The carbon market is a crucial tool implemented to combat climate change and reduce greenhouse gas emissions (GHGs). Its origins date back to discussions about the Kyoto Protocol, an international treaty created in 1997 during the United Nations Framework Convention on Climate Change (UNFCCC) Conference of Parties 3 (COP3) held in Kyoto, Japan.
The agreement only came into effect in 2005; although Brazil wasn't obligated to follow the Protocol's goals, it still adhered to it.
Kyoto Protocol and Clean Development Mechanism
The Kyoto Protocol established mandatory GHG reduction targets for industrialized countries with the aim of mitigating global warming and its consequences. It was a significant milestone as it recognized the responsibility of historically more polluting nations and encouraged them to take concrete measures.
One innovation introduced by the Kyoto Protocol was the concept of "Clean Development Mechanism" (CDM). The CDM allowed developed countries that couldn't achieve their emission reduction targets to purchase carbon credits from emissions reduction projects in developing countries. These projects could involve implementing cleaner technologies, reforestation, or substituting fossil fuels with renewable energy sources.
Thus, the carbon market began to take shape, with carbon credits becoming a "currency" representing the reduction of one ton of carbon dioxide (CO2) or other greenhouse gases. The emissions trading system, also known as "cap-and-trade," gained prominence as an efficient approach to incentivize emissions reduction, rewarding companies that made efforts to pollute less and generating revenue for environmental projects in developing countries.
Despite the success of the Kyoto Protocol, certain limitations were identified. Only developed countries with established targets could trade carbon credits. Moreover, not all countries participated or assumed mandatory emission reduction goals, which limited the effectiveness of the agreement.
In pursuit of better solutions for climate issues, a new international treaty, the Paris Agreement, was established in 2015, bringing significant progress. It allowed the inclusion of other countries in credit trading, encompassing a total of 195 nations (reduced to 194 after the withdrawal of the United States in 2017).
Participating governments agreed to keep the increase in the global average temperature well below 2°C above pre-industrial levels and to strive to limit the increase to 1.5°C. To achieve this goal, numerous actions need to be taken. One of the most discussed aspects in the Paris Agreement was Article 6, which aimed to regulate the carbon market. The objective was to encourage cooperation between countries in buying and selling credits, accelerating the achievement of emission reduction goals for greenhouse gases.
On September 12, 2016, Brazil ratified the Paris Agreement, committing to specific targets as documented and submitted to the UN. These targets are:
● Reduce greenhouse gas emissions by 37% compared to 2005 levels by the year 2025.
● Additionally, continue reducing greenhouse gas emissions by 43% compared to 2005 levels by the year 2030.
Despite its limitations, the carbon market evolved and remains a crucial tool in the fight against climate change. Various countries and regions have adopted their own emissions trading systems, and voluntary carbon market initiatives have emerged, allowing companies and individuals to freely purchase carbon credits to offset their own emissions, even without legal obligations.
Even with Brazil's immense potential, the carbon market is not yet regulated. However, various bills addressing this issue are already being discussed in the Brazilian Congress. Even without regulation, the voluntary or free market has experienced significant growth in the country. Numerous companies have shown concern for reducing or offsetting their emissions, either through credit purchases or by implementing and supporting projects that remove Greenhouse Gases (GHGs) from the environment.
It's worth emphasizing that in the Brazilian Voluntary Market, where Lux Carbon Standard has established the Triple C Standard (Carbon Compensation Credit), companies and institutions can voluntarily generate and/or purchase carbon credits for sale or to offset their own GHG emissions.
To better understand the differences between the Voluntary and Regulated Carbon Markets, we suggest reading our post on the subject, available at this link: <Regulated Carbon Market vs. Voluntary Carbon Market: Understanding the Crucial Differences (luxcs.org)>.
Contributors: Camila Hillesheim Kraus and Pedro Guilherme Kraus
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