Deciphering Brazil’s new regulated carbon market

The impacts of climate change have never been more apparent, with more frequent and severe natural disasters prompting urgent and effective global climate action. The general feeling of progress for such global mechanisms to address the climate crisis at the end of 2024 was bittersweet. While most feel disappointed by the outcomes of the 29th United Nations Climate Change Conference of the Parties (COP29) to ensure stable financing for developing countries, some developments still mean we’re starting 2025 optimistically regarding climate action.

Some of these positive developments come from Brazil…

• First, the country is one of the few that have submitted an updated 2035 Nationally Determined Contribution (NDC) — national climate action plans with the country’s commitments towards the Paris Agreement. Brazil’s new NDC increases the country’s ambition to reduce greenhouse gas (GHG) emissions by 59 to 67% below 2005 levels by 2035.
• Second, Brazil has adopted a new law — Law 15.042 of 11 December 2024 (hereafter referred to as ‘Law 15.042/2024’) — establishing the Brazilian System of Greenhouse Gas Emissions Trade (SBCE).

It’s clear that Brazil is proactively moving forward in its commitment towards the Paris Agreement. With increased ambition to reduce emissions and newly regulated carbon markets to help driving climate action, companies must stay ahead of these developments in a rapidly evolving sustainability landscape.

In this article, Senior EHS and Sustainability Regulatory Consultant Natércia Escorel Cordeiro de Castro and Subject Matter Expert in Products, Sustainability & ESG Paula Galbiatti Silveira examine the newly established Brazilian regulated carbon market and what it means for companies’ operations in the country. Read on to understand the details of how to position your company and bring it into compliance and at the forefront of sustainability.

What are carbon markets?

Carbon markets are a negotiation system between companies and governments to reduce greenhouse gas (GHG) emissions. These negotiations are measured in tons of carbon dioxide equivalent (CO2-eq), which is a metric measure used to compare the emissions of several GHG emissions. This means that each carbon credit corresponds to one ton of CO2-eq that was not emitted to the atmosphere or that was sequestered.

In a carbon market, carbon credits are bought and sold. Companies or governments that have fulfilled their GHG emission targets and have excess credits from emissions reduced, avoided, or sequestered are able to sell these carbon credits. Concurrently, those that emitted more GHGs than they were allowed to can buy carbon credits to balance their climate commitments.

There are essentially two types of carbon markets: regulated (compliance) and voluntary.

Regulated carbon markets are created by national, regional or international law, while voluntary carbon markets are those that occur on a voluntary basis. Before Law 15.042/2024, Brazil only had voluntary carbon markets that were used by companies mostly because of its compensation mechanism to commercialize emission reduction certificates in which the credits were generated from third-party certification.

The Brazilian System of Greenhouse Gas Emissions Trade (SBCE)

Law 15.042/2024 entered into force on 12 December 2024 to establish the SBCE as the regulated system to limit GHG emissions in Brazil and allow for the trade of assets representing the emission, emission reduction, or removal of GHGs. The SBCE allows for the coexistence of the regulated and voluntary markets.

Similar to the EU Emissions Trading System (EU ETS), the SBCE creates a mechanism for large emitters to cut back GHG emissions by setting a cap on the total amount of allowed GHG emissions per year, which will be gradually reduced. This mechanism also includes a system of allowances (or credits) to be distributed to cover these emissions.

For the regulated market, the SBCE provides for the creation of a management body responsible for creating rules and applying sanctions to infractions. Companies that are in the scope of the regulated market will have to provide, among other things, a monitoring plan and activity reports to the management body.

In the voluntary carbon market, operators will be able to offer the carbon credits generated from projects or programs resulting in the reduction of emissions or the removal of GHGs. The voluntary market is defined as the environment characterized by transactions of carbon credits or assets belonging to the SBCE, voluntarily established between the parties for voluntary compensation of GHG emissions, and which do not generate corresponding adjustments to the national emissions accounting.

Scope of application

The SBCE applies to activities, sources, and facilities located in Brazil that emit or have the potential to emit over 10,000 tons of CO2-eq per year, excluding indirect emissions arising from the production of agricultural and livestock inputs or raw materials.

The SBCE will go through a six year implementation period before it becomes fully operational. However, if the current planning stands, as of 12 December 2026, companies will have to comply with measurement and reporting requirements, such as…

• Submitting a monitoring plan
• Submitting a subsequent report on GHG emissions
• If emitting more than 25,000 tCO2e, also submit a report on the periodic obligation conciliation

Exceptions

The requirements established by Law 15.042/2024 will only apply to activities for which there are consolidated methodologies for measurement, reporting, and verification. This is because it will be further defined by the SBCE managing authority, considering the particularities of each activity. Additionally, units for the treatment and environmentally adequate disposal of waste that adopt systems and technologies for neutralizing emissions are not subject to the threshold of 10,000 and 25,000 tCO2e mentioned above. Their thresholds would be considered according to their transversal potential for GHG emissions mitigation.

Operation of the SBCE

The SBCE’s six year period of implementation will follow the five consecutive phases below, until it’s fully operational:

1. Phase I: Until 12 December 2025, extendable for another 12 months, for the edition of further regulations to Law 15.042/2024
2. Phase II: A one year period (until 12 December 2026, if phase 1 is not extended) for operationalization, by the operators, of the instruments for reporting emissions
3. Phase III: A period of two years (until 12 December 2028, if phase 1 is not extended), in which the operators will be subject only to the submission of a monitoring plan and reporting of emissions and GHG removals to the managing authority (not yet defined) of the SBCE
4. Phase IV: As of 12 December 2028 (if phase 1 is not extended), the first National Development Plan Allocation enters into force with the non-cost distribution of Brazilian Emissions Quota (CBE) and implementation of the SBCE asset market
5. Phase V: Full implementation of the SBCE at the end of the first National Allocation Plan

Once implemented, the SBCE will be structured in commitment periods, which will be defined in the National Allocation Plan to determine the GHG national emission reduction goals according to a maximum emissions cap measured in tons of CO2-eq. Under Law 15.042/2024, the Interministerial Committee on Climate Change (CIM) will establish a National Allocation Plan for each commitment period, with, among other things:

• The maximum emissions limit
• The quantity of CBEs to be allocated among the operators
• The forms of allocation of CBEs (free or by payment) for regulated facilities and sources
• The criteria for transactions of net removals of GHG emissions

Therefore, by the end of each commitment period, companies emitting more than 25,000 tons of CO2-eq will go through a periodic obligation conciliation to verify compliance with the emissions obligations established in the National Allocation Plan. This compliance verification will be assessed by weighing the company’s SBCE assets against their net emissions discharged during the commitment period. Companies that have enough assets to cover their emissions will be considered compliant with the National Allocation Plan’s goals.

SBCE assets

The SBCE will operate through the following assets:

1. Brazilian Emissions Quota (CBE)
2. Certificates of Verified Reduction or Removal of Emissions (CRVE)

To be valid and negotiable in the financial market, both the CBE and the CVRE must be registered in the SBCE Central Registry.

The CBE represents the right to emit one ton of CO2-eq and will be granted to companies emitting more than 25,000 tons of CO2-eq. In the beginning, companies will be granted CBEs for free, but this will be gradually shifted, and companies will need to pay for their CBEs. This means that they will have to pay for the right to emit GHGs, within the limits established by the National Allocation Plan.

As mentioned above, during the periodic obligation conciliation, a company’s CBEs will be weighed against their discharged net emissions. The CBEs issued in a certain commitment period will be valid within the same period unless specific provisions determine otherwise by further regulations of the managing authority of the SBCE.

The CRVE represents the effective reduction of emissions or removal of GHG emissions of one ton of CO2-eq according to an accredited methodology to be defined by the managing authority of the SBCE and will be used in the periodic obligation conciliation, together with the CBEs and up to the limit established in the National Allocation Plan — or in the international transfer of mitigation results.

Projects for the reduction of GHG emissions or removal of GHG

Companies can obtain CRVEs through:

1. Trading in the voluntary market, where they can obtain CRVEs generated by other entities.
2. Private projects of carbon credits, which are GHG reduction or removal projects, with a market approach and purpose of generating carbon credits, including:
   1. Activities to reduce greenhouse gas emissions from deforestation and forest degradation
   2. Conservation of forest carbon stocks
   3. Sustainable management of forests and forest carbon increase (REDD+)
   4. Those developed by private entities
   5. Those developed directly by the generator company or in partnership with a developer

Those carried out in areas where the generator is a concessionaire or has legitimate ownership or usufruct of the land

Additional monitoring plan and reporting obligations

In addition to regulating the carbon markets in Brazil, Law 15.042/2024 requires companies emitting more than 10,000 tons of CO2-eq to submit a monitoring plan for each commitment period to be approved by the managing authority of the SBCE. Following the monitoring plan’s approval, companies (or their operators) must submit an annual GHG emissions and removal report. This information will also be registered in the SBCE Central Registry. Companies emitting more than 25,000 tons of CO2-eq will also submit a report on the periodic obligation conciliation. The exact content of the plan and reports, templates, and deadlines will be detailed by the managing authority in subsequent regulations.

Before Law 15.042/2024, the obligation to report GHG emissions in Brazil established by federal legislation applied only to listed stock corporations and is applicable as of 1 January 2026. Such companies will have to inform the Securities and Exchange Commission of Brazil (CVM) of their absolute gross GHG emissions in metric tons of CO2-eq. as part of their sustainability-related financial information report. This report must be prepared in accordance with CBPS Technical Pronouncement 02 – Climate-Related Disclosures, which is based on the International Financial Reporting Standards (IFRS) S2 Climate Disclosures.

Sanctions for non-compliance

Companies not complying with any of the mentioned obligations could be subject to, among other sanctions, a notice, fines, suspension of activities, or suspension of register, license, or authorization to operate. The referred fine could reach up to BRL 20,000,000.00 or 4% of the company’s gross revenue.

Other carbon markets around the world

Carbon markets originated internationally with the Kyoto Protocol of 1997. Currently, the internationally regulated carbon market in the framework of the UNFCCC and part of the Paris Agreement of 2015 includes emission reduction targets as part of the NDCs of each country. There are also regional carbon markets where only those emitting below a certain threshold are allowed to negotiate their surplus carbon credits.

China

The Chinese carbon market, introduced in 2021, is the world’s largest national emissions trading scheme. The Interim Regulation on the Management of Carbon Emission Trading sets forth the supervisory measures for national carbon emission trade and related activities, including emission allowance allocation, trade, surrendering, and GHG emission reporting and inspection in China. It applies to companies designated as Greenhouse Gas Key Emission Entities by the provincial Ecology and Environment Department, as well as other qualified companies to the national carbon emission trading market. These companies must, among other things, provide the previous calendar year’s carbon emission allowances to the provincial Ecology and Environment Department before the designated deadline.

Additionally, the Management Measures on Carbon Emission Trading (Trial) applies to Greenhouse Gas Key Emission Entities companies that belong to an industry covered by the national carbon emission trading market and annually reach or exceed 26,000 tons of CO2-eq in GHG emissions. It requires them to, among other things:

• Create an account on the National Carbon Emission Registration System
• Submit the annual GHG emission report to the provincial Department of Ecology and Environment
• Provide the previous calendar year’s carbon emission allowances to the provincial Department of Ecology and Environment before the designated deadline

European Union

The European Union launched the world’s first international emission trading system (ETS) in 2004, operating on a ‘cap-and-trade’ system in which governments issue emission allowances that can be traded. This means that companies falling under its scope must buy through auctions (or, in certain cases, receive for free) emission allowances to cover their GHG emissions. The emission allowances available are limited by a ‘cap’ which is reduced annually to incentivize emission reductions.

The original ETS — or “ETS1” — covers GHG emissions released by companies operating stationary installations or performing activities listed in Annex I to the EU ETS Directive (and the corresponding national transposing legislation), such as aviation activities, oil refineries, combustion installations, bulk organic chemical production (exceeding 100 tons per day), and glass and glass fiber manufacture (with a melting capacity exceeding 20 tons per day). Under the EU ETS Directive, operators of stationary installations under the EU ETS must hold a GHG emissions permit issued by the Member States’ competent authorities which, among other things, require these facilities to annually surrender allowances corresponding to the total verified emissions released in the preceding year. Additionally, GHG emission permits require operators of stationary installations to monitor and report their GHG emissions.

Applicable as of 2025 and fully operational in 2027, Directive (EU) 2023/959 sets up a separate ETS applicable to the buildings, road transport, and additional industrial sectors not covered by Annex I to the EU ETS Directive (such as the heating of industrial activities). Known as ETS2, it is a new, separate ETS that will cover CO2 emissions from fuel combustion, representing an upstream system. Similar obligations apply, such as:

• Holding a GHG emission permit
• Annually monitoring emissions corresponding to the fuel quantities released for consumption
• Surrendering a number of allowances equal to their total emissions

Prepare for Brazil’s regulated carbon market and future-proof against climate-related risks

Carbon markets help to channel financial resources to support emissions reduction or removal activities globally. Resources from carbon markets can help drive action on real solutions for climate mitigation — such as advancing renewable energy sources — and climate adaptation — such as creating mechanisms to increase resilience to disasters. As such, carbon markets are part of the solution to the climate crisis, but they must be accompanied by other initiatives, such as emission reduction obligations to all sectors (particularly high emitters) and obligations for polluters to pay for their GHG emissions.

The new law regulating carbon markets in Brazil is a step further in climate action. Of course, this system doesn’t come without critics — especially concerning the exclusion of the agricultural sector from the SBCE’s scope. Nevertheless, it shows strong commitments toward the climate protection agenda and ensuring the climate emergency is definitely not a problem for the future.

Climate risks affect all companies, but also represent opportunities for those that want to stay at the forefront of sustainability. Companies caring for the climate are much more likely to attract investments and ensure continuity towards the future.