Brazil is on its way to creating regulated carbon markets in the country with legislation that recently passed through the Senate and is expected to reach the desk of President Luiz Inácio Lula da Silva. Once signed into law, Brazil will have one of the largest regulated carbon markets in the world, behind the EU’s Emissions Trading System. While voluntary carbon markets can be a market-based approach to reduce emissions, government-mandated carbon markets can increase costs for consumers and businesses, and increase the cost of carbon abatement.
Under Brazil’s cap and trade plan, which will become fully operational in a few years, companies that emit CO2 emissions above a specified level will be required to purchase certified offsets from others. The revenue generated from this trading will fund reforestation efforts and conservation projects in Brazil’s Amazon. It is estimated that nearly 30 million acres of the Amazon are suitable for reforestation, a land area that is roughly the same size as Pennsylvania.
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Reducing deforestation is essential to addressing climate change and reducing biodiversity loss. However, stringent regulations that make it harder to do business could hurt Brazil’s market scheme and stymie climate progress. The system will impose annual compliance obligations on any entity emitting more than 25,000 tons of CO2e per year and reporting obligations on companies emitting more than 10,000 tons of CO2 equivalent annually. It is estimated that these regulations will impact roughly 4,000 companies.
Compliance costs for emissions reporting have come at a significant cost to businesses in other markets. Quarterly reporting under the EU’s Green Taxonomy, for example, costs businesses 150 days and an average of $158,000 on consultant fees even “if [a company’s] activities had only limited connections to the criteria addressed.”
And while Brazil’s reporting scheme would likely impact larger corporations exclusively, regulators should still be wary. Writing on large corporate reporting in the Financial Times Fabiola Schneider points out:
As opposed to government-forced carbon reduction programs, voluntary, market-led carbon offsets and trading can deliver meaningful climate progress in a more business and consumer-friendly way. Those markets must improve their legitimacy through better monitoring, reporting, and verification. Recent reporting finds that 39 of the largest 50 carbon offset projects are “likely junk.” Meanwhile a mega-project in Africa, Kariba, recently collapsed after investigations found that “the project had overestimated its climate benefits by at least a factor of five while delivering less money than indicated to communities in Zimbabwe tasked with protecting against deforestation.”
Still, the potential that voluntary markets show in delivering emissions reductions and environmental benefits necessitates that solutions be discovered to ensure their success. Technology will have a central role to play and companies and the government are already working to advance artificial intelligence and measurement, reporting, and verification tools that will provide investors with peace of mind and allow private entities to verify carbon removal.
When it comes to reducing rates of deforestation, improving government integrity is integral. While deforestation in Brazil’s Amazon is largely attributed to expanded agricultural production, local political corruption and a weak rule of law have accelerated the depletion of natural resources in the region. The country’s efforts to improve government integrity, increase monitoring, and levy fines on perpetrators have made a significant difference allowing Brazil to reduce deforestation to its lowest rate in six years.
Engaging with local stakeholders and communities will also aid in reducing deforestation, especially in the developing world. Paraguay for instance is promoting sustainable forest practices to protect some 187,000 hectares of land, with the goal of conserving 600,000 hectares of critically endangered ecosystems.
Brazil’s plan to introduce a regulated carbon market may increase costs for consumers and businesses and drive up the cost of climate action. Voluntary carbon markets can accomplish the economic and environmental goals that policymakers and consumers want at a more competitive price.