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Rafaela Brito and Fernando Moreira provide an overview of the carbon emissions trading market in Brazil.
Clean Development Mechanism
The Clean Development Mechanism (CDM) is one of the flexible mechanisms defined in the Kyoto Protocol, which is intended to be an alternative for Annex I countries in achieving compliance with their quantified emission limitation and reduction commitments related to greenhouse gases. It also involves Non-Annex I parties i.e. developing countries that can trade Certified Emissions Reduction units (CERs) whose emission reduction commitments need to be met.
There are a number of criteria developed by the Designated National Authority (DNA) to acknowledge those projects that need to be aligned to the goals of sustainable development in the host country. In Brazil the authority is the Interministerial Commission on Global Climate Change (CIMC). Projects must be reviewed and given approval by the CIMC before they are submitted to the UN. (Seiffert, 2009, p.139).
CERs can be issued after the registration of a CDM project at the CDM Executive Board, provided that projects are structured according to the CDM in line with Article 12 of the Kyoto Protocol.
The parties can purchase carbon offsets from other countries which have projects to develop clean technologies. This means the setting of a value for each tonne of carbon a project prevents being released into the atmosphere. This trading scheme aimed at the reduction of emissions of greenhouse gases is popularly called Carbon Trading.
Seiffert states that,
"the creation of the Kyoto Protocol actually means an attempt to price environmental damages generated by GHG emissions by various countries whose standards are differentiated according to their level of industrialisation and peculiarities of their energy matrix."
Economic environmental valuation is the process of putting monetary values on goods and services, many of which have no easily observed market prices. Therefore, CERs are the economic valuation of environmental pollution.
Projects eligible for issuance of CERs are those that deal with the increase of energy efficiency; the use of renewable resources and fuels; the adoption of better technologies and systems for the transport industry and overall production process; carbon capture and storage; carbon sinks; and activities related to the use of land, such as reforestation and afforestation.
The valuation process becomes extremely important when adopted by companies and may influence the share value of companies on the stock market. Therefore, it is important to note that the measurement of the environmental impact might be a differential in decision-making for investors.
Strict rules and difficulties involving the approval of CDM projects have helped to create the "non-Kyoto market", also known as a voluntary market or a retail market and represented by exchanges such as the Chicago Climate Exchange (no longer trading) and Carbon Trade Exchange for example.
In the Chicago Climate Exchange pilot phase from 2003-2006, companies were required to cut their emissions by a 1% annual rate and reach 4%. The carbon trading market was expected to reach $13billion in 2007, and is open to the participation of developing countries, or countries with no reduction commitments, such as Brazil.
Projects that do not meet the Kyoto Protocol rules, e.g. projects in countries that have not ratified the Protocol or projects initiated before 2000 can also be validated and verified to purchase non-Kyoto carbon.
The key advantage of non-Kyoto carbon credit trading is non-binding credit certification from CDM registration. This is already happening on the market, mainly because there are many projects that start their activities before registration under the rules of the Kyoto Protocol, but follow the same rules with regards to the technical aspect.
The Brazilian Market for Emissions Reduction
The Brazilian Market for Emissions Reduction (BMER) is the result of a joint initiative of the Ministry of Development, Industry and Foreign Trade (MDIC) and Brazilian Mercantile & Futures Exchange (BM&F) in order to structure the exchange trading carbon credits generated by CDM projects. The market, launched in São Paulo on 6 December 2004, was the first of its kind in a developing country.
The BMER became operational in September 2005 with a Project Database, which aimed to provide visibility and facilitate commercialisation of CDM projects (potential as well as structured projects). Its economic function is to attract foreign direct investments to strengthen economic development; help stimulate clean technology projects; and make the country a benchmark in the international market with regard to environmental instruments, according to the official website on climate change.
To ensure the quality and consistency of the projects, BM&F signed an agreement with specialised research and teaching institutes with expertise in the subject for review and approval of projects submitted for registration. Projects should be in line with the methodology of the Kyoto Protocol. The BMER has a system for the registration of Certified Emission Reductions Purchase Agreement at Rio de Janeiro Stock Exchange (BVRJ) in order to give credibility and transparency to emissions trading. It also runs a training programme for Short Term Trading Market Participants. The BMER states on their website that it was created to facilitate access to medium businesses to a relatively complex market because of requirements such as CDM registration by the Executive Board of the Kyoto Protocol, based in Germany.
The first carbon auction in the city of São Paulo was deemed successful in 2007. It was the world’s first public auction of carbon credits organized by commodities exchanges. The credits were made available through the CDM of the Kyoto Treaty. The auction of over 800,000 CERs by the city government of Sao Paulo was the first to be held in a regulated exchange, the Brazilian Mercantile and Futures Exchange (BM&F). The auction accounted for 1.6 million tonnes of methane gas, produced by the Bandeirantes landfill in the northern edge of the city, thus reducing greenhouse gas emissions into the atmosphere. Fortis Bank, from the Netherlands, paid more than 16 euros a tonne of carbon dioxide equivalent, with a premium of 27.5% over its issue price set by the city government. The credits could then be used for compliance with Kyoto Protocol obligations, to meet emission caps or for trading on the international market. The market price was over 20 euros a tonne. The R$ 34m raised by the city government of Sao Paulo was allocated to a series of eight projects of urban and environmental improvements surrounding the Bandeirantes landfill site.
The development of carbon emission projects has, however, been hindered by lack of funding. Aimed at contributing towards the implementation of the CDM, the World Bank created the Prototype Carbon Fund, the first mutual fund whose primary objective is to foster the development of CDM projects in developing countries through public and private partnerships in industrialized countries. Other forms of financing of CDM projects have been considered in the wake of the Prototype Carbon Fund. The World Bank has a line of credit, the Global Environment Facility, which also funds projects under the Kyoto Protocol. Additionally, in 2011 the Brazilian Development Bank engaged in financing projects under the Kyoto Protocol.
Private financing options, however, are still limited. It is worth noting the interest of some venture capital funds for investments in this area. Projects under the Kyoto Protocol bring an added attraction to this type of investment as it makes possible the adoption of a peculiar disinvestment strategy: the issuance of carbon credits that can be traded in the market; provided they have liquidity.
It is likely that domestic private financial institutions may also participate as CDM projects sponsors either through direct loans or structured transactions involving corporate finance. The structuring of investment funds focused on such projects is another choice available to domestic financial institutions.
Emissions Trading and Taxation in Brazil
Definition of Tribute (Tax)
In Curso de Direito Tributário, 26th Edition (2005), Hugo Machado states that,
"what seems to be the most widespread idea is that individuals, by their representatives, consent to the imposition of the tax as indeed of all the legal rules that govern the nation."
He adds that,
"the imposition of the tax is always made according to the law, and its collection and inspection are administrative related activity. The very institution of a tax follows the principles of the Constitution, which are the basic legal principles of taxation."
It is worth noting that the Republican Constitution of 1988 is composed of a peculiar taxation system that defines the materiality that may be required by federal entities as well as the taxes that may be involved. It does not create taxes, but rather grants taxing authority.
Environmental Taxation in Europe
In Direito Tributário Ambiental (2005), Caliendo identified a number of green taxes adopted in Europe, most of which continue today.
• Carbon tax, when the tax is levied on the use of energy from a certain level of intensity, being especially applicable to trade and industry, as well as heating.
• Dioxide tax as complementary to carbon taxation.
• Tax on chlorinated solvents that are highly harmful to the ozone layer and groundwater.
• Tax on solid waste and the revenue used to support recycling and cleaner technologies.
• Tax on industrial gases.
Tax on the Circulation of Certified Emission Reductions
Although Europe has a number of emissions taxes, CERs, are considered intangible assets by Brazilian law. Therefore, there is no single law that addresses this issue. Thus, the overall rules that involve CERs are scattered across the many legal acts that make up the country’s tax laws.
According to Article 153, paragraph I of the Republican Constitution of 1988, it is incumbent upon the Republic to institute taxes on imports of foreign products. By the semantic meaning of the term, ‘product’ is not part of the assets of intangible nature. In short, there is no taxable event that generates import tax on the issuance of CERs.
Article 153, paragraph II of the Republican Constitution of 1988, also makes it incumbent upon the Republic to institute taxes on exports to other countries of national or nationalised products. The Carbon Market works on the premise that CERs generated in the country must be ultimately transferred to Annex I parties. Nevertheless, for the same reasons behind imports, there is no export tax on such legal transactions. (Sister, 2008, p.79).
For further information on carbon emissions trading in Brazil please contact Rafaela Brito or Fernando Moreira at http://cmb.adv.br/