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Assessing the “food-fuel-forest” competition in Brazil: impacts of sugarcane expansion on deforestation and food supply José Féres, Eustáquio Reis and Juliana Speranza (IPEA) Abstract: biofuels present promising opportunities for Latin-American countries, since most countries in the region have a strong potential regarding biofuel production. However, the technology is not without costs. Biofuel production has faced criticisms regarding its environmental and social impacts. Most of them are related to indirect land use changes due to biofuel expansion. This paper aims at presenting an overview of the empirical literature on the environmental impacts of sugarcane ethanol production in Brazil. In addition to that, we develop a land use model in order to assess the potential competition between food production, biofuel expansion and deforestation. Our empirical findings do not provide support to the argument that sugarcane expansion may lead to food supply disruption. Moreover, sugarcane expansion does not seem to represent a potential source of deforestation pressure in the Amazon. On the other hand, enlargement of sugarcane area in the Center-South region _ which is the main expansion axis _ may induce deforestation. This is of particular concern in the cerrado biome (Center-West region) and in the remaining Atlantic rainforest areas (Northeast and Southeast coast of Brazil). Introduction Increasing consensus about the end of cheap oil, the geopolitical tensions in major oilproducing regions and the consequences of carbon emissions have caused a spurt in the search of alternative energy sources. In this context, plant-based fuel like ethanol and biodiesel seem to be emerging as a serious alternative to fossil fuels. The last few years have witnessed a sudden growth in biofuel production and demand is expected to increase at high and sound rates, as the large energy-consuming nations are all setting ambitious long term targets for biofuels and for reduction in carbon emissions. There are several reasons for the excitement surrounding biofuels. First, biofuels may provide energy that is renewable. Second, several biofuels are less-carbon intensive than fossil fuels and therefore may reduce GHG emissions. Third, increased demand for agriculture is expected to increase farm income. Finally, biofuels are more labor intensive than other energy technologies and therefore biofuels may create new jobs. So, in addition to environmental benefits, biofuels may also improve social conditions and contribute to poverty alleviation in rural regions. In view of the above benefits, biofuels present promising opportunities for LatinAmerican countries, since most countries in the region have a strong potential regarding biofuel production. Most countries will be able to grow one or more types of crops in which they possess a comparative advantage and use them to meet either domestic or foreign demand or both. However, if agriculture is to be relied on to fuel a growing population, then a serious consideration of the consequences of the widespread adoption is warranted. The technology is not without costs. Biofuel production has faced criticisms regarding its environmental and social impacts. Most of them are related to indirect land use changes due to biofuel expansion. Basically, biofuel feedstock production may be characterized as a land intensive activity. This feature has raised concerns regarding the concurrence among competing land uses. First, some analysts argue that biofuels may lead to increased deforestation pressure, since farmers may convert forestland into biofuel feedstock production areas. Increasing deforestation due to biofuel expansion may also result in higher GHG emissions. Second, biofuel expansion may occur at the expense of subsistence crop areas, therefore reducing food supply and leading to food price inflation. In this sense, as Ragajopal and Zilberman state (2007), “biofuels may mean filling the fuel tank at the cost of emptying the stomach of the poor”. This controversy has given rise to the socalled “food-fuel-forest” competition debate. Debates on indirect land use change and “food-fuel-forest competition” are at the core of international trade negotiations regarding biofuels, as illustrated by the current discussions on biofuel sustainability criteria in the European Community (EC). Two EC directives, published in December 2008, establish biofuel use targets for the transport sector as well as sustainability criteria for biofuel production. The Renewable Energy Directive set a mandatory goal of 10 percent of renewable energy by 2020, while the Fuel Quality Directive established a mandatory reduction of 6 percent in total greenhouse gas emissions from the transport sector by the same time horizon. However, biofuels used for compliance with the targets laid by these EC directives are required to fulfil sustainability criteria. Specifically, biofuels to be produced or imported by European countries should not be grown in areas with high carbon stocks (wetlands, forests) as well as areas with high biodiversity value. Areas with high biodiversity value include primary forests, protected environmental reserves and highly biodiverse grassland. The imprecise definition of the term “highly biodiverse grassland” has raised serious concerns among the Brazilian government and the agribusiness sector, who fear that such criteria may prevent biofuel production in areas with high agricultural potential, such as the Brazilian “cerrado”. The debate on environmental sustainability is also present in the negotiations regarding US biofuel imports. The Energy and Independence Security Act established new specific volumes and requirements for renewable fuels that must be used in transportation fuel in the United States. The requirements include greenhouse gas emission thresholds for renewable fuels, including direct emissions from the production cycle and emissions associated to land use changes. The Environmental Protection Agency (EPA), as part of proposed revisions of the Renewable Fuel Standard program, published a preliminary version of the results on full lifecycle analysis for renewable fuels. According to EPA´s Draft Regulatory Impact Analysis, as US increases net imports of ethanol by 2.5 billion gallons in 2022, the major supplier of this increase in ethanol is Brazil. However, in calculating greenhouse gas emissions of land conversion, the report indicates a significant environmental impact resulting from land use changes in Brazil. The report also estimates that major agricultural commodity prices increase globally, providing some empirical evidence on a food-fuel tradeoff. Given the controversy on the “fuel-food-forest competition” hypothesis and its relevance in the context of international trade negotiations, it is of fundamental importance that Latin-American countries take an active role in the debate. Biofuels present great opportunities to LA countries, and failing to provide transparent and consistent empirical evidence in terms of the environmental and social impacts may jeopardize access to export markets. With this background, this paper aims at presenting an overview of the empirical literature on the environmental impacts of sugarcane ethanol production in Brazil, with a special emphasis on indirect land use effects due to sugarcane expansion. In addition to that, we develop a land use model in order to assess the potential competition between food production, biofuel expansion and deforestation. Environmental sustainability of sugarcane production Biofuels present great opportunities to Brazil, given his competitive advantage in ethanol production. With a production that reached 17,4 billion liters in 2006, Brazil is the world´s second largest producer of ethanol. From 2000 to 2007, the production of ethanol in Brazil increased an average of 11.4% per year. Internal consumption has grown continuously since the launch of flex-fuel vehicles in 200. Such cars can run on any blend of gasoline and ethanol. Today, they represent more than 80% of all new light vehicles market sales. It is estimated that domestic consumption could reach 35 billion liters in 2015 and 50 billion liters in 2050. Future exports depend on how open the main consumer markets will become, but it is estimated that 20 billion liters could be exported annually by 2020. There are 335 bioethanol plants in Brazil, and the vast majority can produce either sugar or ethanol using sugarcane as feedstock. Currently, Brazilian sugarcane is almost equally used to produce sugar and ethanol. In 2006, 6,45 million hectares were cultivated and around 3 million hectares were dedicated to ethanol production. The bulk of sugarcane production is in the Center-South region (87% in 2007), 60% of total production being in the state of São Paulo. The economic dimension of Brazilian sugarcane sustainability is not a controversial issue. It is internationally recognised that Brazilian ethanol is produced at low costs and its feasibility does not depend on subsidies. Table 1 compares biofuels productivity and production costs in Brazil, US and the European Union. Table 1: Biofuels Overview of Brazil, United States and European Community Plants in operation Brazil 2006/07 Ethanol 335 United States 2005/06 Ethanol 97 Feedstock sugarcane corn 6.4 31.6 426 267 48% 20% 17,411 18,547 Crop are (million hectares) Feedstock production (million tons) % of feedstocks dedicated to fuels Biofuels production European Union 2005 Ethanol Biodiesel 32 120 Oil from rapeseed, Cereal, sunflower, sugar beet, etc. palm and soy, etc. Cereals: 51.5 6 Sugar beet: 2.2 Cereals: 253 19.7 Sugar beet: 116 Cereals: 1.6% Rapeseed: 40% Sugar beet:0.6% 902 4,458 (million liters) Productivity Cereals: 3,125 Rapeseed:1,999 6,800 3,000 (liters/hectare) Sugar beet:7,250 Sunflower: 833 Production cost 20 40 50-75 44-81 (US$ cents/liter) Note: 2005 production costs for Brazil and the US, 2004 for Europe. US and Brazil data on ethanol refers to 2006. Source: Jank et al. (2007) Notwithstanding the consensus around its economic feasibility, Brazilian ethanol production has been criticized for its potential environmental and social impacts. As already mentioned, the current debate on international sustainability criteria is not restricted to verify whether biofuels have lower GHG emissions vis-à-vis fossil fuels. In addition to positive net carbon balances, several other aspects regarding biofuel production have been identified as relevant for a comprehensive sustainability assessment, namely: a) direct and indirect land use changes; b) socio-economic benefits generated by ethanol production; c) potential impacts on water availability and quality; d) impacts of fertilizer and agrochemical use on biomass production; e) soil impacts; and f) biodiversity loss. In this case study, we focus on the direct and indirect land use changes due to the expansion of ethanol market. Debates on indirect land use change are at the core of international trade negotiations regarding biofuels. As already mentioned, some analysts argue that biofuels may lead to increased deforestation pressure, since farmers may convert forestland into biofuel feedstock production areas. When discussing sustainability criteria, the EC Fuel Quality Directive explicitly refers to this relationship between biofuel expansion, deforestation and the resulting biodiversity loss. According to the Directive´s text, “The increasing worldwide demand for biofuels, and the incentives for their use provided for in this Directive should not have the effect of encouraging destruction of biodiverse lands (…) The sustainability criteria should consider forest as biodiverse where it is primary forest (…) Having regard furthermore, to the highly biodiverse nature of certain grasslands, both temperate and tropical, including highly biodiverse savannahs, steppes, scrublands and prairies, biofuels made from raw materials originating in such lands should not qualify for incentives provided for by this Directive”. The imprecise definition of the term “highly biodiverse grassland” has raised serious concerns among the Brazilian government and the agribusiness sector, which fears that such criteria may prevent biofuel production in areas with high agricultural potential, such as the Brazilian “cerrado”. In addition to deforestation pressure and biodiversity loss, some analysts suggest that biofuel expansion may occur at the expense of subsistence crop areas, therefore reducing food supply and leading to food price inflation. For example, Msangi et al. (2006) employ a sector model to investigate this food-fuel trade-off. The authors predict that when there is aggressive growth in ethanol and biodiesel supply with no accompanying increase in crop productivity compared to current levels, there is likely to be drastic increase in food prices. Results for calorie availability and child malnutrition portend a decline up to 194 kilocaries per person, while the number of malnourished children increases by 11 million children with the worst impacts being felt in subSaharan Africa and South Asia. In this sense, as stated by Ragajopal and Zilberman (2007), “biofuels may mean filling the fuel tank at the cost of emptying the stomach of the poor”. This controversy has given rise to the so-called “food-fuel-forest” competition debate. From the political perspective, the Brazilian government and the private sector have been attentive to the “food-fuel-forest” competition debate. Generally speaking, one can observe that the agenda on land use panning has been quite influenced by the external pressure. Both the governmental policy measures and the pro-activeness of the private sector can be partly attributed to an effort to avoid barriers to trade. Among the many policy initiatives, one may cite the recent economic-ecologic zoning of the North Region, which virtually bans sugarcane production in the entire Amazon forest. The sugarcane producers association UNICA has also announced a phasing-out agenda for manual sugarcane harvesting, which involves slash-and-burn practices. In addition to that, government and ethanol producers are taking part in several bilateral and multilateral negotiations in order to guarantee access to international markets. These discussions involve definition of targets and establishment of minimum biofuel sustainability criteria, as illustrated by the joint bilateral initiative undertaken by Swedish ethanol importers (the private company SEKAB) and Brazilian producers. Considerable efforts have also been devoted to the design and implementation of an ethanol certification program. The so-called Brazilian Program of Biofuels Certification, conducted by the National Institute of Metrology (INMETRO), has been intensively discussed in forums involving government and private sector representatives. According to the premises of the Program, certification would not be compulsory and the criteria should be in line with strategies aiming at foster biofuels exports and at reduction of non-technical barriers to trade. A first version of the proposed criteria and principles is under public consultation. According to the proposal, an ethanol producer is eligible for certification if he complies with the following environmental principles: (i) sugarcane production in conformity with agro-ecologic zoning requirements; (ii) issuance of all environmental licenses; (iii) adoption of waterrecycling measures; (iv) investment in co-generation (sugarcane residual biomass); and (v) environmental management of residuals (including mechanical harvesting). Sustainability analysis of Brazilian ethanol: empirical evidence on the “food-fuel-forest competition” argument Life-cycle analyses of ethanol sugarcane indicate substantial environmental gains. Macedo, Leal and Silva (2004) estimate that the net energy ratio (NER) per ton of sugarcane ranges between 8.3 and 10.2. The authors also calculate net carbon reductions due to the substitution of ethanol for gasoline of approximately 2.6 tonnes of CO2 equivalent/cubic meter of anhydrous ethanol and 1.7 tonnes of CO2 equivalent/cubic meter of hydrous ethanol. Such results are corroborated by Walter et al. (2007), who compute a NER of 9.3. Empirical evidence on land use changes in Brazil does not provide support to the “foodfuel-forest competition” argument. Walter et al. (2008) provides an assessment of recent trends in sugarcane expansion in Brazil. In 2006, the area occupied by sugarcane was estimated in 6.2 million hectares. In terms of geographic distribution, sugarcane production is deeply concentrated in the Southeast region, where 68% of the production took place in 2006. The state of São Paulo concentrated 60% of the national production that year. The Northeast region is a traditional sugarcane producing area since colonial times, but its importance has been reduced along the years and nowadays the total share of Northeast region over the national production is less than 14%. The decadence has been accentuated in recent years due to inadequate topographical conditions, which prevents the introduction of mechanized harvesting in the region. Almost 10% of the national production took place in the Center-West region, one of the main axis of sugarcane expansion in Brazil. The dynamics of sugarcane expansion in the CenterWest region raises some concerns, given the potential risk of environmental impacts in the cerrado biome. The share of South region corresponds to approximately 7.8% of national sugarcane production, mostly concentrated in the state of Paraná (95% of the regional production). Finally, the production of sugarcane in the North region, where the Amazon forest is located, is almost insignificant, representing only 0.3% of the national production. Considering the period 1996-2006, Walter et al. (2008) observe that sugarcane production in the North-Northeast region presented a 5% decrease, while the production grew 87% in the area comprising the Center-West, Southeast and South regions. The authors provides a in-depth analysis of the evolution of sugarcane production in the most dynamic regions and conclude that there is no evidence that deforested areas have been used for the enlargement of sugarcane cultivation. Table 2 exhibits the changes in land use in the six main producer states of the Center-South region1. Along the period, almost 90% of the enlargement of sugarcane area was concentrated in four states (São Paulo, Minas Gerais, Paraná and Goiás). In these states, there was a significant phasing-out of pasturelands, and also a growth in forested areas. Deforestation was significant in two states (Mato Grosso and Mato Grosso do Sul). However, it should be noted that in these states the increase in sugarcane areas represented a small fraction of the soybean expansion, and therefore forest conversion may be mainly attributed to soybean production. Table 2: Land use changes in the six main producer states of the Center-South region 1996-2006 State São Paulo Minas Gerais Paraná Goiás Mato Grosso do Sul Mato Grosso ∆ Sugarcane 792 184 133 120 71 68 ∆ Soybean 93 538 153 1611 811 1607 ∆ Pasture -468 -4794 -942 -3880 -3389 1357 ∆ Forest 372 1428 378 1393 -927 -3785 Source: Walter et al.(2008). Generally speaking, these figures indicate that the environmental impact of sugarcane expansion in relation to direct land use change as been insignificant. The growth of sugarcane areas have occurred mainly in areas previously occupied by pastureland. However, from a prospective viewpoint, land use regulations in the cerrado region (Goiás, Mato Grosso and Mato Grosso do Sul) should be reinforced. The cerrado biome is one of the main sugarcane expansion axis, which could imply in increasing deforestation and biodiversity loss in the future. 1 Center-South region is a generic reference to the area covering the Center-West, Northeast and Southeast regions of Brazil. Concerns have also been raised on the indirect land use impacts of sugarcane expansion. These are based on the premise that sugarcane areas could induce the displacement of activities to other areas, causing deforestation elsewhere. Of particular concern is the possibility that displaced activities, such as cattle breeding or soybean production, could move to the Amazon region and lead to increasing deforestation pressure. Recent studies by Zuurbier and van de Vooren (2008) and Walter et al. (2008) analyze land conversion patterns and both works conclude that sugarcane ethanol production in the Center-South is not pushing cattle and soy farming into the Amazon region. However, in these studies, the analytical approach does not allow to establish causal relations between sugarcane expansion and the displacement of activities. Nassar et al. (2009) and Féres et al. (2009) represent the first attempts to apply specific economic land use models for Brazil to assess the impact of ethanol expansion. Both models adopt a sector approach, emphasizing the substitution patterns between competing land uses and the economic determinants of land allocation and food supply. These efforts towards the development specific land use models offer the possibility to represent at a regional level the dynamics of the Brazilian agricultural sectors, capturing cause-effect relations that are not caught by international and nationwide models. In addition to that, by providing an in-depth analysis of Brazilian land use patterns, such models fill an important gap in the literature on land use modeling, whose treatment of developing countries is very thin. Nassar et al. (2009) focus on the impact in terms of land use change and GHG emissions due to net increases in Brazilian ethanol production to attend additional US import requirements, according to targets established by the Renewable Fuel Standard program. The authors apply a specific land use model for Brazil (BLUM – Brazilian Land Use Model), which projects land use changes in six Brazilian regions. Land allocation is disaggregated according to eight types of use: soybean, corn, cotton, dry beans, rice, sugarcane, pasture and forests. The regional disaggregation and the dynamic approach allow not only the assessment of the substitution patterns between use types, but also the displacement of activities to other areas. In this sense, the model captures the impacts both in terms of direct and indirect land use changes. The authors consider land use changes in order to support an additional demand of 2.5 billion gallons of ethanol. Considering direct and indirect land use change in Brazil, the displacement results are: 75% over pasture, 5% over tropical forest and 20% over savanna and shrubland. The estimated reductions in GHG emissions of sugarcane ethanol compared to gasoline are higher than the results presented by the US EPA Draft Regulatory Impact Analysis: rather than 26% reduction for 30 years as estimated by US EPA, Nassar et al. (2009) projects a 60% reduction for the same time horizon. Nassar et el.(2009) argue that US EPA report overstate GHG emissions and attribute this bias to EPA´s land use model, which calculates land allocation for the entire Brazilian region. Féres et al.(2009) investigate in more detail the “food-fuel-forest competition” hypothesis. The authors specify and estimate an econometric land use model according to five types of use: sugarcane, subsistence crops, other crops, pasture and forests. Simulation exercises are undertaken in order to assess how land allocation would respond to future agricultural prices. Future scenarios are constructed for the year 2035. The land use model model may be found in the Appendix. Depending on the scenarios, the increase in sugarcane crop areas ranges from 17.8 to 19 million hectares. Table 3 illustrates the main results in terms of land use changes2. Before commenting on the results, it should be mentioned that Féres et al.(2009) adopts a static model, which restricts the assessment of the impact of sugarcane expansion in terms of direct land use changes. With this remark in mind, several findings are noteworthy. First, results do not provide evidence on a potential “food-fuel” tradeoff: the model does not predict the conversion of subsistence crops to sugarcane plantations in any region. Second, the expansion of sugarcane production in the North region, where the Amazon forest is located, is not significant. In addition to that, the conversion patterns indicate that this expansion will not occur to the detriment of Amazon rainforest. Finally, the results show that sugarcane expansion may imply in significant deforestation in other Brazilian regions, in particular in the Southeast, Northeast and Center-West area. Important biomes may be found in these regions, such as the Atlantic rainforest (coast of Northeast and Southeast regions) and the cerrado (Center-West region). This finding suggests that, in order to contain the deforestation pressure on these areas, land use planning measures such as ecological-economic zoning and legal reserve requirements should be closely monitored and enforced. Table 3: Land use changes by Brazilian regions according to type of use – agricultural price scenarios for 2035 Subsistence crops (1,000 hectares) Other crops Sugarcane Pasture Forest (1,000 hectares) (1,000 hectares) (1,000 hectares) (1,000 hectares) North 0,15% 4 (0,35 x 10 ha) -20,65% 6 (-0,17 x 10 ha) 959,77% 6 (0,05 x 10 ha) -0,0093% 4 (-0,21 x 10 ha) 0,38% 6 (0,11 x 10 ha) Northeast 0,34% 4 (1,95 x 10 ha) -24,99% 6 (-2,19 x 10 ha) 803,89% 6 (8,07 x 10 ha) -0,0035% 4 (-0,11 x 10 ha) -20,75% 6 (-5,89 x 10 ha) Southeast 0,49% 4 (1,42 x 10 ha) -9,55% 6 (-0,84 x 10 ha) 331,75% 6 (8,53 x 10 ha) -0,0023% 4 (-0,09 x 10 ha) -66,86% 6 (-7,70 x 10 ha) South 0,11% 4 (0,66 x 10 ha) -3,62% 6 (-0,26 x 10 ha) 198,96% 6 (0,69 x 10 ha) -0,0022% 4 (-0,05 x 10 ha) -5,56% 6 (-0,44 x 10 ha) Center-West 0,60% 4 (1,41 x 10 ha) -12,23% 6 (-0,63 x 10 ha) 614,77% 6 (1,78 x 10 ha) -0,00018% 4 (-0,01 x 10 ha) -3,46% 6 (-1,17 x 10 ha) Source: Féres et al.(2009) The survey of the empirical literature on ethanol expansion and land use patterns allows us to draw some general conclusions. First, the available evidence provides little support to a potential “food-fuel” tradeoff in Brazil. The analysis of recent trends in land use changes indicates that the expansion of sugarcane areas has not occurred to the detriment of subsistence crops. Similarly, land use modelling considering future economic scenarios does not suggest that farmers will switch from subsistence crops to sugarcane production. Second, sugarcane production is currently of small importance in the Amazon region and its expansion will not be significant. Therefore, sugarcane 2 Other scenarios regarding agricultural prices were also considered, but the qualitative results are quite similar. For a thorough presentation of the simulation exercises, see Féres et al. (2009). expansion is not a source of deforestation pressure in the Amazon. Finally, enlargement of sugarcane area in the Center-South region _ which is the main expansion axis _ may induce deforestation. This is of particular concern in the cerrado biome (Center-West region) and in the remaining Atlantic rainforest areas (Northeast and Southeast coast of Brazil). This finding suggests that, in order to contain the deforestation pressure on these areas, land use planning measures such as ecological-economic zoning and legal reserve requirements should be closely monitored and enforced. Notwithstanding the importance of developing specific land use models to assess the economic impact of sugarcane expansion in Brazil, there remain some methodological gaps that need to be addressed in future research. First, the models do not incorporate technological change. There is a need for studies that focus on the timing and determinants of technology adoption, such as second generation biofuels. Second, economic land use models are quite limited in identifying causal relations between sugarcane expansion and displacement of competing agricultural activities, which prevents a deeper investigation in terms of indirect land use effects. Finally, current land use models do not consider heterogeneity. The implications for small versus larger farmers, landowning farmer versus tenant farmer may be quite distinct. Allowing for heterogeneity is a fundamental extension to assess these potential distinct implications. Conclusion Brazil and other Latin-American countries have a strong potential regarding biofuel production. Demand is expected to increase at high and sound rates, as a growing number of countries adopt more stringent biofuel targets. However, biofuel production has faced criticisms regarding its environmental and social impacts. Notwithstanding the benefits in terms of net energy value and net carbon reduction reported by the scientific literature on sugarcane ethanol, Brazil has faced some criticisms regarding sugarcane expansion based on the “food-fuel-forest” competition controversy. Some analysts argue that such expansion may increase deforestation pressure, especially in areas with high biodiversity value like the Amazon region and the “cerrado”. Second, it is often mentioned that biofuel expansion may occur at the expense of subsistence crop areas, therefore reducing food supply and leading to food price inflation. These potential negative environmental impacts may jeopardize the access to international biofuel markets, with severe economic consequences to the agribusiness sector. Debates on indirect land use change and “food-fuel-forest competition” are at the core of current international trade negotiations regarding biofuels, as illustrated by the discussions on biofuel sustainability criteria in the European Community and the United States. The Brazilian government and the private sector have been attentive to the “food-fuel-forest” competition debate. Generally speaking, one can observe that the agenda on land use planning has been quite influenced by the external pressure. Both the governmental policy measures and the pro-activeness of the private sector can be partly attributed to an effort to avoid barriers to trade. Among the policy measures, one may cite the recent economic-ecologic zoning of the North Region, which virtually bans sugarcane production in the entire Amazon forest. The sugarcane producers association UNICA has also announced a phasing-out agenda for manual sugarcane harvesting, which involves slash-and-burn practices. In addition to that, considerable efforts have also been devoted to the design and implementation of an ethanol certification program. The survey of the empirical literature on ethanol expansion and land use patterns allows us to draw some general conclusions. First, the available evidence does not provide support to the argument that sugarcane expansion may lead to food supply disruption. The analysis of recent trends in land use changes indicates that the expansion of sugarcane areas has not occurred to the detriment of subsistence crops. Similarly, land use modelling considering future economic scenarios does not suggest that farmers will switch from subsistence crops to sugarcane production. Second, sugarcane production is currently of small importance in the Amazon region and its estimated expansion will not be significant. Therefore, sugarcane expansion does not seem to represent a potential source of deforestation pressure in the Amazon. Finally, enlargement of sugarcane area in the Center-South region _ which is the main expansion axis _ may induce deforestation. This is of particular concern in the cerrado biome (Center-West region) and in the remaining Atlantic rainforest areas (Northeast and Southeast coast of Brazil). This finding suggests that, in order to contain the deforestation pressure on these areas, land use planning measures such as ecological-economic zoning and legal reserve requirements should be closely monitored and enforced. Bibliography Dixon, P., S. Osborne and M. Rimmer (2007). “The Economy-Wide Effects in the United States of Replacing Crude Petroleum with Biomass”. Paper submitted for the GTAP Conference, Purdue University, Indiana. Féres, J., J. Speranza, P. Viana, T. Barcellos and Y. Braga (2009). “Produção de Etanol e sues Impactos sobre o Uso da Terra no Brasil”. Instituto de Pesquisa Econômica Aplicada (IPEA). Jank, M., G. Kutas, L. Amaral and A. Nassar (2007). “EU and US Policies on Biofuels: Potential Impacts on Developing Countries” The German Marshall Fund of the United States, GMF Paper Series. Macedo, I., M. Leal, J. Silva (2004). “Assessment of Greenhouse Gas Emissions in the Production and Use of Fuel Ethanol in Brazil”, report to the Government of the State of São Paulo. Msangi, S., T. Sulser, M. Rosengrant, R. Valmonte-Santos and C. Ringler (2006). Global Scenarios for Biofuels: Impacts and Implications. International Food Policy Research Institute (IFPRI). Nassar. A., L. Harfuch, M. Moreira, L. Bachion and L. Antoniazzi (2009). “Impacts on Land Use and GHG Emissions from a Shock on Brazilian Sugarcane Ethanol Exports to the United States Using the Bazilian Land Use Model (BLUM)”. Institute for International Trade Negotiations (ICONE). Organization for Economic Cooperation and Development (OECD), (2006). “Agricultural Market Impacts of Future Growth in the Production of Biofuels”. OECD Papers, 6(1), pp. 1-57. Ragajopal, D. and D. Zilberman (2007). “Review of Environmental, Economic and Policy aspects of Biofuels”. The World Bank, Policy Research Working Paper #4341. Walsh, M., D. Ugarte, H. Shapouri and S. Slinsky (2003). “Bioenergy Crop Production in the United States: Potential Quantities, Land Use Changes and Economic Impacts on the Agricultural Sector”. Enviromental and Resource Economics, 24(4), pp. 313-333. Walter, A., P. Dolzan, O. Quilodran, J. Garcia, C. Silva, F. Piacente, A. Segerstedt (2008). “A Sustainability Analysis of the Brazilian Ethanol”. Campinas: UNICAMP. Zuubier, P. and J. van de Vooren (2008).”Introduction to Sugarcen Ethanol Contribution to Climate Change and the Environment”. In: Zuubier, P. and J. van de Vooren (ed.), Sugarcane Ethanol: Contributions to climate Change and the Environment. Wageningen Academic Publishers. Appendix: land use model General model We consider that farmers allocate their land for three types of use: sugarcane, subsistence crops, other crops, pasture and forests. Farmers decide their land allocations so as to maximize profits, subject to the restriction that land allocations cannot exceed total farm area. This decision process may be represented by the following constrained optimization problem: 5 5 ∑ Π i ( p i ´, r ´, n , X ) : ∑ n i = N n1 , n 2 , n 3 , n 4 , n 5 i = 1 i =1 (1) Max where ni is the land allocated for each land use type i (i=1,…,5), pi´ is a price vector for outputs associated to each use type, r´ is a vector of input prices, n is a vector of land allocations for the three use types, X is a vector containing agro-climate variables and N is the total farm area. A Lagrangean function, denoted L, states the constrained maximization problem as 5 5 L = ∑ Π i ( p i ´, r´, n, X ) + µ N − ∑ ni . i =1 i =1 (2) The necessary conditions for an interior solution of (2) are ∂L ∂Π i = −µ =0 ∂ni ∂ni i = 1, …, 5 (3) 5 N − ∑ ni = 0. (4) i =1 Equations (3) allocate land among the three use types so as to equate the marginal profit from each use type. The land constraint (4) is binding assuming an interior solution. Solving equations (3) and (4) yields the optimal land allocation choices for the three use types, which are expressed as a function of output and input prices, total farm areas and the agro-climate variables ni* ( p i ´, r´, N , X ) i = 1, …, 3. (5) * i Moreover, replacing the optimal land allocation expressions n ( p i ´, r´, N , X ) in equation (4) and differentiating, we have 5 ∑ i =1 ∂ni* ( pi , r , N , X ) ≡ 1; ∂N 5 ∑ i =1 ∂ni* ( pi , r , N , X ) ≡ 0; ∂p 5 ∑ i =1 ∂ni* ( pi , r , N , X ) ≡0 ∂r 5 and ∑ i =1 ∂ni* ( pi , r , N , X ) ≡ 0. ∂X (6) These four identities impose physical conservation laws on the allocation decisions. The first identity says that land reallocations completely absorb an additional hectare of land, so that they sum to 1. The other three identities says that land reallocations following a change in output prices, input prices or agro-climate variables sum to zero since land availability must remain unchanged. Thus, if producers increase sugarcane area in response to an increase in crop prices, this increase must be offset with a reduction in the areas allocated to the other four alternative uses. Econometric specification and estimation In order to derive the econometric specification of our land use model, we assume that the restricted profit function in equation (1) takes a normalized quadratic form. The choice of this functional form may be justified for three reasons. First, the normalized quadratic is a flexible functional form. Second, it is consistent with economic theory, since it allows imposing linear homogeneity on the profit function as well as symmetry restrictions. Finally, closed form expressions for ni* are tractable using the normalized quadratic because its first derivatives are linear. To begin deriving the allocation equations, we observe that the necessary conditions expressed in (3) and (4) form a system of four linear equations. Setting the equations ∂Π i corresponding to (3) sequentially equal to removes µ. The resulting equations ∂ni form a linear system of five equations and five unknowns (n*sugarcane, n*subsstence, n*othercrops, n*pasture and n*forest). The solutions are the estimable land allocation equations for the three use types: j t s f =1 k =1 l =1 ni* = β 0i + ∑ β 1i f p f + ∑ β 2i k rk + β 3i N + ∑ β 4i l X l + η i i =1,…,5 (7) subject to the parameters´ restrictions implied by (6) ∑β i 3 =1; i ∑β i i 1f = 0; ∑β i 2k i = 0 and ∑β i 4l =0 (8) i and the symmetry restrictions β1i f = β1if . (9) In order to estimate the system of three equations given by (7) subject to the restrictions in (8) and (9), we use the Iterated Seemingly Unrelated Regression (ISUR) method. The choice of a simultaneous equation method is justified by two reasons. First, it may account for the correlation between the errors ηi. Such correlation is likely to be present, since land allocation decisions between the three types of use should be interdependent. Second, a simultaneous equation method allows us to impose the cross-equation restrictions expressed in (8) and (9). It should also be noted that the adding-up conditions (8) imply that the equation system in (7) is singular. In order to circumvent this problem, we drop one equation and estimate the other remaining two equations. The coefficients of the omitted equation can be recovered by using the restrictions in (8). Since we iterate our estimation procedure, coefficient estimates are invariant to the choice of which equation is deleted. Such invariance assures the robustness of our coefficient estimates. Simulation In order to assess how farmers will adapt their land allocations in response to climate change, we adopt the following simulation strategy. First, we simulate the land allocated to each of the three use types by considering the temperature and precipitation predicted by the climate model for the baseline period and obtain ^* j ^ ^ t ^ ^ s ^ n i , BASELINE = β 0i + ∑ β 1i f p f + ∑ β 2i k rk + β 3i β 3i N + ∑ β 4i l X l , BASELINE f =1 k =1 (10) l =1 ^ where β s are the estimated coefficients of the econometric model. Next, we replace the climate variables for the baseline period by the predicted temperature and precipitation for timeslice T1, keeping all other explaining variables unchanged ^* j ^ ^ t ^ ^ s ^ n i ,T 1 = β 0i + ∑ β1i f p f + ∑ β 2i k rk + β 3i β 3i N + ∑ β 4i l X l ,T 1 f =1 k =1 (11) l =1 The variation in the area allocated to each type of use i may be computed by the formula ^* ∆ni* = ^* n i ,T 1 − n i , BASELINE ^* X 100 n i , BASELINE We therefore obtain the estimated variations ∆ni* resulting from climate change. Data Our main data source consists of the 1995 Brazilian Agricultural Census, produced by the Instituto Brasileiro de Geografia e Estatística (IBGE). The Census contains information on land use, output and input prices for all Brazilian municipalities. The variables used in the econometric model are described below • Land allocations: subsistence crop area is given by the sum of manioc, corn and beans areas. Forest areas correspond to the sum of natural forest, planted forest and productive land that was not used in the four years preceding the agricultural Census. • Output prices: sugarcane prices are given by average municipal price. Subsistence crop prices were computed as a Laspeyres price index based on the prices of beans, corn and manioc. The municipal average cattle price was used as a proxy for the price of pasture products. In constructing the price for forest products, we just considered the timber price, since other forest products represent a negligible value when compared to logging activities. We assume that the timber price is a good proxy for the opportunity cost of conserving the forest area. • Input prices: due to data availability restrictions, we consider only two inputs in our econometric specification _ labor and land. Labor price is given by the average rural salary, computed as the sum of the salaries paid to rural workers in a certain municipality divided by the number of rural workers. Land prices were calculated as the value of rented lands in the municipality divided by the total rented area. • Climate variables: the climate variables are the observed average temperatures and precipitations for the period 1960-1996. The reason to include historical averages is that farmers are likely to decide their land use allocations based on long-term climate features. Moreover, in order to take into account seasonality effects, we specify the econometric regression in terms of quarterly averages. This approach is based on the hypothesis that a one-degree increase in the average temperature for the months December/January/February (summer) may have a different impact in terms of land allocation than a one-degree increase in the average temperature for the months June/July/August (winter). Climate projections for the period 2010-2100 are based on the PRECIS model, developed by the Hadley Center, which provides data on temperature and precipitation at a 50 km X 50 km resolution for the Brazilian territory. • Agronomic variables: our agronomic variables include information on soil type, erosion propensity, declivity, drainage restrictions and other characteristics that may affect farmers´ decisions concerning land allocation.