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    Shari FriedmanDavid Gardiner & Associates

    Farms Here, Forests tHereTropical Deorestation and U.S.Competitiveness in Agriculture and Timber

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    acknowledgements

    We greatly appreciate the support o the National Farmers Union and Avoided Deorestation Partners or thisreport. We are particularly grateul to NFU president Roger Johnson and Jeremy Peters or their thoughtulengagement, and ADPs Founding Partner Je Horowitz and Washington Director Glenn Hurowitz ortheir contributions.

    Many dierent people helped make this report possible. Jonah Busch, Ph.D. o Conservation International andRuben Lubowski, Ph.D. o the Environmental Deense Fund provided invaluable assistance in the developmento the economic models used in the report. Erin Myers Madeira and Andrew Stevenson o Climate Advisers andResources or the Future gave extensive and important analytic input. Te Union o Concerned Scientists providedthe resources o its ropical Forest and Climate Initiative to assist in development and review o the report.

    Particular thanks go to Douglas Boucher, Ph.D. and Pipa Elias who provided guidance on integration o theirown and other groundbreaking research.

    We are also grateul to the many expert reviewers who provided detailed comments and eedback, includingGlenn Bush, Ph.D. o the Woods Hole Research Center, Proessor Bruce Babcock at the Center or Agricultural

    and Rural Development o Iowa State University, Barbara Bramble o the National Wildlie Federation, SaraBrodnax o Te Clark Group, oby Janson-Smith o Conservation International, Proessor Brian Murray oDuke Universitys Nicholas Institute, Alexia Kelly o the World Resources Institute, Sasha Lyutse o the NaturalResources Deense Council, Anne Pence o Covington and Burling, Annie Petsonk o the Environmental DeenseFund, Nigel Purvis o Climate Advisers, Naomi Swickard o the Voluntary Carbon Standard, Michael Wolosin o

    Te Nature Conservancy and several others.

    Carley Corda and her team at Glover Park Group designed the report, and special thanks go to ErikHardenbergh, Ryan Cunningham, and Grant Leslie or their help. Olivier Jarda and Caitlin Werrell providedresearch support, and Rachel Arends reviewed the design.

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    about tHe autHor

    David Gardiner & Associates prepared the paper on behal o Avoided Deorestation Partners and the NationalFarmers Union. Shari Friedman, Senior Advisor to DGA, served as lead author.

    David Gardiner & Associates helps industry, nonprots and oundations solve energy and climate challenges.DGA has expertise in climate and energy policy and regulation, as well as tools and strategies or businesses toreduce emissions, lower costs and create advantages within existing or potential policies. DGA also works withoundations and NGOs to develop and pursue strategies that advance their climate and energy goals.

    Shari Friedman is the President o ASF Associates and Senior Advisor to David Gardiner & Associates. ASFAssociates ocuses on climate change policy and private sector strategies. Ms. Friedman has 14 years o experience

    in climate change, including policy development, international negotiations and greenhouse gas markets. She hasexperience in both the ederal government and the private sector. From 1995 to 2001, Ms. Friedman worked onclimate change at EPA, analyzing domestic climate change policies and international competitiveness. From 1998to 2001, Ms. Friedman was part o the U.S. negotiating team or the Kyoto Protocol, ocusing on rules or project-level trading, particularly the Clean Development Mechanism.

    In 2001, Ms. Friedman joined Environmental Enterprises Assistance Fund (EEAF), which managed privateequity unds or environmental businesses. Ms. Friedman let EEAF to create Opus4, now ASF Associates. Ms.Friedman has a Masters degree in Public Policy rom Georgetown University and a B.A. rom uts University.

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    contents

    exiv sy 1

    I b 6

    II ciy ch ei Ip us m 14

    sy 14

    V oi 18

    bf 21

    ti 24

    III Fii Ip f tpi F off 28

    IV ci 29

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    eXecutIVe summarY

    Destruction o the worlds tropical orests by overseastimber, agriculture, and cattle operations has led to adramatic expansion in production o commodities thatcompete directly with U.S. products. About 13 million

    hectares (32 million acres) o orest are destroyedevery year mostly in the tropics.1 Tis deorestationhas allowed large-scale low-cost expansion o timber,cattle and agricultural production, and has also causeddamage to the environment and orest communities.Much o this timber and agricultural expansion has

    come through practices that do not meet U.S. industrystandards or sustainability, labor practices, and basichuman rights, providing these overseas agriculturaloperations a competitive advantage over U.S. producers.

    Te U.S. agriculture and orest products industriesstand to benet nancially rom conservation otropical orests through climate policy. Endingdeorestation through incentives in United Statesand international climate action would boost U.S.agricultural revenue by an estimated $190 to $270

    billion between 2012 and 2030. Tis increase includes$141 to $221 billion in direct benets rom increasedproduction o soybeans, bee, timber, palm oil and palmoil substitutes, and an estimated $49 billion* savingsin the cost o complying with climate regulations due

    to lower energy and ertilizer costs resulting rom theinclusion o relatively low-cost tropical orest osets.Climate legislation currently under considerationin Congress includes provisions to unlock thesebenets or U.S. agriculture through a combination

    o tropical rainorest osets and by setting asideallowances or tropical rainorest conservation.Combined with anticipated comparable action byother developed countries, these policies aim to cuttropical deorestation in hal by 2020 and eliminate it

    entirely by 2030.

    Tis report analyzes the impact o achieving theseconservation goals on U.S. production o soybeans,

    palm oil substitutes, bee, and timber. Eliminatingdeorestation by 2030 will limit revenues oragricultural expansion and logging in tropical countries,

    * Analysis o the cost o compliance with climate regulation was done by Climate Advisers. See Section III or more details. Tese benchmarks are chosen based on global targets or reduced deorestation.

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    providing a more level playing eld or U.S. producersin global commodities markets. We examine potentialannual eects o a reduction in deorestation as well asthe cumulative eect between 2012 and 2030.

    mhy

    Tis report is a rst step in understanding the potential

    impacts on U.S. agriculture o deorestation and globalorest conservation eorts. We consider the impact oreduced production o these commodities on tropicalorest lands and estimate how this reduction wouldaect the world market, taking into account resulting

    changes in commodity production on non-orest landsin tropical orest nations, the United States, and other

    parts o the world.

    We begin by estimating the amount o eachcommodity that is produced on ormerly orested

    land. We consider the impact o a reduction in theorested land available or agricultural and timberproduction in the tropics, without considering theunderlying government policies and measures that

    would produce this result. Tis analysis has been

    structured around available data and thereore methodsare specic to each commodity. Assumptions are

    outlined in the body o the paper.

    We use a partial equilibrium model to estimate theimpact o this reduction on the world market andthe price eects and changes reduced commodityproduction rom deorested land would have or

    revenue or the U.S. agriculture and timber markets. Weuse a range o supply and demand elasticities (estimateso the responsiveness o quantity demanded andsupplied to changes in price) rom existing literatureto provide a scope o possible outcomes. In the low

    revenue scenario, the United States has a limitedability to adjust production in response to market pricechanges and the rest o the world has a greater ability.In the high revenue scenario, the United States has agreater ability to respond to market price changes and

    the rest o the world has a more limited ability.

    We do not consider cross-elasticities or how the priceincrease o one commodity could aect the revenueso another. Tis could be a actor or bee revenues isoybean prices increase and vice versa. Tese actors

    (discussed more in Annex B) are important to drawinga uller picture o what would occur under reduceddeorestation scenarios. We aim to provide an initialconcept o the scope o the issue as a basis to moveorward with a uller analysis. Given time constraints

    and the dearth o existing data and analysis on this

    topic, this report makes the best possible use o theresources available. A uller analysis would incorporatedynamic economic modeling o price changes,estimates o technological improvements, changes in

    elasticities over time, more disaggregated and detailedcountry and regional supply reaction and impacts osupply changes in one commodity on production oother commodities. Tese are recommended areas orurther research.

    Ip f off

    Allowing international orestry osets in climate

    legislation also aects U.S. agriculture and orestry.Because these osets are among the most aordablemeans o reducing climate pollution, they wouldprovide signicant savings on electricity, uel, ertilizer,and other input costs or the U.S. agriculture, ranching,

    Cumulative Revenue Increase

    to U.S. Agriculture and TImber Producers

    from Ending Deforestation, 2012 2030

    Commodity 2008 U.S. $ Billion

    Soybeans $34.2 $53.4

    Palm Oil and

    Palm Oil

    Substitutes (1)

    $17.8 $39.9

    Beef $52.7 $67.9

    Timber $36.2 $60.0

    Total

    Cumulative$141.0 $221.3

    (1) Includes crops or soybean oil, cottonseed oil, sunfower oil and

    canola oil

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    and orest products industries. Tese input costs aremajor expenses or the industries analyzed in thisreport the agriculture sector alone spends about$10 billion just on energy each year.2 Easing near-termcosts o a climate policy allows the sectors to transitionmore smoothly to carbon-ecient technologies and

    reduce the overall cost.

    Allowing capped entities, including energy producers,to oset their emissions by investing in aordableemissions reduction options such as tropical orest

    conservation will reduce permit prices, thereorekeeping energy prices low or armers, ranchers,and the orest products industry. ropical orestconservation is among the lowest-cost emissionsreduction options available, providing importantsavings or the agriculture and orest products

    industries. EPA has estimated that the cost oemissions permits in the House-passed AmericanClean Energy and Security Act would be 89%more expensive i international osets (the bulk o

    which are expected to come rom tropical orest

    conservation) were excluded.3 Estimates based on

    EPAs analysis o the House-passed American CleanEnergy and Security Act indicate that the inclusion ointernational osets will save the agriculture, orestry,shing and timber industries about $4.6 billion per

    year and $89 billion between 2012 and 2030.4 Withtropical orest conservation likely to comprise an

    estimated 56% o osets in the years immediatelyollowing implementation o climate legislation(though more aterwards), this translates into a costsavings or these industries o approximately $49billion between 2012 and 20305 (see Section III).

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    his paper ocuses on the economic impacts odeorestation and orest conservation

    on the U.S. agriculture and timber industries.But what about the impact on people in the rainorestnations themselves?

    Right now, many people in rainorest nations acea terrible choice. In the absence o incentives or

    their protection, orests are worth more dead thanalive. A company or peasant is orced to weigh the

    very immediate nancial proceeds o cutting downa orest or timber, agriculture, or ranching againstthe damage wrought by deorestation to their own

    communities, wildlie, water and the planet aswell as the lost potential uture nancial value o theland as a carbon sink. Even i clearing and burning ahectare o rainorest only produces ranchland worth$200 per hectare, many people make the choice to

    cut it down anyway because that deorestationcan, at least in the short run, put ood on the tableor boost earnings or a quarterly report to investors.But that decision comes at a terrible long-termeconomic price. Based on recent prices in European

    carbon markets, the value o a hectare o rainorest

    as a carbon sink is approximately $10,000 a hectare.Releasing that carbon into the atmosphere byclearing or burning the orest means sacricing theopportunity to realize that value. As a recent WorldBank report put it, Farmers are destroying a $10,000

    asset to create one worth $200. *

    So how will providing nancial incentives or the

    conservation o orests aect those who are protingrom deorestation? In most cases, the people cuttingdown the orests have the most to gain rom conserving

    orests. Because incentives to end deorestation areestablished to, in part, compensate those who lose

    money by bypassing an opportunity to deorest,the armers, loggers, and landowners themselvestend to have the most to gain. Tey will be the onescompensated they can gain income ar exceeding

    sIdebar: th Ip f dfi Pp i rif ni

    any prots rom deorestation, and enjoy enormousbenets to their local communities and environments.

    For instance, in Brazil, many o the ranchers andarmers most responsible or deorestation havebecome advocates o orest conservation programs.Pilot projects and an increasing recognition o thehigh costs o deorestation have convinced many

    that they and their communities will become richer and also enjoy a better quality o lie throughconserving orests rather than cutting them down.Perhaps the most prominent embodiment o these newconservationists is Blairo Maggi, Brazils King o Soy

    the countrys biggest private landowner, personallyresponsible or tens o thousands o acres o orestdestruction, and governor o Mato Grosso province,ground zero or deorestation. Maggi made his namethroughout the world as an enemy o conservationists

    and a vocal ideological deender o deorestation as thepath to riches or himsel and the citizens o his state.

    Maggi has changed, however. He has recently urgedadoption o policies to conserve the orest ithe state can nd developed country governments

    or private companies who will nance orestconservation, most likely as part o a mandatorycarbon reduction system. Forest conservationincentives will be much, much more protable thansoybeans, he told Forbes Magazine.

    In addition, even a small carbon incentive can do alot to bring production in rainorest nations up to

    the environmental and social standards o the UnitedStates and other developed countries.

    Protecting orests will also create much needed,well-paying jobs in developing countries. Forest

    conservation requires people: park rangers to patrolthe orest, oresters to measure carbon storage, andeven satellite manuacturers and operators to providedeorestation monitoring. Reorestation activities

    * Chomitz, Kenneth. At Loggerheads? Washington, DC: Te World Bank, 2007. Perlroth, Nicole. ree Hugger. Forbes Asia Magazine. December 14, 2009. http://www.orbes.com/global/2009/1214/issues-blairo-maggi-

    jungle-conservation-tree-hugger.html

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    that oten accompany orest conservation can provideadditional employment opportunities.

    Protecting existing orests will also provide a moresustainable source o jobs in extractive industriesthemselves. In places without conservation incentives,orests are routinely stripped o all their value andthe ground is let as a barren desert that cant support

    communities or jobs. For this reason, many producers intropical countries have advocatedestablishing carbon incentives that

    would rapidly shit production tomore sustainable sources.

    In Indonesia, or example, clearcutting has drastically reducedthe availability o trees toprovide employment in orestry,including logging. According to

    the Indonesian orestry union,Kahutindo, employment inorest products has declined bymore than 50 percent in the pastdecade, rom 2 million workers to

    ewer than 1 million today. As aresult, Kahutindo now advocatesconserving existing rainorestsand relying solely on reorestation

    to produce ber. **

    Tere is evidence that thisstrategy will work globally

    to create well-paying jobs inthe orestry sector. Te latestU.N. Food and Agriculture

    Organization State o the Forestsreport estimated that switching

    to sustainable orest managementwould create 10 million goodjobs globally, which wouldcreate a major orce against rural

    unemployment, underemployment and poverty.Benets in the agricultural and ranching sectors are

    likely to be signicantly greater, given the greatereconomic values. Providing nancial incentives ororest preservation will allow a wide array o people,

    rom peasants to landowners, to preserve the orestswe all need to ght climate change.

    Glenn Hurowitz

    ** Foster, David. Indonesias Forestry Workers Another Endangered Species. December 11, 2007. http://blog.afcio.org/2007/12/11/indonesias-orestry-workersanother-endangered-species/

    Food and Agriculture Organization o the United Nations. Forests and the global economy March 10, 2009. http://www.ao.org/news/story/en/item/10442/icode/

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    I background

    ropical rainorests store an immense amount ocarbon. Clearing and burning these orests releasesthis carbon into the atmosphere in the orm ocarbon dioxide. An estimated 15% or more o

    total global carbon dioxide emissions comes romtropical deorestation.6 Indonesia and Brazil, orexample, rank as the third and our largest emitters,respectively, almost entirely due to deorestation.7

    Despite the immense amounts o carbon stored in

    tropical orests deorestation releases an averageo about 500 tons o carbon dioxide per hectare incentives or their conservation were excluded romthe Kyoto Protocol and most other major climatepolicies. Without these conservation incentives,

    deorestation continues to occur at a rapid rate, mucho it due to logging and conversion o orestland toagricultural uses.

    Deorestation occurs mainly because other land usesin many cases generate greater immediate nancial

    returns than retaining the land as orest.8 Alternateuses putting pressure on orests include croplands,pastures and plantations.9 oday, an acre o naturaltropical orest holds potential monetary value rom

    the extracted wood and subsequent commoditiesgrown or raised on the land, but holds little nancialpotential as a natural orest.

    Although subsistence activities have dominatedagricultural-driven tropical deorestation, large-scale

    commercial activities are playing an increasinglysignicant role, particularly in the Amazon, Indonesiaand Malaysia.10 Globally, oreign commercialagriculture and timber production have become theleading cause o deorestation. Without policiesthat create value or the environmental services that

    orests provide, tropical orests are oten worth moremoney dead than alive. Foreign agricultural, loggingand ranching operations are able to take advantage ocheap land supply and undercut U.S. producers on the

    world market.

    Te main agriculturalcommodities that drivetropical deorestation todayinclude soybeans, palm

    oil and cattle. Soybeancultivation and cattle aredrivers o deorestationin Brazil and soy alsocontributes to deorestationin Argentina. Palm oil is a

    major cause o deorestationin Indonesia and Malaysia.11

    Te expansion o pastureand plantation to previouslyorested land in nations

    such as Brazil, Argentina,Indonesia and Malaysia

    has contributed to thesecountries becoming leadproducers and exporters othese commodities.

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    I the orests are conserved, the land will not beconverted to pasture or plantation. While someproduction will be shited to other land in the countryor yield per acre may increase more than it would have

    without pressure rom land restrictions, we can expectto see reduced production rom these countries as a

    result o restricted land and higher production costs.*In addition, orests will remain intact, reducing theinfux o timber products into the international market.

    Te degree to which each country would be able to

    intensiy production in response to the restrictedsupply o cheap agricultural land rom orestedareas would depend on each countrys land base andeconomic conditions that determine how much itis likely to expand cropland and yields on existing

    agricultural land or on other available non-orest land.Te ability o one country to capture market share is aunction o its own supply possibilities as well as thoseo other countries. Further, a restriction in supply willlikely have price impacts that then aect demand levelsand also production choices.

    Te interaction among crops and also between crops,pastureland, plantations and intact orests is dependenton many variables, including the prices o each

    commodity whether a crop, timber or the value oa standing orest. A urther consideration is that soy is

    a key eed ingredient or cattle, causing a relationshipbetween price increases or soy and production o bee.

    Economists are beginning to develop modelsspecically designed to examine the eect o dierent

    bioenergy and climate policies on global agriculturaland orestry production and prices. One recentstudy just published in November 2009 by AllaGolub o Purdue University and coauthors nds

    results consistent with this report. Te Golub studyuses a general equilibrium model that links global

    agriculture and orestry to look at how dierent landuse opportunities or greenhouse gas abatementinteract with each other. Te study nds that a $100/ton carbon price leads to an expansion over businessas usual o standing tropical orests that reduces

    the amount o land available or crops and grazing.Te paper nds that this reduction in available land,

    among other actors, leads to agricultural and cattleproduction shiting to other countries. Under the$100/ton carbon price, their model estimates thatthe United States increases its crop productionrom between one and our percent and its cattle

    production by two percent.12

    An Iowa State University study by Kanlaya J. Barr

    and coauthors estimates elasticities o land supplyor agricultural commodities in the United Statesand Brazil, both major producers and exporters osoybeans and bee. Tese elasticities capture the

    willingness o producers in each country to transorm

    land rom one use to another. In this case, it analyzeslikely choices between orest, crops and pasture. Tepaper ocuses on the eect that agriculture priceincreases would have on land choices. Tey estimatethat cropland elasticities in the United States aremuch lower than those o Brazil.13

    In a related study, Michael J. Roberts and WolramSchlenker seek to understand how global ood priceand quantities supplied vary with respect to changes insupply due to biouel demand and other actors. Teir

    report nds that major producers and exporters, suchas the United States and Brazil, demonstrate higher

    elasticities o supply in relation to producers thatconsume most o their own output.14 Also, they ndhigher elasticities o supply or the United States thanound by Barr.

    Blandine Antoine et al. also examine land use changes

    in orested areas, considering recreational value inaddition to crops, pastures, managed orests andnational orests. Te Antoine study uses elasticities o

    land transormation that are similar to those used inGolub et al.15

    Although these studies provide a basis or urtherunderstanding o the impact o reduced deorestationon various markets, there has not been any publishedanalysis o the eect o deorestation alone on the

    * Production costs are higher because the least-cost option (deorestation) is no longer available. Gan et al. nds that in the orestry sector, shiting to sustainable harvest will increase production costs and thereore shit some o the

    production rom one country to another.

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    U.S. agriculture and timber markets. An integratedeconomic model would best address the complicatedinteractions o price and supply between and amongthese sectors. Individual commodity models used

    within the industry will also provide useul results.In the immediate absence o such models, we seekto provide an initial indication o the magnitude oimpact that a reduction in deorestation could have on

    selected sectors.Estimating restricted commodity supply.Whiledata on these commodities is plentiul, most data

    include crops rom plantations and existing yields.We seek to estimate the eect o a reduction indeorestation only and thereore have developedindividual methods based on deorestation rates, yield

    and other relevant data.*

    Not all deorestation results in greater supplies otimber or agricultural commodities to the global

    market. Wood rom tropical orests may also be usedas uel wood in local markets, destroyed as collateraldamage to create roads, burned, or decomposed. Oncecleared, land can be used or industrial purposes, roads,development, or tree arming as well as agriculture.

    Since no global estimates exist or the amount odeorestation driven by dierent commodities, weidentied the main countries where the commodity

    was a driver o deorestation and considered onlythose countries in the analysis. We rst gathered data

    rom articles and published research that analyzedthe degree to which particular commodities drivedeorestation in dierent places. We then excludedthose countries without high deorestation rates inorder to ocus only on those places where commodity

    expansion is driving deorestation.

    Because o the lack o global data, we estimateproduction shits rom the countries where theproduction o a given commodity is a signicant drivero deorestation. Because we are only looking at a

    sample o countries, we risk missing some shits incommodity production that are likely to result romorest conservation. For some commodities, such asbee, this is likely a minor issue since deorestation orcommercial bee production is predominantly in Brazil.

    For timber, however, our ocus on a subset o countrieslikely leads to underestimating the impact since morecountries than the ve we examine harvest tropicalorests and sell the timber in international markets.

    We use existing data and simple calculations to

    estimate the amount o a commodity that is grown

    Intro Table 1: Tropical Deforestation

    Top 20 Countries (3)

    Country (1)Annual Deforestation

    Rate (hectares) (2)

    Brazil 3,103,000

    Indonesia 1,871,000

    Sudan 589,000Myanmar 466,000

    Zambia 445,000

    Tanzania 412,000

    Nigeria 410,000

    DR Congo 319,000

    Zimbabwe 313,000

    Bolivia 270,000

    Mexico 260,000

    Venezuela 228,000Cameroon 220,000

    Cambodia 219,000

    Ecuador 198,000

    Australia 193,000

    Paraguay 179,000

    Philippines 157,000

    Honduras 156,000

    Argentina 150,000

    (1) Country list compiled rom NASA Earth Observatory, TropicalDeorestation: causes o deorestation, http://earthobservatory.nasa.gov/Features/Deorestation/deorestation_update3.php.February 1, 2010

    (2) Food and Agricultural Organization o the United Nations, Stateo the Worlds Forests, 2009. Average annual change rate inorest cover 2000 2005.

    (3) Annual change rate does not directly correlate to emissions, asdeorestation listed above includes both dry and tropical orests.

    * Methods vary by commodity depending on available data and market circumstances.

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    on or extracted or sale rom ormerly orested land.Data on this topic is sparse. We were not able to ndone data set that could be used or all the sectors. Asa result, we developed individual methods to estimate

    the production o each commodity on deorested land.Tese methods are described in the subsections below.Estimating the impact on the U.S. markets for eachcommodity.We combine our estimated avoided

    tropical production with a partial equilibrium model,based on current commodity prices and estimateso supply and demand elasticities. Te model isgeographically divided into tropical orest countries(those where agricultural and timber production are

    the lead drivers o deorestation), the United Statesand the Rest o the World (ROW).

    Te elasticities represent a range ound in existing

    literature. Demand elasticities indicate the amounto a commodity that the market will purchase given

    a change in the price. Te higher the elasticity, themore consumers will react to a price change by, orexample, switching to substitute products. For eachcommodity, we used a single global elasticity odemand, since these are globally traded commodities.

    We averaged the high and low elasticities o demand

    to dene a linear global demand curve. For agriculturalcommodities (including bee ), we used data romthe FAPRI elasticity database.16 For timber, we useddemand elasticities rom Waggener and Lane (1997).17Elasticities o demand will likely change over dierentprice ranges as well as over time as global consumptionpatterns change. Tese elasticities will also varyaccording to dierent time horizons as consumers will

    have greater ability to adjust diets and nd substitutesover longer periods. We use current estimates and do

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    not attempt to account or uture changes in demand.Supply elasticities represent the change in the amounto a commodity that producers will supply given achange in price. Tese incorporate a countrys ability

    to increase yield rates, land availability and capitalconstraints. For each commodity examined, we usethe estimated supply elasticities to dene a set o threelinear supply curves or the United States, rainorestnations, and the rest o the world. We estimated a

    high and low supply elasticity to provide a range. Wedrew heavily rom the FAPRI database, but also usedcommodity-specic elasticities where appropriate (seeAnnex D or urther discussion o elasticity choices). Ingeneral, the supply elasticities used in this analysis are

    short-term to mid-term. One might expect that longer-term supply elasticities would be higher as they wouldincorporate greater adjustments in production.

    Te combination o our estimated supply and demandcurves indicates the global price equilibrium

    o a commodity and how much each country is likelyto supply at that price (see Annex C or urtherdiscussion). Its important to note that the estimateddecrease in supply or supply growth and increase inprices reported in this paper represent changes only

    or the individual commodity and are not refective o

    ood supply or prices in general. In world ood markets,commodities are substituted and technologies areconstantly evolving, aecting net ood supply and price.

    o understand the range o possible impacts on

    individual commodity producers in the United States,we use both high and low estimates o changes to U.S.revenue. High U.S. revenue estimates are based on highelasticities o supply or the U.S. and low elasticities osupply or rainorest nations and ROW. In other words,

    under this scenario, the United States is more likely

    to adjust production in response to price increases andproduction gaps than the rest o the world. Our lowU.S. revenue estimates are based on high elasticities osupply or rainorest nations and ROW and low supply

    elasticities or the United States where the UnitedStates is relatively less likely to change productiongiven price increases and production gaps than the rest

    o the world.Using one elasticity o supply or rainorest nationsand ROW does not account or individual countriesabilities to react to the market. For example, in timbermarkets, northern European timber output has been

    declining due to reduced harvesting, as it is not pricecompetitive. However, productive capacity exists andEurope may have an ability to respond airly quicklyto ll a shortall in world market supply o lumber.

    Tis specic elasticity is aggregated into the ROW

    estimate. Although less detailed, this estimate providesa more simple and transparent analysis or thispreliminary study.

    Te partial equilibrium model provides estimates oannual price eects and production/revenue eects

    o decreasing production on orested land. Resultsshow the increase in revenue to U.S. agriculture andtimber rom both a price increase and also an increasein production. Te analysis does not dierentiatebetween the change in production due to land

    expansion versus an increase in yield. Tese eectsare in principle captured in the elasticities o supplyor each commodity and region, which would have adierent set o opportunities to increase production.Under a system o protected orests, rainorest nations

    are still likely to have opportunities or agriculturalexpansion into non-orested land or reorestation ortimber production. As noted above, while the partialequilibrium model accounts or how each countryor region will behave with a price increase o a given

    commodity, it does not consider the interactionsbetween commodities.

    Estimating cumulative impacts. Once a plantation orgrazing area is established, the yield enters the marketin subsequent years. However, deorested lands poor

    ertility combined with poor agricultural practices cancause land, particularly that used or cattle ranching,to decline in productivity. As a result, ranchers otenabandon their land ater just a ew years and clearadditional orest to accommodate their herd. Tis

    abandon-and-deorest process adds signicantly tothe deorestation produced by certain commodities,

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    particularly cattle.Cumulative estimates or each commodity included inthis paper are based on estimates o that commodityslikelihood to continue production on cleared land.

    For soybeans and oilseeds, we assume that the clearedland will produce each year between 2012 and 2030.For cattle, we assume it will produce or ve years andthen cease to be productive pasture land (see SectionII.c or more detail). imber is harvested once and

    assumed not to regenerate or commercial timberproduction within the timerames considered inthis study.

    We used the partial equilibrium model to estimate thecumulative revenue increase or each commodity o

    a gradual reduction in deorestation rom 0 to 100%between 2012 and 2030, hitting a 50% reduction indeorestation at 2020. We include several simpliedassumptions. We measure the impact o reducingdeorestation relative to a stylized scenario where

    uture production only increases as a result o estimatedtropical deorestation. We also assume this productionincrease at the orest rontier exactly satises uturedemand growth so that prices stay constant in real(infation adjusted) terms. Additionally, we assume the

    estimated supply and demand elasticities stay constant

    over time. Tis simple baseline scenario ignores trendsin yield growth and other actors and is intended toprovide a simple indication o the potential magnitudeso the eects. In addition, the model does not adjust or

    short-term and long-term elasticities. In the long run,

    sustained price increases infuence a variety o market

    adjustments that shit demand and supply. Tis wouldlead to higher long-run elasticities o both supply anddemand, which are not estimated in our model. Temodel thereore allows or long-term sustained priceincreases, which lead to higher prices in the later years

    than one would expect over the long run.

    Using these assumptions and inputs, we used the partialequilibrium model to estimate the amount o reducedtropical production that the United States wouldsupply and the additional revenue due to associated

    price increases.

    State-level impacts. For each commodity, thecumulative impacts are broken down by state, basedon existing production. We calculate the percentagethat each state producers based on USDA and Census

    data and ascribe the increased production value to eachstate based on this data. Past production is an imperectproxy or uture expansion, as it does not consider state-specic actors such as land availability restrictions oropportunity costs o other crops. We present it here as

    a rough distribution indication, acknowledging that theaorementioned actors could shit how an increase inU.S. supply would be met. Subsequent analysis should

    more thoroughly consider state-specic elasticitieso supply.

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    O

    ne o the most contentious areas o energyand climate policy has been a major dispute

    about whether or not biouels produced orconsumed in the United States and other developedcountries are driving deorestation.

    A number o studies published in prominent scienticjournals have concluded that growing crops or uel

    in the United States and Europe displaces ood crops,leading to higher ood prices and greater demand oragricultural products that in turn drives deorestation

    or agricultural expansion.* As a result o this indirectland use impact, these studies ound that ethanol

    and other biouels caused signicantly more c limatepollution than the gasoline they are meant to replace.

    In a report published in the journal Science, orinstance, Princeton Universitys im Searchingeround that corn-based ethanol grown in the UnitedStates increased greenhouse gas emissions or 167

    years over gasoline.

    sIdebar: ei h eh w

    Biouels manuactuers, growers and others havedisputed these ndings, arguing that land use decisions

    in tropical countries are driven by many orces otherthan developed country energy and land use policy and that increasing yields rom many crops could

    counteract any indirect land use impacts.**

    Teres a lot at stake in this debate and not just orthe environment. Te 2007 Energy Independence and

    Security Act mandated the production o 36 billiongallons o biouels by 2022 (a quadrupling o currentproduction), but required 22.3 billion gallons o that tobe subject to liecycle greenhouse gas analysis to ensure

    that it actually reduced pollution relative to gasoline.As part o that analysis, it stipulated that indirect landuse impacts such as tropical deorestation be used to

    calculate the total greenhouse gas impact o biouels.

    I ethanol is ound to indeed drive deorestation atsignicant levels, it would be ineligible to ll thedemand created by part o the 36 billion gallon

    mandate signicantly reducing a source o incomeor corn growers and ethanol manuacturers.

    Although stark disagreements about the environmental

    impact o ethanol persist, environmentalists andbiouels producers have reached a consensus that

    protecting rainorests through climate nancemechanisms will dramatically reduce any indirectland use concerns. In most parts o the world, evenadditional income rom biouels cant come closeto generating the levels o revenue that could

    be available to landowners rom climate nanceincentives or orest conservation meaning thattropical orests will generally stay intact.

    As a result, protecting rainorests through climatenance will allow biouels producers and growers in

    the United States to prosper with ewer concerns aboutthe environmental impact o their production.

    REDD can help reduce the

    potential for any direct andindirect effects of bioenergy

    production on greenhouse

    gas emissions from changes

    in agriculture and other

    land uses.

    Annie PetsonkEnvironmental Deense Fund

    * Fargione, Joseph; Jason Hill, David ilman; Stephen Polansky; and Peter Hawthorne. Land Clearing and the Biouel Carbon Debt, Science. Vol.319, No. 29. February 29, 2008. P. 1235-1238.

    Searchinger, imothy; Ralph Heimlich; R.A. Houghton; Amani Elobeid; Jacinto Fabiosa; Simla okgoz; Dermot Hayes; and un-Hsiang Yu.Use o U.S. Croplands or Biouels Increases Greenhouse Gases Trough Emissions rom Land Use Change. Science. February 29, 2008. Vol319, no. 5867. P. 1238-1240.

    ** Khosla, Vinod. Biouels: Clariying Assumptions. Science. Vol. 322, No. 5900. October 17, 2008. P. 371-374. Energy Independence and Security Act, itle II

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    Te Ohio Corn Growers Association recognizes that the

    indirect land use debate has many arguments on both sides

    of the issue. Regardless, stopping tropical deforestation

    is a win for U.S. agricultures competitiveness as well as

    ending the debate on corns role in indirect land use.

    Dwayne Siekman

    Ohio Corn Growers Association

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    sy

    Te United States is the leading producer o soybeanswith 33% o global production in 2007, ollowed byBrazil, Argentina, and China.18 Te United Statesis also the top exporter o soybeans, accounting or40% o global exports in 2007, ollowed by Brazil,

    Argentina, Paraguay and Canada.

    Te relationship between soy cultivation anddeorestation in the Amazon is complex. In 2003,soybeans accounted or approximately our percent othe agricultural land in the Amazon. Most Amazon

    soybeans are grown on large-scale commercialplantations.19 In some instances, commercial soy

    cultivation is not an initial driver, but ollows initialdeorestation or other purposes. Cattle ranchers orsmall-scale armers deorest the land and then move

    on when the soil has become depleted. Commercialsoy operations recondition the land and createlong-term soy plantations.19 Increasingly, however,large-scale agriculture itsel is the primary driver odeorestation. A National Academies o Science study

    o Brazils Mato Grosso state by Morton et al. showsthat 17% o deorestation was caused by large-scaleagriculture between 2001 and 2004. Further, thisexpansion closely tracks global soybean prices as

    prices go up, more land is cleared or large-scaleagriculture.20 Te increase in soybean cultivation asa driver o deorestation is partially due to expandedtransportation inrastructure in orested regions.Production o soybeans in closed-canopy orestincreased 15% per year rom 1999 to 2004.21

    Te price o orested land is substantially cheaperthan other agricultural land in Brazil. In 2004,uncleared Brazilian savannah or orest cost aboutUS$50/acre. In contrast, cleared Brazilian agriculturalland ranged in price between $100 and $300.22

    Whether commercial soy plantations are the driveror the secondary beneciary, unprotected orests areleading to expanded soy cultivation in the tropics.

    Argentina has also emerged as a leader in soyproduction and exports. In Argentina, expansion

    in soybeans has replaced other crops. However, theintroduction o new soy varieties and other actorshave led to deorestation or soy plantations.23

    ogether, the United States, Brazil and Argentina

    produce about our-ths o the worlds soybean cropand account or 90% o global exports.24

    Recent studies suggest that soybean productionin Brazil and Argentina aects world markets,including those in the United States. A USDAanalysis ound that exports rom Brazil andArgentina were projected to cause a reduction in

    U.S. soybean exports.25 Additional data show thatthe United States is able to pick up gaps in globalproduction. In the 2008 2009 growing season,

    global soybean production decreased by 11%. Inresponse, the United States increased production,

    pulling the world soybean output up by ve percent,counteracting the sharp declines in production inArgentina, Brazil and Paraguay.26

    Table SB1: Global Soybean Producers, 2007

    CountryProduction

    (tonnes)

    % World

    Production

    United States 72,860,400 33%

    Brazil 57,857,200 26%

    Argentina 47,482,784 22%

    China 13,800,147 6%

    Source: Food and Agricultural Organization o the United Nations,FAOStat, FAO Statistics Division (2009)

    Table SB2: Top Global Soybean Exporters, 2007

    CountryExport Quantity

    (tonnes)

    % World

    Exports

    United States 29,840,182 40%

    Brazil 23,733,776 32%

    Argentina 11,842,537 16%

    Paraguay 3,520,813 5%

    Source: Food and Agriculture Organization o the United Nations,FAOStat, FAO Statistics Division (2009)

    II commodItY cHange estImates and ImPacts on us markets

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    o get a preliminary understanding o howdeorestation aects soy producers in the United States,

    we examined the amount o soybeans entering themarket on land that was cleared or soybean growth in

    Argentina, Brazil and Paraguay. Tis does not includesoybean production on land that was cleared or otherpurposes and then converted to soy plantations.

    otal deorestation or these countries combinedis 3.4 million hectares (3.1 million in Brazil, 0.18

    million in Paraguay and 0.15 million in Argentina*).27Given the lack o conclusive data on the driverso deorestation, we extrapolated the inormationreported in Mortons study and assumed that 17%o the deorestation in each country was due tolarge-scale agriculture.28 In the literature reviewed

    or this study, soy was the prime (and oten only)

    commodity discussed or large-scale commercialcrops in the Amazon. Nonetheless, we assumed thatit is reasonable that some other large-scale crops aregrowing on this land and conservatively discounted our

    estimate by 20% to account or potential attributionerrors or other crops. Given a yield o 2.97, 2.81,and 2.41 tonnes per hectare or Argentina, Braziland Paraguay respectively,29 we estimate the annualavoided expanded production rom the orest rontierat 653,000 tonnes per year i deorestation is halved

    and approximately 1,306,500 tonnes per year i netdeorestation is eliminated entirely.

    Using a partial equilibrium model, we estimatedthe eect on U.S. soybean revenue that would resultrom reduced deorestation in Brazil, Argentina and

    Paraguay. We used a 2008 price o $323/tonne.30

    * Numbers are rounded to the nearest thousand. Most literature on this topic addresses soy as the large-scale agricultural crop. Te study noted above by D.C. Morton et al. notes that deoresta-

    tion or large-scale crops in Mato Grosso is highly correlated with global soy prices, indicating that soy is a main driver. In the absence o dataindicating other crops driving large-scale agriculture in the Amazon, we assume 20% as a proxy and apply a discount actor o 0.8.

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    able SB3 shows the annual production data used. Terst row o able SB3 shows our estimate o the annualamount o soybeans that is grown on rainorests clearedor soybean cultivation (based on our analysis described

    above). Te second row shows all the soybeans thatenter the market rom Brazil, Argentina and Paraguay.

    Tese two rows are dierent because not all soybeansrom these countries are grown on land deorestedor soybean cultivation. Some is grown on land other

    than tropical orest and some is grown on land thatwas orested, but was cleared or reasons other thansoybeans. Its common that land is cleared or livestockgrazing, but then converted to soy plantations. In somecases, the baseline production in these countries is

    rom land that was cleared or soybean production inprevious years and now enters the market annually.

    o estimate supply response, we use the averagesoybean-specic demand elasticity o -0.275.31 Tismeans that the global demand or soybeans declinesby about 0.275% or each 1% increase in the price osoybeans. o estimate supply response, we use a high

    supply elasticity o 0.2532 and a low supply elasticityo 0.633 or the three regions evaluated in the model(tropical orest countries, the United State and the resto the world). While elasticities o supply are likely to

    dier between the regions, these elasticities represent

    an approximate middle-range within availableliterature. Tis mid-range allows us to examine whatcould happen i the U.S. has a relatively higher abilityto react than the rest o the world and vice versa. In

    the long run, we would expect supply elasticities to behigher, accounting or various market adjustments thataect supply. Individual suppliers ace more long-runoptions such as technology shits or shits to otherproduction sources (in this case, other types o land).

    Long-term global supply can also shit because newentrants are likely to enter the market i prices arehigher, or exit the market i prices are lower. Tereore,the price eects in the later years are likely smallerthan our model estimates. (See Annex D or urther

    discussion o the partial equilibrium model anddata inputs.)

    We used two scenarios with dierent elasticities osupply to represent the likely high and low impact onU.S. revenue. Tese scenarios were: (1) high supply

    elasticity or the United States and low supplyelasticity or rainorest nations and the rest o the

    world; and (2) low supply elasticity or the UnitedStates and high supply elasticity or rainorest nationsand the rest o the world. For each scenario, we

    estimated the annual impacts at both a 50% and 100%

    reduction in deorestation. able SB4 shows the results.All results are reported in 2008 U.S. dollars.

    Where the U.S. has a higher ability to react to priceincreases, annual U.S. revenue increases by $590

    million i deorestation is ended. Where U.S. abilityto react to price is less than the rest o the world,annual U.S. revenue increases by $387 million withzero deorestation.

    Te cumulative eects assume that a 100% reduction

    in deorestation is achieved gradually with 10% in2012 increasing annually to 100% in 2030. We assumethat once the land is cleared or soybean cultivation,the crop will continue to produce rom 2012 to 2030.

    For simplicity, we assume that increases in productionrom deorestation are exactly enough to meetuture increases in demand such that real prices stay

    Table SB3: Annual Soybean Production

    by Region, 2007

    Country/Region Tonnes

    Annual soybean production that

    drives deforestation (1)1,306,534

    Other annual soybean production

    from Brazil, Argentina and

    Paraguay (2)

    109,889,450

    United States 72,860,400

    Rest of World 36,476,228

    Source: Food and Agriculture Organization o the United Nations,FAOStat, FAO Statistics Division(1) Calculated rom methods described above(2) equals [Total production rom Brazil, Argentina, and Paraguay

    as reported by FAO] [Annual soybean production that drivesdeorestation]

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    constant over time. Future sources o demand, suchas population growth, changing diets in developingcountries, and growing biouel use could increase theprice more than is refected in our model, while yieldgrowth and other sources o supply outside the tropics

    could lead to lower prices. In the cumulative analysis,the model shows price increases each year, which areinitially less than the annual price increase and becomehigher than the annual percentage change in later years.

    Tis is because the amount o soybeans not entering

    the market in early years are added to those notentering the market in later years. In year one, the price(in 2008 dollars) is estimated to increase by between $2and $3 per tonne (a 0.6% to 0.9% increase over 2008prices). In year 19, the price increases between $51 and$60 per tonne (a 15.8 % to 18.6% increase over 2008

    prices). Long-run elasticities that allow or marketadjustments would reduce the price eects especiallyin later years. Given these assumptions, the cumulativeincrease in revenue to U.S. soybean growers rom 2012to 2030 with gradual orest protection up to 100% in

    2030 would be between $34.2 billion and $53.4 billion.

    Soy production in the United States is concentrated inthe South and Midwest, with some production on theEast Coast. able SB5 shows how much revenue eachU.S. state stands to gain rom gradually eliminating

    deorestation, presuming proportional benets to

    dierent states based on current production levels. Tehigh and low estimates are based on the cumulativeestimates between 2012 and 2030 that are described

    above. Annex E shows projected revenue increases orall states.

    Table SB4: Soybean Modeling Results

    Scenario

    Price Change

    (Annual)

    Annual U.S. Revenue

    IncreaseCumulative Revenue

    Increase to U.S. from

    Ending Deforestation,

    2012 2030$/tonne

    %

    Change U.S.$

    %

    Change

    Low U.S.

    Revenue

    50% reduction

    in deforestation$3 1.03% $265,384,316 1.13%

    $34,198,100,533100% reduction

    in deforestation$4.67 1.45% $386,824,566 1.64%

    High U.S.

    Revenue

    50% reduction

    in deforestation$4 1.20% $405,005,077 1.72%

    $53,441,145,875100% reduction

    in deforestation$5.49 1.70% $590,833,044 2.51%

    Table SB5: State-level Soybean Revenue

    Increases From Rainforest Conservation

    State (1)

    Cumulative Revenue Increase

    from Ending Deforestation,

    2012 2030 (Range in millions)

    Iowa $4,945 $7,728

    Illinois $4,376 $6,839

    Minnesota $2,898 $4,528

    Indiana $2,712 $4,238

    Nebraska $2,640 $4,125

    Missouri $2,346 $3,666

    Ohio $2,259 $3,529

    South Dakota $1,791 $2,798

    Kansas $1,634 $2,554

    Arkansas $1,248 $1,950

    (1) State rank rom USDA, National Agricultural Statistics Service.Based on 2009 production data.

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    V oi

    Te greatest driver o deorestation in Asia is palmoil cultivation.34 Rubber, sugarcane and coee alsocontribute, but to a much lesser extent.35 Te growthin palm oil production is largely a result o growingdemand or ood, cosmetics and biouels.36 Seventy-

    seven percent o palm oil is used or ood,37 but demandas a uel source has risen, especially in Europe.38

    Indonesia and Malaysia are the major producers opalm oil and related products, together accountingor about 88% o total world palm oil production.39

    Over hal the new oil palm plantations between 1990and 2005 in Indonesia and Malaysia were established

    on newly deorested land. Tis is partly becauselogging generates revenue that covers initial costs oestablishing the plantation.40

    Palm oil directly competes with and is easily

    replaced by other oils including canola (rapeseed)oil, sunfower oil, cottonseed oil, and soybean oil.41Most products containing palm oil, palm kernel oil,or derivatives such as palmitate requently exchangethese other edible oils depending on small variations

    in price and availability. While the United Statesdoes not produce any palm ruit, it ranks ourthin production o the other oilseeds noted above.Since some crops have other uses (e.g., only 19% osoybeans are used or oil), we calculated the amount

    used or oil. able PO1 shows the top producers o

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    oilseeds (palm ruit, rapeseed (canola), sunfower seed,

    cottonseed and soybeans*).

    Indonesia and Malaysia collectively produced morethan 152 million tonnes o palm ruit and 32

    million tonnes o palm oil in 2007, o which over22 million tonnes were exported.42 Teir combined

    average annual production increase o palm ruitbetween 2000 and 2007 was over 9 million tonnes more than 5.9 million tonnes in Indonesia and 3.2million tonnes in Malaysia.43 Te percentage o palm

    production in Indonesia and Malaysia associated withdeorestation is 57% and 56% respectively.44 Givenexisting yields and market conditions, we estimatethat ending deorestation would reduce business asusual supply o palm ruit by 5 million tonnes.

    Using the partial equilibrium model, we estimatedthe eect on U.S. oilseed producers that would resultrom reduced deorestation in Indonesia and Malaysia.

    able PO2 shows the annual production data. Te rstrow o able PO2 shows our estimate o the annual

    amount o palm production grown on land clearedor palm plantations (based on our analysis describedabove). Te second row shows the remainder o palmand oilseed production that enters the market romIndonesia and Malaysia. Tese numbers are dierentbecause not all palm production rom these countries

    comes rom land deorested or palm plantations.Some is grown in other areas o the country and someis grown on land that was ormerly orested, but wasnot deorested that year or palm production.

    We input the above inormation into our partialequilibrium model, using the average oilseed-specicdemand elasticity o -0.305 and a mix o high andlow global oilseed supply elasticities o 0.2545 to 0.6.46

    Tese are the same supply elasticities used in thesoybean analysis and provide a simple, transparentmethod. Tese high and low elasticities o supply are

    alternated between regions depending on the scenario(i.e., high U.S. revenue or low U.S. revenue scenario).Aggregating high and low elasticities o supply or allregions does not allow or individual country estimates.

    However, these serve as approximate numbers that liewithin the upper and lower boundaries o the supply

    elasticities that we ound in existing literature. In thelong run, we would expect supply elasticities to behigher, accounting or various market adjustments thataect supply (see section II.a or urther discussion).For the price in a business as usual scenario, we used

    * Te soybean market will be aected by tropical orested countries decreasing both soybean and palm oil production. When analyzing soybeansupply as a substitute or palm oil, we only count the amount o U.S. soybean production that is historically allocated to make soybean oil.

    Numbers are rounded to the nearest 0.1 million

    Table PO1: Top Global Producers of Palm Oil

    and Palm Oil Substitutes, 2007 (1)

    Country

    Production

    Quantity

    (Tonnes) (2)

    % Global

    Production

    Malaysia 79,100,000 24.63%

    Indonesia 78,117,784 24.32%

    China 18,440,572 5.74%

    United States 17,383,302 5.41%

    India 12,991,650 4.04%

    Brazil 12,549,340 3.91%

    Source: Food and Agricultural Organization o the United Nations,FAOStats, FAO Statistics Division(1) Palm oil substitutes include cottonseed oil, canola oil, soybean

    oil and sunfower oil(2) Oilseed production is discounted or the percentage generally

    used or oil versus other uses. Percentage o each oilseed usedor oil are assumed to be: palm ruit 100%; rapeseed (canola) 100%; cotton seed 16.2%; soybeans 19%; sunfower

    seeds 91%.

    PO2: Annual Oilseed Production by Region, 2007

    Country/Region Tonnes

    Annual palm and oilseed

    production that drives

    deforestation (1)

    5,161,743

    Other annual palm and oilseed

    production from Indonesia and

    Malaysia (2)

    152,056,042

    Annual U.S. oilseed production 17,383,302

    Annual Rest of World oilseedproduction

    146,589,556

    Source: Food and Agriculture Organization o the United Nations,FAOStat, FAO Statistics Division(1) Calculated rom methods described above(2) equals [Total production rom Indonesia and Malaysia as

    reported by FAO] [Annual palm production that drivesdeorestation]

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    an average 2008 price o oilseeds (weighted by U.S.production) o $324/tonne.47 (See Annex D orurther discussion o the partial equilibrium modeland data inputs.)

    We used two scenarios with dierent elasticities osupply to represent the likely high and low impact onU.S. revenue. Tese scenarios were: (1) high supplyelasticity or the U.S and low supply elasticity orrainorest nations and the rest o the world (which

    represents the high revenue estimate); and (2) lowsupply elasticity or the United States and highsupply elasticity or rainorest nations and the rest othe world (which provides the low revenue estimate).For each scenario, we estimated the annual impacts

    at both a 50% and 100% reduction in deorestation.able PO3 shows the results. All results are reportedin 2008 U.S. dollars.

    In the high U.S. elasticity scenario, annual U.S. revenueor palm oil substitutes increases by approximately

    $202 million i deorestation is reduced by 50% andmore than $340 million i deorestation is eliminated.

    Tis increase is due in part to an increased productionand in part to increase in the annual price o oilseedsdue to the restricted supply. Te annual price increases

    rom between 2.4% to almost 4%.

    Using the partial equilibrium model to estimatecumulative impacts, we assumed that deorestation

    reduction phases in gradually rom a 10% reduction indeorestation in 2012 to 100% reduction in 2030. Wealso assume that once planted, a palm oil plantationremains productive or the time rame examined(2012 2030). Te corresponding price increases

    change each year, with initial years being less thanthe estimated annual price change and latter yearsbeing higher than the estimated annual price change.In year one, the price change ranges between twodollars and our dollars per tonne (a 0.6% to 0.9%

    increase over 2008 prices). In year 19, the price changeranges between $117 and $195 per tonne (a 36% to60% increase over 2008 prices). As noted in previoussections, long-run elasticities o supply would likelyaccount or market changes and lead to less signicantprice increases in the latter years.

    Given these results, we nd that total U.S. revenueincreases or oilseeds rom orest conservation wouldbe between $17.8 billion and $39.9 billion. Teabove estimates are based on the price o oilseed

    crops. Processed oil is about twice the price o rawoilseed crops and thereore the total revenue increase

    would be expected to be higher.

    Table PO3: Palm Oil Modeling Results

    Scenario

    Price Change

    (Annual)

    Annual U.S. Revenue

    IncreaseCumulative Revenue

    Increase to U.S. from

    Ending Deforestation,

    2012 2030$/tonne

    %

    Change U.S.$

    %

    Change

    Low U.S.

    Revenue

    50% reduction

    in deforestation$5 1.6% $100,073,149 1.8%

    $17,819,523,653100% reduction

    in deforestation$8 2.5% $168,151,377 3.0%

    High U.S.

    Revenue

    50% reduction

    in deforestation$8 2.4% $202,179,158 3.6%

    $39,897,030,304100% reduction

    in deforestation$13 3.9% $340,710,694 6.1%

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    Most states produce some substitute or palm oil. ablePO4 shows the top 15 oilseed producing states. Asnoted below, the revenue is based on the price o theoilseed crop and not the processed oil. Te Midwest is

    the strongest producer o oilseed crops, with signicantproduction also coming rom southern states. A ulllist o oilseed producing states can be ound in AnnexE. Tese estimates are based on the assumption thateach state captures its existing market share, which, as

    discussed above, is a rough proxy.

    bf

    Te United States is the worlds largest producero bee48 with 12 million tonnes produced in 2007,amounting to about 20% o the total world market49.Cattle ranching expansion is the primary driver or

    deorestation in Brazil50, which is the worlds largestbee exporter.51

    Estimates o the amount o deorestation attributableto cattle ranching in Brazil are between about 60%52

    and 80%.53 A 2004 report by the USDA estimates that

    1.4 million hectares each year are attributed to cattleranching,54 which would have been 61% o Brazilstotal deorestation.55 A recent study o deorestationdrivers in Brazils Mato Grasso state ound that cattle,

    which accounted or almost 80% o deorestation in

    2002, accounted or approximately 66% in 2003.56

    Argentina is also a large bee producer and exporter, butbecause the bulk o ranching occurs on the Argentinepampas (or prairie) livestock production is not asignicant driver o tropical deorestation in Argentina

    and is thereore not considered in this analysis.

    Te bee trade is complicated by health issues such as

    oot-and-mouth disease, which has been a problemor Brazil, and bovine spongiorm encephalopathy(BSE), which has been ound in the United States and

    restricts U.S. exports.57 Health concerns have createdtwo dierent markets, one or resh bee and one orprocessed bee. Our analysis neither distinguishesbetween the markets nor predicts the impact o traderestrictions on the U.S.s ability to capture market

    share available rom reduced deorestation. Tese areimportant actors to consider in uture analysis.

    Using a gure o 61% o Brazils annual deorestationattributable to cattle, 1.9 million hectares o naturalorested land in the Amazon are converted every year

    to cattle raising. Brazilian cattle yield is just one headper hectare58 and Brazilian bee yields .2295 tons (459lbs) o bee/head.59 (As a point o comparison, USDAchoice bee yields about 487.8 lbs o bee per head.60)

    Table PO4: State-level Oilseed Revenue

    Increases from Rainforest Conservation

    State (1)

    Cumulative Revenue Increase

    from Ending Deforestation,

    2012 2030 (Range in Millions)

    Iowa $2,067 $4,628

    Illinois $1,829 $4,096

    North Dakota $1,591 $3,562

    Minnesota $1,249 $2,795

    South Dakota $1,167 $2,614

    Indiana $1,134 $2,538

    Nebraska $1,118 $2,502

    Missouri $1,054 $2,361

    Ohio $944 $2,114

    Kansas $792 $1,773

    Texas $746 $1,671

    Arkansas $639 $1,432

    Mississippi $388 $868

    Tennessee $360 $805

    North Carolina $353 $792

    (1) State rank based on USDA National Agricultural StatisticsService. Based on 2009 production and value. States areranked by production value as opposed to quantity in order toaccount or dierent values among oilseed crops.

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    Tereore, we estimate that each year Amazonianorests are cleared to provide an additional 434,000tonnes o bee.

    Using a partial equilibrium model, we estimated theeect on U.S. bee revenue that would result rom areduction in deorestation rom Brazil. We used a 2008price o $5,159/tonne.61 able BF2 shows the annualproduction data used. Te rst row o able BF2 showsour estimate o the annual bee production grown on

    land cleared or cattle grazing. Te second row showsall the bee production that enters the market romBrazil. Tese numbers are dierent because not allBrazilian bee comes rom land deorested or cattlegrazing. Some is grown in other areas o the country

    and some is grown on land that was deorested orother reasons, such as slash and burn clearings orsubsistence agriculture. Cattle grazing tends to depleteland within a ew years, so while some baselineproduction is rom land cleared in previous years,

    this eect is less than or soybeans or oilseeds whichcontinue to produce or longer periods.

    We used an average bee-specic demand elasticityo -0.4562 and a mix o high and low bee supplyelasticities (see Annex D or a description o

    elasticities). For the United States, supply elasticitiesor bee have a very wide range. In a more complete

    study, the assumptions that generate each elasticityshould be examined in order to determine the mostappropriate supply elasticities. For this study, wedrew upon the FAPRI database, which cites a U.S.elasticity o supply o 0.01 or cattle and calves,63indicating a airly low U.S. responsiveness to market

    price changes. We keep the U.S. supply elasticityconsistent and alter the demand elasticities orrainorest nations and the rest o the world. Te bee

    supply elasticities used in this study or rainorestnations and the rest o the world range rom 0.24564to 0.5,65 based on elasticities o supply specic to

    Brazil. Both represent a lagged estimate. Te lowestimate is based on land use in Brazil that includespastureland. Barr et al. ound supply elasticities thatinclude pastureland were lower than those without.66

    Table BF1: Top Global Beef Producers, 2007

    CountryProduction

    (Tonnes)

    % of World Total

    Production

    United States 12,044,305 20%

    Brazil 7,048,995 12%

    China 5,849,010 10%

    Argentina 2,830,000 5%

    Australia 2,226,292 4%

    Source: Food and Agriculture Organization o the United Nations,FAOStats.

    BF2: Annual Beef Production by Region, 2007

    Country/Region Tonnes

    Annual beef production that

    drives deforestation (1)434,404

    Other annual beef production

    from Brazil (2)6,614,591

    United States 12,044,305

    Rest of World 40,758,560

    Source: Food and Agriculture Organization o the United Nations,FAOStat, FAO Statistics Division.(1) Calculated rom methods described above(2) equals [Total bee production rom Brazil as reported by FAO]

    [Annual bee production that drives deorestation]

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    Te high estimate is supply elasticity or cattle and

    calves rom the FAPRI database.67 We used two

    scenarios with dierent elasticities o supply to represent

    the likely high and low impact on U.S. revenue. For each

    scenario, we estimated the annual impacts at both a 50%and 100% reduction in deorestation. able BF3 shows

    the results. All results are reported in 2008 U.S. dollars.

    Where the ROW countries have low abilities to react

    to price increases, U.S. revenue or bee increases by

    $1.5 billion annually when deorestation is eliminated.

    I Brazil and the rest o the world have a high ability to

    produce more bee given higher bee prices, the annual

    revenue increase to the United States would be $2.3

    billion with a 100% reduction in deorestation.

    Deorested land in the tropics typically sustains cattle

    or ve to ten years beore the land is depleted and the

    ranchers move on to deorest more land.* We assumedthe conservative ve-year estimate o production.

    Using the partial equilibrium model, we estimated the

    cumulative revenue gains assuming that deorestation

    declines gradually rom a 10% reduction in deorestation

    in 2012 to a 100% reduction in 2030. Te price o bee

    increases gradually as well over this time. Te price

    increases in year one range rom $126 to $159 (a 2.4%to 3% increase over 2008 prices) and in year 19 the price

    increases range rom $331 to $441 (a 6.4% to 8.5%

    increase over 2008 prices). We estimate the cumulative

    benet o this gradual reduction in deorestation to

    U.S. cattle producers to be between $53 billion and

    $67 billion.

    able BF4 shows the top 15 bee producing states in2008 and an illustration o state distribution o the

    economic gain to cattle producers i deorestation werehalted, given existing production rates. Tese estimates

    are based on the assumption that each state capturesits existing market share. Annex E shows estimatedrevenue increases or all states.

    * Food and Agriculture Organization o the United Nations. Livestock Policy Brie 03: Cattle ranching and deorestation. Livestock Inormation,Sector Analysis and Policy Branch. Animal Protection and Health Division. December 4, 2009.

    Table BF3: Beef Modeling Results

    Scenario

    Price Change

    (Annual)

    Annual U.S. Revenue

    IncreaseCumulative Revenue

    Increase to U.S. from

    Ending Deforestation,

    2012 2030U.S.

    $/tonne

    %

    Change U.S.$

    %

    ChangeLow U.S.

    Revenue

    50% REDD $127 2.46% $1,532,682,136 2.47%$52,744,788,255

    100% REDD $150 2.92% $1,817,345,327 2.92%

    High U.S.

    Revenue

    50% REDD $160 3.10% $1,934,190,165 3.11%$67,963,111,806

    100% REDD $191 3.70% $2,310,830,350 3.72%

    Table BF4: State-level Beef Revenue Increases

    from Rainforest Conservation

    State (1)

    Cumulative Gain from Ending

    Deforestation, 2012 2030

    (Range in millions)

    Texas $8,368 $10,782

    Nebraska $5,992 $7,721

    Kansas $5,046 $6,502

    Oklahoma $2,640 $3,402

    California $2,447 $3,153

    Colorado $2,426 $3,126

    Iowa $2,392 $3,083

    South Dakota $1,919 $2,473

    Missouri $1,731 $2,230

    Idaho $1,478 $1,905

    Minnesota $1,437 $1,851

    Wisconsin $1,403 $1,80

    Montana $1,257 $1,620

    North Dakota $972 $1,252

    New Mexico $909 $1,171

    (1) State rank rom USDA National Agricultural Statistics Service.Rank based on 2009 production data.

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    ti

    Natural orests are mostly not cleared exclusivelyor timber, but logging increases the protability

    o deorestation. Many tree species exist in naturaltropical orests, oten more than 100 on a singlehectare and over 1,000 in a single region.68 Not allo these trees have commercial value and not all

    wood o commercial value makes it to the market.Wood may be let to decay or be used as uel wood.

    Te volume and type o high-value trees, as well asthe reasons and timerames or logging them, dierby region.69

    In the Amazon, timber has not traditionally been aprimary driver o deorestation. However, loggingoten involves road construction that enables less well-capitalized cattle and agriculture operations to move in

    behind timber. An estimated 12,000 to 19,800 squarekilometers o the Brazilian Amazon are logged every

    year.70 However, much o the wood rom the orestis not extracted or export, but is lost to collateraldamage rom roads or is burned. Te main timberexport rom the Amazon is mahogany, which can be

    ound distributed throughout a diverse orest. Whileother types o wood are logged and exported rom theAmazon, data was sparse and thereore we only includemahogany estimates in this analysis.

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    In Southeast Asia, timber sales are more closelylinked to deorestation, but are still not the singulardriver. Oten the returns on timber sales nanceplantations, making standing orests nancially

    attractive or agricultural conversion.71 Subsistenceagriculture and uel wood consumption also causesdeorestation, but less than commercial agriculture ortimber harvesting.72 More high-end exportable woodis extracted rom natural orests in Southeast Asia thanin the Amazon. In 2007, Malaysia led the world in

    tropical hardwood exports, accounting or about 35%o the volume o tropical wood exports.73 Some o thisproduction was rom natural tropical orests and some

    was rom tree plantations. ropical wood in this regionincludes teak, epay, and luan plywood.

    Te market or particular timber types and qualities is

    largely driven by consumer demand, which is aectedby economic conditions as well as by marketing andtrends. Te top ve products made in the U.S. romtropical hardwood species are doors, molding, cabinets,decking and fooring.74 While some tropical woods(such as epay or decking) have unique characteristics,

    most uses have readily available American substitutesthat can be used i tropical hardwoods become lessavailable or prices increase.

    Most data or timber production includes harvestsrom plantations, which have dierent yields than

    harvests in natural orests. Similarly, all deorestedwood does not necessarily enter the global or even thedomestic market. Only a portion o the total volume oa natural orest has commercial value and these treesmay be widely distributed.75 o identiy major sourceso high-end timber rom natural orests, we cross-

    reerenced high deorestation developing countrieswith those that had high exports (see able M1).

    In Brazil, where high-value trees are widely distributed

    and much o the orest does not enter the internationaltimber market, we assumed that one tree per

    hectare76 at a mass o 4.6 cubic meters entered themarket. For the Democratic Republic o Congo andSoutheast Asian countries, we used FAOs estimationo commercial timber mass in orests: 25.5 cubicmeters per hectare and 28.9 cubic meters per hectare

    respectively.77 We multiplied the commercial timber

    mass per hectare by FAOs estimates o the totalhectares o deorestation (see able M1, rst column).

    We discounted or slash and burn deorestation, which

    is estimated to be 53% in Arica, 44% in Asia, and31% in Latin America.78 Given these assumptions,50,000,000 cubic meters o wood will not enter the

    global market when tropical deorestation is eliminated.

    able M2 shows estimates or total global hardwoodproduction. Te rst row shows our estimate o the

    TableTM1: Deforestation and Exports

    for Selected Countries

    Country

    Annual

    Deforestation

    (ha) (2000 2005

    average) (1)

    2007 Exports

    (cubic meters) (2)

    Brazil 3,103,000 3,595,777

    Indonesia 1,871,000 2,669,035

    Myanmar 466,000 315,000

    Malaysia 140,000 7,320,861

    DR Congo 17,000 771,680

    (1) Food and Agriculture Organization o the United Nations, Stateo the Worlds Forests, 2009

    (2) Food and Agriculture Organization o the United Nations,ForesSTAT. http://aostat.ao.org. Includes Ind Rwd Wir (c), IndRwd Wir (NC) Other, Ind Rwd Wir (NC) Tropica, Sawnwood (C),Sawnwood (NC), and Veneer.

    Table TM2: Annual Hardwood Production

    by Region

    CategoryProduction (million

    cubic meters)

    Hardwood due to

    deforestation in Brazil,

    Indonesia, Malaysia,Myanmar, and DR Congo

    50

    Other hardwood from

    Brazil, Indonesia, Malaysia,

    Myanmar, and DR Congo

    198

    United States 157

    Rest of World 396

    Sources: Sohngen et al. 2007 and Seneca Creek 2004.

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    amount o wood that enters the market each yearrom deorested land (based on our analysis describedabove). Te second row shows the remaining hardwoodthat enters the market rom the deoresting countries

    considered in this section o the study. Tese numbersare dierent because not all hardwood rom thesecountries comes rom deorestation. Some is rom treeplantations and some is rom degraded (as opposed todeorested) land, which we do not consider here.

    Using these inputs, plus a starting 2008 price o $239/cubic meter hardwood,79 we considered two scenariosin the partial equilibrium model. One was a high U.S.timber-specic supply elasticity o 0.2780 coupled with alow timber supply elasticity or the ROW and rainorestnations o 0.2.81 Tis represents a scenario where the

    United States has a high willingness and ability toincrease production in response to a price change, wherethe rest o the world has a low ability and willingness.

    Te second scenario was based on a low U.S. timber-specic supply elasticity o 0.13482 coupled with a highsupply elasticity or rainorest nations and the rest o the

    world o 1.1.83 (See Annex D or more discussion aboutelasticities and model inputs.)

    able M3 has the modeling results (in 2008 U.S.dollars). Te annual timber price per cubic meterincreases by between $14/cubic meter and $21/cubicmeter i deorestation is eliminated. In that case,

    annual U.S. revenue increases by between $2.5 billionand $4 billion each year. We assume that once a orestis cleared, it is not replanted and thereore timber isonly extracted once. Using the partial equilibriummodel, we estimated the cumulative revenue gains

    assuming that deorestation occurs gradually roma 10% reduction in deorestation in 2012 to a 100%reduction in deorestation in 2030. Te cumulativerevenue increase to the United States between 2012and 2030 assuming a gradual increase in orest

    protection is estimated to be between $36.2 billionand $60 billion. Te estimated price increases or thisperiod range rom $8 per tonne and $12 per tonne in

    year one (a 3.4% to 5% increase over 2008 prices) and$14 per tonne and $21 per tonne in year 19 (a 5.9%to 8.8% increase over 2008 prices).

    Table TM3: Timber Modeling Results

    Scenario

    Price Change(Annual)

    Annual U.S. Revenue Increase Cumulative RevenueIncrease to U.S. from

    Ending Deforestation,

    2012 2030$/m3

    %

    Change U.S.$

    %

    Change

    Low U.S.

    Revenue

    50% reduction

    in deforestation$11 4.54% $1,843,231,982 4.92%

    $36,237,962,107100% reduction

    in deforestation$14 5.99% $2,462,331,269 6.57%

    High U.S.Revenue

    50% reduction

    in deforestation$16 6.70% $3,059,486,073 8.16%

    $59,955,994,975100% reduction

    in deforestation$21 8.64% $4,005,302,651 10.69%

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    Table TM4: State-level Hardwood Revenue

    Increases From Rainforest Conservation

    State (1)

    Cumulative Revenue Increase

    from Ending Deforestation,

    2012 2030 (Range in millions)Pennsylvania $3,711 $6,140

    Tennessee $3,360 $5,560

    Florida (2) $2,988 $4,944

    Virginia $2,697 $4,462

    North Carolina $2,273 $3,761

    West Virginia $1,957 $3,237

    Kentucky $1,926 $3,187

    New York $1,632 $2,701

    Missouri $1,613 $2,669

    Mississippi $1,568 $2,594

    (1) State rank based on hardwood production data rom U.S.Census Bureau. Lumber Production and Mill Stocks2008 Annual.

    (2) Only total timber production data available to calculate staterank. Hardwood data estimated by applying the regionalpercentage o hardwood production to the total timberproduction. Hardwood accounted or 38% and 2.9% o totaltimber production in the Eastern and Western U.S. respectively.

    In the United States, hardwood production isconcentrated in eastern states. able M4 shows thestate distribution o high hardwood-producing statesand illustrates estimates o proportional gain rom

    eliminating deorestation (see Annex E or all states).Tis analysis assumes that states retain their existingshare o the market. In reality, the amount o increasethat any state can capture will be a unction o severalactors including land availability and competing uses

    or land and capital.

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    Protecting tropical orests not onlyreduces competitive pressure on U.S.agricultural producers by reducingoverseas agricultural conversion and

    logging, but also lowers projectedinput costs or agriculture, ranching,and timber that could be aectedby climate policy. Energy costsaccount or up to six percent o U.S.agriculture production costs, about

    $10 billion per year.84 In addition,

    ertilizer and pesticide productionare energy intensive and thereoreertilizer costs tend to increase with

    energy prices. Although increasedenergy costs or agriculture rom

    climate legislation will be minimal(and may be mostly or entirely osetby rural energy eciency incentivesand domestic oset opportunities),tropical orest osets can still have a

    substantial impact.85

    Protecting tropical orests is oneo the most aordable ways o

    reducing greenhouse gas emissions.For example, Brazil is oering tomake large reductions in emissions

    rom deorestation or $5 per tonthrough its Amazon Fund. Someprivate project developers havemade emissions reductions at evenlower costs, while some NGOs

    have oered higher cost emissionsreductions. Te EPAs analysiso the House-passed climate

    legislation estimated that emission permits would be89% more expensive without international osets(most o which are expected to come rom orestconservation).86 Allowing U.S. emitters to get

    * Te analysis in Section III was done by Climate Advisers, 2009. Tis modeling is based on Waxman-Markey. While other legislation has been proposed (e.g., rom Senators Boxer/Kerry, Cantwell/Collins,

    Kerry/Graham) the Waxman-Markey analysis remains the most extensive and is thereore used here.** Te impact on cost is also aected by the price o natural gas, which some o the industries use as a eedstock. Future natural gas prices are hard

    to predict and cause fuctuations in cost estimates o climate legislation. It is inconclusive what the impact o climate legislation will be on natu-ral gas prices.

    III FInancIal ImPact oF troPIcal Forest oFFset aVaIlabIlItYon us agrIculture and tImber IndustrIes*

    oset credit or investing in tropical orest

    conservation could dramatically lower costs o climatelegislation savings that can be passed on to energy

    consumers such as the agriculture, ranching, and

    timber industries.**

    Total Revenue Gain for Agriculture, Fisheries and

    Forestry with and without International Offsets,

    2012 2030 (in U.S.$ billions)

    30

    20

    10

    0

    -10

    -20

    -30

    10

    -30

    With Offsets

    Without Offsets

    Total Revenue Change for Timber

    with and without International Offsets,

    2012 2030 (in U.S.$ billions)

    150

    100

    50

    0

    -50

    -100

    -150

    With OffsetsWithout Offsets

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    Tis estimate applies to all agriculture, orestry, timber, and sheries industries and not only the sectors studied in section II o this study.

    Comparing the macroeconomic impacts on theseindustries in an EPA modeling scenario thatincludes international osets with one that doesnot allow international osets shows that allowing

    international osets will increase revenue in thedomestic agriculture, orestry, timber, and shingindustries by a combined average o $4.6 billion/

    year compared to legislation without internationalosets.It does not account or potential increasesin revenue or these industries rom increases indomestic oset demand that would likely come with

    an elimination o international osets. Te primaryimpact o including international osets is to loweraverage annual allowance prices. o the extent that

    increases in allowance prices were passed through tothese industries in the orm o increased energy and

    input costs, higher allowance prices would cost U.S.agriculture and orest products industries additionalmoney. With tropical orest conservation accountingor approximately 56% o total international osets inthe early years o climate legislation implementation

    (and rising ater that) according to a recent analysis,tropical orests deliver an additional cost savings o $49billion between 2012 and 2030 to these industries.87

    Tis analysis presumes the use o signicant revenue

    rom U.S. climate legislation to help rainorest nationsbuild the capacity to meet the standards required orosets. Without this investment, these osets and their

    cost savings may be purely theoretical.

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