Brazil Formalizes Carbon Credits as Financial Assets, Opening Doors for Use as Collateral

Brazil's carbon credit market is undergoing significant regulatory advancements following the enactment of law 15.042, which legally recognizes carbon credits as financial assets and sets the foundation for their use as collateral in financing. This law defines three types of carbon credits in the country: the Brazilian Emission Quota (CBE), the Verified Emission Reduction Certificate (CRVE), and generic or verified carbon credits. It also imposes obligations on certain financial institutions to invest at least 0.5% of their technical reserves in carbon credits.

Lawyer Luiz Roberto de Assis highlighted that while the economic value of carbon credits as collateral existed previously, the new legal framework now clarifies and legitimizes this role. Despite this, he noted that acceptance of carbon credits as guarantees remains limited, particularly due to the current volatility in their market prices, akin to early bitcoin fluctuations. Creditors may demand discounts on their use as collateral, but this should not impede gradual adoption.

Assis believes that carbon credits will initially serve as collateral mainly in projects geared towards decarbonizing the economy. He pointed out the necessity of proper certification to ensure collateral validity and contractual clauses to manage situations when credits are used for compliance and lose value, including provisions for credit replacement. This cautious but optimistic approach reflects Brazil's ambition to develop its emission trading system, expected to be fully operational by 2030, stimulating investor interest and integrating environmental assets into financial markets.