Uncertainty in discount rates and relative price changes of nature suggest higher than expected social costs of tropical deforestation
By developing a dynamic approach that accounts for uncertainties in future discount rates and the relative price changes of ecosystem services, this study reveals that the social costs of tropical deforestation in the Brazilian Legal Amazon are more than double previous estimates, thereby strengthening the economic argument for forest conservation.
Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer
When we cut down a tropical forest, the immediate loss is often measured in timber or land cleared for farming. But forests provide a vast array of invisible services that keep the planet functioning: they regulate the climate, cycle nutrients, protect water quality, and offer habitats for countless species. Economists call these "ecosystem services," and they have a value, even if it is not traded in a marketplace. The challenge in understanding the true cost of destroying a forest lies in time. A forest lost today is gone for centuries, perhaps forever, meaning the benefits it would have provided stretch far into the future. To compare a benefit received today with one received a hundred years from now, economists use a tool called a discount rate, which essentially asks how much less we value the future compared to the present. However, this rate is not a fixed number; it is uncertain and can change. Furthermore, as forests become scarcer and human incomes rise, the value we place on the remaining forest services tends to increase. This rise in value over time is known as relative price change. For decades, estimates of the cost of deforestation have often treated these future values as static or ignored the uncertainty surrounding them, potentially leading to a severe underestimation of the damage.
A team of researchers from institutions across Europe and Brazil has developed a new way to look at this problem, focusing specifically on the Brazilian Legal Amazon. Instead of assuming that the value of a forest stays the same or changes in a predictable line, they built a dynamic model that accounts for the uncertainty in both the discount rate and the changing value of nature itself. They simulated thousands of possible future scenarios over a period of a thousand years, using a method that allows rates to drift and persist in ways that reflect real-world unpredictability. Their approach treats the future not as a single path, but as a wide range of possibilities, some of which involve the value of the forest rising so sharply that it outpaces the rate at which we usually discount future benefits.
The results of this simulation are striking. When the researchers applied their new method to the deforestation that occurred in the Brazilian Amazon between 1988 and 2025, they found that the social costs of this destruction were more than double what previous estimates suggested. By simply accounting for the fact that the value of forest services increases as they become scarcer and as people become wealthier, the estimated costs rose by nearly half. When they added the uncertainty of the discount rate into the mix, the costs climbed even higher. The combined effect of these two factors—uncertainty in how we value the future and the rising price of nature—increased the total estimated social cost of deforestation by 102 percent. In concrete terms, this means the present value of the lost ecosystem services from the observed deforestation is approximately 2.85 trillion US dollars. This figure represents an annual cost equivalent to 2.4 percent of Brazil's entire gross domestic product in 2023.
The study also revealed something unsettling about the nature of these costs: they are not evenly distributed. The simulations produced a distribution with a "fat tail" on the right side, meaning there is a significant probability of outcomes where the costs are astronomically higher than the average. These extreme scenarios occur when discount rates remain low for long periods while the value of the forest continues to rise due to scarcity. In such a world, the cost of losing a forest today becomes almost incalculable because the future benefits we are ignoring are so immense. The researchers found that the worst 10 percent of their simulations resulted in costs averaging 6.58 trillion US dollars, with annual costs exceeding 200 billion US dollars. This suggests that relying on average estimates or ignoring the uncertainty of the future could lead society to make decisions that are far more costly than anticipated.
The authors emphasize that their findings do not rely on new data about how much forest was lost, but rather on a new way of calculating the value of what was lost. They used established estimates for the economic value of forest services but applied a framework that acknowledges the deep uncertainty of the future. They argue that ignoring the rising value of nature and the unpredictability of economic rates has led to a systematic underestimation of the price we pay for deforestation. By showing that the social costs are likely much higher than previously thought, the study strengthens the economic argument for preserving tropical forests. It suggests that the expansion of agriculture and other land uses that rely on clearing forests may be carrying a hidden debt that is far larger than current economic models admit, urging a reevaluation of how we value the natural world in our long-term planning.
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