Carbon Markets in Latin America

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Carbon markets in Latin America are poised for take-off. With a rich history of involvement in hydrocarbon production and huge natural carbon sinks, such as the Amazon, Latin America has tremendous potential in the creation of carbon credits. Further, a growing number of countries stand ready to activate trading in carbon credits, whether through voluntary or compliance markets, and a growing number of companies are announcing net zero targets that will only be achievable through access to functioning carbon trading markets.

The evidence of climate change is ever present and increasing, and investors and the public have increased their scrutiny of companies and their greenhouse gas (GHG) emissions. Many companies are answering the call to establish net-zero emissions targets, as are the countries in which they work and are based, many of which have pledged to reduce emissions in the context of the Paris Accords. These factors drive demand for functioning carbon markets, and the governments in Latin America are starting to respond.

Some governments have imposed carbon taxes, whether at the national or subnational level. Others provide subsidies promoting low-carbon technologies, and others are working to promote the development of carbon capture and storage technologies with their existing energy infrastructure. This chapter focuses on the carbon trading markets, which have certain attractions for governments in terms of revenue generation potential. An expanded supply of carbon credits from Latin America could also increase the global competitiveness of credits and encourage further development of carbon markets globally.

Currently, Latin America is the second largest source of carbon credits in the world, generating approximately 20 per cent of all carbon credits globally in 2020 and 2021.[2] The regulatory frameworks vary across the region, with one country – Colombia – developing a national emissions trading system (ETS) and four countries and three sub-national regions imposing carbon taxes. The World Bank and other multilateral sources have provided strong support and technical assistance to these efforts. In particular, the World Bank’s Partnership for Market Readiness (PMR) is working in 23 countries, among them Argentina, Brazil, Chile, Colombia, Costa Rica, Mexico and Peru, to design and deploy carbon pricing instruments (CPIs), whether in the form of carbon taxes or cap-and-trade systems.

Carbon taxes are a popular instrument for promoting emissions reductions in Latin America. In Colombia, the revenue from the country’s carbon tax supports the Sustainable Colombia Fund, which deploys the funds in sustainability projects in conflict areas. Also in Colombia, PMR has conducted an evaluation of ETS system design, an impact assessment of an ETS on sectoral competitiveness, and a study on design options for a mandatory GHG reporting programme. Argentina and Brazil are also advancing toward the deployment of CPIs.

The following section describes the progress in several major economies in the region.

Brazil

In May 2022, Brazil published Decree No. 11.075, designed to support the development of green investments and the reduction of GHG emissions. It represents the first step toward the establishment of a National System for Reducing Greenhouse Gas Emissions (SINARE), a central and digital registry with the potential to serve as a filter for the registration of high integrity, socio-environmentally sound programmes and projects, with real benefits for the climate. With this system, the quality of ‘Made-in-Brazil’ credits could improve and give a significant boost to Brazil’s voluntary carbon market, which is predicted to grow up to 20 times if one projects the scope of REDD+ and alternative energy projects available. To get there, Brazil will need to overcome a series of technical issues as well as legal gaps. With the recent election of Luis Inácio da Silva as President of Brazil, this effort could gather steam.

The decree has its legal basis in the National Climate Change Policy (PNMC), adopted by Brazil as law in 2009. The PNMC envisioned the possibility of sectoral agreements for GHG emissions reductions, for example in the energy, agriculture and transport sectors. It also introduced the idea of a Brazilian Market for Emission Reduction: an ETS.

In the 13 years since 2009, no sectoral plans have emerged, but there have been positive developments toward the development of carbon markets in Brazil with the establishment of the Forest + Carbon Program in 2020, and the National Payment Policy for Environmental Services in 2021, under Law No. 14,119. With SINARE, credits registered there may be in demand from regulated companies in Brazil that will need to meet the sectoral goals (which are to be established).

There is still a long regulatory path ahead for Brazilian carbon markets, including some complex technical issues and legal gaps such as the legal nature of carbon credits and the adoption of social and environmental safeguards for the registration of credits with SINARE. Some of these gaps could be filled by proposed Law No. 528/2021. The Lula administration may also adopt a fresh approach to these matters. The approach to decarbonisation reflected in Decree No. 11,075 and proposed Law No. 528 is decidedly one of emphasis on markets and not on taxes, consistent with the findings in a recent World Bank carbon pricing report, which found that worldwide in 2021 the total value generated via carbon markets was approximately US$56 billion, while carbon taxes collected a lesser amount of US$28 billion. These numbers, of course, reflect activity with the creation of carbon credits (purchase of allowances and first sale in the voluntary market) and not trading volumes, which are surging past US$1 billion.

Colombia

Colombia adopted a carbon tax in 2016 of approximately US$5 per metric ton of CO2 that covers only fossil fuel emissions. It is possible to purchase carbon offsets only from projects within Colombia. The government also launched a Colombian Voluntary Carbon Market Platform, although integrity concerns have bedevilled that marketplace.

In 2018, Colombia adopted a National Climate Change System (SISCLIMA), mandating the adoption of an ETS: the National Program of Greenhouse Gas Tradeable Emission Quotas. This programme is still at the development stage. It envisages a system of carbon allowances and allocations, as well as credits for voluntary GHG reductions that are properly verified and certified. Colombia has been working with the World Bank on this system.

Chile

In 2017, Chile introduced a carbon tax at the rate of US$5 per metric ton of emissions of CO2. This level of taxation has been criticised as inadequate and Chile is considering an increase that could go as high as US$40 per ton.

More generally, Chile adopted a legal framework on climate change that came into force in June 2022 and includes measures intended to achieve carbon neutrality for the country by 2030. Like Brazil’s May 2022 decree, the Chilean framework adopts a sectoral approach, and Chile’s Ministry of the Environment is tasked with creating an emissions mitigation plan with sectoral limits, and specifications for GHG emission limits by source according to their technology, sector or activity. Regulated entities that exceed performance requirements can have their surplus emission reductions certified, which will enable them to sell the credits to others for use in complying with their reduction obligations.

Mexico

Mexico introduced a General Climate Change Law (GCCL) in 2012 and a carbon tax in 2013. The tax is based on emissions exceeding a standard set for natural gas usage. Mexico also established MexoCO2, a platform for the exchange of voluntary carbon credits.

Subsequently, in 2019, Mexico amended the GCCL to give its environmental authority, the Secretariat of Environment and Natural Resources (SEMARNAT), a mandate to establish an ETS. It would operate as a pilot for two years and go fully operational in 2023. The pilot phase includes approximately 300 industrial and energy plants with annual emissions in excess of 100,000 metric tons of CO2-equivalent between 2016 and 2019, representing about 45 per cent of national emissions. The pilot phase is designed to test system design and build capacity in emissions trading, as well as develop reference values for the traded credits in the operational phase.

Opportunity in Latin America

With the return of President Lula Inácio da Silva to the Presidency of Brazil on 1 January 2023, there may be substantial opportunity for the expansion of the supply of carbon credits in connection with avoided deforestation (REDD+) due to the significant forest resources in that country. Carbon credits associated with REDD+ projects already have a strong presence in the region. With a renewed emphasis coming out of the Glasgow COP26 on nature-based solutions, there is a real opportunity to integrate local communities into the carbon credit process for improved societal returns. Appropriate metrics for this dimension will need to be developed, together with an improvement in the standards for monitoring and verifying carbon credits for REDD+ projects, which have been criticised for lack of oversight and inaccurate accounting.

As explained above, 20 per cent of all carbon credits are now being generated in Latin America. Many of these credits are being applied in jurisdictions outside the region. As the integrity of carbon credits continues to improve, the volume of credits generated in Latin America should continue to grow. Further, as more countries engage seriously with their national commitments under the Paris Accords, carbon markets in Latin America will continue to grow, whether that be in the compliance market or the voluntary market. In short, these are markets whose growth will generate much activity both for governments and business, as well as lawyers in both government service and the private sector. All have an important role to play in the further development of carbon credits in Latin America, and the growth in carbon credits and trading will make an important contribution towards achieving the emission reduction goals of the Paris Accords.


Footnotes

[1] Whitney Debevoise is a partner at Arnold & Porter. This chapter was accurate as at November 2022.

[2] See IETA report, ‘Status and Trends of Compliance and Voluntary Carbon Markets in Latin America.’ (2021). According to data from Verra, Gold Standard, ACR and CAR, cumulative carbon credit issuances in Latin America exceeded 173.3 MtCO2e by the end of 2021.

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