As can be seen in Table 3, if only industrial emissions are considered, Latin America’s share of global CO₂ emissions is only 4.5% of the total world emissions. But if all sources are considered, including deforestation, the region’s share almost doubles to 9%. The 640 million metric tons of CO₂ are generated by deforestation of about 5.7 million ha in South America and 0.7 million ha in Central America.

The assumption made in estimating the CO₂ emissions from deforestation assumes an average release per ha of 100 tons of CO₂. This figure is quite conservative given the few available analyses of carbon sequestration in tropical forests. A recent survey by the WRI (1998) shows that the CO₂ content of tropical forests around the world ranges between 188 and 348 tons per ha. Thus, using the lowest estimate and assuming that only 54% of the total CO₂ is actually released into the atmosphere through forest conversion we obtain an estimate of 100 tons of CO₂ per ha.

What would be the market value of the forest area that is eliminated every year in Latin America? A recent study has found that the likely price of the right to emit one ton of CO₂ would be $125 if carbon trade were restricted to the North (Ellerman, Jacoby, and Decaux, 1998). If the South is also fully involved in the trading system, the quota price falls to $25 per ton. Using the most pessimistic prediction for the quota value, we obtain a market value of about $16 billion for the 6.4 million ha of forest annually converted. This compares to less than $500 million in annual benefits to the region of the 6.4 million ha that are converted to other purposes (López, 1998). Thus, the value of the standing forests of Latin America can be dramatically increased if the region becomes fully involved in the imminent world carbon-trade system. At the same time, the region can obtain large financial benefits that could be devoted to sustainable development and the fight against poverty.

What are the potential drawbacks to the region of integrating itself into the world carbon trade? The region would have to accept binding aggregate CO₂ quotas. There is a fear that this could restrict its future development potential. The issue here is how the CO₂ quota for the region is set up. A historical benchmark is inevitable, but the region could set as a condition that the volume of quotas received should be adjustable through time so that per capita CO₂ emission rights would gradually converge with those of the North. This could imply, for example, a North-South annual redistribution of CO₂ quotas of the order of, say, 0.5% per annum. More importantly, the region has property rights over its entire forest resources. Therefore, Latin America should have the right to continue deforestation at its present level until its forests are depleted. Thus, the region would reduce deforestation below the historical 6.4 million ha in return for the corresponding quota values. That is, the region would have for the foreseeable future the right to emit 640 million tons of CO₂ per annum and could sell such rights every year at the quota market price. Of course, deforestation in the future cannot affect the areas that have been “sold” for carbon-sequestration purposes. As domestic industrial development demands greater CO₂ emission rights, the region could export a smaller fraction of its deforestation quotas and use the rest domestically.

Figure 2 shows the likely evolution of the CO₂ emissions for the region assuming that it reduces deforestation by 50% in perpetuity, that is, that it cuts its deforestation from 6.4 to 3.2 million ha per annum. It is also assumed that the region’s GDP grows at 5% per annum and that the elasticity of demand for CO₂ with respect to GDP is 0.40. This implies that the demand for CO₂ emissions for industrial development would increase 2% per annum.

Figure 2 shows that by reallocating its deforestation quota gradually from foreign to domestic sectors, the region can continue to grow at 5% for over 28 years without facing CO₂ constraints. Throughout this period the region would have gross revenues related to the deforestation quotas of about US$62 billion expressed in present value using a 10% discount rate (Table 4). Over the first few years, the quota revenues would reach US$8 billion annually. The cost of reducing deforestation by 50% in terms of forgone revenues from the land that is not developed would amount to less than US$4.8 billion, also in terms of present value. That is, the region is likely to obtain a net benefit of more than US$60 billion over the next 28 years without facing binding restrictions on its growth rate. Of course, if the GDP growth rate turned out to be higher, the net quota revenues would decline.

What happens when the deforestation quotas are fully used? The region could negotiate further reallocation of emission rights from the North from time to time until per capita emissions in the region are close enough to those of the North. Additionally, in the future it may become easier to reduce deforestation even further, to below 3.2 million ha per annum. This would give the region more quota benefits and, at the same time, allow it to reach levels of emissions per capita much closer to those of the North.

Another issue concerns implementation: how to achieve the target of cutting deforestation significantly and how to distribute the benefits of the quota revenues to facilitate achieving the reductions in deforestation. These will be dealt with in section 6.

FIGURE 2
TABLE 4