In 2012 Brazil revised its Forest Code legislation that regulates private land use and management. It mandated that landowners set aside and leave unused areas of native vegetation that are equal to 20% of the total property area (80% in the Amazon). The Forest Code was initially established in 1934 to promote fuel conservation and was revised in 1965 to promote the economic development of forest-based industry. But, since the mid- 1990’s, the Forest Code has become an environmental law (S.R. Hirakuri, 2003).

Until recently, government failed to enforce the Forest Code effectively, as neither the political consensus nor the administrative capabilities seemed to be in place. The recent revision of the legislation, however, indicates that both of these circumstances are changing and that a more realistic effort at implementing the Forest Code will be made this time. If this proves to be the case, this might be Brazil’s grand policy experiment in the area of property rights. It is a grand experiment because the size of the country makes the area and population involved reach continental proportions. Other Brazilian policies that involved intervening directly with individuals’ property rights, such as the land reform program or the occupation of the Amazon, pale in comparison. In terms of magnitude and reach, they did not apply to all or even most properties in the country. As those policy experiences showed, interventions that require altering property rights tend not to be as straightforward as they can seem initially; they often elicit unexpected behavior and yield unintended consequences.

These difficulties are compounded by the fact that the Forest Code legislation is one of the most draconian land laws in the world: it requires landowners to set aside significant fractions of their properties. This requirement leads to non-trivial impacts in foregone production possibilities and reduced rental streams that must be fully absorbed by the owners without compensation. On the other hand, it is precisely because of the law’s massive magnitude, depth, and coverage that the Forest Code has the potential for a profound positive environmental impact (Joana Chivari and Christina Leme Lopes, 2015; Britaldo Soares-Filho et al., 2014).

The purpose of this paper is to assess how the nature of property rights in Brazil will affect the implementation of the Forest Code and the realization of the potential positive environmental impacts. This paper analyzes the historical evolution of property rights in Brazil, and it examines how the institutional structure of administering property rights affects the incentives and behavior for property owners.