Development of the carbon market in Brazil and current tax challenges

Wednesday 6 April 2022

Luciana Prates Caldas Cordeiro

Mattos Filho, Veiga Filho, Marrey Jr and Quiroga Advogados, São Paulo


Pâmela Larissa Miguel Gottardini

Mattos Filho, Veiga Filho, Marrey Jr and Quiroga Advogados, São Paulo


During the United Nations Conference on Environment and Development, held in Rio de Janeiro in 1992, the UN Framework Convention on Climate Change was created and an international environmental treaty was established to combat 'dangerous human interference with the climate system', seeking a commitment to reduce greenhouse gas emissions. In 1997, the first implementation of measures under the UN Framework Convention on Climate Change was promoted in the Kyoto Protocol, which defined the grounds for signatory countries to limit or reduce greenhouse gas concentration in the atmosphere.

Country parties agreed to adopt national policies to mitigate the climate crisis, which caused economic challenges in respect of sustainable development, especially in industry. Therefore, the reduction of emissions became economically valuable.

To assist countries in meeting their emission targets and encourage the private sector and developing countries to contribute to emission reduction efforts, a mechanism was devised in which countries receive credits to reduce greenhouse emissions. These credits are known as carbon credits, which are tradable certificates that allow their holder to emit greenhouse gases.

Due to the urgent need to mitigate the climate crisis, the carbon credit mechanism has been seen as a new market business opportunity that the private sector in particular has been investing in globally.

It has been noted that, in the last few years, Brazilian companies have been adding initiatives to address the climate crisis into their scope of activities, intensifying the carbon credit market in Brazil, which has led to the development of new business arrangements for carbon trading.

However, Brazilian legislation on the carbon trade is incipient, and the government has been promoting debates and looking to create a legal scenario to regulate the market properly, which includes both defining the legal nature of carbon credits to establishing the premises under which companies perform activities related to the carbon market.

There are already positions in the Brazilian regulatory sphere that rule out the legal nature of carbon credits as securities, in addition to initiatives in bills (eg, Bill No 3,606/2021) in progress in Congress that define carbon credits as intangible titles, and tradable and fungible assets; however, there is still a long journey towards a conclusive definition. This is because such concepts are not binding and can only be adopted as mere guidelines for the interpretation of the legal nature of operations involving carbon credits, given that current legislation is silent on this matter, and there is no consensus regarding such an interpretation.

Therefore, the current lack of legal provision on the definition of the legal nature of carbon credit operations has allowed a broad scenario of debates and interpretations of the definition and of the relevant legal regulatory and tax effects in connection to it.

From a tax standpoint, due to the fact that there is no common or even legal definition of the nature of carbon credits and, therefore, no specific provisions in Brazilian legislation on the tax aspects applicable to the carbon credit market in Brazil, there is uncertainty regarding the accurate tax treatment of such transactions.

Hence, the operational model, terms and conditions of commercial arrangements, corporate structure, and flow of income and expenses, among other things, have served as elements for defining the legal nature of carbon credit operations and their consequent tax treatment.

This is because, depending on the way in which operations are structured and implemented, companies may face a legal scenario with greater or lesser certainty, and consequently, tax exposure, given that, depending on the business model, the carbon market may conduct activities such as purchasing and selling, intermediation, assignment of rights and provision of services, which, in turn, are subject to different tax treatments.

It is important to highlight that Brazil has a complex tax system, not only from the viewpoint of governmental spheres (federal, state and municipal), which have different competent authorities that create and collect taxes, but also because of the variety of existing taxes, which are higher than those of most emerging and First World countries, in addition to the variety of existing rates and special tax treatments.

Thus, the definition of the legal nature of carbon credit transactions affects the respective tax treatment, which can subject a business to different taxes and expenses, given that, depending on the understanding of which taxes should be applied to the business, different tax obligations will be imposed based on the definition of its legal nature, and a company may support different tax burdens and requirements to comply with current legislation.

It is important to point out that, due to its overly complex tax system, the Brazilian government and Brazilian society have been debating the implementation of tax reform to simplify the Brazilian tax system and overcome challenges related to taxation, particularly to ensure legal certainty and promote a consistent economic environment that is more attractive to new investment and the development of new businesses.

In this regard, there is legal space to debate and develop concepts and regulations related to the carbon market that allow the wide contribution of stakeholders interested in the Brazilian market and contributions from international models, to put in place compatible legislation that benefits the reduction of the impact of the climate crisis and the consistent development of carbon business in Brazil.

Considering this tax scenario and the unavoidable growth of the carbon market, the need to have proper legislation to regulate these activities seems to be a priority, not only for the government but also stakeholders, first to place Brazil in a competitive international position and secondly to avoid legal uncertainty that could increase the number of legal disputes in respect of this matter.