CARBON CREDITS EVOLUTION – UK AND LATIN AMERICA

By Maria Izabel Reis & Viviane Gomes 

The Kyoto Protocol, signed by 150 nations in 1997, and later revised by the Paris Agreement in 2015, was the first international treaty on controlling and reducing greenhouse gases (GHG). 

According to the United Nations Framework Convention on Climate Change (UNFCCC), the Paris Agreement, by its turn, signalled the nations’ desire for more ambitious cooperation in the emissions’ mitigation and adaptation to the effects of climate change, fostering sustainable development and encouraging widespread participation in climate action from both the private and public sectors.  

The Paris Agreement movement reinforced the Kyoto Protocol Mechanisms, namely, the International Emissions Trading (IET), the Clean Development Mechanism (CDM) and the Joint Implementation (JI), making it more daring by adding more actions. 

In summary, the Paris Agreement intends to create new market mechanisms based on the lessons learned from CDM and JI, as well as to develop a framework for non-market approaches mechanism. 

Being the CDM the main mechanism, it is worth to learn that CDM’s flow of credits is pre-set, as described below, and illustrated by the following diagram. 

• There would be a flow of finance either upfront or annually from the developed countries; 
• In return, developing economies would reduce a certain quantity of GHG, through projects that would stream the “certified emission reductions” (CER) to the developed countries. 

The issuance of CERs generated a new commodity, i.e., the GHG emission reductions or removals, which led to the creation of trading schemes established at national or regional levels, nominated International Emissions Trading (IET). The European Union emissions trading (ETS) is the largest in operation. 

To trade with IETs, a buyer usually needs a broker to facilitate the process of acquisition. 

In addition to the mechanisms above, there is a set of economic incentives to reduce GHG emissions called REDD – Reducing Emissions from Deforestation and Forest Degradation. It includes into account greenhouse gas emissions avoided by reducing deforestation and forest degradation. As a development,  

“REDD+ refers to the construction of a mechanism, or a policy, that should contemplate ways of providing positive incentives to developing countries that take one or more of the following actions to mitigate changes climate change”: 

1. Reduction of emissions from deforestation and forest degradation; 

2. Increase in forest carbon reserve; 

3. Sustainable forest management; and 

4. Forest conservation. 

Finally, REDD+++ also incorporates agriculture into the system. 

Numerous REDD initiatives are happening across the globe, with different levels of success. One of the most important cases is the Juma Sustainable Development Reserve Project in Amazonas, Brazil. The Juma project is part of the more comprehensive Bolsa Floresta program – now making payments to more than 6000 families in 14 threatened conservation areas, covering over 10 million hectares. 

So far, the details for the new market mechanism are yet to be developed, as well as how the new framework of non-market approaches mechanism should function. 

In the meanwhile, the non-market approaches mechanism can be anything, and everything provided it is not market- based.1 It must be noted that the Parties have expressed their desire to focus on cooperation on climate policy, more transparency, and governance. Countries also want to include fiscal measures, such as establishing carbon prices or applying taxes to discourage emissions.  

The new mechanisms, although still somewhat unclear on how they will work, are:  

• Cooperative Approaches (Article 6.2); 
• The mechanism for Mitigation and Sustainable Development (Article 6.4); and 

• Framework for Non-Market Approaches (Article 6.8).

REDD is still seen as an opportunity to achieve the Paris Agreement objectives.²

The UK Situation in the International Emissions Trading After Brexit 

From 1 February to 31 December 2020, i.e., the Transition Period, the UK remains a full participant in the EU ETS. 

Regarding the future of UK Carbon Pricing, the UK government issued a consultation on the Future of UK Carbon Pricing in May 2019. Government response to the query has not been published yet.³

In its response to such government consultation on the future of carbon pricing, a British study4 has indicated that, if the UK is to leave the EU Emissions Trading System (ETS) as part of its withdrawal from the European Union, it would be too costly for British firms to only trade emissions allowances with each other. There are two alternatives: the UK government either negotiate an agreement to remain a member of the EU ETS or establish a UK ETS that is linked to the EU ETS, to make sure that UK businesses can continue to trade their emission allowances across Europe. 

Carbon Credits in Latin America 

Climate change may severely affect life in several countries, and Latin America has an essential role in the world.  

Brazilian Climate expert geographer Gustavo Baptista points to Latin America as one of the regions with the most considerable climate resistance, compared to the world, and one that presents great potential to minimize the damage caused by the acceleration of the greenhouse effect. 

Therefore, despite the influence of the United States to withdraw the Americas from the climate agreements, Latin America is going ahead with determination to address the global threat that is Climate Change. Argentina, Chile, Colombia, Bolivia, Mexico, Panama, Peru, and many others have taken essential steps related to fields as broad as renewable energy to green bond emissions and REDD.⁵

Latin American countries currently trading with carbon credit are Brazil, Colombia, Chile, Costa Rica, and Mexico. There is the possibility of opening sales fronts with other countries, such as those that produce sugar cane.