Carbon sink?

Latin America could be a huge beneficiary of carbon markets but the system is still in its infancy.

Carbon markets represent an interesting opportunity to reduce greenhouse gas emissions while enhancing investment in energy transition and low-carbon technologies. Latin America has the potential to become a leading provider of carbon credits which could reach a value of USD 22 trillion at global level according to Corporación Andina de Fomento (“CAF”), an international development bank.

A London-based sustainable finance expert commented, “Costa Rica is leading the region on issues related to payments for environmental services in terms of markets aimed at conservation and the issue of climate change and emissions reductions. Specifically, they are advanced in the issue of controlling livestock farming using these methods and technologies. Chile is following and has done substantial work on promoting the energy transition and implementing carbon taxes. Brazil, Colombia, Mexico and Argentina are also looking at carbon markets  to promote sustainable forestry and agriculture and to reduce greenhouse gas emissions in general.“

“Costa Rica is leading the region on issues related to payments for environmental services in terms of markets aimed at conservation and the issue of climate change and emissions reductions.”

Sustainable finance expert, London

Having established carbon taxes at national and state level, Colombia, Chile, and Mexico lead the development of carbon markets in the region, followed by Brazil and Argentina. Regulatory frameworks, policy windows of opportunity, tax reforms, consultations with domestic stakeholders, and international cooperation initiatives have been key to advance the implementation of these carbon markets.

An executive at a Brazilian NGO didn’t believe that much tangible progress has been made, “Carbon markets are still in their infancy and countries have not yet seen any tangible benefits of the carbon credit system, and it seems to me that there is a very low level of sales and it has to do with price regulation issues. From my perspective, the opportunity around livestock is the most immediate, as is deforestation.”

“Carbon markets are still in their infancy and countries have not yet seen any tangible benefits of the carbon credit system.”

Executive, NGO, Brazil

Countries in the region are looking at voluntary and regulatory compliance purpose-based markets. Notably, Latin America is the world’s second largest provider of voluntary credits (“VCM”), driven by private initiatives and not regulated by governments, which is expected to increase ten-fold throughout the next decade. Most VCM in the region come from nature-based solutions and renewable energy projects. In parallel, compliance carbon markets tend to be policy tools imposed by governments to put an explicit price on carbon.

Most jurisdictions opt for launching carbon markets as pilot schemes to grant practical knowledge to their participants. The World Bank also recommends gradual implementation, which could first include a limited number of sectors, to secure a better understanding of their functioning. However, both government and corporations face multiple challenges which include harmonisation of standards and norms, specific market flaws, governance weaknesses, and limited availability of attractive financial markets.

Despite these hurdles, global companies are showing particular interest in reforestation (“REDD+”) credits in Latin America. REDD+ is a framework created by the UNFCCC Conference of the Parties (“COP”) to guide activities in the forest sector that reduce emissions from deforestation and forest degradation, as well as the sustainable management of forests and the conservation and enhancement of forest carbon stocks in developing countries. REDD+ has the capacity to benefit local communities living and protecting these forests but their monitoring and verification can be problematic due to lack of regulatory oversight.

The region also has the potential to tap into carbon capture, utilisation, and storage (“CCU”) credits. In this context, Petrobras and Ecopetrol recently announced carbon dioxide reservation projects, proving the potential of these initiatives.

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