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A step toward a broader carbon market in Brazil

. Oct 19, 2020
carbon stock market Image: Khakimullin Aleksandr/Shutterstock

Amid the environmental calamities Brazil has suffered throughout 2020, one green milestone went relatively unnoticed: after three years of planning, decarbonization credits — a cornerstone of Brazilian biofuels policy RenovaBio — made their debut on the São Paulo stock exchange. Now, as trading picks up, these credits, known as CBIOs, may be leading the way toward a broader carbon market in Brazil, according to Fabio Solferini, CEO at agribusiness consultancy StoneX.

This milestone dates all the way back to the Paris Agreement of 2015, in which Brazil pledged to slash its carbon emissions by 37 percent by 2025, as well as a 43-percent reduction by 2030. In order to do that, increasing the share of renewable sources in the country’s energy mix to 45 percent was elected as a crucial step. Among the strategies employed toward this ambitious target was the 2017 biofuels policy RenovaBio, which forced fossil fuel distributors to reach a collective carbon emission reduction goal.


According to the law, all fuel distributors must purchase an individual quota of CBIOs, which consist of carbon credits issued by biofuel producers, based on the difference between their carbon emissions and fossil fuels. For each CBIO issued, one ton of CO2 emissions will be spared. As a result, encouraging the CBIO market could help curb Brazilian carbon emissions, especially as increased deforestation is expected to push emissions up 20 percent versus 2018 levels, in stark contrast to the 6-percent global reduction in CO2 emissions as a result of Covid-19.  

To analyze the impacts of CBIO trading on the future of the market, The Brazilian Report spoke to Fabio Solferini, CEO at agribusiness consultancy StoneX, which is specializing in helping CBIO issuers to record and trade the credits on the domestic market. So far, StoneX alone has already traded over 112,000 CBIOs and, according to Mr. Solferini, there is room for this market to grow.

Why

did StoneX join the CBIO market?</strong></p> <blockquote class="wp-block-quote"><p>Since the Paris Agreement in 2015, we have been monitoring it closely. As we are an agribusiness consultancy, we decided to follow our customers’ requests, especially biofuel plants. We took part in meetings with the [Brazilian Petroleum Agency] ANP to debate the regulation of RenovaBio. Then, we established a partnership with our customers to help them to make the calculations to issue certificates and we recorded the bonds on the São Paulo stock exchange. We also look for buyers. Our energy department works with fuel distributors, so we have customers on both sides of the operation, the ones that issue the bonds and the buyers.</p></blockquote> <p><strong>CBIOs were initially traded at around BRL 50 (USD 9) each, but other deals were closed with valuations five times smaller. How do you explain such a steep variation and what can we expect for the coming months?</strong></p> <blockquote class="wp-block-quote"><p>CBIOs were designed to cost around USD 10 each, but it doesn’t mean the market will adhere to this, and it&#8217;s subject to supply and demand. Trading reached BRL 10 to 15 per unit, but it is picking up and now deals are pricing each CBIO at roughly BRL 42 to 45. The market actually started two months ago, so liquidity is still growing. In the beginning, the plants already had CBIOs to offer, but it took a while for fuel distributors to buy them.</p></blockquote> <p><strong>TBR: Concerning targets for carbon emissions, the government scrapped the goals for 2020, blaming the pandemic.</strong></p> <blockquote class="wp-block-quote"><p>I do not think it was because of the pandemic. It may have had an impact if you consider the demand for fuels diminished as traffic slowed down, but the main factor is that it is the first year fuel distributors are obliged to buy these bonds, so it is a period of adaptation. Also, 2020’s goal was reduced, but in 2021 they will have to purchase 30 million CBIOs regardless. I believe the government will keep 2021’s targets, as well as the goals for the coming years, as the country has committed to slash its carbon emissions. Just for comparison, as of October 5, around 20 percent of the CBIO target had already been traded.</p></blockquote> <p><strong>But that’s low, given there are only two months left before the end of the year. Can Brazil reach the goal?</strong></p> <blockquote class="wp-block-quote"><p>Yes, it is low. But I think the goal will be attained. Trading effectively began less than two months ago and, in the past weeks, buying and selling volumes are growing rapidly. It is a new market, it is normal to take some time before gaining liquidity.</p></blockquote> <p><strong>Are there any other industries joining the market now, besides fuel distributors?</strong></p> <blockquote class="wp-block-quote"><p>Yes, there are associations and companies that are not required to buy them, but they are doing it voluntarily as a message to the market that they care about the environment. The first to do this was the Brazilian Association of Agribusiness (Abag). But, so far, the biggest volumes come from fuel distributors, who are required by law to buy CBIOs.&nbsp;&nbsp;</p></blockquote> <p><strong>What about foreign investors? Are they interested in CBIOS?</strong></p> <blockquote class="wp-block-quote"><p>Foreigners have yet to join the market. There are speculators, who buy CBIOs and hold them, waiting to sell them on at higher prices, but they represent a small share.</p></blockquote> <p><strong>This was a tough year for the environment, with fire crises in the Pantanal and Amazon. Do you think this bad reputation might be scaring foreigners away from CBIOs?</strong></p> <blockquote class="wp-block-quote"><p>No, I do not see a connection. CBIOs are a consequence of a global agreement to slash carbon emissions. If Brazil reaches the target, it will help the country’s reputation. Offering CBIOs is good for issuers, who can earn money to invest in clean energy, but it is also an obligation of fossil fuel distributors. That will happen regardless of the country’s environmental reputation abroad.</p></blockquote> <p><strong>CBIOs are seen as being the first carbon credit market in Brazil. Do you think this is paving the way for a broader carbon market in the country?</strong></p> <blockquote class="wp-block-quote"><p>I believe this trend started with something important: they are being paid for by companies producing fossil fuels. And in the medium term, yes, I think this may extend to other forms of capturing carbon in carbon activities. I believe other sectors will become qualified to issue bonds similar to CBIOs. I am not sure they will adopt the CBIO name, but I do think it is possible this may be extended to other sectors.&nbsp;

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Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Before joining The Brazilian Report, she worked as an editor for Trading News, the information division from the TradersClub investor community.

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