Carbon market grows in Brazil ahead of expected regulation in Glasgow

Environmentalists worry about Brazil’s willingness to hit reduction targets and the credibility of government-backed trading schemes
<p>Decarbonisation credits are now traded by biofuels companies on B3, the Brazilian stock exchange (image: Alamy)</p>

Decarbonisation credits are now traded by biofuels companies on B3, the Brazilian stock exchange (image: Alamy)

Chinese power generation company China Three Gorges (CTG) Brasil recently announced the “neutralisation” of its carbon emissions. The goal was achieved, among other things, through the purchase of over 8,000 carbon credits for a conservation project in Vale do Jari, Amapá state, which protects an area of 200,000 hectares.

The purchase helps the company mitigate the environmental impact of projects such as the São Manoel hydroelectric plant on the border between Pará and Mato Grosso, which came into operation in 2018 after being fiercely questioned by environmentalists and indigenous groups. The Chinese company expects the credits to completely offset its emissions by 2022, estimated at 1,700 tons of CO² per year.

CTG Brasil is not the only company following this route. Among others, Natura, Ipiranga, Itaú and Renner are also investing in the purchase of bonds in Brazil, anticipating the regulation of a global carbon market. This is expected to be concluded at COP26 climate talks in Glasgow in November.

“Today in Brazil, there are many companies, from various sectors and sizes, doing offsetting,” said Mariama Vendramini, director of the Brazilian office of EcoSecurities, which specialises in carbon markets. “The market trend is one of growth.”

The subject is favoured by Brazilian Environment Minister Ricardo Salles, who has argued that rich countries should pay so that developing countries, such as Brazil, can preserve the environment.

Bolsonarism is the biggest impediment to greater participation by Brazil in any environmental market

In fact, Brazil has the potential to be a leader in the carbon market. It is third in the world in installed renewable energy capacity, behind China and the US, and second in forest coverage after Russia, with 58% of its land area covered by trees.

Yet, the lack of domestic public policies for the sector and the weakness of Brazilian environmental policies mean that these purchases are growing at the margins of government control in an area known as the “voluntary market”.

In this sector, carbon credits arise from various “green” projects, such as renewable energy plants, reforestation and forest conservation initiatives. The developers of these projects are audited by independent entities and, if they meet the criteria, issue certified carbon credits.

The bonds are then made available in the market, usually on stock exchanges, such as the Chicago Climate Exchange or Brazil’s own stock exchange. Any entity, be it a company, NGO, government or even an individual, can generate and sell carbon credits in the voluntary markets.

Obstacles to global carbon market regulation

The idea of an international carbon market was raised at the UN’s Rio-92 conference and gained strength around the 1997 Kyoto Protocol. According to Kyoto, signatory developed countries should comply with an emissions reduction target, and are obliged to compensate for their surpluses by purchasing carbon credits from other countries.

The strength of the carbon market has varied greatly since its inception. “At the time of the Kyoto Protocol, from 2005 to 2012, there was a very strong carbon market. After Kyoto ended, it dried up completely. And now it is gradually coming back,” explained Pedro Moura Costa, director of the BVRio institute, an NGO that promotes compliance with environmental laws via market means.

According to the World Bank, currently around 60 carbon pricing initiatives are active or being implemented among countries and sub-national governments worldwide.

Many hope that the challenge of regulation, provided for in Article 6 of the Paris Agreement, will soon be resolved. The UN’s 2019 Climate Conference in Madrid (COP 25) frustrated expectations and did not conclude with regulation at the international level. Brazil was one of the countries that created obstacles in the negotiations. These centred on two areas: the collection of old carbon credits, and the definition of a new way of counting.

Brazil wants a way of accounting for the credits that would count emissions reductions for both the countries buying and selling the credits. This is a method contested by several nations. In practice, this would open a margin for potential sellers, such as Brazil, not to actually reduce their emissions.

Congressman Zé Silva attended the COP25 and believes that the summit scheduled for this year should move things forward. “Even though Brazil has some points of divergence with other nations, the convergences are much greater,” he said.

For others, even if the market is regulated, Brazil will continue to have difficulties. With record deforestation in the Amazon, Brazil’s credibility in implementing environmental policies compatible with reduction targets is compromised.

“Carbon is heading towards becoming the new global commodity, but the Brazilian government and part of agribusiness ignore the new world economic geopolitics and insist on backwards steps that not only cost the destruction of the country’s environmental heritage, but stifle the economy and the chances of economic growth with sustainability,” said Senator Fabiano Contarato, a member of the upper house’s Environment Commission.

Moura Costa agreed. “Bolsonarism is the biggest impediment to greater participation by Brazil in any environmental market, including the carbon market,” he said. “There is great scepticism about the credibility, the legitimacy, of any environmental action in Brazil at the moment.”

Domestic carbon trading initiatives

China, the world’s largest emitter, regulated its domestic carbon market earlier this year. “The logic is within China’s more general context of aiming to be an economy that moves towards carbon neutrality by 2060,” explained Lívio Ribeiro, associate researcher at economics institute FGV Ibre.

In Brazil, despite the market’s potential, official initiatives to regulate the carbon market in Brazil have moved slowly.

The regulated market is restricted to the National Biofuels Policy (RenovaBio), and covers just the transport sector. Created in 2017, it is focused on accelerating the transition of the primary sources of energy for transport systems through the greater use of renewable and less polluting fuels.


the value of decarbonisation credits traded on Brazil's stock exchange last year (US$)

The policy’s main mechanism is the commercialisation of decarbonisation credits (CBIOs). These securities are issued by producers and importers of biofuels and sold on B3, Brazil’s stock market (formerly known as Bovespa). Despite the difficulties with the pandemic, in 2020 approximately 600 million reais (US$109 million) were traded in CBIOs.

In addition to the absence of a regulated market in essential areas such as power generation, Brazil faces difficulties in instituting taxes on the emission of pollutant gases. In 2020, the economy ministry announced that the government is evaluating the creation of a “green tax”, without presenting a concrete plan since.

With the participation of the Brazilian state, the market would gain a new scale, said Vendramini, from EcoSecurities. “There are several sectors, especially the most polluting ones, that need to reduce emissions, to make compensations. So the role of the state would be to place this obligation in a more generalist way, defining reduction goals,” he said.

But despite helping to combat climate change, environmentalists have stressed that the carbon market is no panacea.

“There is an effort to be carbon neutral, but that’s not all: you need a compensation mechanism that literally offsets emissions,” says Ribeiro, from FGV. “Otherwise, it becomes a buying and selling of pollution rights.”