Interview of the Month – Joaquim Levy: Markets have started repricing environmental risks and reallocating capit

Joaquim Levy states that transparency is essential to advancing the environmental agenda, and that the intensification of Cattle-Crop would lead to higher profits, soil with higher levels of organic carbon, and higher-value animals

With a doctorate in Economics from the University of Chicago, Joaquim Levy studied sustainable technologies and the transition to a low-carbon economy as a research fellow at the Steyer-Taylor Center at Stanford University.  Since leaving the presidency of the Brazilian National Development Bank (known as BNDES) one year ago, Levy–who has also served as Minister of the Economy–has studied in greater depth the intrinsic ties between the economy and the environment.

In this interview given to Instituto Escolhas, he reflects on how agribusiness depends on the environment in order to prosper, as well as on how Brazil needs to be transparent with its environmental data–not least due to the demands of international buyers and investors.  He also addresses how Brazil can take the path towards a Bioeconomy.  In his view, a low-carbon economy can help reduce social inequalities and improve the living conditions of the population.

Instituto Escolhas – What is the greatest hurdle for the environmental agenda?

Joaquim Levy – Recognition of the importance of sustainability has been growing, including due to the risk of global warming.  Although this warming is being discussed more often in the Northern hemisphere countries, it will primarily affect tropical areas, such as Brazil–and especially the Amazon.  There is evidence that this could substantially alter Brazil’s climate in a relatively short period of time, probably around the time today’s children are entering the labor market.  As the repercussions of deforestation and of climate become clearer, businesspeople will change their risk assessments and investment decisions.  That, by the way, is an international phenomenon: markets are starting to reprice environmental risks and to reallocate capital.  Countries that do not realize this can be left behind.  And transparency is good, because the data that you do not share, others will share, and they will price their assets without you being able to interfere.

Escolhas – There is an idea that taking care of the environment can limit development. Do the environment or the rights of indigenous populations and riverside communities–among others–pose challenges to the expansion of infrastructure in Brazil?

Levy – In many countries, the “development versus conservation” dilemma is sharp. Brazil has the good fortune of not depending, for example, on carbon for electricity and industry, or for heating during a cold winter.  So we have greater liberty than some of the large economies.  Those economies will have to make an extra effort to reduce their dependence on carbon, including by finding new job opportunities for millions of people who depend, directly or indirectly, on fossil fuels.  Here, one key component of infrastructure–which is energy–has to be treated in a sustainable way, respecting the requirements for environmental permits and with low emissions.  The G20 has underscored how early evaluation of environmental impacts and consultations with those who will be impacted by projects improve investment quality.

Escolhas – In this moment of crisis, agribusiness has performed well.  Are there other sectors that can help economic recovery and be sustainable?

Levy – Agribusiness is at the heart of our economy and depends on environmental preservation, as producers are already aware.  The humidity of the Amazon and nearby forests is essential for producing two harvests without artificial irrigation. The Agriculture Minister [Tereza Cristina] has worked to promote sustainability, including through changes to rural credit. And today, almost 20% of the soybean production is made into biodiesel, reducing CO2 emissions and enriching rural producers. Looking forward, there are many possibilities in the digitalization of the economy, as can be seen in the growth of e-commerce, medicina, and distance education. That new, low-carbon economy leads to productivity gains that we have to stimulate, harness, and share, without jeopardizing industrial production.  The basis for all this is education, where it is possible to make great improvements. For example, digital technologies allow universal and frequent tests, so as to identify where students are facing difficulties.  Along with measures to support students in overcoming those challenges, those technologies can help the new generation to learn even more, planting the seed for the country’s future competitiveness.

Escolhas: What is your take on the current situation of the economy and foreign investments?

Levy – In the absence of COVID-19, Brazil was on the path to, at the least, a cyclic recovery, since it had already reverted the excesses seen from 2010 to 2014. It wasn’t easy, but inflation is low, the trade balance is positive, and the country understands the importance of controlling the fiscal situation, which has helped the Central Bank to lower interest when it saw the economy running  below its potential.  The drop in interest rates creates a new dynamic for savers, who accept taking a bit more risk in the private sector.  Sanitation reform can, for instance, help this process along, facilitating new investments, decreasing pollution, and improving the health of the population. Promoting a sustainable construction industry, including through greater use of cultivated or certified wood, would also lead to rapid job creation and would increase the population’s assets.  Can you imagine making our savings work and attract foreign savings for good infrastructure projects in industry and in sustainable activities more broadly?

Escolhas – Brazil has large reserves of natural gas, which is seen as a transition fuel because it pollutes less than carbon.  What role can those reserves play in our economy? Is importing gas the best option?

Levy – Natural gas can play a larger role in Brazil, especially through offshore electricity generation through CO₂ capture, through its injection into oil fields. This model is ideal for Brazil, where gas is generally associated with oil.  In this case, CO₂ injection increases productivity in the fields and makes energy clean, helping natural gas to become competitive in the long term.  Offshore production also relieves gas pipelines, allowing other consumers to be serviced. In fact, the work of the Ministry of Mines and Energy, of the National Agency for Oil, Natural Gas and Biofuels (known as ANP) and the Administrative Council for Economic Defense (known as CADE) in opening gas pipelines, increasing available capacity, is very positive in that it raises the efficiency of the sector and the demand for natural gas.  Cheaper natural gas would create jobs, substituting imported carbon in the steel industry and reducing CO₂ emissions. Compressed, it could substitute part of the imported diesel. Gas can also increase the security of our agriculture, which is very dependent on imported fertilizers.  There is nothing wrong with importing, including liquefied natural gas.  But we have billions of cubic meters available along the coast, and COVID-19 has shown that external supply chains can bring about risks during an emergency.

Escolhas – Instituto Escolhas carried out a study of how Brazil could meet its goal of recovering 12 million hectares of forests.  What do you think of this strategy with respect to job creation, especially for those living in the Amazon?

Levy – I had the honor of participating in the setting of goals for the Paris Agreement, in 2015, with [Environment] Minister Izabella [Teixeira]. I have always believed in natural regeneration, because it has already worked in countries whose economies stopped pressuring forests, by cutting down on the use of firewood or through the mechanization of agriculture in flat areas.   Assisted natural regeneration can bring back two million or more hectares of Atlantic forest, including heavily affected areas such as the north of Espírito Santo state.  For this to happen in the Amazon, an intensification of ranching–there and also in the Cerrado–is needed so as to allow for the expansion of agriculture into old pastures, instead of new land.  This is viable, according to a large number of specialists who consider that improving pastures and integrating ranching into agriculture and the forest is profitable.  Chatting with rural producers, I often hear that, in an alternating system, it is possible to get great results by having pasture between two harvests, with the cattle continuing to be confined and fed with fodder and other products from the harvest itself. The intensification of Cattle-Crop would result in higher profits, soils with more organic carbon, and animals with higher value. Many analysts say that expanding credit for this transition, including for small and medium producers, could bring about a revolution in our agriculture, with great impact on global markets.  In the case of the Amazon, this integration would involve other permanent crops and the recovery of forest in the cleared pastures.  Someone who goes to, let’s say, São Félix do Xingu [in the state of Pará] already sees in some farms the natural regeneration of forest in areas that have been freed up by the improvement of pastures and the intensification of ranching, beyond the expansion of cacau and açaí.  By curbing deforestation, natural regeneration–sometimes assisted–can change the country’s landscape in twenty years. And even increase the production of native wood, something that has not escaped long-term investors.

Escolhas – There is a lot of discussion about opportunities in the Bioeconomy area, including as a development technology frontier. What is the role of the Bioeconomy in Brazil?

Levy – Studying this topic, I find indications that the Bioeconomy is based on knowledge.  The role of universities and research centers, especially those in the Amazon, should therefore be central to its success. People that I highly respect note that the Bioeconomy can focus not only on vaccines against viruses or other frontline issues, but also on finding new commercial uses for fibers, wood, and other natural products.  Or in lowering the cost of aviation fuel that is produced from dendê oil in areas that have long records of forest management, which can generate millions in income for small farmers.  It seems that this is a strategy that cannot be improvised, but that can yield good results in the long term.

Escolhas – What is your take on the low-carbon economy in a world marked by so much inequality?

Low-carbon and nature-based solutions can help reduce inequality when they are more efficient and productive than traditional methods. In Europe or in Asia, for example, low-carbon is found in public transportation that is electrified or that runs on rails. Here, electric buses–when their price drops a bit more–will help to curb respiratory diseases, benefitting the low-income population. Improving sanitation, including in the case of solid waste, or using electrolysis to treat residential waste, are low-carbon solutions with social benefits.  Assisted regeneration and landscape agriculture can generate enough jobs for those living in the Amazon.  It would be great if all of this were better researched in Brazil, so as to guide the government and investors.

Escolhas – Will the COVID-10 pandemic change this line of thought?

Levy – It poses new challenges, for instance in public transportation. And, despite the heroic actions of health professionals and the measures taken by governments through stimulus packages, its human and economic cost is huge. But there are countries in which the response has consisted of an effort to channel fiscal stimulus into activities that generate the maximum number of jobs and that help to decarbonize the economy. Europe, which already had decarbonization plans, is ahead–the key factor there will be that the price of energy does not rise too much.  In Brazil, a recovery agenda that pays attention to climate and to people can advance with the involvement of the private sector, since many companies have publicly reaffirmed their support for sustainability and the circular economy, in which products are recycled instead of being discarded.  The financial sector is watching attentively.  Guiding our savings in a low-interest environment to support investments that are socially and environmentally sustainable would accelerate job creation, with the advantage of creating assets that would generate benefits for the country for many years to come.