What is a carbon credit and how is it traded in Panama?

The need to find mitigation mechanisms against climate change increases as time passes.In this context, Panamanian legislation is directly influenced by international instruments whose main objective is to combat the effects of climate change and assume commitments to reduce greenhouse gases (“GHGs”) emissions; within which is the Kyoto Protocol to the United Nations Framework Convention on Climate Change, adopted by Panama through Law 88 of November 30, 1998; the United Nations Framework Convention on Climate Change through Law 10 of April 12, 1995; the Paris Agreement through Law 40 of September 12, 2016, and, the Doha Amendment to the Kyoto Protocol through Law 38 of June 3, 2015.

A carbon credit is a mechanism that allows companies, countries, and organizations to offset the carbon dioxide emissions they produce. These credits represent the amount of GHGs emissions that a company, country, organization, or individual has reduced, prevented, or removed from the atmosphere by investing in projects that reduce or mitigate these gases.

Carbon credits are traded in the carbon market, which is divided into voluntary and regulated. The voluntary market operates outside the regulated markets and allows the purchase of credits through the free supply and demand of credits, allowing companies, organizations and even countries to offset their emissions on a voluntary basis. In contrast, the regulated market operates within the framework of a government or international organization and trading must conform to applicable regulations. It is important to mention that the prices of carbon credits are not standardized, but vary according to the type of market, the project, the sector, and other factors.

Panama has expanded the regulation of this particular issue through Executive Decree No. 100 of October 20, 2020 (the ‘DE 100’) and Decree 142 of December 9, 2021 (the ‘DE 142’). DE 100 grants the Ministry of Environment (‘MIAMBIENTE’) the potential to develop and regulate the National Carbon Market (‘NCM’), while DE 142 further defines the NCM and its components. DE 142 refers to carbon credits within the NCM as a greenhouse gas emission reduction unit (“UNRE”).

The components of the NCM are:

• National greenhouse gas management programs: These programs of GHG management, under the Reduce Your Footprint National Program (in Spanish, Programa Nacional de Reduce tu Huella) (“PNRTH”)are expected to represent the demand for credits within the NCM. Currently there are programs under the PNRTH, such as Reduce Tu Huella Corporativo-Carbono (“RTH Corporativo – Carbono”) and  Reduce Tu Huella Municipal (“RTH- Municipal”), which were created to standardized the processes related to GHG.
• Panama’s National GHG Offset System (“SNCP”): This component corresponds to the demand for carbon credits (or UNRE) at the national level by participants in the PNRTH. The SNCP will be composed of project developers that implement GHG reduction or removal initiatives in sectors such as energy, waste, refrigeration, forestry and livestock. These projects will be registered in the National Climate Transparency Platform, which will serve as a general information registry for those interested in joining the SNCP and participating in the NCM.
• Panamanian Carbon Exchange (“BPC”): This platform will connect the supply and demand of domestic carbon credits (or UNRE), facilitating the connection of organizations participating in the PNRTH with projects that reduce emissions in the SNCP. The BPC will be managed by the Bolsa Latinoamericana, de Valores S.A. (LATINEX). The BPC is expected to begin operations in 2024.

Despite the recent nature of this regulation and the NCM, there is a noticeable trend towards future projects of this type, as it can be shown in several projects, including  The Azuero Reforestation Project, in which we have recently participated as legal advisors. We are witnessing a growing number of investors and companies expressing interest in joining the SNCP, as well as companies, organizations, and countries eager to invest in carbon credits in the voluntary market. This increasing interest bodes well for the future of carbon credit trading in Panama.