The Economic Effect of Deforestation

economic effect of deforestation

Environmental protection and economic growth do not always go hand in hand. When it comes to forests, immediate economic gains are often the priority. However, the negative economic effect of deforestation is also great and often ignored, especially in the long run.

The economic drivers of deforestation

Forests cover around 30% of the Earth’s land area but the figure is on the decline. Between 2001 and 2015, global forest cover shrank by almost 520,000 km2 1 – an area bigger than the size of Spain. Economic interests played a key role in increasing tree loss during this period.

According to a study2 published in Science, satellite imagery revealed that 27% of tree cover loss can be attributed to permanent land use change for commodity production, in other words, the conversion of forests for agriculture, mining and energy production without much potential for recovery. Forestry operations and short-term agriculture shifts caused the loss of a further 50% of trees. Another 23% were due to wildfires. While in these cases regrowth is possible, the negative impact on the economy and the environment is still significant.

For developing economies, however, the choice between forest preservation and the potential beneficial economic effect of deforestation appears to be rather simple. Research suggests that developing countries have the highest rates of deforestation, especially in the tropical regions in South America, Africa and Southeast Asia.3,4,5

Trees cleared for a coal mine, illustrating deforestation due to economic interests
Deforestation in Kalimantan, the Indonesian portion of the Borneo island.6

In these regions, rainforests are the low hanging fruit for economic growth. Clearing forests provides timber and biofuel, as well as enabling mining for other natural resources. In addition, it opens up areas for agriculture, namely soy, palm oil and livestock. For instance, Indonesia and Malaysia together account for 85% of the world’s palm oil production. Since 2000, 47% of deforestation on Borneo, an island shared by the two countries, was due to oil palm plantations replacing rainforests.7

Negative local and short-term effects

Clearing forests for commodity production is a very valuable venture when the money it generates is weighed only against the associated operational costs, e.g. the costs of equipment, storage, or labor. There are, however, other factors that should be taken into account.

The loss of forests affects millions of the poor in rural areas. About 250 million people in poor rural areas live in forests. Furthermore, over a billion people rely on forests for food, medicine, or fuel.8 For these people, therefore, deforestation means lost income, lost subsistence, and even a lost home. Sometimes commodity production and land conversion from forests to agriculture provide the poor with opportunities for work, yet they can also be associated with poor working conditions and labour exploitation.

In some cases, due to logging or short-term agricultural shifts, forests are not wiped out completely but suffer from degradation. In these scenarios, economic gains suffer as well. For example, Ghana suffers from one of the highest deforestation rates worldwide. According to one study9, every year it loses over a hundred million dollars of revenue when comparing gains from degrading forests to preserving natural forests.

The big picture

Forests are crucial for biodiversity, water supply, and the global climate.10 Thus, we need to adopt a global long-term outlook in order to fully appreciate the detrimental economic effect of deforestation.

Forests are home to 80% of the world’s known land-based animal species.10 Consequently, deforestation wipes out natural habitats causing numerous animal communities and, in some cases, entire species to go extinct. It is difficult to put a price tag on the loss of flora and fauna ethically. However, estimates suggest that the loss of biodiversity and genetic resources for scientific, medical, and drug research could cost billions.11

Deforestation also has the potential to disrupt local and possibly global water cycles and increase soil erosion, with costly consequences. Firstly, disruptions in the provision of clean water in the tropics are costly to local governments. Furthermore, changes in water cycles can negatively affect specific industries. For example, more frequent and longer droughts have been associated with decreases in the variety of coffee species.12 In terms of soil erosion, unlike agricultural plants, forests prevent the soil and its nutrients from being washed into rivers. Therefore, over time deforestation can render some areas unusable even for agriculture.

Finally, forest cover loss is a major contributor to global warming and climate change.13 We cannot yet predict the full effect of these changes but there is no question that they will incur huge costs in the future.

Going beyond costs and benefits

A simple cost-benefit analysis seems to be insufficient and too short-sighted to fully assess the economic effect of deforestation. It lacks a consideration of ethics and global impact in the long run.

However, in advanced economies deforestation rates tend to decrease.4 This suggests a shift in the views of both the public and policy makers. Hopefully the developing world can follow suit.

Please also see Deforestation solutions list


  1. World Bank Data. Forest area (sq. km). The World Bank Group.
  2. Curtis, P. G., Slay, C. M., Harris, N. L., Tyukavina, A., & Hansen, M. C. (2018). Classifying drivers of global forest loss. Science361(6407), 1108-1111.
  3. Cuaresma, J. C., Danylo, O., Fritz, S., McCallum, I., Obersteiner, M., See, L., & Walsh, B. (2017). Economic development and forest cover: evidence from satellite data. Scientific reports7, 40678.
  4. Bhattarai, M., & Hammig, M. (2004). Governance, economic policy, and the environmental Kuznets curve for natural tropical forests. Environment and Development Economics9(3), 367-382.
  5. Ewers, R. M. (2006). Interaction effects between economic development and forest cover determine deforestation rates. Global Environmental Change16(2), 161-169.
  6. IndoMet in the Heart of Borneo, flickr.
  7. Rosner, H. Palm oil is unavoidable. Can it be sustainable? National Geographic. Published December 2018. Accessed April 26, 2020.
  8. 2018 The State of the World’s Forests. Food and Agriculture Organization of the United Nations. Accessed April 26, 2020.
  9. Damnyag, L., Tyynelä, T., Appiah, M., Saastamoinen, O., & Pappinen, A. (2011). Economic cost of deforestation in semi-deciduous forests—A case of two forest districts in Ghana. Ecological Economics70(12), 2503-2510.
  10. Deforestation and Forest Degradation. World Wildlife Fund. Accessed April 26, 2020.
  11. Chorley, M. $5,000,000,000,000: The cost each year of vanishing rainforest. Independent. Published October 2010. Accessed April 26, 2020.
  12. Davis, A. P., Chadburn, H., Moat, J., O’Sullivan, R., Hargreaves, S., & Lughadha, E. N. (2019). High extinction risk for wild coffee species and implications for coffee sector sustainability. Science advances5(1), eaav3473.
  13. Shukla, J., Nobre, C., & Sellers, P. (1990). Amazon deforestation and climate change. Science247(4948), 1322-1325.