Bailing out environmental liabilities: moral hazard and deforestation in the Brazilian Amazon

This paper discusses the emergence of moral hazard behavior in the context of a change in the Brazilian law that governs land use - the Forest Code. The Forest Code revision included benefits which relieved environmental liabilities for a specific group of landowners. We explore the fact that the Forest Code establishes two distinct legal regimes for landowners according to their adherence to the previous law. Basically, those that were not abiding by the former law gained special conditions to regularize the environmental liabilities, whereas those that were in accordance with the law did not receive any benefits. We argue that this latter group engaged in deforestation activities in the hope of also receiving bail outs in the future. We investigate our hypothesis using data on yearly deforestation from 2009 to 2017 by rural private properties in the Brazilian Amazon. Using a difference-indifferences approach, we first show that the new Forest Code has had a significant impact on deforestation. We then extend the analysis in order to demonstrate that hat landholders behave as if the law were non-binding. Moreover, we document increases only in livestock, but not in crop area. Finally, we conduct a counter-factual analysis which reveals that the Forest Code revision led to an additional loss of 533 thousand hectares between 2012 and 2017, which represents a loss of US$ 1.3 billion, taking no more than carbon emissions into consideration.