Brazilian carbon market and market infrastructure

While it is not yet mainstream, Brazil currently has in place an organized and well-regulated carbon market. It operates under the so-called RenovaBio programme and relies on decarbonization credits (CBIO). An important cornerstone of this programme is its use of the Brazilian financial market infrastructure, especially of B3 S/A – Brasil, Bolsa, Balcão (“B3” – the Brazilian Stock Exchange), which allows the control of quantity and ownership, and transparent trades and price formation. Although there are areas that require further development, such as the legal qualification of a carbon credit, the system in place demonstrates that the CBIO are an interesting and safe investment as well as a carbon footprint offsetting opportunity.

In 2017, Brazil instituted the RenovaBio policy, which set annual decarbonization targets for the Brazilian fuel sector. Said objective would be achieved by increasing the share of biofuels in the Brazilian energy matrix. Biofuel producers and importers, duly inspected by certifiers (vetted by the Brazilian National Agency for Petroleum, Natural Gas and Biofuels – ANP) are entitled to CBIO based on their national sales volumes and energy efficiency. Each CBIO, which has no expiry date, is equivalent to a metric tonne of avoided carbon emission based on the comparison of total carbon emissions of the biofuel and its equivalent fossil fuel (e.g.: ethanol Vs. gasoline/petrol).

On the other hand, fossil fuels distributors must meet annual (scope 3) decarbonization targets based on their sales volumes. The only way they can meet their targets is by purchasing and retiring CBIO transactions that are done within B3. Non-compliance by the fossil fuel distributors with their targets can lead to fines varying from BRL 100 thousand to BRL 50 million (equivalent to approximately US$ 20 thousand to US$ 10 million).

The market infrastructure operates as follows: biofuel producers and importers register their sales invoices with ANP. They subsequently hire a bookkeeping agent, which issues the decarbonization credit based on the applicable sales invoices and keeps record of the CBIO’s transaction. The CBIO is then registered with B3, which assigns the credit an identification number, allowing it to be traded. Subsequent transactions are done within B3 (which offers an over-the-counter market and registry of the operations) and communicated to the bookkeeping agent.

The CBIO’s lifecycle ends with its retirement. The CBIO holder (whomever purchased the credit) intending to offset emissions will instruct its intermediary to retire the credit. This order will be communicated to B3, which will block the credit from further trade, will be passed on to the bookkeeping agent, which will register the retirement, and will be informed to ANP.

Trading started in June 2020 and has been growing at a rapid pace. In the first 40 days of 2022, over 10 million CBIO were transacted (an increase of 162% when compared to the same period of 2021), having reached a unit price of BRL 101.50 (record high). Average unit price in 2020 was of BRL 37.40, in 2021 of BRL 39.31, and in 2022 of BRL 82.17.

CBIO are predominantly still bought and retired by fossil fuel producers, but “non-obliged” parties (such as persons that want to voluntarily offset carbon emissions, be them residents or not in Brazil) can participate, transact, and retire CBIO.

The market is evolving. New regulation is being proposed that would allow, for example, future contracts relating to CBIO, with the objective of offering protection mechanisms from market volatility.

As can be seen, there are detailed regulations in place, which are paired with a robust market infrastructure that brings about positive externalities. B3 and involved intermediaries provide a vital role in facilitating trade, centralizing capital pools, and reducing information asymmetry, which brings about trust.

There are, nonetheless, other areas that need further development. As in many other jurisdictions, there is no clear legal definition in Brazil of what a carbon credit is (be it regulated or voluntary in nature). RenovaBio legislation states that the CBIO is an “instrument” registered in book-entry form but gives no further insights.

The Securities Commission of Brazil (CVM), after discussing the nature of voluntary carbon credits, decided that said credits are not securities or derivatives. This definition is important as it can determine which legal protections are conferred to the credit holder and how it should be seen for tax purposes, for example.

Brazil’s regulated carbon market is not yet mainstream but has the potential to grow and attract national interest and foreign voluntary investors. The use of B3’s market infrastructure is an important factor in bringing transparency, liquidity, and trust to the local carbon market. Developments are still needed, but the system in place demonstrates that the CBIO are an interesting and safe investment or offsetting opportunity.