New Tax Reform text delays zero carbon – 10/26/2023 – Market

The Tax Reform report presented by senator Eduardo Braga (MDB-AM) this Wednesday (25) places extractive activities, such as mining and oil exploration, in the Selective Tax’s sights.

The document, however, limits the rate attributed to sectors to 1% of the product’s market value, which frustrates some of the enthusiasm of environmental analysts to consider the tax an embryo of carbon taxation in the country.

“The proposal to include extractive activities could be positive if it had not included this ceiling. This rate generates an effect contrary to the objective of the Selective Tax, as its application becomes absolutely harmless in terms of regulatory impact”, says Gustavo Pinheiro, portfolio coordinator of low carbon economy from ICS (Instituto Clima e Sociedade).

The concern in this case is because a possible tax on carbon emissions from mining or oil exploration could exceed 1% of the market value of the product. Therefore, the tax would not be applied in full, and its main effect of forcing companies to reduce their carbon emissions would not be achieved.

Mining and burning fossil fuels are among the activities that emit the most CO_two in Brazil.

“This is the most damaging part of the text and needs to be removed,” says Tatiana Falcão, environmental taxation consultant.

Considering that seven barrels of crude oil emit one ton of carbon, she estimates that the ceiling stipulated by the report limits the price of a ton of carbon to around US$3 (RS 15). In comparison, France charges 45 euros (R$238) per ton of carbon.

“This value will not give enough incentive for people to exchange their cars for vehicles powered by less polluting fuels”, says Falcão.

The president of the IBP (Brazilian Institute of Oil and Gas), Roberto Ardenghy, in turn, stated that the measure foreseen in the report is worrying. According to him, the extra taxation should have an impact on prices.

On the other hand, Braga removed from the PEC (proposed amendment to the Constitution) the section that provided that those sectors with reduced VAT (Value Added Tax) rates could not be targeted by the Selective Tax — nine, in total.

Among them was the production of food intended for human consumption, which includes agribusiness, the sector that emits the most greenhouse gases in Brazil and which is outside the current discussions about the creation of a carbon market in the country.

But the senator stipulated that the tax will not apply to exports — which could once again include the majority of agriculture on the list of exceptions. Electricity and telecommunications operations are also left out.

Weapons and ammunition may be taxed as long as they are not intended for public administration.

The exclusions go against several parliamentary amendments. A survey by the Pra Ser Fairo movement shows that, until October 4th, senators presented 31 amendments to the Tax Reform dealing with the Selective Tax. Of these, 11 tried to include more sectors in the list of exceptions.

Analysts’ initial concern was that the expansion of the list of exceptions could affect a possible carbon tax, even though the details of this taxation remain in the regulatory process — a phase subsequent to the approval of the PEC in Congress.

Braga’s report establishes that tax rates will be decided through ordinary law.

If the Selective Tax is in fact the basis for creating a carbon tax in the country, one of the points of discussion will be about the gases considered in the metric; that is, whether only carbon or greenhouse gases in general, such as methane, will be taken into account. If the second is excluded, livestock farming, for example, could be spared a large part of the taxation.

“The devil is in the details,” says Maria Netto, executive director of ICS.

According to the World Bank, at least 25 countries, four in South America and the majority in Europe, have created taxes to directly tax carbon emissions. The account does not consider the United States, which adopts state systems.

Each piece of legislation has its own originality, but in general this model consists of taxing the tons of carbon emitted by companies. For example: if the government stipulates that each ton of CO_two worth R$50, and a mining company emits 1 million tons of CO every year_twoin the end the company will pay R$50 million per year in tax.

In some European countries, this taxation works in parallel to the regulated carbon market.

In the first, taxation is direct on the emission of greenhouse gases; In the second, the government stipulates an emissions limit for each company, and those that do not comply need to buy quotas from those that did more than required.

There is concern that the two systems acting simultaneously will generate double spending to reduce carbon emissions. This is because companies would have to invest in technology to comply with their limits in the regulated market, in addition to having to pay taxes related to their emissions.

Countries that currently adopt these two models simultaneously tend to restrict them to specific sectors. This is the case of Portugal: the European nation taxes CO emissions_two from all fossil fuels, but those companies and sectors regulated in the European carbon market are excluded from taxation. The same occurs in France and Spain.

Mexico is another example. The country’s government offers companies to pay the tax through carbon credits, which in practice creates interoperability between the regulated market and the taxation of carbon emissions.

“The advantage of the Mexican model is that a carbon credit comes from investments in green projects”, says Maria Netto.

She points out that, on the other hand, the money collected from carbon taxes does not necessarily go to environmental investments — the allocation is up to current tax legislation.

Braga’s report does not attribute the destination of the Selective Tax to environmental spending.

Taxing carbon emissions is essential for carbon neutrality by 2050, according to the IMF (International Monetary Fund).

In Brazil, a recent study carried out by BV bank and startup Deep showed that the government would raise R$48 billion if it charged R$50 for each ton of CO_two emitted or equivalent damage from other potential heating gases — the estimate drops by half if legislation excludes agribusiness.

The study points out that livestock farming would be the sector with the greatest increase in production costs if a tax of this type were created in Brazil (13.85%).

Without agriculture, the leader becomes the cement sector (9.34%), followed by extractive industry (4.36%) and the manufacture of steel and derivatives (3.8%). Furthermore, carbon taxation could increase the consumer’s cost of living by 1.65% (without agriculture, it would fall to 0.58%).

“Whether you consider agro or not affects the entire food and beverage chain,” says Marcelo Sarkis, risk superintendent at Banco BV, part of the Votorantim group.

With or without carbon taxes in Brazil, Brazilian exports will be subject to this type of taxation starting next year. This is because the European Union created a mechanism that taxes imported products based on carbon emissions from their chain.

Taxation focuses on imports of iron, steel, cement, aluminum, fertilizers, electricity and hydrogen, as well as manufactured products based on these raw materials. Products from countries that already tax carbon will not be targeted.

“If Brazil doesn’t tax, it’s the one who will lose, because when the European Union says it will, it is keeping the revenue that would be attributed to Brazil if there were a carbon tax in the country”, says Falcão.

Eduardo Cucolo collaborated