Carbon market decree ineffective, experts say

In May, the federal government published a decree with the bases for the creation of a carbon market in Brazil. In a single page, the text deals with a system that has been guiding the climate discussion around the world, but leaves gaps in its execution.

In the opinion of experts consulted by the Sheet, the measure indicates that the matter has finally entered the Executive’s agenda, and serves as a kick-off for the country to design its carbon pricing model. However, several points remain open, mainly in relation to deadlines and the obligation of sectors to reduce their emissions.

One of the few certainties is that Brazil still does not have a regulated carbon market — as is the case in Europe, China, New Zealand and Kazakhstan.

The decree only establishes the procedures for the elaboration of sectoral mitigation plans and institutes the Sinare (National System for the Reduction of Greenhouse Gas Emissions), which should function as a central for recording emissions, reductions, offsets and credit transactions. .

The text also sets out the governance of the systems —divided between the Ministry of Economy and the Ministry of the Environment— and presents the definition of assets such as carbon credits and methane credits.

Other than that, experts say the measure arrives late, doesn’t clarify deadlines for emissions cuts, rivals a bill being debated in Congress and promotes legal uncertainty. See some of the main problems of the decree.

1) Does not institute a regulated carbon market

For Gustavo Pinheiro, coordinator of the low carbon economy area at the ICS (Instituto Clima e Sociedade), the decree is ineffective. According to him, this is a voluntary regulation, as it does not generate any obligation to reduce emissions.

Limiting the amount of greenhouse gases within the economy is one of the central points in a regulated carbon market. In this model—known as “cap and trade”—the government sets a cap on certain sectors and grants allowances for emissions.

It’s as if companies have a “budget.” To pollute above the quota, you have to buy more permits, which are sold by companies that have managed to cut their greenhouse gases. This is a legal obligation.

According to Guarany Osório, professor and researcher at the Center for Sustainability Studies at FGV/Eaesp (São Paulo Business Administration School, Fundação Getúlio Vargas), the measure announced by the federal government is not about any of that.

“[O decreto] enters the field of the voluntary market, because whoever generates credit will not be obliged to generate it, and whoever buys is not obliged to buy”, he says.

For the professor, the resolution is positive from the point of view of public debate, as it raises the topic on the discussion agenda. “It seems to me that the Executive is positioned to indicate that this issue is important and that climate change is a reality”, he says. “Looking at it with a very low ruler, at least we have a decree,” he adds.

2) Does not restrict emissions in economic sectors

In a letter published on May 26, CEBDS (Brazilian Business Council for Sustainable Development) criticized several points in the text. The group brings together some of the largest companies in the country, such as Vale, Petrobras, JBS and Itaú, and defends the regulation of a carbon market.

“The decree has many open questions, including deadlines, and it does not make clear the mandatory participation of the economic sectors that will be regulated by the market or if there will be consequences for non-compliance with the goals. These are gaps that imply challenges and uncertainties for the effective execution of a regulated market”, says the letter.

The Executive’s act provides for the preparation of sectoral mitigation plans, which will have gradual emission reduction targets, considering the specificities of each sector. The targets will also need to observe the Brazilian NDC (climate commitment under the Paris Agreement).

However, there are no details on how these gradual goals will work. According to the text, the sectors will be able to present proposals for the emission reduction curves within a period of 180 days – extendable for another 180 days.

According to Osório, the decree does not impose any obligation on any economic segment. It only establishes voluntary measures for the time being.

Renata Amaral, a lawyer at Trench Rossi Watanabe, also says she has many doubts about how this will work. In her assessment, each sector will establish its reduction curve, a parameter that will probably be used by the government to define sectoral targets.

However, the lawyer sees no problem with the fact that the goals are voluntary. “The sectors themselves have been feeling the need to have stronger regulation so that they can put their products on the market. They will need emission reduction targets to sell, for example, to Europe,” she says.

One of the challenges, however, will be to face the differences between the companies. According to her, it is common for players in the same sector to present different degrees of maturity in the environmental area.

This is also the opinion of Ronaldo Seroa da Motta, a professor at UERJ (Rio de Janeiro State University). For him, dividing the agreed target between companies in the same sector can mean a process of difficult convergence.

“This is a zero-sum game. The tendency is to be the same condominium fee, that is, the amount that everyone can pay. It’s what we call the lower limit”, he says.

3) Does not clarify deadlines for reduction targets

Another problem with the decree, in the view of experts, is the lack of deadlines. Osório, from FGV, says that there is no clear timetable — with the exception of 360 days for sectors to send suggestions about their emissions curves.

The perception is the same as that of Seroa da Motta. “Brazil needs a carbon market, but the government came up with a system that is very complex and that is not clearly explained in the text. : other decrees will have to be issued to account for this”, he says.

4) Rivals with PL on carbon market

The creation of a regulated carbon market in the cap and trade model —which is defended by specialists and a large part of the private sector— has been discussed since last year in the National Congress.

Initially proposed by deputy Marcelo Ramos (PSD-AM), bill 528/2021 is attached to another of similar content. There was even an expectation that the bill would be voted on in November 2021, during COP26, as a way of signaling Brazil’s commitment to the global climate effort — which did not happen.

For months, the matter was awaiting the opinion of the deputy rapporteur Carla Zambelli (PSL-SP), who only concluded the examination on May 19 – the same day as the publication of the decree.

According to Renata Amaral, from the Trench Rossi Watanabe office, a part of the business community considered that the best option for the government would be to strengthen the process of the project in Congress.

“The PL establishes what is more common in other countries in terms of a cap and trade market, where there is effectively a target established by the government and, based on that, a trade in permits for certain sectors”, he says.

The matter in the Legislature also brings sanctions in case of non-compliance with these goals, something that the decree does not provide.

“In other countries there is a stronger element for the government to establish a mandatory target and from there to leverage a market based on the permissions given to the regulated sectors. This is a rationale that, at least for the time being, we are not following”, adds Amaral.

In addition to the bill addressing details that are not covered in the decree, it has also been subjected to greater scrutiny. Seroa da Motta recalls that the matter had the collaboration of CEBDS, CNI (National Confederation of Industry), Febraban and Abiquim (Brazilian Chemical Industry Association), in addition to specialists and civil society organizations.

“The PL has a structure of principles and guidelines, a very well determined governance, clear decision criteria… This was all abandoned because it would be rightly said that it is a project that needs to be discussed in Congress for at least a year . But the government wanted to hurry, because now he is an environmentalist”, he says, in a tone of irony.

5) Promotes legal uncertainty

Another criticism made by experts concerns the legal force of the measure. “Many investors feel insecure about basing their decisions on a decree, which is something that can be changed at any time by the Executive Branch, even more so at a time of eventual transition of governments and discussion around polarization”, says the Trench lawyer. Rossi Watanabe.

The reasoning is followed by Seroa da Motta. In his view, it is a format that is less subject to public consultations, agreements between parties and pressure from civil society.

“Nobody is going to invest in reduction projects, because it is not known if this market, from one moment to another, can totally change the rules. The decree is a normative act that has legal fragility, which generates uncertainty”, he says.

The criticisms made by CEBDS are even harsher. According to the organization, the regulatory framework does not have the predictability and stability necessary to encourage long-term investments and may even inhibit actions that are already being taken by the productive sector.

6) Arrives late

In addition to criticism of the format, Guarany Osório, from FGV, says that the measure is overdue. Considering that Brazil had already updated its 2020 climate targets, a one-page decree to establish sectoral plans arrives with at least two years delay.

“In theory, it is expected that, when entering the new term of a commitment, you will have the instruments to implement what was promised”, he says.

The government’s slowness in dealing with the issue even harmed a partnership with the World Bank to implement the carbon market.

according to Sheet revealed last year, the federal government had, since the end of 2020, a study detailing why it was desirable to create a carbon market in the country. However, the project did not advance, and the country lost strategic support from the bank.

The phase would be the later stage of the PMR (partnership for market preparation), a World Bank program that Brazil started to participate in in 2016 and whose objective was to help countries adopt initiatives to mitigate the climate crisis.

Seroa da Motta acted as a consultant to the PMR and said that the decree published by the government erases everything the program suggested.

“For a government that had a non-environmentalist, denialist platform, the measure is a great advance. Of course, this advance did not happen due to a mass conversion of the government, it was because there was great pressure from the productive sector and the global chain of business demanding that Brazil, in addition to the need to join the OECD (Organization for Economic Cooperation and Development),” he says.