Carbon: a Decree by the Brazilian government is out, but not the market

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The Brazilian government had been announcing since COP 26 that a carbon market would be created in the country. Minutes circulated behind the scenes of what would be the text of the decree in recent weeks. Different sectors related to the topic were displeased, but the criticisms were seldom heard, nor did they stimulate participation mechanisms for the construction of a consensus standard. After much expectation, finally, on Thursday (19) Decree 11,075 in an extra edition of the Official Gazette.

Do we now have a Brazilian carbon market? Not really. The decree provides guidelines for the enactment of future rules that may regulate and, thus, establish this market. Therefore, in the Methodology for monitoring and classifying the TALANOA Institute/Politica por Inteiro project, this decree is about “Planning”. And not a “Regulation”.

The Decree establishes the procedures for the preparation of Sectorial Climate Change Mitigation Plans, institutes the National System for the Reduction of Greenhouse Gas Emissions (Sinare) and also amends Decree No. 11,003, which deals with the Federal Strategy for Incentive to Use Sustainable Biogas and Biomethane and was published in March/2022.

Despite creating Sinare and defining its governance, under the main competence of the Ministry of the Environment, the act is optional for most items, even in relation to Sector Plans. Thus, it cannot be considered a Regulation, given that it does not establish new rules or produce guidelines for economic agents. As it is not a regulatory process per se, but a guiding strategy, it fits into the Planning class.

Mains issues:

  • Creation of Carbon Stock Units, that is, assets linked to carbon stock, mainly forestry. It is not known whether they will be fungible with assets measured in CO2eq properly. High risk of non-environmental integrity.
  • Creation of the methane credit, also different from assets measured in CO2eq. No clarity about environmental integrity.
  • It is based on sectoral plans, which can be fulfilled via internal reductions and carbon credits.
  • The deadline for submitting plans is open and may also vary between sectors. There is no penalty for non-compliance.
  • There is ambiguity about the obligation and authority regarding who proposes sectoral mitigation plans: Article 3 of the decree assigns responsibility to the Executive Branch, which could avoid capture by the sectors. But Article 12 has another interpretation: the sectors themselves can propose their trajectory of reductions. In other words, there is no clear signalling of mandatory emissions reduction, nor clear and independent governance of the targets.
  • Finally, the Decree presents something far from a cap-and-trade Regulation, or emissions trading system. Voluntary market projects are certified and no basis is given for a mandatory system, which would protect our industry from international border adjustment fees, making the process ineffective.
  • At the heart of the decree is the single registration of projects and national carbon credits. This center can give visibility to the voluntary credits generated in Brazil – but its implementation will depend on the high-level capacities and competences of the Ministry of the Environment, since Sinare came under its competence

What about a cap-and-trade law?

The non-mandatory nature of the provisions included in this recent decree make legislation through the National Congress necessary for regulating carbon pricing. And an evident political signal about this dispute for protagonism – which has been observed since COP 26 between the Legislative and Executive on the subject – was issued on Thursday (19) as well, with congresswoman Carla Zambelli presenting her fi al report on Bill 2148/2015 (and appended 10,073/2018, 5,710/2019, 290/2020 and 528/2021). It is highly likely that the Brazilian Congress will deal with this Bill in the coming days and weeks, raising expectations that the matter can still be approved (at least in the lower House) in 2022. If so, then the Senate will be the next to appreciate the matter.

Overall, it is clear that carbon pricing is high on Brazil’s political agenda, including in the upcoming elections for the Presidency and National Congress