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Regulated Carbon Market in Brazil? From the Legislative Process to Enforcement Challenges

Leonardo Garcia Da Silva Munhoz Sr and Lucas Bertolo


  • Brazil's Congress is working on establishing a formal regulated carbon market. It will be the first big carbon market in the world encompassing tropical agriculture.
  • The proposed legislation specifically exempts primary agricultural activities from the carbon market due to concerns about regulatory burdens and uncertainties in measuring farm emissions.
  • Additionally, big questions remain, as both houses did not clarify the national bodies and agencies responsible for the SBCE.
Regulated Carbon Market in Brazil? From the Legislative Process to Enforcement Challenges
Vitor Marigo via Getty Images

The Brazilian Congress has been discussing a new law to create a national regulated carbon market. Currently, Brazil lacks a formal and regulated carbon market; instead, there is only a voluntary market available. Thus, Congress is crafting the Sistema Brasileiro de Comércio de Emissões (SBCE). However, there are some unanswered questions as to how this cap-and-trade system will work in Brazil, as a means of conducting economic agents to inhibit, or reduce, their greenhouse gas emissions.

If we had to sum Brazilian environmental law up in a few sentences, we would have to start with constitutional provisions of the universal right to an ecologically balanced environment, as well as the state’s duties to defend and preserve it for present and future generations. However, if we were to describe it chronologically, the Forest Code would be the first mentioned. Within Brazil's environmental legislation, there is a set of command-and-control limitations to private property rights, combined with the regulation of economic activities such as mining, extractivism, and fishing, aimed at protecting native biomes, fauna, and flora. It is worth highlighting that the Forest Code's permanent preservation areas (APP) and legal reserves (RL) are parts of property in which a farmer cannot use for agricultural purposes and must maintain its native vegetation. In other words, APP and RL are mandatory easements imposed on a farmer, without financial compensation by the government. On the other hand, Brazil's law also enables the use of market incentives such as the use of payments for environmental services.

Therefore, the future Brazilian regulated carbon market is poised to become a key component of Brazil’s vast and complex environmental regulatory framework. Thus, the future SBCE shall not be overburdening for Brazil’s productive sector, and in particular those already regulated by other norms (e.g. Forest Code, environmental licensing), nor is it likely to be malaligned with other laws. That being said, it is important to understand how a Brazilian Emissions Trading System (ETS) will be incorporated into the national's environmental regulatory framework, and the main legal issues this cap-and-trade system will create.

The process to establish the ETS is currently ongoing. So far, a legislative proposal (Projeto de Lei 412/2022) has been approved by the Senate’s Environment Committee. This approval came after the proposal underwent extensive revisions, including more than fifty amendments over several months, resulting in four different versions of the document.

Following these developments, the proposal was approved by both the Senate and the Chamber of Deputies (as Projeto de Lei 2.148/2015) before the conclusion of the 2023 parliamentary term. Notably, the original version of the SBCE legislation experienced the majority of its significant changes and amendments not during full plenary sessions, but rather within the Environment Committees of both legislative houses. This pattern suggests a strong coordination of political parties, and coalitions, to concentrate substantial deliberation in parliamentary committees, and to schedule votes only when the issue has already been resolved or is well advanced. The text still has to be voted on by the Senate's plenary.

As for the text’s main points, an amendment by Senator and former Minister of Agriculture, Tereza Cristina, excluded primary agricultural activity from the SBCE. The reason behind this agriculture exemption is the regulatory overburdening and uncertainties regarding methodology and metrics for agriculture and farm emissions (e.g., the EU-ETS also excludes agricultural primary sectors). According to the senators, the SBCE should encompass only industry and energy sectors (i.e., any source emitting more than 25 thousand tons per year of carbon dioxide). The senators also explain that Brazilian farmers already must respect other environmental property limitations prescribed by the Brazilian Forest Code (i.e., APP and RL) and have the possibility of integrating the agricultural sector into voluntary carbon credit markets, which are mentioned in the regulated market legal text, as a valid way of offsetting emissions beyond one’s cap defined by the SBCE managing body.

In this sense, as for its governance structure, the current bill lacks a transparent system. Both houses did not clarify the national bodies and agencies responsible for the SBCE. The current draft only describes the creation of an interministerial body that will manage and approve national allocation plans and the SBCE guidelines and goals. Also, the draft mentions a managing body (i.e., Órgão Gestor), with the prerogatives to elaborate and set national allocation plans to be approved by the interministerial body––it will be the executive branch of the SBCE. However, the draft does not set at the managing body composition, processes, and hierarchy. Since this body will elaborate allocation plans, setting allowances and emissions’ cap, its authority will be key for a functional SBCE. Thus, an omissive regulation on this issue can compromise the SBCE as a whole.

Regarding taxation of the SBCE assets and carbon credits, article seventeen of the bill's draft establishes a unitary tax regime for SBCE assets and carbon credits. All gains arising from the sale of carbon credits, under the regulated market or not, shall be taxed by the income tax, including “net gains, when earned in transactions carried out on stock, commodities and futures exchanges and organized over-the-counter markets.” It is worth saying that this type of tax regime is not much different from the European Union ETS. For a country known for its complex and unusual tax system, the simplified taxation of the carbon credit markets is a relief.

Another important provision concerns methodologies for activities to become eligible for carbon credits. Determining the appropriate methodologies for measuring the reductions or removals of emissions in different economic activities in Brazil can be challenging. Currently, most methodologies used in the world belong to a few carbon certifiers of the voluntary market, such as Verra, American Carbon Registry, Gold Standard and Climate Action Reserve (i.e., Verra alone has 75 percent of carbon credits certifications from the voluntary market), which are from developed countries, with an industrial economy and temperate climate. However, with its SBCE, Brazil will have the opportunity to design new methodologies and measurements for tropical agriculture. Brazil will be the first relevant agricultural commodity exporter to set its regulated carbon market with specific methodologies for it. Brazil could even become an exporter of this know-how to other tropical countries, especially Africa and Southeast Asia, significantly changing both national regulated and voluntary carbon markets in those places. The SBCE bill´s draft has provision creating a technical body responsible for certifying new methodologies to proposed by scientists specific for tropical agriculture.

The draft also establishes a compatibility and articulation between the SBCE and the United Nations Framework Convention on Climate Change and its instruments. This coordination will be developed in two stages, domestic and globally, where Brazil’s ETS is situated into broader programs and policies to combat climate change. While the potential for a prosperous sustainable market is exciting, we must remember that the primary regulatory function of carbon credit markets, as an incentive mechanism aimed at reducing or removing emissions, is to reconcile environmental preservation and socioeconomic development.

Finally, despite the issues previously raised, we can say that the future Brazilian Emissions Trading System, will be just one of the gears in a complex economic and environmental regulation engine, with international ramifications, and aligned with the most modern standards in market incentives for environmental preservation, which has been implemented in several developed and developing countries. Brazil is a globally recognized ecological and environmental powerhouse, known not only for its natural resources, but also for its renewable, clean energy matrix. Thus, it is of the utmost importance that the international community keep an eye on legislative developments in environmental law in this country, with the possibility of bringing innovative solutions in bioeconomy incentives and policies to other regions, and to different regulatory systems around the globe.