Brazil Senate Advances Bill for Regulated Carbon Market

(Bloomberg) -- Brazil is getting closer to setting up a regulated carbon market that will help to reduce emissions and expand forested areas after the Senate approved a bill on Wednesday.

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The bill will go back to the lower house for debate and needs President Luiz Inacio Lula da Silva’s approval. It is moving forward at a time climate negotiators are meeting in Azerbaijan at the COP29 summit, where Brazil announced a new nationally determined contribution to reduce 67% of emissions by 2035 from 2005. The bill has become a priority for Brazil’s government as it prepares to host COP30 next year in the Amazonian city of Belem.

“This pressure becomes even greater,” said Vinicius Nunes, a BloombergNEF analyst in Sao Paulo. “The federal government does not want to get into discussions about preserving the Amazon without having at least a regulated carbon market approved.”

Companies who emit above established limits will be able to buy credits from others who pollute below their quotas. They will also be able to buy credits from developers in the voluntary market who have projects to protect standing forests or are replanting deforested areas. If the bill becomes law, Brazil will join other countries including the EU, China, Japan and Mexico that have already set up regulated emissions trading frameworks.

The carbon market is also part of Brazil’s plan to halt deforestation in the Amazon and become carbon neutral by 2050. The vast amounts of deforested land in Brazil where tropical trees can grow fast give the country a strategic advantage in nature-based carbon removal.

“The single largest opportunity to do reforestation is in Brazil,” said Peter Fernandez, the chief executive officer of Brazilian carbon removal startup Mombak Gestora de Recursos Ltda. “I think Brazil is going to be the Saudi Arabia of carbon removal.”

The quotas will impact around 5,000 companies, according to the government. Carbon offset and removal projects could grow the economy as much as 2% and bring jobs to remote areas, said Davi Bomtempo, the superintendent of environment and sustainability the Brazilian National Confederation of Industry.

Agriculture Loophole

The bill has generated criticism for excluding agriculture, Brazil’s largest economic activity that generates an estimated 25% of its carbon footprint. Experts have pointed out that agriculture is responsible for the vast majority of Brazil’s deforestation, and that farmers could make money from selling carbon credits without being forced to curb their own emissions.

To meet plans to reduce greenhouse emissions, Brazil needs the agriculture and forestry industries to participate, said Carlos Sanquetta, a professor of forestry engineering and bioenergy at the Federal University of Parana.

If Congress approves a “limited bill” that doesn’t cover all polluters, the country will need to introduce other incentives such as low-carbon agriculture to achieve emissions reduction goals, he said.

Lawmakers who favor excluding agriculture say it’s too hard to quantify its emissions, while critics point out that farmers are Brazil’s most influential special interest group.

Voluntary Markets

Brazil is already a major producer of carbon credits for voluntary markets, and accounts for 6% of carbon credits that have been retired since 2015. Brazil has the capacity to generate 30.5 billion metric tons of carbon credits by 2050, according to BloombergNEF.

The law aims to create additional demand for voluntary credits because they can be used to offset excess pollution.

“You end up financing and feeding a positive virtuous cycle for reforestation,” said Bomtempo.

Still, like in much of the world, Brazil’s voluntary market for carbon credits has suffered cases of greenwashing. Federal prosecutors have opened investigations into carbon credit projects for illegal and abusive contracts, for harassing indigenous communities and failing to deliver on promises made to local communities. Last year, for example, officials in Para state suspended four projects for alleged land grabbing.

The global voluntary carbon market has plummeted amid quality concerns, with credits often delivering fewer climate benefits than advertised. And mandatory carbon markets haven’t been immune from these problems: Academics last year, for instance, found that the most oft-used project type in California’s compliance market was having scant climate impacts.

Brazil can help prevent fraudulent contracts and avoid greenwashing through the regulated market, Sanquetta said, but this depends on the final version of the law. The bill has been under discussion since 2015 and has undergone many changes. It will also take at least a year to create the regulations needed for the regulated market to start operating, Sanquetta said.

--With assistance from Daniel Carvalho.

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