With Brazil’s struggle to establish a regulated carbon market, the country’s new president aims to implement a fresh approach in replacing his predecessor’s unsuccessful strategy. However, achieving success is still uncertain. President Luiz Inácio Lula da Silva’s administration is finalizing a proposal for a new regulated cap-and-trade system, which he plans to submit to Congress later this month. This approach diverges greatly from Jair Bolsonaro’s decree, which relied on the private sector to establish the foundation for a carbon market but failed to materialize. In either case, the system would set emission caps for specific industries and allow companies to offset excess pollution by purchasing allowances from entities that have surpassed the required emission reductions. Each credit would represent one metric ton of carbon dioxide removed from or prevented from entering the atmosphere. Over time, the cap would be gradually decreased to reduce emissions. The financing of carbon-capture projects, such as reforestation, could also generate carbon credits. Advocates argue that this is a means to protect the Amazon rainforest and other ecosystems, potentially offering a source of income for the millions of impoverished residents who currently profit from deforestation. Despite widespread support from exporters, who view a regulated carbon market as necessary for maintaining foreign consumer markets and attracting investments, the initiative faces considerable political challenges at home and may not be sufficient to address the deforestation that accounts for nearly half of the nation’s carbon footprint. Brazil prides itself on obtaining nearly half of its energy and nearly all of its electricity from renewable sources. Additionally, the country already has an active market for voluntary carbon credits, where corporations purchase credits from certified environmental projects to fulfill self-imposed emission reduction targets. However, these efforts may not be adequate in a world increasingly concerned about climate change. Gustavo Pinheiro, coordinator of the low-carbon economy portfolio at the nonprofit Institute for Climate and Society, highlights the need to price rising emissions and asserts that a regulated market is the least disruptive solution. As a country housing almost 60% of the Amazon rainforest, Brazil plays a crucial role in mitigating global warming. According to data from the European Union, Brazil was responsible for approximately 1.3% of global carbon dioxide emissions in 2021, and its population, economy, and carbon footprint are expected to grow, pushing the country further away from its commitments under the 2015 Paris Agreement and emphasizing the necessity of a regulated carbon market. Furthermore, a cap-and-trade system could strengthen Brazil’s struggling economy, as global trade increasingly requires environmentally friendly supply chains, according to some experts. Luiz Gustavo Bezerra, a partner at Tauil & Chequer law firm, affiliated with Mayer Brown, asserts that establishing a regulated carbon market would benefit the overall economy and improve the competitive position of Brazilian corporations. Local exporters anticipate the advantages of aligning regulations with those of key overseas markets, which demand low-carbon supply chains. For instance, a domestic regulated carbon market could help exporters avoid the carbon border adjustment mechanism that the European Union plans to impose on certain imported products starting in 2026. Brazil is a major exporter of iron, used in the production of steel for various purposes, such as household appliances, vehicles, and wind turbines. Vale, an iron-ore exporter aiming for net-zero emissions by 2050, uses an internal price of $50 per metric ton for its greenhouse gas emissions. The company stated that initiatives to price carbon are crucial for the competitiveness of the Brazilian industry. Brazil also serves as a significant global supplier of soybeans, corn, and beef, products often associated with deforestation. Roncador, a farming group specializing in grain and beef production, expresses concerns about increasing global restrictions on products lacking environmental certifications. The group’s CEO, Pelerson Penido Dalla Vecchia, states that due to the absence of a regulated carbon market in Brazil, they are conducting their own research and have developed protocols to ensure their activities have a positive environmental impact. Exporters also view a regulated market as an opportunity to rehabilitate Brazil’s tarnished environmental reputation, a consequence of its history of deforestation. Antônio Queiroz, Vice President of Innovation, Technology, and Sustainable Development at Braskem, one of the world’s largest petrochemical companies, expresses high expectations that the government will establish better regulations for carbon markets. A regulated market could also attract investments in the green economy, according to Lawyer Bezerra, who claims that private equity firms frequently seek investment opportunities in Brazil for reforestation and forest preservation initiatives. A study conducted by the Brazilian division of the International Chamber of Commerce and local carbon consulting firm WayCarbon suggests that the country could earn up to $120 billion by 2030 through carbon credits, assuming an optimistic scenario with a carbon price of $100 per metric ton. While this price is significantly higher than current voluntary market credits, which are valued at around $1, European Union credits have recently been trading at approximately €82 per metric ton, equivalent to $88. Brazil aims to reforest an area larger than Pennsylvania, according to Ana Toni, Head of the National Secretariat for Climate Change, suggesting the country’s significant potential impact. However, carbon-capture projects focused on forest preservation are typically traded in voluntary markets that often lack government regulation. Many of these projects have recently faced scrutiny for failing to deliver on their promises. For example, a Wall Street Journal investigation revealed that a reforestation project in Peru allocated little of the designated funds for rainforest preservation to locals. Nonetheless, Brazil’s Ministry of Development, Industry, Trade, and Services states that its proposal will allow for the inclusion of credits from the voluntary market, to a certain extent, in the new regulated market. The da Silva administration plans to establish a functioning carbon market within the next couple of years. However, da Silva lacks a majority in Congress and is expected to prioritize major fiscal and tax legislation over the carbon-market bill. A recent legislative move to weaken the Environmental Ministry led by Marina Silva, a vocal sustainability advocate supporting the effort to create a regulated carbon market, demonstrates the challenges ahead. While there is hope that carbon legislation may be approved before the United Nations Climate Change Conference in Dubai commencing on November 30, Annie Groth, Head of Advocacy and Policy at Biofílica Ambipar Environment, a developer of carbon projects in the Amazon and other biomes, cautions that this is the most optimistic outcome.
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