Leakage Effects from Reforestation: Estimating the Impact of Agricultural Displacement for Carbon Markets

Reforestation is widely promoted as a nature-based solution for climate change, yet its unintended consequences, such as deforestation leakage, remain under-investigated. This study provides empirical evidence of reforestation-induced leakage in the Brazilian Amazon, using municipality-level panel data from 2000 to 2023 and spatial Durbin panel models to estimate both the magnitude and spatial reach of agricultural displacement. Despite the positive local effects of reforestation projects, we found a significant displacement of deforestation to the vicinity of municipalities. We estimated a statistically significant deforestation leakage effect of approximately 12% from the reforested area, due to the agricultural displacement of cattle ranching activities. Spatial spillovers are strongest within a 150 km radius and within two years after reforestation onset. Sensitivity tests using alternative spatial weight matrices, including distance decay and land rent-weighted specifications, confirm the robustness of these findings. Livestock intensification, proxied by cattle stocking rates, does not significantly mitigate displacement effects, challenging assumptions about land sparing benefits. These results suggest that current carbon market protocols (e.g., Verra, ART-TREES) may improve their leakage analysis to avoid under- or over-estimating net carbon benefits. Incorporating spatial econometric evidence into offset methodologies and reforestation planning can improve climate policy integrity and reduce unintended environmental trade-offs.