As the urgency to reduce carbon emissions intensifies globally, the world finds itself racing against time to mitigate the impacts of global warming. Natural disasters fueled by climate change have become an increasingly common occurrence. Amidst this backdrop, the carbon sales market represents a strategic mechanism in the fight against climate change, having evolved over the last decade to play a significant role in global efforts to decrease carbon emissions.
In South America, this market is gaining strength. Brazil, which already possesses a well-established voluntary market, will now have regulations in place for the trading of emission rights and other decarbonization-related securities by creating its own Emission Trading System (ETS). The ETS will enable certain companies to reduce their emissions, avoid paying for carbon, and even earn revenue while others will be able to continue emitting by adhering to the cap on greenhouse gas emissions and paying for those emissions.
How will it work?
The model is largely based on the European Union’s cap-and-trade system, which involves capping emissions and allowing the trading of carbon credits between entities with varying emission levels.
By establishing a ‘cap’ on emissions, particularly from sources like power plants, it is believed cap-and-trade will effectively reduce pollution.
The ‘trade’ aspect involves the creation of a market where companies can trade allowances permitting them to emit a specified quantity of pollutants. Thus, they are incentivized to pursue emission reductions in the most cost-effective way, thereby saving money while contributing to environmental conservation. The price of the allowances is determined based on the offer/demand principle.
Formally called the Brazilian Greenhouse Gas Emissions Trading System, ETS sets emission limits for companies and industries that emit more than 10,000 metric tons of carbon equivalent per year.
Companies emitting between 10,000 and 25,000 tons per year must submit a monitoring plan and an annual emissions offset report, either by investing in green technologies or buying quotas from companies that produce emissions below the government-stipulated limit.
Those emitting over 25,000 tons per year will be mandatory participants in the regulated market and approximately 5,000 companies, particularly in the steel, chemical, cement, and aluminium industries, fall under this criterion.
Using a hypothetical example, the regulation may require a company that emits 40,000 tons of carbon dioxide to reduce this to the 25,000 limit within a year. If the company chooses to continue to emit 40,000 tons of pollutants, it will need to offset the excess 15,000 tons through the carbon market by purchasing the necessary credits.
Why is it important?
Ranked as the sixth-largest emitter of greenhouse gases, Brazil has committed to reduce gas emissions by 53% below the 2005 levels by 2030 and to reach climate neutrality by 2050. It is believed the new regulation will be able to help Brazil align with its environmental conservation strategies, as well as tap into significant potential for resource generation, job creation, and economic stimulation.
Brazil, which is already among the world leaders in terms of decarbonization opportunities and nature-based solutions, has further expanded its potential. The country increased its share in the global supply of carbon credits from 3% in 2019 to 12% in 2021, with its annual revenues estimated to stand at 48 billion reais (US$10 billion).
Should the country meet its full potential and supply up to 28% of the global demand for carbon credits on the regulated market and about 49% on the voluntary market, it could achieve up to US$120 billion in revenues by 2030.
The system is also expected to open up the opportunity to create 8.5 million jobs by 2050.
“The market regulation brings greater legal certainty to transactions, reduces negative externalities, and contributes to consolidating the adoption of social and environmental safeguards. The regulation also enhances competitiveness in the Brazilian market, as most of Brazil’s international trading partners already have established carbon pricing policies in place,” explained Karen Oliveira, Director of Public Policy at TNC Brazil.
What about the voluntary market?
According to Future Carbon, a company that specializes in carbon credit projects in Brazil, the carbon global market doubled in size from 2021 to 2022, reaching US$2 billion and a McKinsey study forecasts it could reach $15 billion by 2030 and $35 billion by 2040.
In Brazil, about 5 million carbon credits are issued every year in the voluntary market, but this is still less than 1% of the country’s annual potential. With the new regulation, the price is expected to rise significantly.
“I always repeat this: Brazil has the potential to be the Saudi Arabia of carbon credits. With regulation, the prices will soar even higher. To uphold their commitments, these companies will have to purchase a substantial amount of carbon, and Brazil can supply that,” optimistically stated Felipe Adaime, the creator of Moss, Brazil’s first carbon exchange.
In the voluntary market, at least until now, there has been no government oversight. Companies engage directly with landowners, indigenous communities, and traditional peoples, quantifying the amount of carbon a particular area has sequestered from the atmosphere or how much-avoided deforestation has contributed to this capture.
In this scenario, a ton of carbon that is not emitted becomes a carbon credit which is then sold to those companies wishing to voluntarily offset their emissions. The price is determined by the dynamics of supply and demand, rising in moments of scarcity.
Agriculture, the bone of contention
One of the primary criticisms of the new cap-and-trade system in Brazil is the exclusion of the agricultural sector. The ‘cattle lobby’ managed to maintain this restriction in Congress, despite agriculture accounting for 25% of emissions according to various studies.
The country is a major exporter of soy, corn, and beef, and a significant portion of these products originates from land that, only a few decades ago, was lush tropical forest.
Nonetheless, rural landowners will be exempt from the greenhouse gas emission limits set by the market’s regulatory body but, on the flip side, they can sell carbon credits in the voluntary market. In essence, rural landowners will not be obliged to meet emission targets, but those proving a reduction in emission reductions can profit from credit sales.
“In the regulated market, there is a need for metrics, numbers, data, and, especially, conditions related to primary production that no one has yet been able to present,” said MP Pedro Lupion. “Imposing metrics that cannot be met would stifle the sector’s growth,” he argued.
This is the latest challenge faced by Lula’s ‘ecological transformation’ proposal. The Brazilian government is aiming for carbon neutrality by 2050 but, with pressure from the ruralist caucus to exempt producers, achieving this goals is becoming increasingly distant.
However, Brazil is not alone in this controversial measure. In Europe, rural producers also do not participate in the bloc’s carbon market, although some authorities have pushed for their inclusion to help to curb the emissions related to agriculture which have not decreased over the past decade.
Guilherme Mello, Secretary of Economic Policy at the Ministry of Finance, noted that while the exemption hampers the decarbonization plan, it would not be a devastating blow.
“There are many instruments beyond the credit market to further strengthen the sustainability of our agriculture,” Mello evaluated. “These are the policies we are working on, regardless of the format of the Brazilian credit market that will be approved.”
