Carbon Market in Brazil

On day four (04) of October 2023, the law project 412/2022 was approved by the Environment Commission, which regulates the carbon market in Brazil. But what does this regulation means?

First, we should mention what is a carbon credit and how carbon markets work. A carbon credit is the coin of the carbon market, and is equivalent to one ton of carbon dioxide (CO2) that has it's emission reduced, that is no longer emitted or is sequestrated from the atmosphere. Markets arise from the need to achieve global goals for reducing Greenhouse Gas (GHG) emissions. Credits work as a way of trading emissions and carbon sequestration, where those who need to offset their emissions buy credits from those who carry out activities that reduce GHG emissions. In activities like restoration of degraded lands and reforestation, for example, a large amount of carbon is sequestered and stored. Plants are the major responsible for carbon sequestration, using the element for their growth and returning oxygen to the air. Furthermore, GHG emissions can be avoided or reduced through sustainable agricultural practices, use of renewable energy sources and reduced deforestation and fires.

https://www.wri.org/insights/forests-absorb-twice-much-carbon-they-emit-each-year

There are two markets that deal with carbon credits: the regulated and the voluntary market. The regulated market arises from Kyoto Protocol in 1997, where developed countries made a commitment to reduce GHG emissions, allowing carbon credits to be traded between countries that signed the protocol and other countries that have not reached the emissions limit. The expansion of Kyoto Protocol culminated in Paris Agreement, where all countries should set targets to reduce their emissions, reavaluating the fulfillment of these targets every 5 years. In these mean time, the voluntary market emerges, in which the adherence is optional, seeking a carbon certification that demonstrates the company's or jurisdiction's commitment to reducing GHG emissions,

The voluntary market works through national and international certifiers, where each one has a type of carbon credit that can be sold by proponents of projects that reduce and sequester carbon to companies seeking certification. The main actors in this chain are the carbon credits sellers, who own the land where the reduction and/or removal will be carried out and the buyers of these credits.

Brazil's participation in the regulated carbon market occurs through the Clean Development Mechanism (CDM), as it is the only mechanism of the Kyoto Protocol that allows the voluntary participation of developing countries. As we can see in the graph below, CDM used to dominate Brazil's carbon market, being surpassed by the voluntary market in 2020, despite growth already ocurr since 2018.

Vargas, D. B.; Delazeri, L. M. M.; Ferreira, V. H. P., 2022. Mercado de Carbono Voluntário no Brasil: Na Realidade e na Prática. Observatório da Bioeconomia. FGV EESP. * Where graph "A" represents the volume of carbon credits (in millions) and "B" the distribution of these credits between CDM (in blue) and the voluntary market (in red). The X axis represents the years 2006 to 2021.

Currently, are the certifiers that define the rules for registering projects that seek to generate carbon credits. The credits generated by each certifier are unique, with different values for commercialization. Therefore, the regulation of these markets becomes essential, bringing security to everyone envolved in the process and creating rules that make the process more organized, especially when it comes to the regulated market.

If you have any questions or interests regarding the carbon market, please contact WaKa Brasil team for a conversation.

References:

IPAM, Instituto de Pesquisa Ambiental da Amazônia, 2015. O que é e como funciona o mercado de carbono? Disponível em: https://ipam.org.br/cartilhas-ipam/o-que-e-e-como-funciona-o-mercado-de-carbono/.

Maizland, L., 2022. Global Climate Agreements: Successes and Failures. CFR. Disponível em: https://www.cfr.org/backgrounder/paris-global-climate-change-agreements

Ministério da Ciência, Tecnologia e Inovação, 2023. Autoridade Nacional Designada para o MDL. Disponível em: https://www.gov.br/mcti/pt-br/acompanhe-o-mcti/cgcl/paginas/copy_of_autoridade-nacional-designada-para-o-mdl

Vargas, D. B.; Delazeri, L. M. M.; Ferreira, V. H. P., 2022. Mercado de Carbono Voluntário no Brasil: Na Realidade e na Prática. Observatório da Bioeconomia. FGV EESP.