Brazilian Emissions Trading System Approved by the National Congress

On November 19, 2024, the Chamber of Deputies approved Bill No. 182/2024, establishing the Brazilian Emissions Trading System (SBCE), following its approval by the Federal Senate on November 13. The text now awaits presidential approval.

The SBCE will operate as a typical cap-and-trade system, in which its managing body will be responsible for proposing—and the Interministerial Committee on Climate Change (CIM) will be responsible for approving—the maximum limits for greenhouse gas (GHG) emissions, and the number of Brazilian Emission Quotas (CBEs) (i.e., allowances) to be allocated among regulated operators. Mandated operators must then carry out “periodic reconciliation,” in which the level of net emissions reported must correspond to the number of CBEs (or other assets that are part of the SBCE) held by the operator. Operators capable of reducing their emissions will be able to sell excess CBEs, while operators that emit above the CBE limits initially allocated will have to acquire such assets under the SBCE.

The SBCE establishes two levels of obligations for regulated operators. (i) Operators responsible for sources that emit more than 10,000 tonnes of CO2 equivalent (tCO2e) per year will be required to report their GHG emissions or removals; while (ii) operators responsible for sources that emit more than 25,000 tCO2e per year will have to report their emissions and undergo periodic reconciliation. Primary agricultural production is not subject to the obligations of the SBCE, which was a major point of discussion during the processing of the bill.

In addition to the CBEs, the SBCE will accept Verified Emission Reduction or Removal Certificates (CRVEs) for this periodic reconciliation at a percentage yet to be defined, which may consist of carbon credits from the voluntary market generated using an accredited methodology that has been registered with the SBCE.

In addition to establishing a regulated market per se, the bill also introduces provisions regarding voluntary markets. Among these provisions, private properties that are in areas overlapping with jurisdictional programs may be excluded from such programs upon request by the owner or developer of the project. Owners and operators may opt out at any time, unconditionally.

The final text approved by the Chamber of Deputies also provides that insurance companies, capitalization companies, local reinsurers, and open supplementary pension entities must invest at least 1% of the resources from their technical reserves and provisions into the SBCE’s environmental assets (CBEs or CRVEs).

The SBCE will be implemented in phases, as follows:

• Phase I - A 12-month period (extendable for the same period) dedicated to regulating the SBCE;
• Phase II - A one-year period for operators to implement the emissions reporting instruments;
• Phase III - A two-year period for operators to present a monitoring and reporting plan for GHG emissions and removals;
• Phase IV - Implementation of the first National Allocation Plan (free distribution of CBEs); and
• Phase IV - Full implementation of the SBCE as the first National Allocation Plan expires.

Failure of an operator to comply with the reporting and periodic reconciliation obligations may result in penalties, such as warnings, fines, embargoes, loss of tax incentives, among others.

The Environmental, Climate Change and ESG Practice of Tauil & Chequer Advogados, in association with Mayer Brown, is available for further clarification on this topic.