On 19 November 2024, the Brazilian National Congress passed a law setting the framework of the Sistema Brasileiro de Comércio de Emissões de Gases de Efeito Estufa (SBCE), a national cap-and-trade system expected to be operational in five to six years.
The law follows over a year of deliberations in both upper and lower houses. The approval of the SBCE framework comes during COP29, where Brazil announced its new commitment to a 59% to 67% reduction in net greenhouse gas emissions by 2035 compared to 2005 levels.
Key features of the SBCE
- Governance: The existing Inter-ministerial Climate Change Committee will oversee the system. The SBCE will be operated by a cap-and-trade administrator body, and supported by a technical body, both yet to be established.
- Scope: Entities emitting over 10,000 tCO2e/yr will face reporting obligations, while those emitting over 25,000 tCO2e/yr will face compliance obligations. A key government official indicated that these thresholds could see roughly 4,000 companies face compliance obligations. Reporting and compliance obligations will be annual.
- National Allocation Plans: The government will periodically update National Allocation Plans to define the system’s scope, the emissions cap and its trajectory, allowance allocation methods, carbon credit usage limits, and provisions to support market stability and avoid emissions leakage. The first plan is expected a year before the first compliance period commences, within three to four years.
- Revenue use and non compliance: ETS revenues, to the extent available, will be disbursed to cover administrative costs, finance mitigation activities, and support indigenous peoples and traditional communities. Non-compliance will be punishable by administrative warnings, fines, and activity embargoes, among others.
Implementation timeline
The implementation of the law will occur in five phases:
- Phase I (1-2 years): government enacts regulations needed to implement the system
- Phase II (1 year): regulated entities implement emissions monitoring and reporting.
- Phase III (2 years): regulated entities face monitoring and reporting obligations.
- Phase IV: implementation of the first national allocation plan, with free allowance allocation.
- Phase V: full operationalization of the SBCE, following the end of the first national allocation plan.
Use of domestic carbon credits
Regulated entities will be allowed to surrender domestic carbon credits to meet part of their compliance obligation, though the government has yet to set the exact share. Credit eligibility is yet to be determined, but will include credits generated with Clean Development Mechanism and Paris Agreement Article 6.4 methodologies. Brazil’s emissions are dominated by the agriculture, land-use change and forestry sectors, which accounted for over 60% of emissions in 2020; 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 law.
The law also explicitly grants indigenous peoples and traditional communities 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 will have to adhere to a benefit-sharing regulation.
Article 6 transfers
The law also contains provisions for international transfers under Article 6 of the Paris Agreement. Carbon credits will be eligible for international transfers, subject to authorization by a designated national entity. The designated national entity will 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 will track both national and international transactions.