Deforestation and environmental policy : a DSGE approach

Abstract

This paper proposes an environmental dynamic stochastic general equilibrium (DSGE) model with deforestation of a tropical rain forest. The forest can be used to produce goods, but it also affects the well-being of the representative individual. Environmental policy is implemented with the taxation of the deforestation activity. We calibrate the model for the Brazilian economy, and show that it predicts a procyclical deforestation, and that a more stringent policy reduces the volatility of deforestation. Moreover, technological progress decreases the stock of forest, and it does so more intensely with a lenient environmental policy.