Brazil Advances in Carbon Market Regulation By Thais Stoppe

In its effort to position itself as a global climate leader—and in alignment with the Ecological Transformation Pact, which aims to involve the Executive, Legislative, and Judicial branches—Brazil has made significant progress in approving the law that creates and regulates the Brazilian carbon market, the Brazilian Emissions Trading System (SBCE). The National Congress has approved Bill No. 182/2024, which now awaits presidential approval to become law. The approved bill establishes a regulated carbon market while setting rules for the voluntary market’s participation in the system.

The regulated market adopted will operate as a cap-and-trade system, in which a maximum level of emissions is set for regulated sectors (the cap). This cap is divided among economic agents within the sector in the form of emission allowances. These agents can trade allowances among themselves, meaning those with surplus allowances (emitting less than their allocated amount) can sell them to those exceeding their quotas. Over time, this system reduces emissions by putting a price on carbon and making it economically advantageous for companies to lower their emissions, either to avoid buying allowances or to earn revenue by selling surplus allowances.

The approved bill establishes governance and guidelines for this system, while the detailed regulations that will define how it operates remain to be determined. Key aspects yet to be defined include the sectors subject to the regulated market, the maximum emission cap, the method for allocating allowances, and how emissions will be accounted for (e.g., by company, economic group, or installation). The SBCE will be implemented gradually and in phases, including regulation, operationalization of instruments, monitoring, free allocation (serving as a market test), and full implementation, which will occur in no less than five years.

Another critical aspect of Bill No. 182/2024 is the establishment of rules for the voluntary carbon market. Until now, this market has operated without regulation, raising uncertainties about how Brazilian law applies to it. The definition of the legal nature of carbon credits and the applicable tax regime is expected to provide greater legal certainty for those involved in this sector. Furthermore, the bill ensures interoperability between the regulated and voluntary markets, meaning that voluntary market credits could—if they meet the criteria to be established—be used to partially fulfill the obligations of regulated agents. This would increase demand for carbon credits in Brazil. The size of this demand depends on regulatory factors, such as the scope of the market (who the regulated agents will be) and the percentage of offsets allowed.

Given the significance of Nature-Based Solutions in Brazil, the new law also delves into various aspects of such projects. The legislation addresses the ownership of generated credits, the rights of traditional communities, the possibility of public-private partnerships, state-level deforestation control programs (jurisdictional approaches), and the rights of rural landowners, among other topics. The implications of these provisions will depend on the regulations and how they are implemented in practice.