Are voluntary environmental agreements effective in combating deforestation?

An environmental policy is generally characterized by the coexistence of several sets of rules, created by public or private agents. Voluntary actions have become increasingly common in the private sector, allowing companies directly involved in environmental problems to seek solutions and rules of their own to achieve objectives more quickly and flexibly.

However, monitoring of public or private environmental rules is generally imperfect. After all, monitoring costs are necessarily greater than zero, fall only on certain agents in the process, and the benefits arising from greater investment in this area are either publicly shared by everyone or present limited financial returns in the short term.

The ability to supervise and monitor varies according to the level of competence of the entity responsible for verifying compliance with rules or the characteristics of the policy to be monitored. When costs are high, there is greater limitation in carrying out adequate monitoring for an accurate assessment of compliance with a rule, regulatory instruments can lead to unexpected results – and, at times, even contrary to those that regulation seeks to achieve.

Miranda and Oliveira (2023) assessed how the coexistence of voluntary agreements and public policies in a scenario of high monitoring costs impacts deforestation rates in the Brazilian Amazon through the case of Conduct Adjustment Agreements (TACs) in the cattle farming supply chain.

TACs are voluntary agreements designed in 2009 to encourage meatpacking companies to monitor the environmental practices of cattle ranchers located in the Brazilian Amazon region. By signing a TAC, the company that operates in the activity signals to the market that it is purchasing meat from properties without environmental liabilities – a decision that could suggest “good environmental behavior” on the part of all cattle ranchers linked to it.

There are many potential benefits that a company can obtain by signing a TAC. The main one would be greater ease in obtaining financial resources. However, the existence of high monitoring costs in the Brazilian Amazon means that oversight is generally imperfect. Therefore, these monitoring problems can contribute to opportunistic behavior on the part of some cattle ranchers operating in the region, who would be able to obtain easy financing from banks even if they do not comply with environmental requirements. The result would then be an unexpected increase in illegal deforestation rates in the region. 

The results of the study developed by Miranda and Oliveira (2023) provide evidence that there was an increase in deforestation concomitantly with the greater provision of rural credit in municipalities where a meatpacking company signed a TAC, between 2006 and 2017. It is worth noting that the analysis was based on a period prior to the more robust implementation of TAC compliance audits, which highlights the importance of the role that recurring monitoring can play. In this sense, these results bring a simple but impactful message: in a scenario of high monitoring costs, voluntary agreements may present vulnerabilities that allow opportunistic actions. 

However, this message should not lead us to conclude that TAC agreements, or voluntary commitments in general, are doomed to failure. After all, voluntary commitments often emerge because they are the only viable alternative in a world characterized by positive monitoring costs. By attempting to circumvent the limitations faced by the State in enforcing environmental laws in the Amazon, the policy of TAC agreements can offer a viable (and creative) organizational solution to a complex problem, when well executed and monitored. 

This result also suggests that the deforestation problem in the Brazilian Amazon derives more from a lack of incentives and resources for behavior change than from limitations in available technology. This conclusion is particularly valid when one considers the distributive dimension of TAC agreements: in a world characterized by the existence of positive monitoring costs, someone must pay the price of monitoring. 

One example illustrates the nature of the challenge: The Brazilian Federation of Banks (Febraban) recently announced that, starting in 2025, meatpackers will only be able to obtain loans if they can prove that their purchases come from properties free of illegal deforestation. Representatives of the meat industry have responded quickly, demanding stricter standards from banks regarding livestock farmers. Specifically, the Brazilian Association of Meat Exporting Industries (ABIEC) has expressed concerns that Brazilian banks are “outsourcing” the responsibility of monitoring their customers’ behavior to meatpackers. 

To increase the effectiveness of voluntary commitments, farms and companies need to address the distributional issues arising from the growing demand for monitoring of production practices in the Brazilian beef supply chain. In other words, it will be necessary to discuss how to share the costs of monitoring. This highlights the importance of collaboration between the different actors in the agro-industrial chain.

Reference:

This text was based on the full article:
Miranda, BV, & Oliveira, GM (2023). Assessing the performance of voluntary environmental agreements under high monitoring costs: Evidence from the Brazilian Amazon. Ecological Economics, 214, 107982.

Bruno Varella Miranda is an Assistant Professor at Insper. He holds a PhD in Agricultural Economics – with a certificate in Institutional and Organizational Analysis – from the University of Missouri-Columbia (United States). Bruno also holds a Master’s degree in Administration and a Bachelor’s degree in International Relations from the University of São Paulo. 

Gustavo Magalhães de Oliveira is a researcher at the Institute for Food and Resource Economics (ILR) at the University of Bonn (Germany), where he works on the CLEVER project . He holds a PhD in Administration from the University of São Paulo. During his doctoral studies, Gustavo worked as a visiting researcher at the University of Perugia (Italy).

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