Brazil’s Senate approves bill aiming to regulate carbon market

A bill that seeks to regulate the carbon market in Brazil – Bill No. 412/2022 – was unanimously approved on October 4, 2023, by the Senate Environment Committee. It will now be sent on to be approved in the House of Representatives.

The proposed legislation would establish the Brazilian Greenhouse Gas Emissions Trading System (Sistema Brasileiro de Comércio de Emissões de Gases de Efeito Estufa – SBCE), a regulated framework for trading assets that represent emissions, reductions or removals of greenhouse gas (GHG) emissions that would be subject to GHG emissions limits. This system aims to meet the provisions of Brazil’s National Policy on Climate Change (Law No. 12,187/2009) and its commitments to the United Nations Framework Convention on Climate Change.

Entities subject to regulation

Unlike other bills that have sought to regulate the carbon market in Brazil, Bill No. 412/2022 does not define regulated entities based on economic sectors; rather, they are defined by a minimum emissions threshold. The bill’s proposed mandatory participation thresholds are 10,000 and 25,000 tonnes of carbon dioxide equivalent (CO2e) per year per source or facility, which apply equally across all economic sectors. The one notable exception is primary agricultural production, which has been expressly excluded.

According to the bill, regulated operators – individuals or legal entities responsible for sources or facilities emitting over 10,000 tonnes of CO2e per year – will be required to report their emissions. Moreover, those responsible for sources and facilities emitting over 25,000 tonnes of CO2e per year will be obligated to periodically reconcile their emissions.

Regulated operators could undertake emissions reconciliation by proving ownership of Brazilian Emission Quotas (CBE), representing an allowance to emit one tonne of CO2 and Verified Emission Reduction or Removal Certificates, representing the reduction or removal of one tonne of CO2 emissions (registered in the SBCE) in an amount equal to the net emissions incurred during the period.

SBCE governance

The governance structure of the SBCE would consist of the Interministerial Committee on Climate Change (Comitê Interministerial sobre Mudança do Clima – CIM), the Permanent Technical Advisory Committee (Comitê Técnico Consultivo Permanente – CTCP), and a governing body. It is worth noting that the approved text does not establish who the governing body would be.

The CIM is a deliberative body that would be responsible for establishing general guidelines for the SBCE, while the governing body would be responsible for operating the system and regulating the market. The governing body’s responsibilities include defining the activities, sources, facilities, and gases regulated in each commitment period, as well as developing and implementing the National Allocation Plan (see below) after the CIM approves it.

Meanwhile, the CTCP – comprised of experts representing the federal and state governments, operators, academia, and civil society – would be responsible for providing input and recommendations for improving the system.

National Allocation Plan

The National Allocation Plan is central to making the SBCE operational. It must establish the following elements for each commitment period (among others):

• Maximum emission limits;
• The number of CBEs to be allocated to operators;
• Whether CBEs are allocated with or without charges;
• The maximum percentage of Verified Emission Reduction or Removal Certificates permitted in periodic emissions reconciliations.

To ensure predictability for operators, the National Allocation Plan must be approved at least 12 months before becoming effective.

Furthermore, the plan may establish differential treatment for certain operators or economic sectors due to the inherent characteristics of their activities, revenue, net emission levels, or location, among other criteria established by the SBCE’s governing body.

Infractions and penalties

The bill specifies that the SBCE’s governing body will determine administrative infractions for failure to comply with SBCE rules. It also outlines potential penalties, including fines of up to 5% of a company’s gross revenue, prohibiting operations, sources, or facilities from continuing, as well as restrictive penalties such as canceling licenses and banning operators from entering into government contracts.

Connection to the voluntary market

Bill No. 412/2022 establishes the possibility of carbon credits being envisaged as Verified Emission Reduction or Removal Certificates, meaning they could be used when reconciling emission obligations. Carbon credits are defined as ‘tradeable assets representing actual emission reduction or removal of one tonne of CO2e, obtained as a result of greenhouse gas reduction or removal projects or programs carried out by public or private entities and subject to national or international methodologies that include criteria and rules for measuring, reporting and verifying emissions outside of the SBCE’.

To achieve this, carbon credits must meet specific requirements, and their use should not exceed the maximum limit defined in the National Allocation Plan.

Furthermore, when carbon credits are traded in the financial and capital markets, they will be legally classified as securities, subject to the regime of Law No. 6,385/1976.

Rights of indigenous peoples and traditional communities

Although the bill’s principal focus is on establishing the SBCE, it also sets parameters for the voluntary carbon market – particularly concerning the rights of indigenous peoples and traditional communities. The bill stipulates that their right to trade carbon credits generated in areas they traditionally occupy must be ensured, as well as socio-environmental safeguards and obligations regarding their free, prior, and informed consent.

Rolling out the SBCE

The SBCE will be rolled out in phases, the first of which involves issuing regulations for the system within 12 months (extendable for an equal period). This will then be followed by a three-year timeframe to operationalize the system, at which point the first National Allocation Plan becomes effective.

The Senate’s approval of the text is a significant step toward creating a regulated Brazilian market, a long-debated topic that has gained particular momentum since 2021.

During the Senate Environment Committee’s vote, Senator Jaques Wagner – leader of the government in the Senate – reaffirmed the government’s intention to definitively approve the bill before the 28^th Conference of the Parties in Dubai, which commences on November 30 this year.

For further information on this topic, please contact Mattos Filho’s Environmental Law & Climate Change practice area.