Reforestation incentives and the economic structure of the charcoal market in Minas Gerais, Brazil

The incentives were intended to increase the area of industrial plantations - most of which are eucalyptus. Most of the wood produced in these eucalyptus plantations is converted to charcoal, which is then used as a reducing agent in the state"s extensive iron and steel industry. An investment model of the planting decision for eucalyptus was estimated. This model measures the effect on planting levels of the subsidy program"s limits on the percentage of taxes due eligible for tax credits and attempts to measure what area might have been planted without the incentives. The results indicate that the incentives" limits are negatively related to the amount of planting done, i.e., when the limits were high, less planting was done. Apparently, some other factor more effectively limited participation in the program. Supply and demand functions for plantation-origin charcoal were estimated. Demand function estimates were inconclusive, but theoretical considerations, a previous study (Amancio et al, 1983), and the provisional results obtained in this study all indicate that the demand for charcoal in Minas Gerais is price elastic. The supply of plantation-origin charcoal, on the other hand, is apparently very price inelastic. The quantity supplied is determined mostly by the amount of mature eucalyptus available, i.e., by past planting decisions. Thus, any effects the subsidy program had on the planting decision directly affected the supply of plantation-origin charcoal eight years later. (Author abstract)