Buy low, sell high. Traders are dumping voluntary carbon credits after it was revealed that many credits issued by Verra (largest credit issuer) had minimal to no impact on actually reducing emissions. With this increased scrutiny and upcoming regulatory changes, it is now an opportune time to start investing in these assets. Brazilian’s state-owned petroleum company, Petrobras, did just that—making its first carbon credit purchase in September of 2023 by buying 175,000 credits in a forest conversation project in western Brazil. It aims to spend at least U$120 million in carbon offsets through 2027, joining a crowd of multinationals that could fuel a 500x growth in the global voluntary carbon markets by 2037.[1] Latin America and the Caribbean, the region with the highest forest coverage in the world, will serve as a key supplier of offsets and nature-based solutions in the race to net-zero.
Petrobras is estimated to have paid roughly U$1 million for its 175,000 credits, a bargain at $5.71 per credit. Credit prices vary significantly by the type of project, location, volume traded and vintage (the older the credit, the cheaper the price), but tend to range between U$5 and U$26 in Brazil.[2] Although credits are sold for less in LAC (i.e., less revenue for project developers), cheap land and lower operational costs often lead to higher margins for developers vis-à-vis more mature markets. In Australia, prices for premium credits can surpass the U$40 range, but land acquisition, preparation and plantation costs are much higher. The graphic below offers a quick breakdown.
There are three main types of carbon markets/mechanisms across the world: voluntary carbon markets (VCM), carbon taxes and cap-and-trade schemes (these last two are mandated by law). Petrobras’ purchase was part of the voluntary carbon market (VCM), which allows companies to voluntarily offset their emissions by purchasing carbon credits from project developers. A carbon tax for specific sectors, which has been adopted by Mexico (in certain states), Chile, Argentina, and Colombia, is another market mechanism that encourages companies to buy offsets and/or reduce emissions to avoid paying a tax.[3] A third carbon mechanism, the cap-and trade system, involves a regulatory body setting a limit on emissions allowed per company. These emissions, often represented as permits, can then be sold by companies who emit less carbon than the pre-defined quota, and bought by those that surpass their emissions’ limit. This market scheme is less common in Latin America due to lagging regulation, but Brazil has recently prepared a cap-and-trade framework that will limit emissions at 25,000 metric tons per company. The bill should be voted on in Q4 of 2023.[4]
Despite increased scrutiny over the authenticity of new carbon projects, the nearly $1 trillion dollar growth in VCMs by 2037 will continue to lead to billions of dollars in low-quality voluntary offsets. Years of waiting to take soil samples, delays in land permitting, unrealistic corporate climate targets, and understaffed credit issuers (Verra, Gold Standard) will encourage some stakeholders to turn a blind eye, leading to PR nightmares and squandered investments in carbon offsets. Collaborating with a vetted local partner will ensure high-quality credits, while simultaneously providing a well-connected partner to manage socio-environmental relations with communities.
Developers and investors looking for high-quality carbon projects in Latin America should also focus on countries in which landowners own the carbon rights of their land. Since no country has a wide-ranging carbon legislation that explicitly grants landowners those rights, regional developers of carbon projects rely on precedent that is granted by local courts. Colombia, Paraguay, and Brazil have that jurisprudence in place and are seeking to formalize those decrees through legislation. Costa Rica and Panama have favorable carbon policies too, but struggle with expensive land costs and achieving economies of scale. Many local developers also face large swathes of communal and indigenous land, such as the “ejido system” in Mexico and the widespread indigenous communities in Colombia, Peru, Mexico, and Bolivia.[5]
Finding specific development opportunities within those countries are still plausible, but stakeholders should target states/municipalities with the following characteristics:
- State carbon program (e.g., Yucatan’s VCM roadmap) or local/national carbon tax.
- Welcoming local community.
- Affordable and abundant land.
- Favorable climate (i.e., the temperature, rain and sun will influence tree growth, which directly impacts the amount of carbon sequestered per acre).
- Existing infrastructure (i.e., nearby labor, roads, water, and equipment to ensure timely and affordable land preparation)
Areas in which there are clear land titles are another fundamental aspect for a successful project. In states such as Amazonas, Manaus, and Para, in the northern Brazil, a piece of land is often owned by three different people. This is often the case in remote areas, near indigenous reservations or forests, which makes successful land negotiations a nearly impossible task. Although there are pockets within the listed countries that are especially challenging/or attractive based on the factors mentioned above, below is a graph of some of these most attractive locations for carbon projects in Latin America.
Political Factors to Factor In
Beyond the conditions we outlined above, stakeholders also need to conduct political risk research as governments are now viewing carbon as a commodity that can generate substantial profits for their coffers. In Latin America, Honduras recently put a moratorium on the sale of forest-based carbon credits “to avoid the colonization of carbon revenues,” while in Africa, Zimbabwe announced it would retain 30% of all carbon proceeds. Zimbabwe’s announcement put at risk $100 million in investments by developers such as CO2balance, Cicada Carbon and South Pole, the leading seller of global offsets.[6] Government scrutiny will not only make it harder for developers to make a profit, but it is also likely to delay development periods due to bureaucracy and meddling political interests. In March of 2023, Brazilian developer Biofilica came under scrutiny for selling carbon credits from publicly owned land without prior state authorization.[7]
Looking ahead, the world will need to remove 10 billion tons of CO2 per year by 2050, equivalent to roughly 20% of current global emissions.[8] Carbon removal projects, such as the reforestation of degraded land or direct air capture (DAC), currently stand at 5mn tons/year – creating a 2000x gap that needs to be bridged. Latin America will play a pivotal role in overcoming this seemingly insurmountable chasm.
Next Steps
Contact us if you are a carbon-credit developer who needs to identify the ideal project location in Latin America. We help companies do this by researching and analyzing a variety of factors (e.g., geographical growing conditions, policy, community opposition). We then find local partners to jointly execute those projects.
In addition to market sizing and competitive intelligence, on the off-take side AMI primarily helps carbon credit buyers conduct due diligence on the quality and pricing of the credits they are purchasing, ensuring a fair and reputable agreement. AMI has over 20 years’ experience in Latin America’s energy sector and a proven track record helping companies with their nature-based solutions.
Sources
[1] BNEF, January 2023, “Carbon Offset Market Could Reach $1 Trillion With Right Rules”
[2] iFood, February 2023. “Crédito de carbono: como funciona esse mercado”
[3] White & Case, October 2022. “Growth of carbon markets in Latin America”
[4] Wall Street Journal, August 2023, “Brazil’s Government Readies Carbon Market Proposal”
[5] Rights and Resources, November 2015, “Who Owns the Land in Latin America?
[6] Bloomberg, August 2023, “Rule That Rocked Global Carbon Market Softened in Zimbabwe.”
[7] Reuters, March 2023. “INVESTIGATION-In Brazil’s Amazon, disputed carbon credit project feeds land-grabbing fears”
[8] World Resources Institute
