Brazil cap-and-trade carbon framework in sight, but agriculture gets a pass

In his first seven months in office, Brazilian President Luiz Inácio Lula da Silva reduced deforestation by more than 40% compared to the previous year, part of a wider effort to protect the Amazon. The government has now set its sights on another way to slash greenhouse gas emissions, after finalizing a new bill to create a cap-and-trade carbon market.

The bill, PL 412/2022, details the Brazilian Greenhouse Gas Emissions Trading System (SBCE), which seeks to regulate emissions across most sectors and create a framework to help companies meet their carbon obligations. It caps company emissions at 25,000 metric tons per year, meaning those that exceed this amount must either find ways to reduce their emissions or offset them by buying carbon credits; those below the limit can sell their quotas as credits. The regulations will affect about 5,000 companies, with sectors such as oil and gas, chemicals, steel, and cement likely to be impacted by the legislation.

Although the bill doesn’t specify which sectors will be subjected to emissions obligations, an amendment was approved by Congress in November 2022 to exclude agricultural activity from the regulated market. Agriculture and livestock farming are the leading causes of deforestation and greenhouse gas emissions in Brazil, and, as a result, experts say exempting them from emissions regulations is a major flaw.

“It is unacceptable and inconceivable that the agricultural sector is left out of the emissions reduction targets,” Beto Mesquita, director of public policy and forests at environmental finance nonprofit BVRio, told Mongabay.

Generating carbon credits

Currently, Brazil only has a voluntary carbon market, with no reduction targets or established rules, leaving it subject to irregularities and unethical practices that include companies harassing Indigenous peoples or forcing them to sign biased contracts. The bill aims to address the “problem of carbon cowboys” — a term coined by Rafael Dubeux, adviser to Brazil’s finance minister, Fernando Haddad, as quoted in Reuters — by giving Indigenous peoples, Quilombolas and extractive reserve workers the right to sell carbon credits generated in the territories they occupy through representative entities.

The bill states that certain conditions must be met for carbon transactions to occur on Indigenous land. This includes adherence to the international convention ILO 169, which protects Indigenous rights and ensures that resources generated from carbon credits within protected territories are distributed fairly. “Having this reinforced by law will be very important and will contribute to the framework of socioenvironmental safeguards,” Mesquita said.

By encouraging carbon credit generation, however, the bill has generated some controversy. Carbon credits collected in these territories would come from activities preventing deforestation and forest degradation, enabled through the U.N.’s REDD+ scheme. Under this instrument, the volume of credits earned would be proportional to the risk of deforestation: no threat of deforestation would mean a low volume of credits; high deforestation risk would mean a higher volume of credits. Some estimates predict that this carbon trade could generate a 100-billion-reais ($20.4 billion) market by 2030, but other experts say this is exaggerated.

“It’s not a win-win market,” Shigueo Watanabe Junior, a senior researcher at the Talanoa Institute, a climate politics think tank, told Mongabay. He added the focus should be on eliminating fossil fuel use with the expectation that the carbon market will disappear one day when emission targets are achieved.

“If deforestation drops to zero, if Lula and Marina [Silva, Brazil’s minister of environment and climate change] do what they promised to eliminate deforestation, the volume of credits that these projects will earn is zero because there is no longer any risk,” he said. “It is not a business that will last long if everyone does the serious work of combating deforestation.”

Some experts say future demarcation of Indigenous territories could be directly or indirectly conditioned to accepting REDD+ projects. Indigenous territories across Brazil store a combined 13 billion metric tons of carbon, according to Michael Schmidlehner, a researcher of traditional knowledge, climate justice and society-nature relationships, and professor of philosophy at the Federal Institute of Education, Science and Technology in Acre state. To implement Lula’s growth policy and reconcile it with forest conservation and Indigenous land rights, this carbon will have to be commercialized, he told Mongabay.

“For the Brazilian industries that are to be regulated, compensating [for] emissions will probably be much cheaper than reducing them. This will likely result in tremendous pressure on Indigenous communities,” Schmidlehner said. “The narrative that is being used to make such projects palatable to [Indigenous peoples] is that of the bad carbon cowboy and the good government. The bottom line is the same: a continued logic of unbridled growth and pay-to-pollute, as well as disenfranchisement, epistemicide and criminalization of Indigenous peoples.”

Voting on the regulated market

Brazil’s Senate is expected to vote on PL 412/2022 this month. If approved as it currently stands, the bill will go into full force within three years. Several other bills before Congress also seek to create a regulated carbon market, but PL 412/2022 is regarded more positively among environmentalists than those others.

“I see this one as the best one that has ever been presented,” Mesquita said, adding that other bills are “very confusing and not very objective.”

Previous governments attempted to establish a regulatory framework for carbon trading, but failed to fully implement it, such as Decree 11.072/2022 introduced last year by then-president Jair Bolsonaro. It outlined the creation of a National Greenhouse Gas Emissions Reduction (SINARE), introduced concepts of sectoral plans, and a carbon credit definition, but failed to create the actual trading system. Lula, who took office at the start of 2023, revoked the decree in June.

Experts say PL 412/2022 has a good chance of moving forward due to its detailed outline and international pressure on Brazil to comply with its emissions reduction commitments under the Paris Agreement, increasing the demand for a regulatory system to be put in place. The bill is a part of Haddad’s “ecological transition plan” to shift Brazil into a low-carbon economy. Having a regulated carbon market isn’t expected to interfere with international funding for Amazon conservation, but instead ensure the country can internally meet its climate obligations and create an alternative source of funding for nature-based solutions, Mesquita said.

“Having this system now prepares for the future scenario where international resources will, regardless of what happens internally, start to become scarce,” he said.

The regulated carbon market plan has been widely acclaimed as a positive proposal, especially in respect to regulating industry emissions. However, some experts lament the reliance on carbon credits to reduce greenhouse gases. “The way the regulated market is being designed is great,” Watanabe said. “What I don’t like is mixing the two. It means people won’t do their homework and will buy offsets for the rest of their life. What I want is for them not to buy offsets. I want them to transition to a low-carbon economy.”

Banner image: Cattle ranching at Monte Fusco livestock farm in Figueirópolis d´Oeste, in Mato Grosso state. Cattle ranching is the primary driver of forest destruction in the Brazilian Amazon. Image © Ricardo Funari/Lineair/Greenpeace.

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