1. Introduction

Many companies are establishing policies seeking climate neutrality in their operations. One front of action is compensating Greenhouse Gas Emissions (GHG) that cannot be avoided by the business. To this end, some players aim at developing their own compensation project (via reforestation on properties located in Brazil), instead of purchasing carbon credits on the market. The purpose of this article is addressing the feasibility and legal format of carbon projects to be directly conducted by companies in Brazil.

1. Regulation of the carbon market in Brazil

Although Brazil is a signatory to the United Nations Framework Convention on Climate Change (1992) and the Paris Agreement (2015) and has a National Policy on Climate Change (the PNMC), approved by Law 12.187/2009, the country has not yet approved a law to regulate GHG and the carbon market. For this reason, it is said that there is still no regulated market in the country, only a voluntary market.

Bill of Law 182/2024 (already approved in the Chamber of Deputies, as Bill 2148/2015), which establishes the Brazilian Greenhouse Gas Emissions Trading System (SBCE), is under discussion in the Senate. In general, the Bill adopts the internationally recognized system of “cap-and-trade”, which consists of the establishment of a maximum limit on greenhouse gas emissions (cap) together with the possibility of trading (trade) certificates representing GHG emission rights (Brazilian Emission Quota – CBE) or GHG removal (Verified Emissions Reduction or Removal Certificates - CRVE). Those certificates may benefit companies that emit above the permitted caps and that need to adjust their balance of emissions, either by using the emission quota of a company that emitted below the permitted caps, or by compensating for its additional emissions.

The sectors/operators regulated by the Bill are the sources and facilities that emit more than ten thousand tons of CO2 equivalent per year, apart from the agricultural sector. They must present a monitoring plan that details their system for measuring, reporting, and verifying GHG emissions and report their GHG emissions and removals to the SBCE management body. Sources and facilities that emit more than twenty-five thousand tons of CO2 per year must, in addition, conduct periodic reconciliation of obligations, i.e., they must prove the balance between their Brazilian Emissions Quotas (CBE) and the Verified Emissions Reduction or Removal Certificates (CRVE) purchased on the market.

In any case, if approved with the current text, the new law will only apply to “activities, sources and facilities located in the national territory that emit or may emit greenhouse gases, under the responsibility of operators, individuals or legal entities” (art. 1, §1). It will not affect companies’ activities not located in Brazil, even if those activities emit greenhouse gases offset by GHG projects located in Brazil. Furthermore, the compensation of a company’s emissions will be entirely conducted within the scope of the voluntary market and will not be subject to regulation under future Brazilian law.

Even so, some concepts related to the Bill’s carbon market are relevant because they reflect the discussions that the actors in this market have been having for a long time. They also bring some widely accepted concepts that are likely to be included in the legal system shortly. One of these concepts is carbon credit.

1. Legal nature of carbon credits

Legal authors bring several definitions for the carbon credit, but in this essay, we will look for its legal definition, so that we can understand how the mechanism should be used in the contractual sphere and to which tax regime it is subject.

Law 12.187/2009 (PNMC) preferred not to define carbon credit, but left it understood that it is a security representing certified avoided greenhouse gas emissions, negotiable on stock exchange and other places authorized by the Securities and Exchange Commission – CVM (art. 9). Law 12.651/2012 (Forest Code) objectively (and insufficiently) defines carbon credit as a “title to intangible tradable assets” (art. 3, XXVII). Decree 11.075/2022, which established SINARE - National System for Reducing Greenhouse Gas Emissions, defined carbon credit as a “financial, environmental, transferable asset representing the reduction or removal of one ton of carbon dioxide equivalent, which has been recognized and issued as credit in the voluntary or regulated market” (art. 2, I). However, this decree was revoked by Decree 11.550/2023, which, in turn, does not deal with carbon credits, let alone define them.

Bill 182/2024 maintains carbon credits in the voluntary market (although it admits that they will be used in the SBCE if they follow certain rules). But it provides a definitive and more complete legal definition for this asset, which, as it seems, will be incorporated into the future law:

“CARBON CREDIT: tradable asset, autonomous, representing effective emissions reduction or removal of 1 tCO2e (one ton of carbon dioxide equivalent), with the legal nature of civil fruit, obtained from projects or programs to reduce emissions or remove greenhouse gases developed based on a good, with a market approach, submitted to national or international methodologies that adopt criteria and rules for measuring, reporting and verifying emissions, external to SBCE, including forest maintenance and preservation, carbon retention in soil or vegetation, reforestation, sustainable forest management, restoration of degraded areas, recycling, composting, energy recovery and environmentally appropriate disposal of waste, among others” (Art. 2, VIII).

Considering that the legal definition of carbon credit given by the PNMC, and the Forest Code is imprecise and insufficient, the approval of Bill 182/2024 as it stands will allow for a more assertive and secure understanding of the legal nature of this asset.

Although the conceptual proposal for carbon credits conveyed by Bill 182/2024 is not yet a “legal definition”, it is in line with what most legal operators have already been maintaining: the carbo credit is a movable, intangible and negotiable asset with the legal nature of a civil fruit. The nature of civil fruit arises from the fact that the carbon credit is an accessory asset which originates from a main good, and whose production or use does not alter the quantity and substance of the main good. In the case of carbon credits derived from forest restoration or avoided deforestation, the main asset is the growing forest or the standing forest, with the carbon credit being the accessory asset that is only generated and only exists because of the forest – therefore, if the forest/main asset is destroyed, the carbon credit/accessory asset ceases to exist.

Currently, carbon credits are not taxed as a service, because they are not included in the list annex to the Supplementary Law 116/2003 that regulated the Service Tax (ISS, 5%) due to the municipalities. They are neither taxed by the State Level ICMS (18%), because such tax was conceived to assess the sale of merchandises and it is not clear whether the concept would comprise carbon credits, mostly because the already mentioned Federal Decree 11.075/2022 declared them as financial assets, a fact that moved the taxation to the realm of the federal Tax upon Financial Operations (the IOF). Since the revocation of Decree 11.075/2002, the only certainty concerning taxation of the sale of carbon credits is the assessment of the revenues by the federal PIS (1,65%) and COFINS (7,6%).

However, under a tax perspective, we must take in consideration that the current taxation model upon the corporate revenues (by the federal PIS/COFINS) and the sale of goods (by the state level ICMS) and services (by the city Level ISS) is being replaced by a new VAT introduced by the Constitutional Amendment 132 of December 2023, by which those five taxes will be progressively substituted by a dual value added tax, starting in 2026, composed by a federal tax (the CBS) and a shared state-city tax (the IBS). Under the IBS/CBS General Law currently being discussed at the Congress, the sale of tangible and intangible goods and rights in the country will be taxed. The proposed reference rate is 26,5% and the bill of law (PLP 68/2024) provides no different treatment for the sale of carbon credits (which shall fall within the concept of a “good”).

Despite the changes in the taxation model, the Constitution ensures tax exemptions for exportations, and the benefit is reaffirmed by the proposed IBS/CBS General Law (art. 78). We can assume that such regime will not change in a near future since no one ever supported taxation of exports in Brazil because it would hinder the international competitiveness of Brazilian products and services. Therefore, the sale of carbon credits generated in Brazil to a foreign counterpart shall constitute exportation of intangible goods under the IBS/CBS General Law and will not be taxed.

The IBS/CBS General Law allows the corporate seller/exporter to retain the credits of the VAT paid in the previous phases of the productive process of the exported good and use them to offset the tax due in any other internal sale (art. 78). If the resulting VAT balance comes out as positive in favor of the company, it may keep the balance for further absorption in any new sales in the future or ask for its reimbursement in cash which, under the proposed law, must occur up to 60 or 270 days after the request, depending on the nature of the operation that generated the credit (art 53).

After these introductory remarks about the legal framework, the concept of carbon credit in our legal system and its current and near future taxation, another issue that must be addressed deals with the core of the debate. Carbon credits are not born spontaneously, but from a certification process conducted by certifying companies. This certification process can only be initiated if the holder of the main and accessory asset wishes or authorizes it. Thus, it is extremely important to know who owns the right to carbon credits.

In the PROPERTY chapter, the Civil Code provides that:

“Art. 1.232. The fruits and other products of the thing belong, even when separated, to its owner, unless, by special legal precept, it falls to someone else.”

Therefore, the right to carbon credits undeniably belongs to the owner of the rural property where the forestry project is developed. Or to its usufructuary, if the owner of the property has granted usufruct to a third person, pursuant to art. 1.390 et seq. of the Civil Code. Or, still, to the tenant of the surface right, if the owner of the property has transferred the surface right to a third person, pursuant to art. 1.369 et seq. of the Civil Code.

Either the owner, the usufructuary or the tenant can transfer their right to carbon credits to third parties, for a fee or free of charge, given that art. 95 of the Civil Code provides that even “not separated from the main asset, the fruits and products can be the object of legal transactions”. Consequently, the owner (or usufructuary or tenant) is entitled to execute the forestry project, promote the certification of carbon credits, and hold ownership of the asset. They can also transfer this right to a partner company, so that it may develop the forestry project on the property, promote certification and hold ownership of carbon credits. As for the issued carbon credits, they can be transferred by the holder to third parties (sale of the asset), or they can be retired (removed from circulation) by the holder if it is the “end user” of the credits.

The ownership of rural land is taxed by a federal tax (the ITR) which is regulated by Law 9.393/1996. Although the ITR is not a relevant tax, answering solely for 0,18% of the total federal taxes in 2022, its calculation depends on annual information of the properties’ owners to the government (through a report known as DIAT) in which they declare the use of the areas. Relevant for the matter herein addressed is the benefit granted to permanent preservation and legal reserve areas and to those areas covered by primary or secondary native forests in medium or advanced stages of regeneration, which are not considered in the calculation of the taxable areas. Hence, the more the area is covered by native forests, the less it will be taxed.

1. Final remarks

What comes to our mind after assessing all potential deal models is the understanding that exporting certified carbon credits through a sale agreement is the least taxed option. The IBS/CBS will not be charged on the sale because it constitutes an exempt exportation. Currently, PIS/COFINS are not levied on revenues derived from exports and there is no taxation of ICMS or ISS on carbon credits. Purchasing the land is always subject to the city ITBI (generally 4%) and owning it requires the payment of the federal ITR, except if demonstrated that the property is covered by forested or reforested areas, something that is likely to be achieved with a carbon absorption project. All the credits will be generated by a Brazilian company either owning the land or having possession of it through different contractual arrangements, established for free or for a fee.  Adding more parties to the arrangement implies in more fees to be charged, making costlier the operation, because of margins and corresponding taxes. Assuming these higher operational costs is a justified strategy if they imply in lower investment costs so set the project up.

Authors: Eduardo Szazi and Erika Bechara