Carbon trading: Brazil opens carbon exchange

Brazil will hold its first auction to sell carbon credits in September. The auctions will offer a lifeline to the country’s small-scale carbon reduction projects.

Although these projects are registered under the UN Clean Development Mechanism, or CDM, they are currently building up a frustrating backlog of tradable credits, due to problems with administrative red tape.

The auctions, operated by the Brazil Mercantile and Futures Exchange (BM&F), will be regulated by Brazil’s financial regulator, the Securities and Exchange Commission (Comissão de Valores Mobiliários).

The online auction will open with the sale of about 800,000 tonnes of carbon dioxide equivalent, generated from a São Paolo landfill project, producing electricity from captured methane. The auctions will be scheduled from then on according to sellers’ requirements.

In addition to the large volumes traded in this first auction, BM&F stresses that one of the main benefits to come out of the exchange will be the trade of small volumes of carbon credits generated from CDM projects.

Difficult sell

Until the launch of the new market, carbon reduction projects have had to try and sell credits over-the-counter. The search for buyers has meant them incurring significant costs due to consultants and lawyers fees.

Carbon saving projects have faced serious difficulty selling small volumes of carbon credits in the current over-the-counter market, given that carbon funds prefer to purchase bigger amounts – 500,000 tonnes of CO₂ equivalent or more – to satisfy their European clients.

According to Guilherme Fagundes, chief of the department for special projects at BM&F, the auctions will slash the trading costs of carbon credits, giving international players, like banks, carbon funds and brokers, access to all Brazilian CDM schemes whether small or large.

“What matters most is that our auctions will permit the trade of small volumes”, Fagundes says.

This will come as welcome news to many of Brazilian projects registered under the UN Clean Development Mechanism that are generating less than 100,000 carbon credits annually and have not yet managed to sell them.

These include low carbon electricity projects such as small-hydro power stations, local plants for generating energy from sugar cane and methane capture from smaller landfills.

Landfill, the new goldmine

São Paulo city authorities expect to earn about US$16 million from selling their landfill carbon credits in the first auction, next month.

The carbon credits were generated by the CDM project at Aterro Bandeirantes, which processes approximately 7,000 tonnes of waste every day, half of the total domestic waste of São Paulo.

Around 80% of the methane captured from Aterro Bandeirantes is used to generate 22 megawatts of electricity, supplying energy for 300,000 homes. Profits from the sale of the electricity and the carbon credits will be invested in social and environmental improvements surrounding the landfill site.

Next year, the city’s second landfill project, Aterro São João, will start to produce 20 megawatts of electricity, generating a total of 5.7 million carbon credits by 2013. Between them, the landfill sites are expected to provide nearly 10% of São Paulo’s power.

Eletrobrás, the state electricity provider, also intends to start trading on the exchange this year, using carbon credits generated by Proinfa, the federal programme developing alternative sources of electricity (including wind, biomass and small hydropower plants).

Nearly 2.8 million tonnes of CO₂ equivalent in emissions will be avoided annually when all of the 144 Proinfa power projects are in operation in December 2008, with a total installed capacity of 3,300 megawatts.

Spots then futures

Set up in 1985, BM&F already offers futures and spot contracts for a number of financial assets, including Brazil’s main agricultural commodities – ethanol, cattle, sugar and coffee. The exchange intends to transfer its knowledge and experience directly to the carbon market.

BM&F believes that the public sector will be a key part of this process. Given that the organisation is already under the watchful eye of the media and NGOs, the government says it wants to use the new market as a way to show transparency.

The Brazilian government also believes that the increased competition between buyers at the open auctions will drive up the price of its carbon credits.

The auctions will start off as a spot market, trading previously generated carbon credits from UN regulated CDM projects only.

Eventually BM&F would like to extend trade to the futures market, selling carbon credits yet to be generated. To offer more security to buyers, the price of future credits would be lower than for credits already generated.

A futures market would have the added bonus of offering cash upfront to investors, helping them to get more CDM projects off the ground in Brazil.

The secondary market (in which buyers purchase credits from other buyers rather than the issuer) is another possibility for BM&F in the long term.

If the BM&F carbon exchange takes off, Brazil will make a major contribution to the global carbon trade by opening up a lucrative market to many small-scale projects that have until now struggled to become visible to investors.



Glossary

Over-the-counter market – a security bought or sold through a private dealer or bank rather than on an exchange.

Spot market – also called cash market, where a transaction is made on the spot, for cash and delivery immediately.

Primary market – the security is purchased directly from the issuer.

Secondary market – an investor purchases a security from another investor rather than the issuer.


FACTS: CDM projects in Brazil

On 15 July 2007, Brazil had 230 projects registered or under consideration by the CDM executive board.

The 104 projects already registered by the board have achieved a reduction of 140 million tonnes of CO₂ equivalent during the first phase of Kyoto (2008-2012), 11% of the world total reductions through the CDM (which total 1,321 billion tonnes).