The Amazon: Economics of the Rainforest

Why the Amazon rainforest is being cleared, what drives deforestation economically, and how Brazil sharply reduced it in the 2000s.

The Amazon is the world’s largest tropical rainforest, spanning nine countries, with around 60 percent in Brazil. It stores vast amounts of carbon, holds extraordinary biodiversity and influences rainfall across South America. Yet large areas have been cleared.

What drives deforestation

Deforestation is driven largely by economic forces:

Cattle ranching: clearing land for pasture is the leading driver of Amazon deforestation.
Soybean farming, though much soy expansion occurs on previously cleared land.
Land speculation: clearing forest can establish claims to land, which can then be sold at a profit.
Roads: new roads open remote areas to settlement and clearing.
Illegal logging and mining.

The economic puzzle

A standing forest provides enormous value to the world through carbon storage, rainfall and biodiversity. But much of that value does not reach the people who own or use the land. For a rancher, cleared land brings income; a standing forest may bring little. This gap between private and social value is a classic externality.

Brazil’s success and setbacks

Between 2004 and 2012, Brazil reduced annual deforestation in its Amazon by around 80 percent. Key measures included:

Satellite monitoring by Brazil’s space research institute, INPE, enabling near-real-time detection of clearing.
Stronger enforcement, with fines and seizures.
Credit restrictions: from 2008, rural credit in the Amazon was conditioned on environmental compliance.
Protected areas and Indigenous territories, which have much lower deforestation rates.
The Soy Moratorium, an agreement by traders from 2006 not to buy soy grown on newly deforested land.

Deforestation rose again in the later 2010s as enforcement weakened, then fell again from 2023 when enforcement was strengthened.

Paying to keep forests standing

Norway pledged up to 1 billion dollars to Brazil's Amazon Fund, created in 2008, to reward reductions in deforestation. Germany also contributed. The fund pays for enforcement, sustainable production and support for Indigenous communities. It is an attempt to transfer some of the global value of the forest to those who protect it.

Thinking deforestation is driven only by poverty

Much Amazon deforestation is driven by commercial ranching and land speculation, often by well-resourced actors, not only by poor farmers. Effective policy targets these incentives through enforcement, supply chain rules and financial conditions.

Key takeaways

Cattle ranching is the leading driver of Amazon deforestation.
The forest's global value mostly does not reach landholders, creating an externality.
Brazil cut Amazon deforestation by around 80 percent between 2004 and 2012 through monitoring and enforcement.
Funds like the Amazon Fund try to reward protecting forests.