Trade-off between amazon forest and agriculture in Brazil – shadow price and their substitution estimative for 2006

Agriculture has led to deforestation in the northern states of Brazil during the last decades, generating a tradeoff between forest and agricultural commodities. In this study we estimate this tradeoff for the Brazilian Amazon region. To calculate the tradeoff, we use a directional distance function to estimate a production possibility frontier and the marginal rate of transformation between deforestation and agricultural activities. Using this information and market prices we calculate the shadow price of deforestation in terms of agricultural GDP foregone. Results indicate that, on average, US$ 129.48 in agricultural GDP has to be foregone to keep one hectare of virgin tropical forest. Marginal rates of transformation suggest a higher tradeoff between livestock and deforestation given the currently extensive production in the region. Also, we found that these rates vary across states due to the relevance of each agricultural activity for them, illustrating the heterogeneity of the region with respect to agricultural production. We also found an average perpetuity shadow price of a ton of CO2 emissions of US$4.16. A market-price equilibrium for tCO2 at this average price would lead to a reduction of at least 468 thousand hectares, around 43% of 2006 deforestation.