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We study the impact of the revision of the Brazilian Forest Code - the national law
that governs land use - on deforestation in the Brazilian Legal Amazon. Our empirical
strategy exploits the fact that the Forest Code establishes two distinct legal regimes to
landowners according to their fulfillment of to the previous law. Basically, those that
were not abiding by the former law gained special conditions - even amnesties in some
cases - to regularize the environmental liabilities, whereas those that were in accordance
with law did not receive any benefits. Given the historical of debt renegotiations and
political power held by the rural sector, we argue that this structure of incentives led
to a moral hazard behavior and was conducive to an increase in deforestation activities.
We investigate our hypothesis using data on yearly deforestation from 2009 to
2017 by rural private properties in the Brazilian Legal Amazon. We first show that the
new Forest Code has had a significant impact on deforestation. Then, we exploit some
heterogeneity related to size of farms and biomes. We extend the analysis to show that
there was no associated increase in agricultural output. Finally, we conduct an counterfactual
analysis and show that the Forest Code revision led to an additional loss of 420
thousand hectares between 2012 and 2017, which represents a loss of USD 1 billion
considering only carbon emissions.
