Drawing on international experience such as the Renewable Fuel Standard, California's Low Carbon Fuel Standard and the EU Renewable Energy Directive, the Brazilian Biofuels Policy (RenovaBio) was established in 2017 by Law No. 13,576/2017. It is designed to support Brazil's commitments under the Paris Agreement, promote further expansion of the production and use of biofuels in the national energy matrix and improve the energy efficiency of biofuels.
In this Blog Post, we discuss key elements of RenovaBio, as well as early results of the policy's implementation and other developments in the Brazilian carbon markets more broadly.
The end of 2020 marked the first year of RenovaBio's full implementation and, by December 31, 2020, 97.6% of the mandatory annual greenhouse gas emission reduction target for the period was achieved—despite the COVID-19 pandemic and unsuccessful lawsuits filed by some fuel distributors to challenge their individual reduction targets.
In a nutshell, under RenovaBio, national carbon intensity reduction targets for the 2020-2030 period were set by the National Energy Policy Council. These targets are increased each year and broken down into individual targets for fuel distributors, in proportion to the distributor's market share in the preceding year. For tracking and compliance purposes, the distributor must demonstrate it holds the required amount of Decarbonization Credits (CBIOs) for that year. Distributors who do not meet their individual targets may face a fine ranging from BRL 100 thousand to BRL 50 million.
CBIOs are instruments of both financial and environmental nature traded on the Brazilian stock exchange. Each CBIO corresponds to one tonne of CO2-equivalent emission reduction. They are issued by a bank or financial institution contracted by a certified biofuel producer or importer, in amounts proportional to the volume of biofuels produced and commercialized. While fuel distributors must comply with RenovaBio, any investor can buy CBIOs.
Demand for CBIOs is expected to rise over the next years following the increase of the national reduction targets. The expected implementation of Article 6 of the Paris Agreement, which provides the framework for international cooperation mechanisms to help countries meet their emissions reduction targets and encompasses carbon markets, will also play an important role on the development of carbon markets in Brazil and worldwide.
It should be noted that RenovaBio was not Brazil's first attempt to implement a regulated carbon market. Back in 2009, Law No. 12,187, which established the National Policy on Climate Change, created the Brazilian Emissions Reduction Market (Mercado Brasileiro de Redução de Emissões – MBRE), but this market has never become significant. In addition, in 2014, the Brazil Partnership for Market Readiness Project was initiated with the objective of guiding the decision-making process around the design and adoption of carbon pricing schemes. The Project presented preliminary results in the end of 2020, finding that carbon markets should play a key role in carbon pricing initiatives in Brazil.
Other recent and relevant developments that are worth noting are: (i) the launch of the Forest+ Program through Ordinances 288/2020 and 518/2020 of the Ministry of Environment; and (ii) the enactment of Law 14,119/2021 which introduced the National Policy on Payment for Ecosystem Services. The Program and the Policy stimulate the growth of voluntary carbon markets, particularly with regard to carbon credits issued for projects aimed at the conservation and recovery of forests and other native vegetation, including REDD+.
All of these regulations and initiatives represent important steps toward the consolidation of Brazil as a key player in relation to carbon markets, both domestically and globally.
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This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.