Carbon Markets and Climate Litigation in Brazil

During the past few years, Brazil has seen an unprecedented surge in all matters relating to climate change, carbon markets and climate litigation. From bills of law and executive regulations to litigation seeking further climate action, there is a lot in-between to be considered by corporations doing business in Brazil, or even by corporations with no presence in the country but seeking to benefit from Brazilian-originated Nature-based Solutions (NbS) when framing their ESG/carbon emissions reduction policies.

As recently as May 2022, the Brazilian Federal Government published a Decree establishing the National Greenhouse Gas Emissions Reduction System (Sinare) and the related procedures for the implementation of the Sectoral Plans for Climate Change Mitigation. These Sectoral Plans were originally referenced in the 2009 Brazilian National Policy on Climate Change and are expected to set forth reduction targets for regulated sectors in line with the Brazilian Nationally Determined Contribution (NDC) in the context of the Paris Agreement. These sectors include power generation and distribution, chemicals, paper and pulp manufacturing, mining, and general industry.

In addition to taking the first step towards regulating reduction targets for these specific sectors, the decree also seeks to establish a regulatory framework for carbon markets in Brazil. In this sense, Sinare is expected to be a centralised registry for emissions and removals of, reductions in and compensation for greenhouse gases, as well as acts of commerce, transfers, transactions and retirements of carbon credits.

It is worth pointing out that, on the same day that the Decree was published, the lower house of the Brazilian Parliament also made a new draft of the Bill of Law No 2,148/2015 public. The Bill also seeks to establish a framework for carbon markets in Brazil, though in a more structured manner, creating two concurrent systems: a traditional emissions trading system (cap and trade) and a system for registering carbon credits (offsetting). If the National Congress approves the Bill, new regulations will likely be necessary, in addition to modifications to the recent Decree, not only to ensure compatibility with the future law, but also to connect the novel framework to existing markets, particularly the Decarbonisation Credits market created by the Brazilian National Policy on Biofuels (RenovaBio).

Brazil is already home to a sprawling market of projects seeking to capture carbon through reforestation, to avoid carbon emissions by reducing emissions from deforestation and forest degradation (REDD+), while also contributing to human rights and biodiversity protection. Therefore, the establishment of a regulatory framework for carbon markets should be of particular importance not only to companies operating in Brazil, but also to those interested in NbS as a strategy for achieving greenhouse gas reduction and net zero goals.

Parallel to these recent developments in carbon markets, Brazil has also seen an uptick in climate change litigation. Climate lawsuits are not a novelty in Brazil, some of them date back as far a decade ago, but only recently has climate litigation appeared to be gaining traction and public attention.

The main point of focus has been a recent set of sessions held by the Brazilian Supreme Court to judge several different lawsuits filed against the Federal Administration involving the protection of the environment and effects on climate change. This was an important milestone for the Brazilian climate litigation landscape, as it was the first time Supreme Court sessions were exclusively dedicated to climate-themed cases. Even though such cases were brought against the government, corporations should also be on the lookout.

As seen around the globe, when it comes to climate change litigation lawsuits against governments are only a first step, a harbinger of what should be expected by the private sector, particularly large corporations exposed to value chain risks or deemed to significantly contribute to greenhouse gas emissions. This is also true for Brazil and recent developments are a sign of that.

In 2021 alone, there have been several examples of lawsuits filed against private entities in connection with climate change. Some of them are innovative in terms of what has been seen in the past in Brazil and are worth mentioning. One such example is a lawsuit filed against a rural landowner, seeking the landowners accountability for alleged illegal deforestation connected to breeding cattle in the Amazon. This kind of lawsuit is very common in Brazil, but one of the prosecutors claims is worthy of attention in this specific case: the prosecutor required that the defendant pay compensation for climate damages (danos climaticos) resulting from the deforestation, something until then unwitnessed in cases of this sort in Brazil, going as far as calculating how much such compensation should be.

Another example is the lawsuit filed by a group of NGOs against IBAMA (the Brazilian federal environmental agency) and a company developing a coal mining and associated thermal power plant project. Assisted by prosecutors, the NGOs managed to obtain an injunction suspending the licensing of the project and determining that IBAMA should include climate change guidelines among the requirements applicable to environmental impact assessments of thermal power plants.

These are precedents that clearly demonstrate how climate change litigation is consistently developing in Brazil, and how public prosecutors have been adopting a proactive approach to litigating these types of cases, which involve not only climate change per se, but also matters such as biodiversity loss, human rights violations and greenwashing. In fact, this appears to be the result of training courses that have been consistently conducted by public prosecutors associations in partnership with NGOs dedicated to climate justice, seeking to equip prosecutors with climate litigation strategies.

Corporations with a presence in Brazil or seeking to do business in the country or with Brazilian companies should be aware of and closely monitor relevant developments in laws and regulations pertaining to climate change and related issues, as well as climate litigation trends in order to be prepared and anticipate potential risks.

On the carbon markets side, companies should pay special attention to conducting due diligences to confirm the credibility of NbS projects and the quality of carbon credits resulting therefrom. The lack of an effectively operating regulatory framework governing the development of such projects and the registration of such credits in Brazil is one more reason to do so. Due diligence is also an important tool for assessing environmental and human rights risks arising from supply chains.

As for litigation risks, companies should be aware that it is only a matter of time before climate litigation turns into an instrument used on a large scale by prosecutors and other stakeholders against the private sector. In Brazil, it is of particular importance to closely monitor risks related to value chains, as they can also be a trigger for climate litigation involving deforestation, biodiversity loss and human rights violations.