HAS RESOLUTION 3,545 HAD AN EFFECT IN REDUCING DEFORESTATION?

Responsible researcher: Eduarda Miller de Figueiredo

Intervention Location: Amazon

Sample Size:

Sector: Environment

Variable of Main Interest: deforestation

Type of Intervention: Resolution 3,545 – Rural Credit

Methodology: Differences in Differences

Resolution 3,545, of 2008, made the granting of subsidized credit in the Amazon subject to proof of compliance with legal titling requirements and environmental standards. In view of this, the authors seek to evaluate the effective impact of the resolution on deforestation within the Amazon biome. Using panel data composed of information from INPE and the Central Bank, the Differences in Differences methodology was used to produce estimates. The results are significant and suggest a 60% reduction in deforestation. Heterogeneous effects were found for different activities and regions, which demonstrates that the resolution is a complementary policy and not a substitute.

Policy Problem

Of the latest global greenhouse gas emissions, almost 20% is attributed to tropical deforestation. And, as a result, policymakers around the world have dedicated themselves to implementing a set of policies based on incentives that help reduce deforestation.

The article aims to evaluate the impact of Resolution 3,545 on deforestation, as this resolution represented a potential restriction on access to rural credit, which is one of the main mechanisms to support agricultural production.

Implementation and Evaluation Context

In 2008, the Central Bank of Brazil published Resolution 3,545, which made the granting of subsidized credit in the Amazon subject to proof of compliance with legal titling requirements and environmental standards. Furthermore, this resolution applies exclusively to properties within the administrative definition of the Amazon biome, so properties outside the biome are not subject to the policy.

Resolution 3,545 determined that eligibility for access to rural credit must be conditional on the presentation, by the credit recipient: (i) of the Rural Establishment Registration Certificate, which proves that the property hosting the project to be financed is properly accounted for in federal records; and (ii) a document issued by the State attesting to the regularity of the establishment that hosts the project to be financed, as well as the declaration that the property is not under any embargo [1] caused by deforestation. Where producers who feared that the resolution could affect their future access to credit could signal an intention to change their deforestation behavior in the future and thus be considered in compliance with environmental regulation at the current time.

It is important to highlight that shortly after the compulsory adoption of the resolution, new measures relaxed the requirements for granting rural credit to small producers, mainly through the inclusion of new groups of small producers to the list of credit borrowers who were exempt from complying with the requirements. originals of Resolution 3,545.

Policy/Program Details

For the analysis, a set of panel data from 2003 to 2011 of municipality per year was used. A georeferenced map containing the location of municipalities and the limits of the Amazon biome was used, which enabled the creation of subsamples of municipalities, inside and outside the Amazon biome, located at specific distances from the biome border, as shown in the figure below:

Benchmark Sample

Data on deforestation were constructed from satellite images from the Institute for Space Research (INPE) within the scope of the Deforestation Monitoring Project in the Legal Amazon (PRODES). The authors define deforestation as the area of ​​forest in square kilometers deforested in the twelve months preceding August of a given year. For this reason, credit loans and all other variables were recoded for this period, where year t will refer to the twelve months preceding August t .

Administrative contract-level data compiled by the Central Bank were also used to construct municipal-level rural credit variables from data in the Common Registry of Rural Operations. This set of administrative microdata covers all records of rural contracts negotiated by official banks and credit cooperatives.

Method

The fact that Resolution 3,545 only applies to properties located within the Amazon biome, generated an explicit geographic divide between two groups of municipalities: (i) those entirely within the Amazon biome and, therefore, subject to the resolution; and (ii) those entirely outside the Amazon biome, which are not subject to resolution. Therefore, the treatment group will be made up of the municipalities in the first group, while the control group will consist of the municipalities in the second group.

In this way, the authors use Differences in Differences to evaluate the impact of Resolution 3,545 on deforestation. The variable of interest in the study is the interaction of a binary variable that indicates whether the municipality is located within the Amazon biome with a variable that marks the period after the implementation of the resolution. Municipality and year fixed effects were added to the model to control for persistent municipal characteristics and common temporal trends, respectively. Furthermore, variables were added to control other environmental policies.

Main Results

The main results demonstrated that, in the absence of Resolution 3,545, total deforestation would have been 2,000 square kilometers greater than that actually observed from 2009 to 2011 in the sample of 100 km of municipalities, which represents a reduction of 60% if deforestation is considered from the baseline in 2008. In other words, the resolution has played an important role in containing deforestation in the Amazon biome.

Furthermore, the results suggest that the inclusion of environmental monitoring and law enforcement controls do not affect the impacts of the resolution, that is, that the resolution did not affect the granting of credit via a reduction in demand from credit recipients. Therefore, in general, the results indicate that the effects of Resolution 3,545 on deforestation directly reflect the reduction in deforestation in response to the reduction in access to rural credit.

However, the authors point out that the policy may have had different effects in different regions. Thus, regional heterogeneity is explored, observing how the relationship between credit and deforestation may differ between municipalities with different activities. In livestock municipalities, the point estimate is quite similar to the other specifications. In contrast, estimates suggest that Resolution 3,545 had no impact on deforestation where agriculture is the main activity. According to the authors, this is consistent with reports documenting that agricultural production in Brazil has been less dependent on credit which, following various technological improvements, has increased its production at an intensive margin. In relation to credit lending, the results indicate that credit concessions for use in livestock farming were the most affected by Resolution 3,545 in comparison to other activities, suggesting that access to credit and deforestation are particularly correlated in livestock farming.

Therefore, the authors conclude that Resolution 3,545 helped to contain deforestation in the Amazon biome. Where the resolution had negative effects on both deforestation and credit provision, where the actual implementation of the new policy, in fact, supports the assumption that the resolution affected deforestation only through the credit channel.

Public Policy Lessons

The study suggests that conditioning rural credit is an effective policy instrument in combating illegal deforestation. However, the heterogeneous effects across sectors and regions suggest that it is a complementary policy, rather than a substitute for other conservation efforts.

[1] In the Amazon, embargoes are an administrative sanction that can be applied to landowners as punishment for illegal deforestation within private property.