Market instruments and forests: Evaluating the EU'S deforestation-free regulation in Brazil's soy supply chain

The European Union's Deforestation-Free Regulation (EUDR), approved in 2023 and set to take effect in December 2026, mandates plot-level traceability and physical segregation of compliant from non-compliant products in supply chains linked to deforestation. This paper assesses the economic and environmental impacts of EUDR compliance costs on Brazil's soybean supply chain. Using a dynamic multiregional computable general equilibrium (CGE) model with integrated land-use transitions, we simulate counterfactual outcomes from 2026 to 2035 under two policy scenarios: (i) Legal Amazon–only coverage (S1-AMZN) and (ii) nationwide coverage (S2-BRA). Compliance costs are modeled as production-tax equivalents, scaled by the regional share of EU-bound soybean-equivalent exports. Results show cumulative export losses of US$ 85.1 billion (S1-AMZN) and US$ 216.3 billion (S2-BRA), with corresponding real GDP shortfalls of US$ 409.9 billion and US$ 1.167 trillion. Avoided deforestation ranges from 51,466 to 105,899 ha, though leakage effects emerge under S1-AMZN. Estimated abatement costs are US$ 133–207 per ton of CO₂e, while forgone GDP per hectare of avoided deforestation ranges from US$ 58,630 to US$ 171,652. These findings suggest that clearing the EU's soy supply chain of deforestation alone delivers limited environmental benefits at high economic cost, underscoring the need to complement trade-based measures with robust domestic land-use governance and enforcement policies. • EUDR lowers Brazil's GDP slightly and deepens regional income disparities • Soy export losses drive land and labor shifts toward corn, cotton, and other crops • Welfare gains for the poorest and richest, losses for middle incomes • Modest avoided deforestation at high economic cost • National versus Amazon-only enforcement yields similar macro but less leakage