“Deforestation, pollution and environmental degradation affect the production of goods and services, the well-being of individuals and the access of local producers to markets.”
Ariaster Baumgratz Chimeli is a professor of economics at the University of São Paulo, has a bachelor’s degree in economics from the Federal University of Minas Gerais, a master’s and PhD from the University of Illinois at Urbana-Champaign and a postdoctoral degree from Columbia University. Ariaster focuses his research on the link between economy, environment and development.
AgriBrasilis – How does deforestation and environmental pollution impact Brazil’s economy?
Ariaster Chimeli – Deforestation, pollution and environmental degradation affects the production of goods and services, the well-being of individuals and the access of local producers to markets.
Agriculture in Brazil offers a good illustration: the country is not a power in agricultural production by chance. Success in the sector comes from work, research and innovation, largely driven by Embrapa and natural resources, which enable large-scale production. Among these resources are, for example, a rainfall regime that provides favorable conditions for production in various regions of the country. Deforestation can impact the rainfall regime, contributing to global warming and compromising agricultural production.
In some circles, the complaint is heard that the Rural Environmental Registry generates punishments for violators, while farmers who comply with the law receive no positive incentive. However, protection of vegetation on a sufficiently large scale benefits everyone. Those who follow the law benefit from environmental protection.
Other impacts of environmental degradation on production are the consequences for the tourism sector, which depends on natural resources, the reduction in productivity of workers exposed to pollutants and the consequent loss of profitability for companies.
Although the well-being of individuals at first doesn’t seem like an economic issue, economists typically view production and consumption choices as motivated by the well-being of the individuals who make up society. Therefore, the literature identifies several pollutants that aggravate human health. The increase in morbidity and mortality has serious consequences for the population’s quality of life, as well as for the productivity of workers and, consequently, for the profitability of companies.
As consumers, countries and companies at different points in the production chains become sensitive to environmental impacts, producers with a negative impact may face restrictions on access to markets. The European Union, for example, has legislation that restricts trade in certain machinery and equipment that contain toxic substances, regulates the entry of chemical substances and, more recently, has advanced in the implementation of tariff barriers for products with high levels of greenhouse gas emissions from countries with less ambitious climate change mitigation policies. Tariff barriers for products with high gas emissions tend to have a major impact on Brazilian steel and, in the future, other products. Also at the national level, consumers are increasingly sensitive to products and companies with an image of degraders.
AgriBrasilis – Is the country already suffering penalties for environmental issues?
Ariaster Chimeli – Internationally, Brazil’s image in relation to environmental protection is frequently questioned. This can hamper our ability to negotiate agreements of all kinds. More recently, with large increases in Amazon forest fires, some countries have threatened sanctions and cooled the rapprochement between Mercosur and the European Union. Some international companies also announced the suspension of the purchase of Brazilian inputs that could be associated with deforestation.
At the national level, extreme weather events suggest consequences of environmental degradation. While it is impossible to say that extreme rains, droughts, landslides and flooding in any given year are a consequence of climate change, the increasing frequency of these events suggests that climate change is taking a toll on our economy and well-being. These natural “penalties” are a consequence of a history of environmental degradation that increases the systemic risk of the economy in its traditional way of functioning. Such environmental penalties can be several orders of magnitude greater than the penalties imposed by countries and companies.
Systemic risks to a way the economy works can be catastrophic and historical examples exist. An iconic case in agriculture is the Dust Bowl phenomenon, which occurred on the plains of the US in the 1930s. A combination of agricultural practices that exposed the soil and drought generated dust storms that killed people, livestock and compromised crops and the local economy.
AgriBrasilis – Considering that one of the main sectors of the economy is agribusiness, how is economic development possible in a sustainable way?
Ariaster Chimeli – The development of Brazil necessarily involves agribusiness and environmental protection for the very survival of the sector. Agribusiness is and will be of great importance to the national economy in the generation of jobs, profits and taxes and in the dynamism of the economy that the sector provides.
Agribusiness also depends on the quality of soils, rainfall patterns and other ecosystem services. For the country to grow sustainably, it is important to strengthen institutions that value the flourishing of agribusiness and its long-term protection. This perspective of protection of national interests, including safety for the producer and consumers and the well-being of the population in general, applies to all sectors.
A technical and transparent dialogue that guarantees the country’s sustainable development necessarily involves solid institutions for the protection of business and the environment. Conflicts of interest will always exist. What guarantees the constructive handling of these conflicts is an institutional environment respected by citizens and the interest groups that naturally make up society.
AgriBrasilis – How can preserving the environment in Brazil benefit investor relations?
Ariaster Chimeli – Everything indicates that local and international consumers will pay more and more attention to environmental, social and corporate governance actions. A history of degradation on the part of companies signals to investors an environmental liability capable of restricting access to markets or turning into future legal proceedings with substantial compensation, which reduces the value of companies and discourages investments.
Similarly, commitment to environmental protection and solid preservation actions signal lower risks. From the companies’ point of view, a proactive environmental agenda, in addition to reducing environmental liabilities, brings a competitive advantage in the anticipation of legislation, branding, access to low-cost capital and talent attraction.
The international financial market has been mobilizing since the 1990s to promote financing for companies and projects with a solid agenda of ESG actions. More recently, we have seen the growth of financial instruments dedicated to the financing of projects aligned with an agenda of low negative environmental impact. Concrete environmental preservation actions can be the differential for access to credit markets.
AgriBrasilis – What does environmental valuation mean?
Ariaster Chimeli – Environmental valuation refers to the estimation of the value of ecosystems, air and water quality, rainfall regime or any indicator of environmental quality. What is peculiar about environmental valuation is that there are no markets for environmental goods.
Unlike the case of goods for which markets exist, we cannot use prices of environmental goods to estimate their value. However, we know that value exists.
To try to estimate the value of environmental goods and services, we use statistical techniques that follow the behavior of consumers and producers, or that somehow ask these producers or consumers to declare the value of environmental goods. For example, the value of land depends on several factors that include soil quality, rainfall regime, river water quality and distance from markets, among others. Therefore, two lands that are identical except for the quality of the water of the adjacent river used for irrigation will have different prices. Land with easy access to good quality water will generally be more expensive than its equivalent with poorer quality water.
The price differential tells us something about the value of water quality in that context. In other cases, we are unable to link a market good (land) to an environmental good or service (water quality) and we resort to techniques where users declare the maximum sacrifice (payment) they would be willing to make to guarantee a better environmental quality. In the urban context, for example, we can carry out experiments to estimate how much citizens would be willing to pay to curb fires and avoid waves of smoke and contaminated rain.