The world is racing against time to try to reduce carbon emissions into the atmosphere. Global warming is already a daily problem, causing natural disasters across the planet. One of the mechanisms devised to help with this task is the carbon sales market. In 2021, global revenues from carbon pricing soared by almost 60% compared to 2020, reaching US$84 billion according to the World Bank‘s annual “State and Trends of Carbon Pricing”.
Although Latin America has huge potential to develop this market due to its giant forests and biomes, the steps taken in this direction are still too slow to allow the region to fully benefit from its advantages. Of the continent’s 33 countries, only four have been adjusting their environmental policies so as to become players on the carbon market.
What is carbon pricing?
Carbon pricing refers to a price being put on carbon emissions in an attempt to reduce these and attract investments into green projects. Although having been known since the 1970s, the term gained wide usage after 1997 when around 180 countries signed the Kyoto Protocol. This agreement required countries to cut down their greenhouse gas (GHG) emissions between 2008 and 2012 to 5% below 1990 levels in order to reduce climate change caused by global warming. Later on, in 2015, the Paris Agreement further reiterated the urgent need to cut GHG emissions.
Currently, there are two widely known ways of carbon pricing: a carbon tax and an emissions trading system.
How does it work?
To put it simply, to be allowed to emit GHG, companies receive carbon credits (permits) which they subsequently trade within ETS. The credit market is attractive to heavily polluting industries such as airlines and industrialized countries that signed the Paris climate accord, given that carbon credits are cheaper than the fines for exceeding the emissions cap.
Thus companies, particularly from developed states, that do not use all their carbon credits can sell these to those that need more credits. Also, companies, mainly from developing countries, that implement green projects allowing them to sequester carbon, can also sell their carbon credits and thus obtain more funds for their projects.
Maisa Ribeiro, a Professor at São Paulo University, says that the idea took a few years to spread but gained space in particular from the 1990s onwards when discussions about climate change grew and, with that, it was taken to an international level.
“For emerging countries to be able to develop with clean technology, they would need money, and it would come from rich countries. The credits would be an instrument to represent this exchange which would show which companies or countries would deserve financial compensation for the reduction,” she explained.
Latin America investments
Latin America has been taking slow steps to establish itself in this carbon market but it has enormous capacity for evolution. It has gigantic forests and biomes that can be utilized as a useful tool in this market.
Currently, four countries are emerging in carbon sales. Mexico has been a pioneer in investing in this environmental policy. Since 2018, the carbon market has been voluntary there – that is, it does not have mandatory targets.
According to the local organization, MexiCO2, Mexico has the capacity to trade 6 million carbon credits a year and expects, with future regulation, to sell up to 30 million carbon credits a year.
In 2018, Mexico City, one of the largest cities on the continent, became the first capital in Latin America to issue forest carbon credits. The goal of the program in the Mexican capital is that by next year more than 32,000 tons of carbon will be captured and traded on the country’s Stock Exchange.
In Chile, there are more than 17 million hectares of forests and woods with potential for the carbon market. The country wants to neutralize its carbon emissions by 2050. Currently, the government of Chile charges about US$5 per metric ton of CO2 generated by industries’ private drivers.
By 2030, the country wants to review this tax amount which could reach US$35 per metric ton representing a way for Chile to invest in a greener economy that does not generate so many pollutants.
Colombia intends to pursue the same path, with a tax reform to encourage the use of clean energy and reduce pollution. As a result of the changes, the Colombian government will seek to collect about US$3.4 billion per year. The goal of the country is to reduce its emissions by 51% by 2030.
Last year, both the Moody’s Group and the British consulting firm, TS Lombard, produced an analysis of the carbon market in Latin America. For Moody’s, businesses on the continent are anticipating the regulations of their local governments and committing to reduce the emission of greenhouse gases. TS Lombard pointed out that Brazil is one of the main countries that could benefit from sales of carbon credits as the country “has the potential to be a global supplier of green hydrogen and renewable fuels”.
In Moody’s assessment, “the majority of companies with risk classification in Latin America in high-risk carbon transition sectors have less exposure to investment risks than their global peers, due to greater use of renewable energy, mitigation strategies, and product diversification”.
Brazil’s market
In May, Brazil signed a decree to regulate the carbon credit market in the country. The Brazilian government’s intention will be to export credits, especially to countries and companies that need to offset emissions to comply with carbon neutrality commitments.
The carbon market could bring revenues of up to US$100 billion to Brazil according to a study carried out by the International Chamber of Commerce (ICC Brasil). The study indicates that in the next decade the largest country in Latin America would have the potential to supply 5% to 37.5% of the global demand of the voluntary market (direct negotiations between companies) for carbon credits and up to 22% of all global regulated market demand.
“What do you need for the carbon market to become a reality in Brazil? Two very concrete things: one is for Brazil to establish a national carbon market, with clear governance, with a methodology accepted by the international market,” explains Gabriella Dorlhiac, Executive Director of ICC Brasil. “The second: an education of the private sector of what carbon credit is and how companies can issue these credits, what changes would they have to make for them to be part of this new great market,” she added.
