Regulatory additionality limits climate finance

Pedro Moura Costa[1], February 2023

1.Introduction: the urgent need to promote NBS in the Amazon

There is an urgent need to promote conservation and restoration at scale. It is estimated that sequestration and conservation of carbon stocks in vegetation can lead to 16 Gt CO2 annual benefits worldwide[2].??

The importance of vegetation and nature-based solutions (NBS) to climate change mitigation has been widely recognised, at both the UN level and voluntary circles.??At the same time, capital has been mobilised at scale to support NBS. Recent commitments to fund forest protection include the US$ 12 billion Global Forest Finance Pledge[3], the USD 1 billion LEAF Coalition[4], and private sector commitments worth 10s of billions of dollars made by Amazon[5], Microsoft[6], Google[7], Apple[8], etc.?

The deployment of capital and development of NBS projects, however, is and will increasingly be hindered by voluntary carbon markets (VCM) standards and methodologies.??

In order to ensure environmental integrity of carbon credits, carbon market standards introduced a series of demands to ensure that projects are additional to the current baseline – i.e., business as usual.??One of such requirements is that of “regulatory surplus” – i.e., that the activities receiving carbon finance are over and above the requirements of any law or regulatory framework.?While this is understandable, regulatory surplus could be an unrealistic ambition if its application ignores prevailing levels of legal compliance.

While standards and methodologies include caveats for recognising common practice, there is a tendency among validators to interpret such requirements in the most strict and restrictive way.??The result of this is deleterious to the ability to promote climate positive activities. Paraphrasing Voltaire, “Perfect is the enemy of?the good?the environment”

An analysis of the level of compliance in Brazil illustrates this point. This analysis focused on the Brazilian Amazon only, but may reflect the reality in other tropical countries as well.

There is a need to review the requirements and/or their interpretation to enable carbon finance to be deployed at scale and contribute to positive climate initiatives in the Brazilian Amazon and beyond.

2.????????Regulatory framework: Brazilian Forest Code?

The Brazilian Forest Code (Law 12.651) creates one of the most powerful domestic mechanisms for avoiding deforestation and protecting natural forests anywhere in the world. If fully implemented, it has the potential of conserving over 250 million ha of native vegetation in Brazil and storing ca.100 GtCO2.?

The Brazilian Forest Code imposes a series of obligations among landowners and/or users that have the potential to generate positive social and environmental impacts on an unprecedented scale.??The main requirements of the new Forest Code are:

1) That all rural properties in the country are entered in the newly created Rural Environmental Registry system (Cadastro Ambiental Rural – CAR), a georeferenced digital registry connected to satellite images that enables monitoring and mapping of land use in rural properties.??Once complete, this system will provide an invaluable tool for land use planning and management and for the government to enforce compliance with this legislation.??According to the Forest Code, all rural properties will have to be in the CAR within a maximum of two years after publication of a government normative, after which they will be subjected to a series of legal sanctions and will lose the right to access agricultural finance.?

2) That all rural properties maintain natural vegetation along water courses and steep slopes, in order to protect water resources and prevent erosion. These areas are called Permanent Preservation Areas (APPs, from the Portuguese ‘areas de preserva??o permanente’) and their size varies depending on the width of the water course, the slope and the size of the farm. A large number of rural properties, however, do not currently maintain sufficient APPs.?

3) That all rural properties in the country maintain a certain amount of land under native vegetation (called “Forest Legal Reserves” – “Reserva Legal”, in Portuguese). The size of Forest Legal Reserves can vary from 20% to 80% of rural properties, according to the type of vegetation (biome) and the region in which the properties are located[9]. According to the Brazilian Institute of Geography (IBGE), there are more than 5 million rural properties in Brazil, all of which need to comply with this legislation.?

Those who do not have sufficient area of Legal Reserve can comply with the law in different ways such as planting or restoring areas within the rural property itself, or through an offsetting mechanism created in the Code: "Forest Legal Reserve Credits” (Cotas de Reserva Ambiental?– CRAs).?

In order for it to succeed, however, it is imperative that those involved in land use (agricultural producers, cattle ranchers, smallholders, forest stewards, etc.) comply with the requirements and obligations created by the Forest Code.?

A series of factors, however, have hindered the implementation of the Code and have the potential to diminish its expected positive effects. One of them is lack of financial incentives for landowners to value standing forests – something that could be provided by climate finance. Another one is the lack of enforcement of the law.??The result is that there has been no compliance with the forest conservation requirements of the Forest Code.

Given that law enforcement is mainly dependent on government and political will, there is the urgent need to provide financial incentives for landowners to comply with the objectives of the Forest Code.??Implementation of the Forest Code could result in a significant impact in terms biodiversity conservation and carbon storage on a landscape scale – a meaningful contribution to the global environment.

3.????????The reality: lack of compliance and enforcement

Deforestation in Brasil?

Deforestation has increased year on year in the last decade. This trend has accelerated in the last four years, due to a reduced effort on law enforcement, reduced budgets available for environmental agencies, and increased emphasis on production as opposed to conservation.?

Deforestation conducted by the landowner, ignoring legal requirements

A significant proportion of the deforestation in the Amazon is conducted by the landowners themselves, who clear their land for conversion to other uses (cattle ranching, agriculture).??

According to the Brazilian Forest Code, landowners are legally allowed to deforest any native vegetation in excess of the legal reserve and APP[10]?requirements applicable to their lands.?

However, common practice is to exceed the land conversion limits authorized by the Forest Code for private properties. And, given that such limits are commonly exceeded, landholders also ignore the administrative procedures of requiring Vegetation Suppression Authorizations (ASVs –?Autoriza??o de Supress?o de Vegeta??o,?in Portuguese) prior to deforestation. According to a recent study by MapBiomas (2021), 99.9% of deforestation in the Amazon biome has some degree of irregularity (see Table 1 and Figure 2).

Table 1. 2020 deforestation alerts with indications of irregularity or illegality in the Amazon region as a whole. Source: MapBiomas 2021[11]

Non-compliance with legal reserve requirements established by the Forest Code?

The Forest Code requires that all rural properties in the country maintain a certain amount of land under native vegetation (called “Forest Legal Reserves”). In the?Amazon biome, the Forest Legal Reserve required corresponds to 80% of the area.??In addition, all rural landholdings must maintain natural vegetation along water courses and steep slopes to protect water resources and prevent erosion (Permanent Preservation Areas or ‘APPs’).

Areas exceeding the legal reserve (ELR) requirements may be deforested pending authorization, provided they respect the requirements of maintaining Forest Legal Reserves and APPs.?

The reality is different and deforestation in the Amazon region commonly goes beyond the ELR limit.?Once landowners start clearing their land, it is common practice that they do not respect the limits established by the law, and clear areas of Legal Reserve and APPs.?A recent study has shown that?in 92% of cases, deforestation goes beyond the areas of ELR (Trase, ICV, Imaflora 2022)[13].??

BVRio’s internal analysis confirms these facts. Based on a sample of 1,813 farms that converted some native vegetation between 2011 and 2020, 94% of the farms deforested more than the legal limit of 20% ELR, and on average cleared 61% of their total land.??This calculation was based on data analysed by Imaflora (2021)[14]that used landholdings registered in the CAR and overlayed with historic deforestation figures calculated using satellite imagery provided by MapBiomas.

Non-compliance with the requirement for deforestation licenses (ASVs)?

While the Forest Code grants the legal rights to deforest vegetation in?areas exceeding the legal reserve requirement, state legislation introduces an administrative requirement for landowners to apply for Vegetation Suppression Authorizations (ASVs –?Autoriza??o de Supress?o de Vegeta??o,?in Portuguese) prior to deforestation.?

Application for an ASV is a lengthy and bureaucratic process and in most cases, landowners do not apply for such permits (0.4% of cases in 2020, see Table 2). A study by MapBiomas shows that, out of 60,857 deforestation alerts in the state of Pará, for instance, only 25 had an ASV (Figure 3).?

Table 2.?Proportion of alerts with Vegetation Suppression Authorization (ASV) (2019-2020) in the Amazon Biome (ha). Source: MapBiomas 2021.[15]

There are several hypotheses to justify the reality observed in Brazil: the excessive time that it takes for the approval, the complex bureaucratic process, the common lack of know-how, the associated costs, the impunity that accompanies non-compliance and others. Furthermore, if landowners plan not to adhere to the legal reserve limits imposed by the law, they are also unlikely to apply for ASVs.?

Non-compliance with requirement to compensate or restore legal reserve areas?

The result of historic and uncontrolled deforestation results in vast areas that do not have sufficient forest legal reserve and could be restored.??According to IBGE (Brazilian Institute of Geography), there are more than 6 million rural properties in Brazil, of which ca. 4 million properties covering ca. 250 million hectares don't have sufficient area of Legal Reserve[17].

Those who do not have sufficient area of Legal Reserve must either utilise the Forest Legal Reserve Credits (Cotas de Reserva Ambiental?– CRAs) compensation mechanism or restore areas within the rural property itself.?

Since the approval of the Forest Law in 2012, the CRA mechanism hasn’t been regulated yet by the federal government, and to date this mechanism was never used.??At the same time, restoration of legal reserves has not occurred apart from punctual cases. One of the reasons is the lack of financial incentives and/or credit lines for restoration[18], as well as lack of enforcement for landowners to comply with legal reserve requirements.

Lack of enforcement?

In the last years, rampant illegal deforestation (and little forest restoration) has been observed but environmental agencies have been historically unprepared to monitor, verify and enforce the legislation.?

While modern remote sensing technology has made this job easier, a systematic dismantling of the capacity of environmental agencies have been observed in recent years. In the first year of the current government (2018), the budget of the Federal Environmental Agency, IBAMA, was reduced by 51%.[19]??Declarations from the Minister of Environment at the time incited landowners to clear land for agricultural production and resulted in a significant increase in deforestation rates compared to previous years.[20]

The result of these actions is that there is no capacity and no political willingness to monitor, verify and enforce the law – only 1.2% of the illegal deforestation alerts raised in 2020 resulted in infraction notices (MapBiomas 2021). Another study MapBiomas shows that in the state of Pará, for instance, there were there were 60,857 deforestation alerts from 2019 to end of 2021; 59,774 of these had indication of illegalities but no enforcement action was taken.[21]??

Even though the justifications may vary, the overall conclusion is the same: the common practice observed in the Amazon region is the non-compliance with the regulatory framework defined by the Brazilian Forest Code. Combined with blatant lack of enforcement, these factors result in continuous and increasing loss of native vegetation in the Amazon region.

4.??The VCM could play a role, but the requirement of “regulatory surplus” prevents climate action?

Climate finance could play an important role in providing the financial incentives required for forest conservation and forest restoration in Brazil – ultimately supporting the implementation and enforcement of the Brazilian Forest Code.??The requirement of “regulatory surplus” adopted by some standards, however, will prevent the use of carbon finance to be used to support implementation of laws and prevent climate action.

One of the most important rules of VCM standards is that project activities need to be additional. As stated in one of the standards, “a project activity is additional if it can be demonstrated that the activity results in emission reductions or removals that are in excess of what would be achieved under a “business-as-usual” scenario and the activity would not have occurred in the absence of the incentive provided by the carbon markets.”

However, in some cases, this?demand extend to the need for project activities to be beyond “regulatory surplus” – i.e., activities receiving carbon finance must be over and above the requirements of any law or regulatory framework[22].

In the case of countries with very low levels of law enforcement, these two requirements are inherently in conflict.??It is clear that forest conservation projects in the Amazon will not occur in the absence of financial incentives (including from carbon markets) even if deforestation is not allowed by law.??Indeed, non-compliance with the law is the baseline scenario, and carbon market incentives could result in a change in behaviour that would be additional to business-as-usual practices.?

5.????????Impacts?

Unless the requirement of regulatory surplus is adjusted, projects aiming at protecting privately-owned forests in the Amazon will not be able to access carbon finance. This, in turn, would preclude 29 million hectares of native forests to receive climate funding for its protection, leaving vegetation containing ca. 14.5 GtCO2?at risk of deforestation.??

Regulatory surplus would also prevent climate finance been used to fund forest restoration of legal reserve areas in Brazil, given that in theory these areas should be restored to comply with the Forest Code.??This is clearly not the case - It is estimated, that ca. 4 million properties covering ca. 250 million hectares don't have sufficient area of Legal Reserve[23]. In the case of the Amazon region alone, this would preclude the restoration of 8.7 million ha of degraded land and the sequestration of ca. 4.35 GtCO2.

There is a need to review the requirements of the VCM related to land use. Methodologies should adopt a “common practice”[24]?approach to analyse whether local laws are complied with, and if law enforcement requires additional support. If this is the case, carbon finance could be an incentive to improve and reinforce current regulations, resulting in additional climate impacts.

[1]Pedro Moura Costa is a director of BVRio Institute, member of the Steering Committee of the Voluntary Carbon Markets Integrity initiative (VCMI), Honorary Fellow of the International Emissions Trading Association (IETA), director of Oxford Climate Policy, non-executive director of ecosecurities Holdings S.A. and founder of Sustainable Investment Management.??The views expressed in this publication are those of the author, and not necessarily reflect the views and positions of these organisations.

[2]?Griscom, Bronson W., et al. "Natural climate solutions." Proceedings of the National Academy of Sciences 114.44 (2017): 11645-11650.https://doi.org/10.1073/pnas.1710465114

[3]?https://www.gov.uk/government/news/12-billion-donor-support-to-halt-and-reverse-forest-loss-and-protect-land-rights

[4]?https://www.emergentclimate.com/wp-content/uploads/2021/11/Press-Release-LEAF-Coalition-Mobilizes-1-Billion-for-Tropical-Forest-Conservation_021121-1.pdf

[5]?https://sustainability.aboutamazon.com/environment/nature-based-solutions

[6]?https://blogs.microsoft.com/blog/2020/01/16/microsoft-will-be-carbon-negative-by-2030/

[7]?https://sustainability.google/commitments/carbon/#supporting-partners

[8]?https://www.apple.com/uk/newsroom/2021/04/apple-and-partners-launch-first-ever-200-million-restore-fund/

[9]?Specifically, properties with forest cover located in the Amazon region need to hold 80% of legal reserve while properties in other biomes (Atlantic Forest, Cerrado, Pampa, Caatinga and Pantanal) need to keep only 20% of native vegetation. An exception is the case of properties containing Cerrado vegetation located in the Amazon region, that need to maintain 35% legal reserve.?

[10]?áreas de Preserva??o Permanente: Permanent Preservation Areas

[11]?MapBiomas 2021.?Annual report on deforestation in Brazil.?https://s3.amazonaws.com/alerta.mapbiomas.org/rad2020/RAD2021_-_MapBiomasAlerta_EN.pdf.

[12]?https://www.icv.org.br/website/wp-content/uploads/2020/06/traseissuebrief4pt.pdf

[13]?https://www.icv.org.br/website/wp-content/uploads/2020/06/traseissuebrief4pt.pdf

[14]?https://atlasagropecuario.imaflora.org

[15]?MapBiomas 2021.?Annual?report on deforestation in Brazil. https://s3.amazonaws.com/alerta.mapbiomas.org/rad2020/RAD2021_-_MapBiomasAlerta_EN.pdf

[16]?MapBiomas Monitor da Fiscaliza??o (Inspection Monitor), 2022. https://datastudio.google.com/embed/u/0/reporting/edba4d53-ed1d-40e7-9da7-0ad4050d55c8/page/p_ervp1r4arc

[17]?See, e.g., Gerd Sparovek et al., 2011: A revis?o do Código Florestal Brasileiro.??Novos Estudos 89.

[18]?https://planaflor.org

[19]?https://www.brasildefato.com.br/2019/05/03/bolsonaro-corta-95-do-orcamento-das-acoes-destinadas-a-combater-mudancas-climaticas/

[20]??https://imazon.org.br/imprensa/desmatamento-na-amazonia-cresce-29-em-2021-e-e-o-maior-dos-ultimos-10-anos/

[21]?https://datastudio.google.com/embed/u/0/reporting/edba4d53-ed1d-40e7-9da7-0ad4050d55c8/page/p_ervp1r4arc

[22]?"The project shall not be mandated by any law, statute or other regulatory framework, or for UNFCCC non-Annex I countries, any systematically enforced law, statute or other regulatory framework. For UNFCCC non-Annex I countries, laws, statutes, regulatory frameworks or policies implemented since 11 November 2001 that give comparative advantage to less emissions-intensive technologies or activities relative to more emissions-intensive technologies or activities need not be taken into account. For all countries, laws, statutes, regulatory frameworks or policies implemented since 11 December 1997 that give comparative advantage to more emissions-intensive technologies or activities relative to less emissions intensive technologies or activities shall not be taken into account.”

[23]?Gerd Sparovek et al.?(2011), in “A revis?o do Código Florestal Brasileiro.??Novos Estudos?89”.

[24]?“Common practice” analyses were used by the Clean Development Mechanism methodologies as a way to define project additionality.