The carbon credit market can be regulatory or voluntary, moves billions of dollars, has Brazil as an important agent and can protect forests worldwide: understand how this complex system works

People other than just environmental and traditional activists got involved with forest economy for a while now. At least since the beginning of this century, it’s a growing market – despite the obstacles faced during the last two decades.

The climate aligned universe (a credit model of investment in which proceeds are exclusively invested in green projects, and has carbon credit as its primary source) featured outstanding US$ 895 billion outstanding in 2017, an increase of US$ 201 billion from the 2016 figure. Of this amount, 61% was designated to low-carbon transport, and 19% to clean energy.

The origin of the forest economy and Brazil’s participation

The creation of this market model dates from 1992, when the United Nations Framework Convention on Climate Change was created during the Earth Summit, held in Rio de Janeiro. At this conference, some concepts were sown and, little by little, took shape. The first one was the Kyoto Protocol, adopted in 1997. Its purpose is to reduce greenhouse gas emissions. The protocol entered into force in 2005 after Russia ratified it.

The discussions revolved around the recognition of the global warming effects, and the need for a transnational action to solve environmental matters. To solve this problem, the carbon credit and the carbon market were idealized, as well as other models, such as the forest offsets.

Vista aérea de floresta. Crédito: PxHere

In this historical process, Brazil was a key element. In the ‘90s, according to the World Resources Institute, Brazil and Indonesia alone represented nearly half of all the emissions from deforestation – in 2017, the two countries were, respectively, in the 4th and 3rd positions. Part of it, a result of the green bond policy, through the voluntary market.

At the COP 19 (Warsaw, 2013), the Brazilian government proposed a methodology to standardize measurements, effects and the system of carbon credits trading. The Brazilian proposal was to consider the consequences and historical responsibilities of the nations since the Industrial Revolution – which would, certainly, demand more efforts from the developed and highly industrialized countries. The idea was rejected by the rich countries, but the Brazilian contribution remains in the environmental debates.

What are carbon credits and how does the carbon market work?

Greenhouse gas emissions are measured in metric tons of carbon dioxide equivalents (tCO2e). Each ton corresponds to a unit of carbon credit. Those credits can be traded between businesses, non-governmental organizations, institutions or producers, to obtain environmental offsets.

The carbon markets and environmental offsets can work by two models: regulatory and voluntary.

The regulatory market depends on a set of rules and procedures set out by the State or through an agreement between States – just like the Kyoto Protocol. The nations have emission reduction targets and manage their environmental impact to keep it in line with the goal. For this, they trade credits nationally and internationally, usually via two mechanisms: CERs (Certified Emission Reductions) or CDM (Clean Development Mechanism) – linked to the energy, transport, and forestry sectors. That was also a Brazilian proposal in Kyoto, and it aims to stimulate environmental protection in developing countries.

The voluntary market trades the carbon credits and environmental offsets outside a regulatory system, but based on internationally recognized certifications. In this model, a business or sector has a limit of greenhouse gas emissions. If the threshold is exceeded, a fee is charged. To avoid this tax, the businesses/industries have permission to buy offsets in the market, from other companies or NGOs, landowners, etc. Two of the main brokers of the voluntary market are the Chicago Climate Exchange and the European Climate Exchange.

Gráfico de ações. Crédito: Chris Liverani/Unsplash

In the voluntary market, the main mechanism of credit is the REDD (Reduced Emissions from Deforestation and Forest Degradation) – which had the collaboration of Brazilian researchers in its conception too. By using the REDD (or REDD+) credits, businesses finance forest conservation projects before deforestation. The idea is to keep and avoid, not to reforest. As a consequence, companies can benefit from the credits generated by financing resources to the forest and traditional peoples’ reserves, private proprieties where the biome is implemented or improved, presenting themselves as environment-friendly.

“The offsets can be bought as CDM or REDD, which is the most valuable now”, explains Caio Gallego, REDD Project Manager at Biofílica, a forest consulting firm. “When the business goes to the market to buy credits, they evaluate their benefits too, that is, if the credits have quality for more or for less. This way, the business can advertise its environmental actions,” he completes.

How does the carbon credits trade work?

Since the carbon offsets trading started, the amount of certified voluntary projects have helped reduce, sequester, or avoid over 440 MtCO2e, the equivalent of not consuming almost 1 billion barrels of oil. The categories which move the energy market are: fossil fuel energy (128 MtCo2e), management of land and forests (95 MtCO2e), chemical processes and industrial manufacturing (63 MtCO2e), renewable energy (62 MtCO2e), and use of water resources (57 MtCO2e).

According to the Voluntary Carbon Market Insights 2018 report, voluntary carbon projects exist in 83 countries around the world and can be traded freely between buyers and sellers in the same or across different countries. The largest share is traded by Asia (39%) and North America (26%), with India, China, and the United States on top of the ranking. Brazil is responsible for around 5% of the transactions volume, and occupies 5th place in the world ranking, after Turkey.

In the regulatory market, the CDM credits are certified via a methodology standardized at the Kyoto Conference, under the protection of the UN. In a voluntary market, the REDD credits are certified by different methods – the Verified Carbon Standard (VCS) and the Climate, Community & Biodiversity (CCB) are the most accepted by negotiators.

“VCS is technical and presents requirements and methodologies to the generation of credits. CCB is about price, and it adds a standard that demonstrates the co-benefit qualities of the project”, explains Caio.

Among several standards set out by those certifications, four are the most important:

1) real: provide evidence that the project removes or prevents emissions;  

2) additional: ensure that emission reductions rely on those project activities;

3) measurable: accurately provide results measurements;

4) verifiable: be available for a neutral third-party audit.

How does the carbon credit market work in Brazil?

Brazil doesn’t have a regulatory carbon market yet. It means that there are no standards to define projects to the forest offset. “Brazil is far behind other countries in standardization, and much further in relation to what the market expected”, says Caio Galego.

Caio explains that, today, most of the REDD carbon credits buyers in Brazil are the European businesses and markets. They are also the largest fundraisers of environment preservation programs, such as Fundo da Amazônia, whose main sponsor is the Norwegian government.

Barco navega na floresta amazônica. Crédito: PxHere

“Brazil is famous for exporting commodities. Now, it will export environmental services. And chances are that it will be better than the pre-salt. How much pre-salt is worth our forests or the potential we have in carbon credits surplus? This is Brazil’s chance to take off”, says Elizabeth de Carvalhaes, President of the Brazilian Tree Industry (Ibá), in an interview with Brazilian economy magazine Época Negócios.

According to Caio Galego, “The trend is that it turns into a great commodity. But the public policies didn’t develop as much as expected, and so the discussion didn’t move on.” He highlights that Colombia is an example to follow.

“The Colombian government developed a taxation system that allows businesses to emit more than the established goal, but it’s possible to exchange the fees by carbon credits,” he mentions. “It was an efficient way to drive the market to the conservation: in the last three years, several projects were designed in the country.”

In Brazil, Acre is in focus. In 2010, the state signed an agreement with California to provide REDD credits. The primary Brazilian goals were to reduce greenhouse gas emissions by 43% by 2030, and to recover 12 million hectares of forest by the same year – same area as the whole territory of Amapá, another Brazilian state.

Content published in April 11, 2019

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