Senate Approves Bill Regulating the Brazilian Carbon Market 8 nov 2023

Senate Approves Bill Regulating the Brazilian Carbon Market

Approved by the Environment Committee of the Federal Senate at the beginning of October (10/04), Bill No. 412/2022 (“Bill”) establishes the Brazilian Greenhouse Gas Emissions Trading System (“SBCE”). The Bill has reached the Chamber of Deputies, where it has been appended to a series of other bills with similar themes that shall be submitted for consideration by the plenary. The rapporteur of the Bill is Congressman Aliel Machado, from the Green Party (state of Paraná).

In general terms, the SBCE establishes a regulated carbon market in Brazil through a cap-and-trade system, a legal framework that limits Greenhouse Gas Emissions (“GHG”) and enables the trading of assets representing these emissions, their reduction, or their removal.

Except for agribusiness, the emissions limits imposed by the SBCE shall apply to all activities, sources, and facilities emitting over 25,000 tons of carbon dioxide equivalent (“CO2e”) per year. The emissions limit shall be subsequently defined through regulations. Companies emitting between 10,000 and 25,000 tons of CO2e shall be required to submit an emissions monitoring plan to the SBCE Managing Authority.

For the establishment of the SBCE, the following assets are expected to be created:

  • Brazilian Emissions Allowances (“CBE”): a fungible and tradable asset representing the right to emit one ton of CO2e granted and distributed by the SBCE Management Authority, either free of charge or through auctions or other instruments defined in regulations;
  • Certificates of Verified Emission Reduction or Removal (“CRRVE”): a fungible and tradable asset representing GHG emission reduction or removal following accredited methodologies and registered within the SBCE framework.

When not traded within the SBCE framework, those credits obtained from GHG reduction or removal projects or programs, subject to national or international methodologies that adopt criteria and rules for emission measurement, reporting, and verification, shall be referred to as carbon credits.

When traded in the financial and capital markets, the assets shall be considered securities. Private offers outside the scope of financial and capital markets are allowed, case which such offers shall not be subject to the regulation of the Brazilian Securities and Exchange Commission (“CVM”).

The Bill also establishes the National Allocation Plan, which shall determine the maximum emission limits per sector; the quantity of CBEs to be allocated among operators, whether free or not; the maximum percentage of CRRVEs allowed; and mechanisms to stabilize the prices of SBCE assets to reduce their volatility; among other aspects.

The establishment of the SBCE shall occur as follows:

  • Phase 1: lasting 12 months, extendable by an additional 12 months period, it shall be devoted to the SBCE law regulation;
  •  Phase 2: after the SBCE law’s regulation, there shall be one year for operators to prepare to report their emissions;
  • Phase 3: over the next 2 years, operators shall be obliged to submit their monitoring plan and report their GHG emissions and removals to the SBCE Management Authority;
  • Phase 4: marks the entry into force of the first National Allocation Plan, with the free distribution of CBEs and the establishment of the SBCE asset market;
  • Phase 5: the phase where the full establishment of the SBCE shall occur – at the end of the first National Allocation Plan’s term.

Once the SBCE is implemented, operators must annually submit a report regarding the periodic reconciliation of obligations to the Management Authority, which must confirm that the operator holds an equivalent quantity of assets within the SBCE as their emissions incurred in the respective period. Non-compliance with obligations under the SBCE may lead to various penalties, including suspension of activities, fines, among others.

Furthermore, expenses incurred for GHG emission reduction or removal linked to the generation of the above-mentioned assets may be deducted from the calculation base of Corporate Income Tax (“IRPJ”) on real profit regime and Social Contribution on Net Income (“CSLL”) for legal entities subject to the actual, presumed, or arbitrated profit.

The governance of the SBCE shall be composed by the following bodies:

  • Deliberative Body: The Interministerial Committee on Climate Change, as provided for in Article 7 of Law No. 12,187/2009, is responsible for establishing the general guidelines of the SBCE; approving the National Allocation Plan; establishing technical groups to provide input and recommendations for the improvement of the SBCE; and approving the annual plan for the use of funds derived from SBCE revenue.
  • Executive Authority: The SBCE Management Authority, responsible for regulating and managing the market through the so-called Central Registry of the SBCE; defining which activities, facilities, sources, and gases shall be regulated; establishing the requirements and procedures for measurement, reporting, and verification of emissions; issuing CBEs and conducting auctions related to them; receiving and evaluating emissions reports; developing mechanisms for price stabilization; setting requirements and procedures for methodology accreditation; providing information on accredited methodologies and certified projects; connecting the SBCE to international emissions trading systems; ensuring the enforcement of sanctions; adjudicating appeals and creating operational rules; among other responsibilities.
  • Advisory Body: The Permanent Technical Advisory Committee, responsible for providing input and recommendations to improve the SBCE, such as criteria for accreditation and disaccreditation of methodologies for generating CRRVEs; criteria for developing the proposal for the National Allocation Plan; technical input for the annual resource allocation plan – as stipulated in Article 7, item IV; and other topics submitted to it.

Finally, the Bill also defines the rules for the voluntary offering of carbon credits and the requirements for them to be considered CRRVEs. The expectation is that the Bill will be approved later this year, before COP28.

Main Contacts:

Alexandre Calmon
Sócio | Partner

Fabiano Gallo
Sócio | Partner

Marcelo Frazão
Sócio | Partner

Rogerio Campos
Sócio | Partner

Vilmar Gonçalves
Sócio | Partner

Isabela Morbach