carbon credits
Though the Bolsonaro administration has come under criticism for its perceived indifference to climate change, Brazil is about to launch a marketplace for carbon credit certificates that could reduce fossil fuel emissions
By Rodrigo Amaral
Once a global leader on climate change, Brazil is steering a decidedly different course under President Jair Bolsonaro. The new administration has expressed concern that environmental policies are at odds with economic growth. The way the government handled the recent fires in the Amazon has only further tarnished its image as a green pioneer.
However, the launch of a new carbon credit marketplace in Brazil, aimed at mitigating global warming and providing a new investment opportunity, goes some way to counterbalancing that perception.
The government hopes the new credit will encourage expanded use of biofuels and increase demand for ethanol. Brazil is one of the world’s biggest producers of sugar cane-based ethanol.
The new scheme is based on the introduction of a new environmental asset, named CBIO, a Portuguese acronym for Decarbonization Credit. These new emissions reduction certificates will be traded very much like a commodity at B3, the São Paulo stock exchange. Each CBIO will be equal to one ton of CO2 not emitted into the atmosphere by replacing fossil fuels like gasoline and diesel with ethanol.
“What we are proposing is to replace an energy source that pollutes more with another that produces fewer pollution. So we will try to stimulate other sectors to follow the leadâ€
—Paul Costa, Ministry of Mining
At first, only Brazil’s fossil fuels and biofuels industries will participate in the program, which starts in 2020. But the government hopes a successful implementation would allow it to expand the initiative to include other industries and invite global investors to participate.
“What we are proposing is to replace an energy source that pollutes more with another that produces fewer pollution. So we will try to stimulate other sectors to follow the lead,†says Paulo Costa, who is leading the project at Brazil’s Ministry of Mining and Energy. “Our studies show that it is possible.â€
Whether it’s probable is another matter. Sceptics question whether there will be enough CBIOs to justify trading. And a lack of supply could mean sharply higher prices that could discourage investors.
To promote the substitution of biofuel for green alternatives, the National Council for Energy Policy (CNPE), the government body has established annual targets for CO2 emission reductions throughout the country. The national mandatory target then will be divided into individual targets for companies that distribute fossil fuels, based on their share of the gasoline and diesel market. Each fuel distributor will then purchase the appropriate amount of CBIOs that allows them to meet their target.
Companies that decline to participate will face fines and could be subject to other administrative and monetary sanctions.
CBIOs will be issued by ethanol producers. To participate, producers must first have their plants certified and graded, based on the sustainability of their farming and industrial processes. The grade, along with the volume of production, will determine how many CBIOs they can issue. The producers will use the proceeds to expand production.
Financial companies, likely banks, will issue the certificates on behalf of the producers. Brazil’s four biggest banks - Itaú, Bradesco, Santander and Banco do Brasil – have shown an interest in writing the titles, according to Costa. CBIOs will not have an expiration date and will only be retired when buyers meet their mandatory or voluntary reduction quotas.
CBIOs will be purchased on the B3 exchange by the fuel distribution groups and any other company that wants to reduce its carbon footprint. The fuel distributors can then sell the certificates on the secondary market. Costa expects that pension funds and other investors will also develop a taste for the environmental asset, buying them at the initial low price and selling them when the market matures, and demand grows.
“On the buying end of the market will be fuel distributors, which will have an obligation to buy CBIOs, but also investment funds, pension funds and individual investors, both from Brazil and abroad,†says Costa.
Trading volume is expected to be small at first. Felipe Bottini, the CEO of Green Domus, a firm that certifies ethanol producers, estimates CBIO prices could range between $10 and $40 per unit. CNPE has set targets for total CBIO purchases by distribution companies. They stand at 28.7 million units in 2020, which will grow to 94.6 million units by 2028. The volume could be high if fuel distributors increase purchases voluntarily if they want to pursue more aggressive strategies to reduce emissions.
The CBIO program comes at a time when Brazilian companies are increasingly involved in combatting CO2 emission. CEBDS, a sustainable think tank maintained by business groups, estimates that Brazilian companies invested $85.5 billion in projects to reduce CO2 emissions between 2016 and 2019. The investment resulted in 1,340 projects that reduced CO2 emissions by 217.9 million tons in the period.
Beyond reducing carbon emissions nationally, the program could also position Brazil as a major player in the global carbon credit market. Outside of Brazil, demand could come from initiatives like the Carbon Offsetting and Reduction Scheme for International Aviation, which aims to reduce CO2 emissions by the commercial airline industry. Organizers of the CBIO market have already contacted the International Civil Aviation Organization, which developed the project, according to Costa. They hope to persuade airlines to use the CBIO process to reduce their own carbon emissions.
“Demand for carbon credits is huge,†says Laion Pazian, a consultant at BiofÃlica, which works with forest preservation initiatives. For example, he says sales of credits generated by reforestation projects his company has advised increased by 500% since 2016. Demand has been almost exclusively from foreign buyers, he says.
If successful, the program will not only encourage more ethanol production by providing additional capital to producers. But it could provide a framework to benefit other forms of sustainable energy producers, such as wind and solar plants. Likewise, carbon credits could be used by other industries, such as transportation and chemicals, that are looking for efficient ways to offset their emissions.
CEBDS, for instance, has presented the government with its own proposal to create a marketplace for carbon credits with the support of industries such as pulp and paper, oil and gas and financials.
“In the past two years, this idea has grown very quickly,†says Marina Grossi, president of CEBDS. “Not only are many companies doing their internal carbon pricing estimates, but they are also demanding for a carbon market.â€
While supporters of the program are quick to point out the potential, the CBIO trading platform is still to be tested. Luzia Hirata, the head of Sustainability at Anbima, Brazil’s capital markets association, stressed that it’s not clear whether there will be enough volume of CBIOs to justify trading on an exchange. The market will be launched with 108 mandated buyers who must meet the targets set by CNPE. But three, Petrobras, RaÃzen and Ipiranga, will account for two-thirds of all CBIO purchases.
“Pricing is another issue, as, if CBIO prices are too high, companies may opt for paying a fine rather than buying them,†Hirata says. But Bottini of Green Domus disagrees and says rules are likely to make it mandatory for fuel distributors to meet their targets even if they are fined for missing the legal deadline.
Not surprisingly, Evandro Gussi, president of UNICA, a trade association of sugarcane producers, expects investors to show interest and eagerly buy CBIOs that provide money for more ethanol production. For him, it’s an easy trade-off: “When we change the use of land to plant sugar cane, we increase environmental protection and reduce carbon emissions.â€
