Carbon pricing – a key tool to combat climate change – is gaining momentum all around the world, including in emerging markets such as Brazil. Since 2013, there has been rapid growth in Brazilian corporate adoption and support for carbon pricing as a mechanism to prepare for a climate-constrained future. Leading companies (including Itaú Unibanco, CPFL, and Vale—respectively Brazil’s largest private bank, largest private electric utilities, and a global mining company) have been participating in voluntary ETS simulations to gain experience and develop proposals for an emissions trading system in Brazil that can reduce national GHG emissions at the lowest possible cost. In 2018, 29 companies from diverse sectors of the Brazilian economy participated in this exercise. The ETS simulation is coordinated by the Centro de Estudos em Sustentabilidade da Fundação Getulio Vargas (FGVces). Trading takes place through the Rio de Janeiro Green Stock Exchange (BVRio). The rights are distributed through auctions and free benchmark allocation based on carbon intensity indicators. The experience of participating companies offers insights into operating in the market, and is an ongoing pilot project to start paving the way to a Carbon pricing policy in Brazil.
According to a Report by the International Carbon Action Partnership released in January of 2020, the Brazilian government also is currently considering the implementation of market instruments to meet Brazil’s mitigation targets and reduce overall mitigation costs. This includes assessing different carbon pricing instruments, including an ETS and a carbon tax. The Ministry of Economy is developing design options and conducting comprehensive economic and regulatory impact assessments for both instruments. This includes an analysis on potential interactions between carbon pricing instruments and existing policies.
In addition, the Ministry of Economy has launched a strategy to strengthen the understanding of carbon pricing instruments among stakeholders through engagement, communication, and consultation. Currently, the Brazilian government is also working on the regulatory impact assessment of a national mandatory GHG emissions/removals registry with support from the German Development Agency.
RenovaBio, the National Policy for Biofuels, was approved in 2017 (Federal Law 13576), establishing mandatory goals for the reduction of GHG emissions by avoiding the use of fossil fuels. The policy provides for a trading mechanism for emissions reduction units generated from switching from fossil fuels to biofuels, relative to a 100% fossil fuel use scenario. The system basically allows for the certification of biofuels. The Ministry of Mines and Energy claims that the objective of the certification is to measure the exact contribution of each biofuel producer to greenhouse gas emissions reductions, in relation to their fossil substitute. The law also creates a decarbonization credit that combines the emissions reduction targets and the live cycle assessment of each biofuel producer. The credits are described as a financial asset that can be traded on a stock exchange. They are issued by the biofuel producer following the sale of product, and fuel distributors will meet required targets by acquiring these credits. This project could lead the way to the introduction of a more solid ETS system in the near future.
Establishing carbon pricing through a trading scheme aligns with regional developments. Mexico, Argentina, Colombia, and Chile have already adopted carbon taxes and are moving toward trading schemes at national and regional levels. Once Brazil has its own trading scheme, the size of its domestic market and the dominance of its manufacturing sector in the region will reinforce the country’s leadership in the trade agenda within the region and beyond it.
Brazil’s main commercial partners apart from Latin America—China and the European Union (EU) — also already have an emissions trading system, and by joining the game Brazilian industry can expand its presence in these markets and attract investment in low-carbon innovation.
The only arguments against the implementation of a carbon pricing scheme in Brazil arise from the discussion that industry contributes only a modest share to Brazilian emissions (industrial process emissions account for less than 2 percent of total emissions, and energy emissions account for only 6 percent). Much more potential, in the short run, would be in the land use change (LULUCF) sector, which has much higher emissions. Thus the Brazilian targets under the United Nations Framework Convention on Climate Change can largely be achieved by reducing emissions in land use. However, it is also recognized that Brazil’s mitigation advantages based on forest and agricultural emissions will eventually decline, forcing the country in 2025 to begin considering new targets for 2030 and beyond, when emissions from industrial processes and energy will certainly be under discussion.
Activity Rating: *** Right Direction
Although there is still not an implementation of a carbon pricing policy in Brazil, there are clear signs of movement in the right direction, with articulations between the Ministry of Environment, Ministry of Economy (previously Ministry of Finance) and the Ministry of Mines and Energy to effectively introduce this as a climate change mitigation technique in Brazil in order to allow for Brazil meeting its GHG emissions targets. Moreover, the Industry sector in Brazil is eager to see the establishment of a carbon market, suggesting a huge potential for implementation of pricing techniques trough interactions between public and private initiatives.
Specifically to the case of Brazil, it appears that implementation would be most effective with a gradualist approach, as carbon pricing involves technical and institutional challenges. Moreover, Brazilian industry has been making efforts to improve its international competitiveness, and many businesses would prefer to adopt carbon pricing policies and measures that do not threaten their achievements.
In order to be effective, it is clear that a complex institutional arrangement is needed to support such a scheme. Namely, it should clearly identify the mandates of public and private entities. Having an executive governmental agency at the federal level responsible for implementing and coordinating the regulatory market and its participants, including the stock exchange, agents, operators, and MRV entities, would be a start.
Please send the following message to the policymaker(s) below.
We congratulate the government on setting the foundations for the establishment of a Carbon Trading System, showing commitment to achieving the Paris Agreement and transition to a low carbon economy. However, we urge you to encourage public and private partnerships to ensure the effective implementation of such system.
Ministry of Economy (previously Ministry of Finance) and the Ministry of Mines and Energy
Paulo Roberto Nunes Guedes
Minister of Economy.
Esplanada dos Ministérios
Ministério da Economia
Bloco P – 5º andar
Telefone: (61) 3412-2515/1721
Minister of Mines and Energy.
Minister of the Environment
Telefones: (61) 2028-1057/1289/1422
Esplanada dos Ministérios, Bloco B, 5º andar
70068-900 – Brasília – DF
This Post was submitted by Climate Scorecard Country Manager Luiza Martins Karpavicius