Powerful Forests: The Welfare Implications of Deforestation for the Power Sector

The energy transition depends not only on building renewable capacity but also on protecting the natural resources on which renewables rely. This paper shows that conservation and renewable policies are complements. We quantify how Amazon deforestation affects Brazil's electricity market by reducing rainfall and hydropower generation. We model the transmission chain from deforestation to atmospheric moisture, to downwind rainfall, to river discharge and hydro output, and embed the resulting supply shift within a market-equilibrium framework. Counterfactual simulations indicate that reversing all deforestation since 1985 would increase annual hydroelectric output by 13 TWh, lower electricity prices, and generate welfare gains of USD 1.1 billion per year. These gains are unevenly distributed: consumers benefit from lower prices and Amazon-basin hydropower producers benefit from higher output, while thermal generators and hydropower producers elsewhere lose. Finally, we identify small, high-leverage regions that account for a disproportionate share of hydropower value, informing targeted conservation and restoration.