Changing Climate: What The Paris Accord Means For Brazil

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1 Changing Climate: What The Paris Accord Means For Brazil Law360, New York (March 15, 2016, 12:52 PM ET) -- In December 2015, nearly 200 countries reached a historic agreement in Paris to limit greenhouse gas emissions in hopes of curbing global warming. Law360's Expert Analysis special series looks at the impact the agreement will have on policies in various regions and countries. Renata Campetti Amaral Patricia Vidal Frederighi After more than five years of discussions among the parties of the United Nations Framework Convention on Climate Change (UNFCCC), the terms of an agreement to follow the Kyoto Protocol known as the Paris Climate Change Agreement (PCCA) were finally agreed upon in December 2015 as an annex to Decision 1/CP. 21. The purpose of this article is to provide an overview of the regulatory structure of the PCCA as well as a summary of the policy settings that have and may continue to occur as a result of the PCCA in the forestry and energy sectors in Brazil. We also explore, some of the possible long-term impacts on investments and business transactions in Brazil based on the existing international and national regulatory structures on climate change. The Regulatory Structure of the PCCA The PCCA furthers the high-level objectives of the UNFCCC by holding the increase in the global average temperature to well below 2 C above preindustrial levels and to pursue efforts to limit the temperature increase to 1.5 C above preindustrial levels. Despite the fact that the emissions reduction obligation established by the PCCA will only commence in 2020, the PCCA was considered a major development toward a lower carbon-emission future. This was largely due to the fact that each UNFCCC party is required to prepare, communicate and maintain nationally determined contributions (NDCs) outlining the countries' mitigation and adaptation measures v1\SYDDMS 1

2 The NDC structure places the onus on countries to develop internal policy and regulatory approaches to achieve their mitigation and adaptation targets, such as the creation of domestic market mechanisms. In addition, the PCCA allows countries to cooperate in meeting their NDCs which could happen through the so-called "internationally transferred mitigation outcomes" (ITMOs). Even though the details on how the ITMOs will operate are yet to be defined in the coming Conferences of the Parties (COPs), the PCCA establishes the international policy framework required to support carbon markets, at domestic, regional and international levels. By doing so, the PCCA reinforces ongoing initiatives of the public and private sectors around the globe to develop mechanisms to reduce emissions of greenhouse gases (GHGs) and get companies to start considering the price of carbon in their operations. Additionally, given the fact that the PCCA is built upon regular reporting obligations with regard to progress to meet the NDCs, governments will come under pressure to start moving toward low carbon approaches well before Brazil's High-Level Emissions Reductions Plans In the lead-up to the Paris COP, Brazil confirmed its high-level intended nationally determined contribution (first established in 2010 when the National Policy on Climate Change (NPCC) was enacted), which commits to reduce GHG emissions by 37 percent below 2005 levels by 2025 and 43 percent by The country reserves its position in relation to the possible use of any market mechanisms that may be established under the PCCA and it proposes to achieve its goals mainly through: (1) the increase of renewables in the energy sector; and (2) actions related to the forestry sector. Given the new PCCA structure, and the fact that Brazil has produced a relatively detailed NDC, it is worth considering what implications this may have on investments and business transactions in Brazil, specifically with regard to the forestry and energy sectors. Impacts on the Forestry Sector Specifically concerning the forestry sector, Brazil's NDC is in line with the PCCA, according to which parties are encouraged to take action to implement and support activities relating to reducing emissions from deforestation, forest degradation, conservation, sustainable management of forests, and enhancement of forest carbon stocks in developing countries (REDD+). At the end of 2015, a national commission was created to coordinate and monitor the v1\SYDDMS 2

3 implementation of the national REDD+ strategy within the NPCC. Also, the Brazilian Forestry Code determines that the federal government is authorized to establish a program to support and encourage the environmental conservation comprising the payment for REDD+ projects. Moreover, at the state level, many Brazilian states have designed and are now implementing programs to prevent deforestation that include the establishment of statelevel targets to reduce deforestation. Finally, the Brazilian private sector, through associations such as the so-called "Coalização Brasil Clima, Florestas e Agricultura," has actively participated during the negotiations of the PCCA and is currently discussing approaches to contribute to the protection, conservation and sustainable use of forests. Although the PCCA does not create the conditions through which REDD+ credits may be exchanged presently, its provisions encourage the use of carbon sinks as a way of reaching the global well-below-2 degree Celsius goal. In this regard, the REDD+ mechanism could play a significant role. For this reason, the PCCA ultimately reinforces all of the above mentioned initiatives as well as the need to create legal and managerial strategies linked to REDD+ projects that may enable, in the future, the exchange of credits within the country and with the international carbon market, engaging the various spheres and governmental entities in the process. This is mostly due to the fact that the PCCA establishes that, as part of the global effort, developed-country parties should continue to take the lead in mobilizing climate change finance from a wide variety of sources, instruments and channels, noting the significant role of public funds. It should be noted that the successful efforts related to REDD+ in Brazil have mainly been financed through public finance, and mainly by countries such as Norway and Germany. Proper and adequate financing is a critical feature for the long-term sustainability and development of REDD+. Indeed, the "future of low deforestation rates would be threatened without a solid source of funding for REDD+ actions."[1] Therefore, one of the challenges facing REDD+ in countries like Brazil is the need to create opportunities for the development of projects prior to 2020 through governmental and private investment. In this sense, the National Fund on Climate Change and the Brazilian Carbon Market established by the NPCC could increase the amount of funds available for the control of deforestation, in addition to contributing to the modernization and competitiveness of industry. In order to encourage finance to flow on a larger scale, remaining legal uncertainties connected to REDD+ will have to be addressed v1\SYDDMS 3

4 In summary, the PCCA encourages, and the Brazilian government has signaled ongoing commitment related to, REDD+. For this reason, as previously noted, it is likely that the role for REDD+ will grow in the future, provided that it can be financed appropriately. Energy Sector The need to increase renewables in the energy sector is also under the attention of public and private companies in Brazil. The increasing demands on the government to reduce its emissions while there is a growing demand for power mean that renewables have become a key consideration among policymakers. In this sense, environmental authorities have enforced, through the environmental licensing proceeding, the need to adequately power several industrial plants so that they emit less or no GHGs. For some areas of the state of Sao Paulo known as "saturated areas" there is even an absolute prohibition to emit certain types of pollutants, including GHGs. Clear enforcement initiatives like this one will certainly push several sectors to change their energy matrix as the only possible path to enable the enlargement of their industrial capacity, opening space for solar, wind and biomass energy generation, such as those produced from sugar cane and eucalyptus pulp. With respect to biomass, for example, it is also notable how such enforcement initiatives may impact the whole supply chain, whereas technological development is one of the key factors to ensure high level of productivity of the plantations and the superior quality of the pulp produced. Regulatory Responses to Climate Change in Brazil The issuance of further policies and rules prohibiting or discouraging the commercialization/use of carbon-intensive products constitute a long-term impact of the PCCA on the business transactions conducted by companies located in Brazil. One example of this trend is a technical understanding recently issued by the state of Sao Paulo's environmental protection agency (CETESB) within the discussion of a bill of law that is contrary to the commercialization of diesel vehicles in Brazil on the grounds that the GHGs emissions would increase and contribute to global warming. Connected to the enforcement of more stringent rules addressing climate change, the number of large companies placing an internal price on GHG emissions has been growing at high rates in countries such as the United States and Canada, and, in view of the provisions of the PCCA and the NDC proposed by Brazil, this is certainly one of the impacts in the long term for the companies located in the country. It is relevant to v1\SYDDMS 4

5 mention that the advantages related to the implementation of internal price on GHG emissions by Brazilian companies could be two-fold: (1) they could be key to complying with the federal and state rules on climate change; and (2) they could constitute a tool for financing emissions reductions projects (such as REDD+) and incorporating policies to make them more efficient and more resilient to climate change. Conclusion The PCCA has changed the business environment around the globe, and in Brazil specifically. Companies that succeed in contemplating the policy measures that are proposed in Brazil's NDC and implementing their own strategies accordingly will be at an advantage. Not only will they be able to stay ahead of the increasing regulatory frameworks that regulate emission reductions, they may also be able to find new opportunities for business development. By Renata Campetti Amaral and Patricia Vidal Frederighi, Baker & McKenzie LLP Renata Campetti Amaral is a partner, the head of the environmental group and a member of the global climate change group at Baker & McKenzie in the firm's Sao Paulo office. Her practice includes environmental crisis management and negotiation with authorities. She leads major cases of environmental contamination and regularization in Brazil. Patricia Vidal Frederighi is an associate in Sao Paolo. Her practice includes climate change, environmental advisory, environmental litigation, and consumer and social responsibility. The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice. [1] Stimulating the Demand for REDD+ Emission Reduction in Brazil: The Need for Strategic Intervention Pré Available at 21.pdf. Access on March 03, v1\SYDDMS 5