President Lula signs law creating regulated carbon market in Brazil

President Luiz Inácio Lula da Silva has sanctioned Law 15.042, which establishes the Brazilian Greenhouse Gas Emissions Trading System [Sistema Brasileiro de Comércio de Emissões de Gases de Efeito Estufa/SBCE]. Published in the Federal Official Gazette on Thursday, December 12 [pt], the measure creates a regulated carbon market in Brazil and sets limits on greenhouse gas emissions.

The new law, which was approved in November by the National Congress and passed without vetoes, establishes a bonus system for companies or states that reduce the emission of carbon dioxide into the atmosphere. In practice, those who can prove they have stopped emitting will earn carbon credits, which can then be bought by companies that emit above the established limit.

CARBON CREDIT — The SBCE establishes, among other things, limits on greenhouse gas emissions. From this limit, it will be possible to negotiate the Brazilian Emission Quotas [Cotas Brasileiras de Emissão /CBE]. Each quota allows an emission limit of up to 1 tCO2e (ton of carbon dioxide equivalent). The Certificate of Verified Emissions Reduction or Removal [Certificado de Redução ou Remoção Verificada de Emissões/CRVE], in turn, indicates the amount of carbon removed from the atmosphere and each certificate is equivalent to 1 tCO2e.

REGULATION — The law divides the carbon credit market into two sectors: regulated and voluntary. The first promotes decarbonization through government targets for different sectors of the economy, which can be met by reducing emissions within companies or by purchasing carbon credits generated by methodologies accredited by the managing body of the Brazilian Emissions Trading System.

The law also clarifies rules for the voluntary market, where companies seek to acquire carbon credits to meet corporate targets for neutralizing greenhouse gas emissions. In this regard, the measure clarifies the rules for REDD+ projects and programs that generate carbon credits and donations based on reducing emissions from deforestation, degradation and increasing carbon stocks in native vegetation.

The law also establishes rules for the development of state and jurisdictional REDD+ programs, ensuring the primacy of the right of legitimate owners and usufructuaries, including indigenous peoples and traditional peoples and communities, to carry out carbon projects in their areas. In this way, Brazil will reflect nationally the rules recently adopted by the United Nations Framework Convention on Climate Change (UNFCCC).

CO2 equivalent is a measure used to compare the emissions of different greenhouse gases, taking into account the global warming potential of each substance and representing the total in an amount of CO2 that would have the same potential. Organizations subject to regulation must provide a monitoring plan and reports on their activities to the management body.

AGRICULTURE — The agricultural sector will be left out of this regulation. Indirect emissions of carbon dioxide and other gases related to global warming resulting from the production of agricultural inputs or raw materials will not be considered in the obligations to contain gas emissions. However, the project maintains the possibility of agribusiness generating carbon credits through the maintenance of Permanent Preservation Areas [Áreas de Preservação Permanente/APP], legal reserves and restricted use areas.

DEFINITIONS AND DEADLINES — These definitions should be achieved within 12 months, extendable for another 12. After this stage, the system will take a few more years to be fully implemented, with full operation expected by 2030. Brazilian industries will be the main ones affected and those who fail to comply with the rules will be subject to fines of up to 3% of their gross turnover in the previous year, or 4% in the case of recurrence. For individuals, the penalties range from BRL 50,000 to BRL 20 million.

DIFFERENTIALS IN THE BRAZILIAN MARKET:

• Inclusion of indigenous and traditional communities as carbon credit generators, with percentages going directly to these populations.
• Alignment with the international market, allowing greater competitiveness and attracting foreign investment
• Potential for integrating jurisdictional REDD+ projects into the market, generating new credit opportunities