Brazil: Lula sanctions law that allows the sale of carbon credits in forest concessions

President Luiz Inácio Lula da Silva has sanctioned, with a veto, Law No. 14.590, which amends three other laws, and releases the sale of carbon credits in forest concession areas.

For lawyers heard by ESG Practice, the move is an initial step for Brazil to follow through on its plan to reduce greenhouse gas emissions, the so-called NDC or Nationally Determined Contribution, agreed under the Paris Agreement but also leverages the emissions offset market.

The text came with a veto in the section that defined legal reserves as “areas registered to maintain wood stock, designated as technical plans of conduction and management.”

The government followed the argument defended by the Ministry of the Environment, which argued that this part could loosen the protection legislation on legal reserves of these areas, which would represent an “environmental regression”.

For Bryan Lopes, partner at the law firm Lee, Brock e Camargo Advogados (LBCA), the law is positive for the local carbon market because it stimulates the market for the purchase of carbon credits from “green” initiatives by companies that want to neutralize their emissions of polluting gases.

“Brazil needed the sanction of law 14.590/23 (carbon market law). This was an important step to foment the disruptive process necessary for this transition,” says Lopes.

He adds that it is “of the utmost importance” that Brazil begins the transition to a low-carbon economy, not only for urgent environmental reasons “but also because of the unsustainability of the current economic model and its heavy dependence on fossil fuels, which is one of the main causes of the greenhouse effect.

Daniela Stump, a partner in charge of ESG at DC Associates, comments to Practice ESG that the private sector expected the sanctioned changes.

“They foster the bio-economy, unlocking the financial flow for forest restoration and more effective environmental protection in public forests and protected areas (conservation units), with the possibility of selling carbon credits,” she says.

For her, the most important point is the transfer of ownership of carbon credits from the granting authority to the concessionaire of public forests and the right to sell them according to the regulation to be issued.

“It is a source of income that is often decisive to enable restoration and protection of the forest,” reiterates Stump.

The professor of the Federal University of Rio de Janeiro (UFRJ), Luan Santos, an expert in the carbon credit market, explains that, in practice, this law changes the rules of the law regarding public forests through concession, now allowing these areas to be exploited for activities other than logging, such as the commercialization of carbon credits resulting from the preservation of native forest and the restoration of deforested areas.

Besides, it allows access to genetic heritage for research and development purposes and the exploitation of fishing services and wild catch.

“Deep down, this ends up, in some way, encouraging the conservation of the Amazon and the maintenance of the standing forest via carbon credit generation projects for the voluntary market,” Santos points out.

“In addition, for Brazil, it is a great opportunity because the country positions itself as a possible provider of these carbon credits for the global market, which can buy the credits and achieve greenhouse emission targets and their respective NDCs.”

The NDCs he refers to are the so-called Nationally Determined Contribution (NDC).

Each signatory country to the Paris Agreement has set targets for reducing greenhouse gas (GHG) emissions.

The Brazilian NDC revised last year establishes that Brazil must reduce its emissions by 37% by 2025 and 50% by 2030 compared to 2005.

The expectation is that the issue of emissions and the international carbon market – article six of the Paris Agreement – will be the subject of discussions at the climate conference (COP 28), which will take place in November this year in the United Arab Emirates.

In an interview with ESG Practice, Ludovino Lopes, a lawyer specializing in European Law, explains that the law is an important opportunity for the government to get on with its decarbonization plan.

“Public lands are fundamental for compliance with the NDCs, even more so because much of the deforestation that counts towards the country’s emissions inventory happens on public lands,” he says.

But he reiterates that a study is needed to calibrate how much of this concession will generate carbon credits for the voluntary market and, more importantly, what methodology will be used to verify that credit generation is possible.

“The question remains whether the government would use methodologies already used today, but which are not regulated by a body like the UN, for example, and which could be subject to questioning,” comments Ludovino.

He points out that there is a distinction between the voluntary carbon market and the regulated market that needs to be explained.

In the case of the regulated market, there are no carbon credits but rather permits to emit.

The model most used today in other countries is that sectors have individual pollution ceilings distributed among the companies in that sector.

Those who exceed their limit can compensate by buying credits from other companies, which works more like a “license to pollute”.

“The advance of the government in relation to the voluntary market can pull emissions over the regulated market in Brazil.”

“It also brings opportunities to advance in the voluntary and regulated market,” says Luan Santos from UFRJ.

Santos remembers, however, that organizing the law proposals that are in progress to constitute the regulated carbon market, such as the PL 528 of 2021 and the PL 290 of 2020, is necessary.

Today, in Brazil, only the voluntary carbon market exists, in which companies and governments can voluntarily buy credits generated by the reduction of emissions through the prevention of deforestation or carbon capture, projects certified by international entities such as Verra today.

On the other hand, these projects discussed in Congress aim to establish guidelines to regulate Brazil’s unpolluting goals, determining emission ceilings for sectors and defining the rules for commercializing carbon credits when necessary (the so-called cap and trade mechanism).

“What is being discussed in Congress is not only about the carbon credit market, but it has guidelines to prepare sectorial climate change mitigation plans, creating the basis for a more technical and qualified discussion of the carbon market,” Santos highlights.

Bryan Lopes, from LBCA, recalled that the governance of the locally regulated carbon market would be a challenge.

The ideal, he thinks, is that there is governance in which the private sector is inserted and can define the maximum amount of greenhouse gas emissions with the regulated entities, thus allowing them to make the equivalent emission.

“The idea is that this limit is not defined individually by company or sector, but for a set of regulated entities, fixing the emissions amount that must be reduced in a specific period, which can be, for example, for a period of five or ten years,” comments Lopes.

This way, each regulated entity could define the best strategy to achieve its goals, being able to reduce emissions or buy more compensatory assets, such as carbon credits that are currently only traded in the voluntary market.

According to the WayCarbon study in partnership with the International Chamber of Commerce (ICC Brazil), with the correct regulation of the Brazilian carbon market, the country would be able to supply 22.3% to 48.7% of the global demand for voluntary market credits, which should reach between 1.5 and 2 gigatonnes of CO2 equivalent by the end of the decade.

It is worth noting that the law sanctioned this Thursday changes three legislations, Law No. 11284 of March 2, 2006, which provides for the management of public forests for sustainable production; Law No. 11516 of August 28, 2007, which created the Chico Mendes Institute for Biodiversity Conservation, and Law No. 12114 of December 9, 2009, which created the National Fund on Climate Change.

With information from Valor

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