Brazil introduces draft law for cap-and-trade system
A new legislative proposal for the establishment of a Brazilian Greenhouse Gas Emissions Trading System (Sistema Brasileiro de Comércio de Emissões de Gases de Efeito Estufa - SBCE) has been introduced to the Brazilian National Congress. The proposal, which has the support of the federal government, would establish a mandatory emissions trading system (ETS) and could help the country meet its climate targets of reducing emissions by 50% below 2005 levels by 2030 and reaching climate neutrality by 2050.
Several legislative proposals related to carbon markets had already been under discussion in Congress. Upon taking office, the administration of President Lula da Silva began drafting its own proposal. Rather than introducing it as a new legislative process, the proposal by the Federal Government has now been incorporated into draft law 412/2022, which is at advanced stage of consideration in the Senate. The law would establish the governance framework and the legal foundation for obligations by regulated entities. Key design elements would still need to be decided and implementing regulations developed at a later stage.
The proposed system would impose compliance obligations on entities emitting more than 25,000 tCO2e per year. Reporting obligations would apply to entities emitting more than 10,000 tons of CO2 equivalent per year. Compliance and reporting obligations would incur annually. While the sectoral scope of the system is not yet defined, a key government official mentioned that compliance obligations would impact roughly 4,000 companies – excluding farms and ranches, but including some meatpackers.
The system would be overseen by the Inter-ministerial Climate Change Committee, operated by an ETS administrator body, and supported by a technical body. National Allocation Plans – to be published regularly – would set out key parameters, including the cap and its expected trajectory, allocation methods, the percentage of carbon credits allowed for compliance, market stability provisions, as well as provisions to protect against reversals and leakage. The cap is to be set in accordance with Brazilian climate targets. Revenues from the trade of allowances and carbon credits would be subject to net gains and capital gains tax. Non-compliance would be punishable by fines and by embargoes, among others.
Regulated entities would be allowed to surrender domestic carbon credits to meet a certain share of their compliance obligation, which is still to be determined. Eligible credits would include those generated using methodologies approved under the Clean Development Mechanism and under the mechanism established by Article 6.4 of the Paris Agreement. Projects must be verified through an ‘independent conformity assessment’. Once registered in the SBCE registry, the credits would be denominated as ‘Verified Emissions Reduction or Removal Certificates’ and become eligible for use under the SBCE. The Brazilian emissions profile is dominated by the agriculture, land-use change and forestry sectors, which in 2020 were responsible for more than 60% of greenhouse gas emissions in the country; these sectors are expected to play a key role in the generation of carbon credits. Provisions for the eligibility of carbon credits generated by REDD+ activities, for example, are already included in the draft law.
The draft law also explicitly defines the rights of indigenous peoples and traditional communities with regard to carbon crediting. This includes the right to commercialize carbon credits generated on lands they traditionally occupy, as well as the compensation for any damages resulting from carbon credit projects. Furthermore, actors involved in carbon credit projects would have to adhere to a benefit-sharing regulation.
The draft law also contains provisions for international transfers under Article 6 of the Paris Agreement. Both SBCE allowances and carbon credits would be eligible for international transfers, subject to authorization by a designated national entity. The designated national entity would establish criteria and conditions for such authorizations, which may include annual transfer limits in order to ensure consistency with the country’s climate targets. Moreover, the SBCE registry would track both national and international transactions.
The draft law will now be discussed by both houses, and adoption could take place still this year. As per the current text, once Congress approves the law, the government will have 12-24 months to enact the regulations needed to implement the system. The system would begin with two years of reporting obligations only, which means that the ETS could become fully operational in four to five years.