Brazil can break the carbon market deadlock

Brazil is well positioned to move forward negotiations around international carbon market regulations in the face of disagreements between the EU and the US at COP28

COP28 ended in Dubai last week after a last-minute push to strengthen language around fossil fuels to reach net zero carbon emissions by 2050. Many attendees at the climate conference, in particular those from emerging markets, argued that a new financial infrastructure is needed to support the shift from fossil fuels to renewable energies and that change is already underway. Brazil can break the carbon market deadlock Conference delegates failed, however, to ratify international regulations on carbon markets, one of the strongest private sector mechanisms to incentivise climate-centric projects.

Disputes over carbon markets stemmed from disagreements between US and EU delegates over carbon removal methods and the authority of Article 6 supervisory bodies. Given the conflicts between the world’s largest fossil fuel producer and the world’s largest carbon market, another diplomatic heavyweight is poised to provide a path forward, namely Brazil.

Brazil will have to work fast to steady global carbon markets amid extreme volatility, like last week’s 4 per cent drop in carbon pricing in the EU Emissions Trading System.

Brazil is well positioned to lead the way. The country is developing its compliance carbon market with an explicit focus on redistributing income to stakeholders like indigenous communities.

Its prominent role in environmental talks, oil production and environmental justice allows it to build trust in negotiations between hard-to-abate sectors, frontline countries and emerging markets concerned about north Atlantic dominance in international climate politics.

Recognizing Brazil’s stature, COP28 president Sultan Ahmed al-Jaber described the country as a “key player” in Article 6 negotiations to “incentivize higher mitigation ambition”, as revealed in his much-criticized pre-COP28 leaked presentations. Jaber also noted Brazil’s renewable energy boom, infrastructure overhaul and potential areas of collaboration with the United Arab Emirates’ Masdar clean energy project.

Cementing its status as an international leader also advances Brazil’s foreign policy goals. Filling the carbon market gap will likely strengthen south-south cooperation, especially with African countries that have long been central to President Luiz Inácio Lula da Silva’s diplomatic strategy. It will also give Brazil a commanding position as it prepares to host COP30 in 2025 in Belém.

The global economy and climate finance initiatives need a transparent and consistent consensus on carbon market standards. A more explicit leadership role for Brazil on the international climate stage will materialize with its own greenhouse gas emissions trading system. The Sistema Brasileiro de Comércio de Emissões de Gases de Efeito Estufa (SBCE) has ambitious targets – to reduce emissions by 50 per cent below 2005 levels by 2030 and to achieve climate neutrality by 2050.

Widely praised legislation establishing the SBCE was expected to pass Brazil’s lower house by the end of December, although disputes, apparently over whether to include the agricultural sector in carbon caps, mean this deadline may not be met.

The SBCE also underscores the urgency of collective action in reducing greenhouse gas emissions. Unlike the EU, Brazil is politically accountable to indigenous voters – who are also carbon credit project stakeholders – for carbon market successes or failures.

Given the Brazilian market makes up 15 percent of the global offsetting potential, successful implementation sets a precedent for other nations, providing a tangible framework for implementing emissions trading systems on a global scale and fulfilling a domestic political incentive for market equity.

Some 4,000 companies would be covered by the system, with comprehensive compliance obligations applying to entities emitting more than 25,000 tonnes of CO2 equivalent (tCO2e) a year and reporting obligations for those emitting more than 10,000 tCO2e annually.

Governed by the Inter-ministerial Climate Change Committee, the SBCE outlines a dynamic governance structure of regularly reviewed national allocation plans to ensure elective operation and compliance. International best practices, including the eligibility of carbon credits under mechanisms such as the Clean Development Mechanism and Article 6.4 of the Paris Agreement, further underscore Brazil’s commitment to global collaboration.

The SBCE also signifies a groundbreaking commitment to addressing historical environmental inequalities and promoting inclusivity in climate action. Recognizing the disproportionate impact of climate change on marginalized communities, the SBCE incorporates measures to distribute the burdens and benefits of emissions reduction efforts equitably.

The Surui Forest Carbon Project, initiated in 2009, exemplifies the positive impact of indigenous-led conservation projects funded through carbon offsets.

Further, the Brazilian Ministry of Indigenous Peoples is proactively engaging in training programs to enhance its understanding of climate finance mechanisms, carbon markets, and jurisdictional REDD+ frameworks, which seek to protect forests as part of the Paris Agreement. This empowerment equips the MPI to navigate these complex frameworks, ensuring indigenous peoples can directly benefit from these mechanisms while safeguarding their rights.

The visionary initiative encapsulated in the SBCE means Brazil is positioned as a beacon of inspiration for other nations navigating the intricacies of elective climate action.

Brazil assumes a leadership role in shaping the future of global emissions trading by setting an example and providing a comprehensive blueprint that fully incorporates environmental justice considerations.

This transformative approach positions the SBCE not only as an environmental strategy but as a comprehensive framework fostering a fairer and more just approach to climate action, and positions the country as a leader in shaping climate policies that contribute to a more equitable and sustainable world.

A version of this article was published by the Financial Times’ Sustainable Views. Click here to view.