Promoting sustainable logging in Brazil's national forests: Tax revenue for an indemnity fund

The Brazilian government is rapidly establishing millions of hectares of national forests (FLONAs) in the Amazon rainforest. The strategy behind the establishment of the FLONAs is to bring legal logging to areas where it is more easily controlled, taxed, and sustainably managed than the “boom and bust” logging that occurs, and has historically occurred, on private property in the Amazon. Management of the FLONAs includes the levying of stumpage fees and administration taxes to generate operating revenue and foster more sustainable logging practices. We consider alternative policies available to FLONA administrators that, under a certain set of assumptions, are sufficient to indemnify some social costs of tropical deforestation. Specifically, we look at various rates of profit and severance tax and examine how these affect logging firms' decisions regarding harvest rates and how these taxes might be used to establish an indemnity fund. This fund could be used to cover the FLONA's operations costs, placate local non-loggers, and offset externalities of logging.