Prospects for Brazil's Carbon Cap-and-Trade Framework, with Agriculture Exempted

07 Sep, 2023

Prospects for Brazil's Carbon Cap-and-Trade Framework, with Agriculture Exempted

In the initial seven months of his presidency, Brazilian President Luiz Inácio Lula da Silva achieved a remarkable 40% reduction in deforestation compared to the previous year. This accomplishment was part of a broader strategy to safeguard the Amazon rainforest. Now, the Brazilian government has taken another significant step in its efforts to combat greenhouse gas emissions by finalizing a new bill aimed at establishing a cap-and-trade carbon market.

The bill, known as PL 412/2022, outlines the Brazilian Greenhouse Gas Emissions Trading System (SBCE), which intends to regulate emissions across multiple sectors and create a structured framework to assist companies in meeting their carbon obligations. Under this system, companies will have their emissions capped at 25,000 metric tons per year. Those exceeding this limit will need to either reduce their emissions or purchase carbon credits to offset them. Companies operating below this threshold can sell their emission quotas as credits. Approximately 5,000 companies are expected to be affected by these regulations, with sectors like oil and gas, chemicals, steel, and cement likely to face significant impacts.

However, the bill does not explicitly specify which sectors will be subject to emissions obligations. An amendment approved by Congress in November 2022, however, excluded agricultural activity from the regulated market. This exemption has raised concerns among experts as agriculture and livestock farming are significant contributors to deforestation and greenhouse gas emissions in Brazil. Critics argue that excluding them from emissions regulations is a major oversight.

Beto Mesquita, the director of public policy and forests at the environmental finance nonprofit BVRio, expressed his discontent, saying, "It is unacceptable and inconceivable that the agricultural sector is left out of the emissions reduction targets."

To address issues within Brazil's existing voluntary carbon market, known for irregularities and unethical practices, the bill introduces measures to combat "carbon cowboys." Indigenous peoples, Quilombolas, and extractive reserve workers will gain the right to sell carbon credits generated within their territories through representative entities. Specific conditions, including adherence to the international convention ILO 169, which protects Indigenous rights and ensures equitable distribution of resources generated from carbon credits within protected territories, will be established by law.

Despite the potential benefits of encouraging carbon credit generation, the bill has generated controversy. Carbon credits from these territories will result from activities preventing deforestation and forest degradation through the U.N.'s REDD+ scheme. The volume of credits earned will be proportionate to the risk of deforestation, with high deforestation risk yielding more credits. Some predict that this carbon trade could create a $20.4 billion market by 2030, though others view this estimate as exaggerated.

Shigueo Watanabe Junior, a senior researcher at the Talanoa Institute, expressed reservations about the focus on carbon credits. He emphasized the importance of transitioning to a low-carbon economy rather than relying on offsets.

Brazil's Senate is expected to vote on PL 412/2022 this month. If approved as currently proposed, the bill will come into effect within three years. While several other bills before Congress also seek to establish a regulated carbon market, PL 412/2022 is viewed more favorably among environmentalists due to its detailed outline and international pressure on Brazil to meet its emissions reduction commitments under the Paris Agreement.

The bill aligns with Fernando Haddad's "ecological transition plan" to shift Brazil toward a low-carbon economy. It is not anticipated to hinder international funding for Amazon conservation but aims to ensure Brazil can fulfill its climate obligations and create an alternative funding source for nature-based solutions.

While the regulated carbon market plan has garnered widespread acclaim, particularly concerning industry emissions regulation, some experts remain critical of the reliance on carbon credits to reduce greenhouse gases. They argue that the focus should be on achieving a true transition to a low-carbon economy.