Carbon market regulation may reduce Brazil’s GDP

The government of Luiz Inácio Lula da Silva (PT) seeks to play a leading role in environmental agendas under the pretext of improving Brazil’s image in the international community. Eager to find an agenda that stands out, after eight months of the current administration, Lula is now investing in the regulation of the carbon market. The objective of the PT administration is to use the regulation as an “trump card” for Lula to show his colleagues at the 28th United Nations Conference on Climate Change (COP28), to take place in November this year, in the United Arab Emirates.

For this, a bill that is still pending in the Federal Senate needs to be approved in the House, also pass in the Chamber of Deputies and be sanctioned by the president in less than three months. The race for approval, however, could have an impact on Brazil’s Gross Domestic Product (GDP). The warning comes from the lawyer specializing in environmental law and responsible for the World Bank study on the carbon market in Brazil, Antônio Fernando Pinheiro Pedro.

“There is experience that has already been found about the loss of GDP in the adoption of carbon mitigation projects in developing countries. The risk is giving up economic growth based on consolidated energy matrices in several first world countries in exchange for a credit for reduced emissions”, said Pinheiro Pedro.

The lawyer explains that with the focus on issuing carbon credits, keeping the forests standing, Brazil may be prevented from making use of its territory for the exploration of minerals and fossil fuels, for example, which are still in full use. in the economic activities of several countries. “We cannot make use of the carbon market as a mirage in the desert. When we get there, you may not have the water you want”, added Pinheiro Pedro.

The new legislation will create a greenhouse gas emissions trading system that internalizes the costs of carbon emissions in companies. “If approved, the project will encourage the implementation of a carbon pricing system and, thus, encourage companies to work to install new technologies and measures that provide a reduction in carbon intensity in the production processes of the main economic activities in the country”, explained the lawyer.

Government wants to strengthen bill pending in the Senate

The Minister of the Environment, Marina Silva, has defended the regulation and has been personally involved in the negotiations of the texts that are being discussed in the Senate. Together with senator Leila Barros (PDT-DF), president of the Environment Commission (CMA) and rapporteur of bill 412/2022, which regulates the Brazilian Market for Emissions Reduction (MBRE), Marina said that Brazil has the possibility of taking advantage of the opportunity in relation to the regulated carbon market. “And that we can be the address of the most honest credits that the world can offer”, added the minister to journalists.

During the interview, the senator also emphasized the participation of ten other ministries, in addition to the Ministry of the Environment, in the preparation of the report for the bill on the carbon market. “The government worked not only with the Ministry of the Environment, but with ten other ministries, and we did our job here [no Senado]with [a realização de] four audiences and talking to the sectors. This report that we are presenting was built by several hands and, of course, the basis of the text is from the government, but with the general contributions of everyone who was involved in the process. It is a priority agenda for President Rodrigo Pacheco”, said senator Leila Barros.

The report on the bill presented by the senator received amendments and had a request for collective review (more time for analysis) granted at the Environment Commission. Next week, the rapporteur should meet with the Forum of Governors of the Legal Amazon to discuss the carbon market.

The bill in progress seeks to insert Brazil in the regulated carbon market. It is divided into two categories: regulated and voluntary, with the second being the most common. The difference between them is that the first market undergoes an official international regulatory policy, while the second does not. In Brazil, the voluntary carbon market is in operation, while the regulated one is still being built.

“Brazil seeks to replace the voluntary (or free) market model, whereby companies seek to offset their carbon emissions by virtue of a moral norm or equivalent (non-legal) by the regulated one, where the legislation will oblige companies to carry out compensation ”, explained Pinheiro Pedro, a lawyer specializing in the carbon market in Brazil.

But what the PT government is not aware of is that the carbon credit market is still in its infancy, even internationally. There is no standardization of how to measure and certify carbon credits that is accepted worldwide, which makes the market risky. That is, creating a way to regulate carbon credits here in Brazil does not mean that it will be accepted or adopted abroad, as there is still no clear standard to be followed internationally.

Energy and agro sectors seek to improve the text

In June, the secretary of Green Economy, Decarbonization and Bioindustry of the Ministry of Development, Industry, Commerce and Services (MDIC), Rodrigo Rollemberg, said he was “optimistic” about the approval of the PL. “I am convinced that the more in tune and consensus we are, the easier it will be for approval by the National Congress before the COP is held at the end of the year”, said the secretary, during an event held by the National Confederation of Industry (CNI).

Despite speeches by the government indicating consensus, the project may face resistance during debates. The Parliamentary Energy Front has already signaled that the text is of interest to the entire sector, but that there are points to be improved. Analysts also estimate that the regulation will encounter greater resistance from agribusiness.

In a hearing held in the Senate, also in June, Senator Zequinha Marinho (Podemos-PA), vice-president of the Agricultural Parliamentary Front (FPA), expressed concern about the increase in costs for the agribusiness with the possible regulation of the carbon market .

Also present at the Senate hearing, the technical advisor of the Confederation of Agriculture and Livestock (CNA) Rodrigo Justus de Brito stated that the costs of implementing the carbon market need to be lower than the benefits. “Approval of a regulated emissions market is required. However, with all care, observing the international scenario and the competitiveness of our products. Placing agriculture as a payer of carbon emissions means incorporating additional costs into food, bringing about inflation. Agriculture is not part of the regulated market in any country in the world,” said the CNA advisor.

The warning about the impacts in Brazil is also reinforced by lawyer Antônio Fernando Pinheiro Pedro. For him, the projects in progress may result in a reduction in GDP. “The government is a victim of its own geopolitical proselytism. It is hostage to the Eurocentric discourse, so that a market based only on mandatory reductions, directed towards external demand, could reduce GDP”, he evaluated.

The specialist also added that, “although we are one of the countries with the highest generation of clean energy, we are criticized by Europeans in relation to the Amazon”. “We sold our environmental differentials very poorly. We have to build our own environmental policy and put an end to this colonialist relationship. It seems that we are still in the 19th century”, criticized Pinheiro Pedro.

But there are other interpretations of what Pinheiro Pedro calls the colonialist relationship. Europeans made the political decision to reduce their greenhouse gas emissions. Brazil is not obliged to sell carbon credits to Europe, but if it wants to enter the European Union market, it will have to adapt to local laws. That is, it will have to comply with the same impositions and burdens imposed on carbon credit certifiers and European companies so that competition is fair.

Thus, Brazil needs to decide whether or not it wants to sell carbon credits to Europe and give Lula the international visibility he wants to achieve. But if it wants to conquer European customers, Brazil will have to follow European rules. The point is that this game can harm other sectors of the Brazilian economy.