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The idea is to incentivize the financial sector to extend,

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credit

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or offer more favorable conditions to sustainable

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products in general, under the umbrella of,

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of financial sustainability, of course.

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Um, the, two, I would say most interesting,

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Um, examples here.

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Um, one is related to disclosure requirements

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and the other one is related to the Rural Credit Bureau.

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And, let me explain those two.

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The first is, Brazil's pretty advanced in terms

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of disclosure requirements.

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So they at the Central Bank asks bank to,

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include in their disclosure quantitative metrics.

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So scope one and Scope two emissions,

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about their credit portfolio.

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So firms in their portfolio, need to be able to state,

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emissions, their own emissions so

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that the central bank can map climate risks,

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transition risks, and the exposure of banks.

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So the rural credit system,

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the central bank put in place in 2022,

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a rural credit bureau, you, you need

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to think about it more kind of as a marketplace

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where a farmer, looks for rural credit

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and the farmer discloses information about, the project,

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about, the location, about the crop.

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And that information then,

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its other parties can then use that information and, and,

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and be matched to the, to the farmer

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that is looking for credit.

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But at the same time, the regulator can also use

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that information and condition the credit on compliant

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with environmental and social standards, so such that the,

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the regulator can block a credit that goes

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to a farm in protected lands.

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And that is already happening.

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And that, that's, that's really interesting how,

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standards for credits can steer a climate smart as well

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as protective, infrastructure.

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Let me reiterate here as well that there is a lot of,

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different initiatives out there.

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Um, in the paper we focused on the largest,

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that largest in initiatives for, addressing,

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deforestation incentives and forest con conservation.

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Um, I think the biggest sort of difference

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between the Amazon fund and carbon credits

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and payment for environmental services is

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that the Amazon fund is relevant mostly for public lands.

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So here it focuses on projects

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and initiatives relative to, law enforcement.

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And that was been essential in 2023

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to bring down the deforestation rate.

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That that was really the key policy that helped

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bringing down deforestation over the past, one

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and a half years carbon credits as well as payments

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for environmental services focus more on private lands

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in terms of, and and granting incentives to protect forest

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or to reforest and incentives for sustainable land use.

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In general, carbon credits could be used in conjunction

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with other climate finance instruments, for instance.

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And maybe you've also read recently

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that there's a big interest

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by international companies in, in carbon credit.

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So that that, that, that opportunity Brazil,

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as I was talking about opportunities

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before Brazil has the opportunity,

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to set the appropriate standards

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and provide a market that guarantees, and additionality

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and pulls in more financing for carbon credit,

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but that's more on the private land

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and more on the incentive side rather

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than on the law enforcement.

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Now what we propose in the paper is a, feedback system

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that develops further the incentive part of the,

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program or the payment for environmental services.

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And the idea is that, while the payment

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for environmental services basically gives subsidies

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for those farmers that are, farming sustainably, the,

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the feedback would do this as well,

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but it would also add a part where you charge more

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to farmers that are not farming sustainably,

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or the idea is to,

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target big landowner at the forestry land border

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where those, landowners

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that turn forest into farmland would be tax higher

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or charge higher, versus owners that land owners

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that would turn their farming land into

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forests would be charged less.

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The the idea of the feedback is that it,

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it would be cost effective, it would cover more incentives,

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and it also would not be a fiscal burden.

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If we compare Brazil

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with peers on certain indicators like food loss

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or farm infrastructure, there's still a way to go.

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So there we need more investment in climate adaptation

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and in in agriculture.

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And, here we took a pretty macro view on this

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and asked how much investment do we need?

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We set up a model, we computed a model, calibrated it

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to, Brazil of two sectors, one agriculture,

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one non agriculture in an open economy.

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Um, hence there is trade with the rest of the world.

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And we allow the agriculture sector

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to suffer productivity losses due to climate damages.

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If we do this in calibrated with, Brazilian parameters,

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we actually derive an optimiz investment

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in agriculture that is relatively small, is only 0.5%

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of GDP, even if we remove all financing constraint,

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it's, it's relatively small.

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However, we can show that,

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this relatively small investment

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is cost effective in addressing the productivity loss

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and overcoming this, this,

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the damage from climate change.

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If we don't, invest in adaptation in the output

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of Africa, agriculture would fall, would fall

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by more than 2% of GDP and the,

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and food that would not be produced would need

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to be imported, hence risking food security in the country.

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Our paper here proposes as well a fee based system,

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which is very similar to the land use

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or deforestation, fee based

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that we talked about earlier.

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Just in this case, we would look

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and differentiate, across agricultural products.

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So the idea would be, to look at, crops

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like stock in terms

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of their emission intensity, and you would

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Charge, or you would charge higher taxes on

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products of, on production of crops

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or livestock that emits more emission.

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And you could then recycle this in grand subsidies

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or lower taxes to products that would,

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produce crops with lower emissions.

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Such a system would provide strong incentives

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for research and development.

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And what is very important here is that to,

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Brazil has a competitive advantage in agriculture, like 50%

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of are related somehow agriculture.

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And to maintain that competitive advantage, obviously,

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we we, we do not want to create a system where the most,

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competitive products are at a

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disadvantage relative to the world.

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Yet with a feedback system it could actually help investing

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in, in research and development to maintain that

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and competitive advantage globally.

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Those main vulnerabilities to rising temperatures and,

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and changing precipitation are concentrated in agriculture

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and, the power sector.

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But at the same time, Brazil's make one of those countries

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that could overcome that trade off between growth emissions

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and energy use, just given the very green energy mix,

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given the vast opportunities that Brazil has.

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And what we've also seen from, the initiatives

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that both from the Ministry of Finance,

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the national transformation plan, the, the

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ecological transformation plan, as well

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as the sustainability agenda from the central banks,

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as those are very promising avenues in order to,

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to take on those challenges,

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but also to towards meeting the NDCs over the longer term.

Quick Answers

Impact of Climate Change on Brazilian Agriculture and Power Generation

00:00:00 - We were looking at food prices and saw them going up in real times, but we also saw aggregate inflation increasing even more. And we are wondering what was driving this. And it turned out it was actually electricity. So we really wanted to understand better what was going on and how climate conditions affected the, Brazilian economy at the time. Now, we focused on two sectors. first one was agriculture, and the second is power generation. while the impact of climate changing climate conditions on agriculture seems

00:00:37 - for power generation. So let me unpack the second. About 60% of Brazil's water, of, of Brazil's electricity, generation is coming from hydropower. Now, during that 2021, drought water levels fell and hydropower production had to be replaced by thermal power production. This is fueled by gas, and it had to be imported. So it is way more expensive than hydropower protection. Electricity prices increased,

00:01:06 - and increased frequency of droughts has also diminished the Amazon's resilience to shocks. So in addition to these, climate shocks that the Amazon is facing, deforestation and land use patterns that we have seen are heading on top. So what we see is we risk of a profound modification of water cycles, which in turn has an effect on agriculture and on hyper protection. So all the, these three together are intertwined, of course.

Key Challenges for Brazil's Sustainable Development

00:01:38 - through these three different sectors and affect the economy. We identified three challenges. the first one is stop deforestation and build on this huge success that we've seen in 23. So, the rates of deforestation relative to 22 were halved, and that was impressive. And locking in these policies, that would be fantastic. The second, is investing in agriculture, so investing in adaptation to adjust the crops as well

00:02:07 - And the third challenge, is to make the power sector fit for future. So to diversify and invest in the grips, a lot is happening already. But to continue, continue investing in this. and let me maybe add also it's the, a final challenge that is more positive challenge, which is, seize the opportunities that Brazil has by now. The about 90% of power production is, coming from renewables, and thus, this gives this lens

00:02:40 - together with carbon credits, together with climate finance, the interest that is there for carbon credits. I think that's, it's a big challenge for Brazil. It's a positive challenge. Let me start with agriculture and then move to hydro pilot. So agribusiness meaning traditional agriculture, as well as processing, food processing And services related to agriculture. make up around a quarter of Brazil's economy and about half of Brazil's export. So this is significant. Now,

Regional Drought Impacts on Brazil's Economy and Agriculture

00:03:13 - a disaster or a a natural, the su in one part of the country like drought might not hit the other part of the country yet. When we look at prices and also the impact on GDP, we, we do see aggregate impacts. for instance, in 20 20 10, another year where drought hit Brazil, we saw that the price differential between the domestic prices and international prices, almost doubled, end up 50%

00:03:42 - So there is an impact on the aggregate, from even from regional droughts that we have observed. There is regional disparity in terms of vulnerabilities. Farmers in the northeast are much more vulnerable than farmers in the southern part of the country, for instance, this is related to less irrigation systems, but also to, insurance coverage, which is lower in the northeast relative to other parts of the country. And hydropower, here, it's not only the single drought that matters, but what we've seen for the past decades that,

00:04:16 - or deviations from mean temperature have, lowered capacity utilization. So we were thinking about how does that, how does climate change with even more volatility in temperatures, how does that impact future production of hydropower? And here we're basically utilizing different modules and different models, to understand power supply, power demand, and then to compute the power gaps

Power Supply Challenges and Climate Change Impacts in Brazil

00:04:44 - The supply power supply we use from the Pacific Northwest National Laboratory Model, it shows that under high emission scenario, we see a decline in power or hydropower capacities by about 20%. So we use, projection, long-term projections on this. We then, know in terms of power demand that higher economic growth as well as more demand for cooling will increase,

00:05:14 - So pulling this together, our power gaps that we compute are about 14% of the current supply. Simply from using, the standard models and relatively conservative assumption on the renewables, we know that there's a lot in the pipeline in terms of solar and wind. So this is more kind of an upper bound of a power gap. Yet just to understand that this power gap that would arise all else equal would translate into about 20% higher emissions. So that would bring the country actually further away

00:05:44 - The NDCs national contributions, about 20% of the financial sector's credit portfolio is exposed to the sectors vulnerable to climate change. So here we have about 12% of the credit portfolio that is Extended to agriculture, and about 5% that is extended to the energy sector. And the rest is, construction activities. So this is a sizable share of the bank's portfolio. so far the financial sector, Brazil is very sound and is stable.

Brazil's Climate Initiatives and Economic Transformation

00:06:15 - mid can factor could be that, that the credit is pretty short term, so it can be renewed. But what, what we've seen in particular in the 21 drought is that, in the insurance sector, for instance, emia as well as claims have increased, a lot during the crisis and they have not come back after, after 21. Brazil's nationally determined contributions require reducing emissions by about one third by 2030. Now, there are lots of initiatives out there,

00:06:48 - It's the Ministry of Finances, plan for ecological transformation, and it's the, central bank sustainability agenda. even I know those two, there are lots of initiatives that I'll try to focus on. The one that are, most interesting. let me under, let me explain a little bit on the national, like the ecological transformation plan. It's the ministry takes a, a holistic view, on how to prepare the economy for meeting the NDCs.

00:07:21 - of promoting green growth while decarbonizing the economy and doing this in an equitable way. And let me ask, let me, let me give you a few examples that are being rolled out. So now, one is the carbon market. So here in a mandatory carbon market, is being designed as being, rolled out over the coming years. that would, target the largest emitters, in Brazil. it would compliment or it could be complimentary to a voluntary market of,

Establishing a Robust Carbon Market and Climate Finance Framework

00:07:52 - And here, it's really important to get the design rights to get the institution right, the market infrastructure right, to make sure that this is not a greenwashing event, that this is true additionality and the authorities are very much interested in, in building such kind of market. that is the sound carbon market to address, meeting the NDCs over the longer term. Let me also take the example of climate finance credit lines that they're currently rolling out. so here, in order to attract a longer term financing,

00:08:26 - with the InterAmerican Development Bank, is offering credit lines as well as hedging instruments, that could lead to or attract more financing for green products. The idea is to incentivize the financial sector to extend, credit or offer more favorable conditions to sustainable products in general, under the umbrella of, of financial sustainability, of course. the, two, I would say most interesting,

00:08:56 - one is related to disclosure requirements and the other one is related to the Rural Credit Bureau. And, let me explain those two. The first is, Brazil's pretty advanced in terms of disclosure requirements. So they at the Central Bank asks bank to, include in their disclosure quantitative metrics. So scope one and Scope two emissions, about their credit portfolio. So firms in their portfolio, need to be able to state, emissions, their own emissions so

Enhancing Rural Credit through Environmental Standards

00:09:30 - transition risks, and the exposure of banks. So the rural credit system, the central bank put in place in 2022, a rural credit bureau, you, you need to think about it more kind of as a marketplace where a farmer, looks for rural credit and the farmer discloses information about, the project, about, the location, about the crop. And that information then, its other parties can then use that information and, and, and be matched to the, to the farmer

00:09:59 - But at the same time, the regulator can also use that information and condition the credit on compliant with environmental and social standards, so such that the, the regulator can block a credit that goes to a farm in protected lands. And that is already happening. And that, that's, that's really interesting how, standards for credits can steer a climate smart as well as protective, infrastructure. Let me reiterate here as well that there is a lot of,

00:10:32 - in the paper we focused on the largest, that largest in initiatives for, addressing, deforestation incentives and forest con conservation. I think the biggest sort of difference between the Amazon fund and carbon credits and payment for environmental services is that the Amazon fund is relevant mostly for public lands. So here it focuses on projects and initiatives relative to, law enforcement.

Incentivizing Sustainable Land Use to Combat Deforestation

00:11:06 - to bring down the deforestation rate. That that was really the key policy that helped bringing down deforestation over the past, one and a half years carbon credits as well as payments for environmental services focus more on private lands in terms of, and and granting incentives to protect forest or to reforest and incentives for sustainable land use. In general, carbon credits could be used in conjunction

00:11:36 - And maybe you've also read recently that there's a big interest by international companies in, in carbon credit. So that that, that, that opportunity Brazil, as I was talking about opportunities before Brazil has the opportunity, to set the appropriate standards and provide a market that guarantees, and additionality and pulls in more financing for carbon credit, but that's more on the private land and more on the incentive side rather than on the law enforcement.

00:12:09 - that develops further the incentive part of the, program or the payment for environmental services. And the idea is that, while the payment for environmental services basically gives subsidies for those farmers that are, farming sustainably, the, the feedback would do this as well, but it would also add a part where you charge more to farmers that are not farming sustainably,

Strategic Taxation for Sustainable Land Use in Brazil

00:12:38 - target big landowner at the forestry land border where those, landowners that turn forest into farmland would be tax higher or charge higher, versus owners that land owners that would turn their farming land into forests would be charged less. The the idea of the feedback is that it, it would be cost effective, it would cover more incentives, and it also would not be a fiscal burden. If we compare Brazil with peers on certain indicators like food loss

00:13:10 - So there we need more investment in climate adaptation and in in agriculture. And, here we took a pretty macro view on this and asked how much investment do we need? We set up a model, we computed a model, calibrated it to, Brazil of two sectors, one agriculture, one non agriculture in an open economy. hence there is trade with the rest of the world. And we allow the agriculture sector to suffer productivity losses due to climate damages.

00:13:45 - we actually derive an optimiz investment in agriculture that is relatively small, is only 0.5% of GDP, even if we remove all financing constraint, it's, it's relatively small. However, we can show that, this relatively small investment is cost effective in addressing the productivity loss and overcoming this, this, the damage from climate change.

Enhancing Agricultural Sustainability in Brazil: A Fee-Based Incentive Approach

00:14:16 - of Africa, agriculture would fall, would fall by more than 2% of GDP and the, and food that would not be produced would need to be imported, hence risking food security in the country. Our paper here proposes as well a fee based system, which is very similar to the land use or deforestation, fee based that we talked about earlier. Just in this case, we would look and differentiate, across agricultural products.

00:14:46 - like stock in terms of their emission intensity, and you would Charge, or you would charge higher taxes on products of, on production of crops or livestock that emits more emission. And you could then recycle this in grand subsidies or lower taxes to products that would, produce crops with lower emissions. Such a system would provide strong incentives

00:15:15 - And what is very important here is that to, Brazil has a competitive advantage in agriculture, like 50% of are related somehow agriculture. And to maintain that competitive advantage, obviously, we we, we do not want to create a system where the most, competitive products are at a disadvantage relative to the world. Yet with a feedback system it could actually help investing in, in research and development to maintain that and competitive advantage globally.

Brazil's Green Potential: Navigating Climate Challenges and Opportunities

00:15:48 - and changing precipitation are concentrated in agriculture and, the power sector. But at the same time, Brazil's make one of those countries that could overcome that trade off between growth emissions and energy use, just given the very green energy mix, given the vast opportunities that Brazil has. And what we've also seen from, the initiatives that both from the Ministry of Finance, the national transformation plan, the, the

00:16:26 - as the sustainability agenda from the central banks, as those are very promising avenues in order to, to take on those challenges, but also to towards meeting the NDCs over the longer term.

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Episode: Brazil's Economic Resilience