Green finance and deforestation reduction in Brazil: a PVAR analysis of the Amazon Fund
Owing to deforestation, since 2021 the Amazon rainforest is emitting more CO2 than it is able to absorb, with a crucial impact on global warming and biodiversity loss. Legal Amazonia is an administrative area in Brazil that accounts for 64% of the whole Amazon rainforest in South America. With 5.2 million km2, it represents 61% of the entire Brazilian territory, encompassing 9 federal states. The Amazon fund is one of the main vehicles of international climate finance operating in Legal Amazonia. Its disbursements have dramatically dropped in recent years following important disagreements with the Brazilian government. The goal of this paper is to assess the impact of the Amazon fund’s projects in reducing deforestation, along with some other key factors, such as the national environmental agency’s sanctions and agricultural production. Using satellite observations and microeconomic data, we build a panel dataset on the evolution of variables capturing geography, climate finance, regulation and production over 2002-2020 across the 760 municipalities of Legal Amazonia. We use a PVAR to replicate a stylized economic system where variables can influence each other at different lags. Our main empirical findings entail interesting policy implications: i) The Amazon Fund disbursements significantly reduce deforestation rates; ii) by recipient body, projects managed at the states level are more efficient than those managed by municipalities or universities; iii) by type of project, those related to land use planning, which involve the development and protection of local autochthonous communities, are the most efficient.