world. Agricultural productivity thus remains a critical complement to manufacturing productivity to raise productivity overall without causing deforestation. Table 3 shows that a scenario in which both agriculture and manufacturing raise productivity at the same rate both agricultural output and land productivity can be raised without causing deforestation. The reason is that the productivity gain in manufacturing lowers the cost of capital and inputs (whether produced by manufacturing in Brazil or whether imported, aided by the appreciated exchange rate). Thus, the price of capital and inputs falls relative to the price of land and labor. This results in higher mechanization of agriculture, with lower labor shares but also lower demand for natural land. In other words, these are macroeconomic drivers of the intensification of farming that raise agricultural output with less deforestation it promotes the structural transformation of agriculture (labor migrating into industry and services) while reducing deforestation.

_Table 3. Productivity and deforestation in the Legal Amazon. Impact of a 0.5pp TFP increase by sector or combination of sectors. Percent change relative to the baseline for all variables except for natural land which is expressed in million hectares_

|Sector|Out<br>Cattle|put<br>Soy|Land pro<br>Pasture|ductivity<br>Crops|Land rent<br>Pasture|s<br>Crops|Wages<br>(rel. to<br>Brazil)|Natural<br>land<br>(Amazon)|
|---|---|---|---|---|---|---|---|---|
|Agriculture|8.87|9.73|8.15|8.07|11.62|12.56|1.70|-0.54|
|Manufacturing|-3.61|-3.06|-2.93|-2.59|-8.59|-9.29|5.11|0.54|
|Agriculture &<br>manufacturing|4.95|6.53|5.00|5.35|1.89|2.30|6.89|0.02|

Source: Simulation results from CGE model. Note: Cumulative impacts 2020 to 2030.

Finally, inferences can be drawn about the overall impacts of emissions from these different growth models. Revisiting Table 2 once more shows that among the scenarios displayed the largest positive impacts on lowering CO2 emissions can be achieved by increasing productivity outside the Legal Amazon, notably Brazil’s economic centers in the south and southeast. This is followed by raising productivity in manufacturing across Brazil, further followed by raising manufacturing productivity in the Legal Amazon itself. This takes into account both the emissions associated with manufacturing, land use change and deforestation. The former is relatively small in Brazil, not least due to a relatively clean energy mix (largely hydropower). Thus, the emissions associated with industrial expansion from a manufacturing productivity gain are outweighed by the saved emissions from lower deforestation. Notably, this is not the case for agriculture: even though raising agricultural productivity across Brazil can help reduce deforestation, agricultural emissions are sizeable and therefore not offset by emissions savings from lower deforestation.<sup>6</sup>

# **6. Conclusions and policy implications**

Protecting Brazil’s vast natural forest wealth is of utmost importance. In the shorter-term, effective governance, including land regularization and command and control policies to enforce

> 6 Notice that livestock production is included in the broad agriculture sector. Emissions associated with the level of livestock activity is the highest single sector emissions in Brazil.

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