New study by WayCarbon and ICC Brasil focuses on carbon market regulation

November 9, 2023 / WayCarbon / Economia de Baixo Carbono

WayCarbon, a global company and benchmark in solutions aimed at a fair and resilient transition towards a net zero economy, and ICC Brasil (International Chamber of Commerce) present the third edition of the study Opportunities for Brazil in Carbon Markets, with the aim of analyzing the potential impacts of the establishment of the Brazilian regulated market and the European Union’s CBAM on the country’s competitiveness.

As we approach 2030, the deadline set by many nations to cut emissions, climate policies are even more addressed, debated and better defined around the world. At the end of last year, the EU adopted a carbon border adjustment mechanism (CBAM) aimed at replacing free allocations given to exporters, preventing European companies from moving their production to less environmentally restrictive countries and improving the competitiveness of their products, in addition to encouraging exporters from countries like Brazil to reduce their emissions.

“Regulating the carbon market in Brazil protects us from the unfavorable effects of the EU CBAM and makes us more competitive, as it increases our relevance in the global context. The study by WayCarbon and ICC supports the discussion of the impact of regulating our market and brings to light the urgency of defining principles that bring advantages to global climate policy”, says Henrique Pereira, COO of WayCarbon.

Recently, the Senate Environment Committee approved PL 412/2022, which regulates the carbon market in the country, and the discussion now passes to the Chamber of Deputies.

The definitions created by the EU CBAM could negatively impact the Brazilian economy with restrictions and taxation, with a loss of income of up to US$444.3 million from exports of energy-intensive products, a reduction of 1.49% in relation to a scenario without the CBAM. Carbon pricing is a tool that can help organizations incorporate the financial impact of climate change into their decision-making and, at the same time, encourage the reduction of their emissions.

Therefore, when countries adopt more ambitious climate policies in response to the EU CBAM, the overall improvement is significant, as reductions in global emissions tend to increase. However, while governments do not adhere to the mechanism, the EU CBAM increases the distance between developed and developing countries, as it protects the first group, which does not suffer a drop in exports.

“The study, in addition to guiding the discussion on the impact of carbon market regulation in the country, highlights the importance of dialogue between the various sectors of the Brazilian economy. Brazilian private sector companies must take the lead and contribute intensely to the definition of the factors and principles that will guide the success of this regulation and ensure that any negative impacts on our country from other internationally adopted mechanisms can be mitigated”, explains Gabriella Dorlhiac, executive director at ICC Brazil. “ICC Brasil believes that progress in implementing a regulated market in the country is an important factor in ensuring that Brazilian companies, both public and private, maintain or even increase their competitive advantages in international markets.”

In addition to the development of the study by WayCarbon and ICC, the following are supporters of the initiative: Itaú, Ibá, Schneider Electric, KPMG, AES, Shell, Santander, Marfrig, Natura&Co, Tauil & Checker Advogados, Trench Rossi Watanabe Advogados and Demarest.

Brazilian sectors impacted by EU CBAM:

Exports of various products to the European bloc will suffer from the CBAM, as, according to the proposal, the charging of tariffs will be based on the difference in emissions of imported products in relation to European ones. Among the most impacted productions are: iron, steel, aluminum, fertilizers, cement, electricity and hydrogen. Brazil is among the main exporters to the European Union in iron and steel, vegetable and animal oils and fats sectors, in addition to being less carbon intensive in energy production and agriculture.

When calculating the carbon footprint in the production of 1 ton of the mentioned products, Brazil, according to data from Ecoinvent, adds:

2.14 tCO2e in steel production, (compared to 2.18 tCO2e in the global average);
3.04 tCO2e in the manufacture of vegetable and animal oils and fats (compared to 7.82 tCO2e in the global average);
0.344 tCO2e in oil and gas extraction, (compared to 0.385 tCO2e in the global average).

The data represents a competitive advantage for Brazil in relation to the carbon footprint of these items, as the European Union is not self-sufficient in these cases. Mainly in the manufacture of vegetable and animal oils and fats, Brazilian production is significantly more advantageous. However, market regulation becomes essential for maintaining competitiveness.

Socioeconomic impacts of carbon regulation:

The macroeconomic effects of a CBAM depend on the way the instrument is designed and analyzed. Modeling studies suggest that EU CBAM could result in an increase in EU GDP by 0.2% by 2030 and 0.4% by 2050, as well as generating around 600,000 additional jobs. In Brazil, the introduction of pricing mechanisms would allow achieving national mitigation targets with lower costs and would affect different agents and sectors of the economy, especially those previously indicated in which the country stands out, in addition to stimulating social co-benefits, such as social inclusion and generation of income for local communities, indigenous, riverside and/or quilombola populations.

The allocation of the resources generated would have an impact on the fair transition, as explained by Henrique Pereira, COO of WayCarbon: “The use of revenue from Emissions Trading Systems, depending on how it is delimited, can influence the fair transition and subsidize populations in most vulnerable areas, for example.”

Main recommendations for market regulation in the WayCarbon ICC study

Even with the advancement of PL 412/2022, discussions of decrees are still necessary, for example, as the law will bring principles that need additives that guide the market. Therefore, the study provides recommendations for the evolution of the topic:

Brazilian government:

Implementing a regulated carbon pricing system (ETS) that guarantees that there is an exemption or reduction in fees imposed by the EU CBAM for exported products.
Establishing phases for the implementation of the ETS in order to: start implementation by regulating the fuel and industrial sectors and expand the number of regulated sectors; gradually reduce the ETS cap; initially include domestic compensations in the Brazilian ETS for eligible project types; and periodically reassess the impacts of the ETS to guarantee the effectiveness of the carbon pricing policy.
Recycling any revenues effectively and fairly, in order to offset the negative distributive effect on the income of the most vulnerable and in sectors whose competitiveness will be affected by the pricing mechanism, as well as to carry out investments in decarbonization or R&D projects.
Studying the implementation of a carbon tax on imported products in the country, concomitantly with the establishment of the ETS in the country, similar to other border adjustment mechanisms.

Private sector:

Prioritizing decarbonization, considering it an urgent strategy to be implemented, independently and in parallel to the process of creating a regulated market in Brazil.
Expanding efforts to reduce and remove GHG emissions by investing in technological development and innovation.
In the case of the actors’ carbon credits offer, investing in projects that include participation and that generate income for indigenous and traditional populations, aiming at the inclusion of compensation in the Brazilian regulated market.
Strengthening the involvement of the financial sector to increase market liquidity and financing possibilities and financial mechanisms for decarbonization projects. Other financial mechanisms must be developed to reduce the capital cost of regulated entities.

How to access the WayCarbon and ICC study?

The third edition of the study “Opportunities for Brazil in Carbon Markets” is available on our website for free, as well as the 2021 and 2022 editions. Access here!