Understand the Regulated Carbon Market

As we saw in the previous article, the carbon market emerged as a tool to help address the socio-environmental challenges caused by climate change. It involves the purchase and sale of credits generated by greenhouse gas (GHG) emissions offset projects in order to promote actions against global warming and achieve GHG emissions reduction targets.

In the voluntary market, the value of the credit is based on the implementation of carbon projects and the certification of carbon credits for their commercialization. Companies acquire these credits to offset their emissions, often as part of their corporate responsibility goals.

In the case of the regulated market, governments establish emission reduction targets or limits through legislation applicable to the sectors responsible for the emitting sources. Companies that emit less than the established quota have the option of selling their carbon credits to those that exceed the quota, respecting a limit.

Implementation of the Regulated Carbon Market in the World

Implementation of the Regulated Carbon Market is notably slower than that of the voluntary market. Currently, few countries have legislation that is comprehensive enough to operationalize incentive and punishment mechanisms that ensure companies manage their GHG emissions seriously. The first emissions trading system, the European Union Emissions Trading System (EU ETS), was created by the European Union in 2005. The EU ETS is a cap-and-trade system that sets a maximum limit (cap) on GHG emissions and issues allowances corresponding to that amount so that companies can buy and sell (trade) these allowances on the carbon market. The EU ETS currently applies to all EU member states, the countries of the European Free Trade Area (Iceland, Liechtenstein and Norway), and Northern Ireland for electricity generation. Cap-and-trade systems are also in operation in several places, including China, New Zealand, Australia, Canada, Chile, Colombia, Mexico, Kazakhstan, Japan, South Korea, Indonesia and in some states in the United States. However, due to differences between the regimes in relation to CO2 prices, design and sectors covered, it is necessary to advance in the interconnection of these systems to facilitate the international trade of CO2 emissions between countries.

In Latin America

All Latin American countries have ratified the Paris Agreement and submitted their Nationally Determined Contributions (NDCs), however, only seven of them (Argentina, Brazil, Chile, Colombia, Mexico, Paraguay and Peru) have some kind of legal framework for Climate Change. Furthermore, studies indicate that most of these frameworks, which have the potential to be integrated into legislation, providing credibility and legal certainty, lack ambition in view of the climate and ecological urgency we face. The region is among those that will suffer most from the increase in temperature and the change in rainfall patterns resulting from global warming, but it is still making slow progress in implementing climate policies.

Brazil, which in the early 2000s was considered a protagonist for its conservation actions, has not managed to maintain its positive trajectory. Ambitious emissions reduction targets had been set, but largely due to increased deforestation under the Bolsonaro administration, they were not met. Now, the country is faced with the urgent need to act to meet its emissions reduction targets and address current climate challenges, which requires effective policies and actions. Brazil currently does not have a regulated carbon market.

Current Overview of Carbon Market Regulation in Brazil

Several bills have been debated in Brazil. In October 2023, Bill 412/2022, which aims to regulate the Brazilian Emissions Reduction Market (MBRE), was approved by the Senate Environment Committee and attached to Bill 2148/2015. Two months later, Bill 2148/2015, which proposes the creation of the Brazilian Greenhouse Gas Emissions Trading System (SBCE), was approved by the Chamber of Deputies, after undergoing some modifications. The bill, now called PL 182/24, is currently awaiting reassessment by the Federal Senate.

The bill’s proposal is based on the cap-and-trade model. The limit will be divided into Brazilian Emission Quotas (CBEs) and the number of CBEs that each company will have for a given period will be established by the SBCE. In order to stay below the cap, companies will be able to trade the CBEs among themselves.

According to the proposal, companies that emit between 10,000 and 25,000 tons of GHG will have to submit monitoring reports. Above that, companies must submit, in addition to the reports, a plan to reduce their emissions. In case of non-compliance, the bill stipulates a fine of up to 5% of the company’s revenue, in addition to the possibility of partial or total suspension of activities. The bill also establishes a two-year transition period and proposes the creation of a management body that will define which activities, facilities, sources and gases will be regulated, as well as the emission levels and methods for measuring emissions. Experts agree that the final text is much more mature than previous ones. One advance observed was the guarantee to indigenous peoples and traditional communities regarding the commercialization of credits generated in their territories. There is great expectation regarding the regulation on the creation of a new demand for credits. Sectors such as aviation, for example, face limitations in reducing their environmental footprint. Another sector that could benefit from the SBCE is renewable energy, which has a high potential for growth and technological development and already has a relatively small environmental footprint.

Establishing a regulated carbon market in the country offers important advantages, including the predictability and security it can provide to industries committed to sustainability. Furthermore, the implementation of this regulated market in Brazil has the potential to increase the competitiveness of national products on the international stage.

However, the project has been criticized for excluding agribusiness from its regulation. The sector is responsible for 73% of GHG emissions in the country, considering deforestation and changes in land use, according to the study published by the Greenhouse Gas Emission Estimation System (SEEG). On the other hand, experts argue that no regulated carbon market in the world includes agriculture and livestock in its regime and that there is still no consolidated methodology for calculating emissions in this sector. In any case, research groups, including international partnerships, are developing methodologies to account for emissions from agribusiness, considering it essential to include the sector for an efficient national policy to reduce emissions.

A negative point in the text was the permission to generate carbon credits through the maintenance of Permanent Preservation Areas (APP), legal reserves and restricted use areas, which is already mandatory under the Forest Code. This generation of credits does not provide additionality, that is, it does not guarantee that the mitigation result would not have occurred in the absence of the action in question. This may lead to questions about the real effectiveness of these credits in reducing carbon emissions.

Opinions on the approval of the bill differ in several aspects. While some advocate approval of the text this semester to accelerate the reduction of emissions and propose the creation of other bills to deal with specificities, others argue that more time is needed to discuss points of uncertainty to make it more robust, with greater legal certainty for its application.

In parallel with the discussion on the approval of the Bill, the Undersecretary of Sustainable Economic Development states that multidisciplinary working groups, supported by the World Bank and the Inter-American Development Bank, are developing measures to implement the System, in addition to monitoring methodologies and other crucial issues for economic and socio-environmental prosperity.

The complexity of the issue demands extensive study and dialogue. It is a fact that Brazil is falling short of its goals, while the climate crisis worsens. It is imperative to act quickly in the search for policies, projects and innovations to address it. The creation of legislation that regulates a fair, safe, transparent and effective carbon market against the practice of greenwashing is essential in this context. While some members of parliament work on drafting bills related to preventing and combating climate change, others persist with initiatives that facilitate the deforestation of Brazilian biomes and blame nature as if it were not responsible for the current climate catastrophes. This scenario is worrying and unacceptable.

References

Aliança Brasil NBS – O Mercado de Carbono Regulado em 2024: Avanços e Perspectivas

Confederação Nacional da Indústria. 2021. Mercado de carbono: análise de experiências internacionais.

DW. Dezembro 2023. O que o Brasil tem a ganhar com mercado regulado de carbono?

EU Emissions Trading System (EU ETS) – European Commission

LACLIMA. Rodrigo Sluminsky. Mercado de carbono e adicionalidade em projetos de energias renováveis

Ministerio de Ambiente y Desarrollo Sostenible – Contexto Mercados de Carbono

Ministério do Meio Ambiente e Mudança do Clima. Fevereiro 2023. Fundo Clima terá até R$ 15 bilhões em parcerias com BID e Banco Mundial

O Joio e o Trigo – Sem agro, projeto de lei que regulamenta mercado de carbono espera votação no Senado

PL 182/2024 – Câmara dos Deputados (senado.leg.br)