Experts caution that failure to curb deforestation could prevent the country from achieving its climate goals, forcing it to purchase rather than sell greenhouse gas emission licenses. They note that while Brazil’s G20 presidency might attract new funding for the energy transition, challenges persist. Domestic demand for carbon credits could outstrip supply due to unchecked emissions, and there may be hurdles in selling Brazilian credits internationally.

According to Marcos da Costa Cintra, who holds a doctorate in energy from the University of São Paulo and a master’s in public policies, strategies, and development from the Federal University of Rio de Janeiro (UFRJ), Brazil’s ability to lead in the carbon credit market is significant, yet restricted by the stipulations of the Paris Agreement and European Union regulations.

Marcos da Costa Cintra, citing World Bank data, said that Brazil, with its robust renewable energy sector and reforestation initiatives, significantly reduces emissions yet often remains uncompensated.

He added that Brazil was once a top exporter of Certified Emission Reductions (CERs) in the carbon market during the Kyoto Protocol era, particularly from 2003 to 2010. However, regulatory changes led by the European Union curtailed this trend, stifling a dynamic that had both cut emissions and generated financial resources for Brazil.

Mr. Cintra also referenced the establishment of the Clean Development Mechanism (CDM) in 2000, following the inception of the global carbon market under the Kyoto Protocol. Through this mechanism, Brazilian companies and organizations were able to reduce emissions and sell the resulting certificates to other entities in wealthier nations, creating a beneficial exchange.

However, the Brazilian carbon market remains unregulated. Bill 2.148/15, aimed at establishing the Brazilian Greenhouse Gas Emissions Trading System (SBCE), would set emission caps and facilitate the trading of carbon credits within the national market. Passed by the Chamber of Deputies (Brazil’s Lower House) in January, this pivotal legislation is now under Senate review.

This focus on bolstering the domestic market coincides with the implementation of the European Union’s stringent regulations for emissions trading through the European Union Emission Trading Scheme (EU ETS). In this system, credits are traded on a European platform, adhering to rigorous standards designed to cut emissions. According to Mr. Cintra, European regulations permitted the purchase of CERs issued by Brazil under the CDM only until 2012.

Mr. Cintra said, “Under the current international rules set by the EU, the world’s principal carbon market purchaser, only small island countries and Least Developed Countries (LDCs) can sell emission reduction outcomes.”

He added, “With the ban on CDM sales in Europe and new costs imposed by the Paris Agreement, we’ve seen a severe deceleration that stifles the regulated international carbon market.”

The current dynamics of the carbon market require that credits originate from additional emission reductions—those that would not have occurred without the specific project or activity in question.

“Thus, emissions reductions that are ‘already made,’ such as those from the Amazon rainforest or existing biofuel production—projects that are already established and operating—are not eligible to generate credits,” said Mr. Cintra. He added that the European Union views these as non-contributory to further reductions in atmospheric greenhouse gas concentrations.

“This limitation restricts Brazil’s ability to capitalize on these resources for carbon credits unless new initiatives or significant enhancements to existing projects are undertaken,” he added.

Thus, even if the bill regulating the Brazilian carbon market passes, international restrictions could limit the availability of carbon credits due to deforestation and other unaddressed emissions, Mr. Cintra noted.

“This could paradoxically turn Brazil into a net importer of carbon credits to meet international obligations like those set by the Paris Agreement,” he said. Mr. Cintra also warned, “If deforestation continues to increase in Brazil, not only will it lead to higher greenhouse gas emissions, but it could also result in Brazil accruing an ‘external carbon debt.’”

This trend of increasing deforestation could diminish Brazil’s ability to supply carbon credits on the international market, compelling it to purchase credits from other nations.

Ludovino Lopes, founding partner of Ludovino Lopes Advogados and a specialist in environmental law and climate change, said, “The risk of needing to import carbon credits arises only if we fail to meet our targets, properly regulate our market across various national sectors, and, crucially, drastically reduce deforestation.”

Mr. Lopes also said that whatever carbon market model Brazil adopts, it will be essential to comprehensively include sectors currently excluded from it or from international climate commitments.

“Achieving our targets and cultivating a sustainable, low-carbon economy will be crucial for the country,” he said.

Among the key measures to achieve these climate goals, Mr. Lopes suggests, would be to curtail emissions by implementing strategies to combat deforestation at federal, state, municipal, and private levels.

“Additionally, Brazil must modernize and update, both financially and regulatorily, the tools of the green economy to build confidence and attract international capital commensurate with its real potential,” he states.

Mr. Lopes emphasizes that failing to meet its own climate targets would make it difficult for Brazil to attract foreign investments or even to purchase carbon credits on the international market.

Brazil has committed to reducing its greenhouse gas emissions by 37% by 2025 and by 50% by 2030, relative to 2005 levels, and aims to achieve carbon neutrality by 2050. It has also set a goal to eliminate illegal deforestation by 2028.

According to the National Institute for Space Research (INPE), deforestation in the Amazon decreased by 50% in comparison to 2022, but it increased by 43% in the Cerrado) Brazilian savanna), the country’s second-largest biome. The recorded deforested areas were 5,151 km² in the Amazon and 7,828 km² in the Cerrado, respectively.

Experts argued that Brazil must invest in renewable technologies, carbon capture and storage, and incentives for sustainable practices across several economic sectors to effectively curb illegal deforestation.

Powershoring

Jorge Arbache, Vice President for the Private Sector at the Development Bank of Latin America (CAF), believes Brazil is well-positioned to expand and draw more funding for its economy’s decarbonization efforts.

Mr. Arbache champions powershoring, a strategy aimed at decarbonizing corporate sectors by producing energy-intensive, export-oriented goods.

“Our conservative estimates indicate that powershoring could generate over $358 billion in exports of green products and attract $198 billion in foreign investment to Brazil over the next decade,” he said. Mr. Arcache said that Brazil’s robust green power generation mix is a significant asset in attracting foreign investments.

He said that Brazil’s power generation matrix is over 90% green, and there is an energy surplus, particularly in the Northeast. This region benefits from three key elements of powershoring: a port adjacent to an industrial area powered by green energy.

These features align with the interests of global companies seeking sustainable solutions for their production processes, enhancing Brazil’s role in international supply chains.

Mr. Arbache said the potential benefits with an example: “A hypothetical Belgian company could relocate an energy-intensive plant to Brazil, thereby reducing its reliance on non-renewable energy sources in Belgium and leveraging Brazil’s green energy. This move would accelerate decarbonization efforts and aid in achieving climate objectives.”

He said that relocating production to Brazil could be economically beneficial for consumers, who would pay less for green products manufactured in a country that efficiently utilizes green energy.

He commented on the international dynamics affecting powershoring, saying, “Developed countries are increasingly erecting barriers to powershoring because they prefer to produce domestically. However, they face significant costs.” Mr. Arbache said that products made with green energy are typically more expensive in European countries compared to Brazil and other nations in the Global South, where renewable energy sources are more abundant.

Role in the G20

Data from Petrobras’ recent Climate Change Supplement highlighted that Brazil boasts the second least carbon-intensive power mix among the G20 nations, surpassed only by France, which relies predominantly on nuclear energy.

Holding the presidency of the G20 this year, Brazil is positioned to significantly influence the creation of new global financing mechanisms for the energy transition.

“This is a unique opportunity for the country to demonstrate leadership and commitment to reducing carbon emissions, energy efficiency, environmental conservation, and a fair and equitable transition to a low-carbon economy,” said Mr. Lopes.

He advocated for Brazil to leverage both national and international partnerships to advance sustainable practices such as restoration, recovery, and reforestation.

“This would certainly lead to a radical reduction in the risk of carbon ‘debt,’” he said.