| The Brazilian government has been pushing for changes to the United States' extensive barriers to ethanol imports. However, removing these barriers would present a crucial environmental tradeoff. On the one hand, replacing US consumers' use of petroleum and corn-based ethanol with Brazilian sugarcane-based ethanol could have a large positive impact on carbon emissions. On the other hand, this additional ethanol would require an expansion in sugarcane production that could lead to greater deforestation and other environmentally harmful land clearing in Brazil. This paper addresses this tradeoff by answering the question: Would freely importing Brazilian ethanol into the US lead to enough land clearing to offset the environmental benefits of greater ethanol use? To answer this question, I develop and estimate an empirical general equilibrium model of Brazil's regional agricultural markets. I estimate the model using rich household survey data, region-level data on production and land use, and data on the prices of key goods. I then use the estimates to simulate the effects of a change in US import barriers, where I examine the sensitivity of the results to alternative assumptions about the level of international ethanol prices after the policy change. Reassuringly, I predict that if the US could freely absorb Brazilian ethanol at a price 12% above the baseline, Brazil would supply 12.4 billion gallons of ethanol to the US with a decline of only 37 million acres of non-agricultural land. However, if the price rose 15%, Brazil would supply approximately 21.1 billion gallons to the US, and the additional 8.7 billion gallons of exports would require a large additional decline of 86 million acres, with a large share coming in the regions containing the Amazon Rainforest. Whether or not the US importing Brazilian ethanol is ultimately good or bad for the environment will turn on the exact nature of US and international demand in the future, as well as on the Brazilian government's ability to direct the above acreage declines away from the most environmentally important land. |
