The carbon market: an opportunity to control deforestation caused by agricultural expansion in Brazil

Brazil is at the center of efforts to meet the United Nations' global climate and biodiversity goals. More than 14% of the world's priority ecosystem conservation areas are in Brazil (PLANGEA Web, 2023). As a result, the country has the greatest potential for Reducing Emissions from Deforestation and Forest Degradation in Developing Countries (REDD+), with an estimated nine billion tons of carbon that will not be released into the atmosphere if our ecosystems are preserved. In addition to having the greatest biodiversity on the planet, many species of fauna and flora are unique to Brazil and several plant species of global economic importance are native to the country.

Nevertheless, despite its undeniable importance, since 1970 Brazil has lost 18% of its ecosystems to deforestation. According to the Annual Deforestation Report (MapBiomas, 2023), in 2022 Brazil's deforested area grew by 22%. Agricultural expansion was the main culprit for the suppression of native plant cover, accounting for 96% of this deforested area, nearly two million hectares. Yet only 1% of the farms registered in the Rural Environmental Registry (CAR) showed any sign of deforestation in 2022. Although very low, this percentage represented 79% of deforestation alerts in Brazil, reflecting a high concentration of deforestation on a small number of registered farms. Specifically in the Cerrado, one of the most severely affected biomes, the Ministry of Environment estimates that half of the deforestation was carried out legally, duly authorized by state environmental agencies.

This data underscores the urgency of implementing policies to reduce legal deforestation and to increase the voluntary conservation of native vegetation, as well as to manage environmental resources more efficiently, moving towards sustainable agricultural production. In addition to social and environmental benefits on national and global scales, such as climate change mitigation, these actions offer farmers access to deforestation-free commodity markets, including the European Union and the United Kingdom.

According to the Law on the Protection of Native Vegetation (known as the Brazilian Forest Code), farmers must set aside part of the area of native vegetation on their rural property as a Legal Reserve, in addition to maintaining/restoring Permanent Preservation Areas on their land. Studies reveals that landowners believe that compliance with these requirements fulfills their obligation to the environment. In order to encourage behavioral changes and stimulate additional steps, other mechanisms are needed to make farmers realize that the voluntary conservation or restoration of native vegetation is an attractive business opportunity.

In this context, the MATOPIBA region draws special attention as the country's fastest-growing agricultural frontier. It accounted for most of the Cerrado’s deforestation in 2022, around 82% of the area of native vegetation cleared. The ten municipalities with the biome’s most deforested areas are also located in this territory. In order to identify challenges and opportunities for financial mechanisms for environmental conservation and restoration, the International Institute for Sustainability (IIS) interviewed more than 60 farmers in the four states that make up the MATOPIBA region (Maranhão, Tocantins, Piauí and Bahia). The survey, financed by the Land Innovation Fund (LIF), showed that the majority of farmers there (70% of those interviewed) see the sale of carbon credits as their main source of potential income from areas with natural vegetation, followed by payments for environmental services (PES).

“Although many farmers are interested in accessing a market that makes the voluntary conservation of native vegetation financially worthwhile, most of them do not understand how a carbon market works and say they do not have access to it.”

The carbon market is a funding mechanism with great potential applications in rural areas, and there are significant opportunities for its development in Brazil. REDD+, forest management, reforestation and forest restoration initiatives offer the sector's greatest potential in all three spheres of the carbon market: mitigation, regulated markets and voluntary markets (ICC & WayCarbon, 2022). In addition to helping with a farm's legal compliance, they can also drive sustainable agricultural practices, new green jobs, and sustainable economic development for the country.

Although many farmers are interested in accessing a market that makes the voluntary conservation of native vegetation financially worthwhile, most of them do not understand how a carbon market works and say they do not have access to it. The procedures for certifying, registering, and monitoring the reduction of carbon emissions in a project come at a high cost, which can be an obstacle depending on how large the area is and where it will be applied. Generally speaking, the minimum area for a carbon credit project based on restoration to be financially viable is around 10,000 hectares. Since the average size of a farm in Brazil is 69 hectares (IBGE, 2020), this is a deterrent, especially for small and medium landowners. New strategies are needed to share the costs and challenges among landowners in the same biome or biogeographic region, to implement carbon projects as organized groups.

Brazil has one of the world’s most unequal distribution of land ownership (Mapa da Desigualdade, 2020). The 15,686 largest holdings in the country (0.3% of all holdings) occupy 25% of all agricultural land in Brazil. On the other extreme, we must add up the areas of the 3,847,937 smallest farms (77% of all farms) to reach the same percentage. Organized efforts, therefore, will be essential to keep carbon markets from excluding small and medium farmers, further increasing class disparities and inequalities.

Given this market's great potential in Brazil, sub-national governments must help create the conditions for the carbon market to materialize into funding for conservation and restoration in rural areas, generating income for environmentally compliant farmers and keeping them in the countryside. For this to happen, however, technical and governance issues need to be addressed, as well as ensuring legal certainty for potential investors and a future market for these projects. To this end, a technical report produced by IIS identified eight key recommendations for the actions of subnational governments towards a more inclusive carbon market in Brazil. These recommendations bring together a variety of efforts, including theoretical references, expert perspectives and a contemporary outlook gleaned from a workshop with key players in state governments, carbon project developers, potential investors and civil society organizations:

1. Regulations and a political structure for the carbon market must be established, once underlying legal issues have been settled, such as land-holding rules and compliance with the forestry code. The definition of basic criteria for private and jurisdictional projects will clarify opportunities for small and medium landowners;

2. Governments can promote regional certification for carbon credits to pool administrative costs and processes. Lower-cost, less bureaucratic projects bring in small and medium farmers. In addition, rigorous scientific backing and third-party verification bring transparency and international competitiveness to certification;

3. Respecting local governance and establishing trust-based relations gets landowners involved, a vital aspect for long-term activities and effective carbon projects. In addition, coalitions between governments, the private sector and the third sector can help small and medium farmers scale up their projects and impacts;

4. The return on carbon credits must be fair and appealing to farmers, obtainable through monetary mechanisms or other individual and collective benefits, such as: physical and financial analysis, technical assistance and training, technological tools, and loans. To achieve expectations and enable the participation of small and medium farms, cooperatives or associations will be valuable tools;

5. It is essential to reduce financial costs as the quality of carbon monitoring, reporting and verification improves, especially through advances in methodologies and protocols that can be scaled up in Brazil. Investment in science and technology is essential to create alternatives that can be adopted by small and medium farmers;

6. Financial alternatives must be facilitated by the joint action of different social sectors to include small and medium farmers. One example is blended finance, which has been gaining ever more ground in this context. Governance and transparency must be strengthened to attract investors and lenders to such nature-based solutions (and their long-term activities and benefits);

7. Technical training for civil servants, extension agents and third sector organizations is essential to make carbon projects work for small and medium farmers. Adapting to each location brings better results and enhances the administrative capacity of sub-national governments, avoiding bureaucracy and delays;

8. Besides enabling good internal dialogue within the project, communications must reach all of its stakeholders and support network, to allow active participation in discussions and decision-making. Communication about carbon policies and projects must also reach others, such as companies and industries, considering their specificities, interests, levels of knowledge, etc.

This robust, participatory approach creates cooperative support networks for governments and farmers, boosting the chances for success of policies and projects in carbon markets. The importance of these markets is clear, as economic tools for sustainable practices in rural areas, benefiting both environmental conservation and the prosperity of small and medium farmers. Implementing these actions will build awareness of the importance of mitigating climate change and conserving biodiversity and transitioning to a more sustainable and resilient future.

*Rafael Loyola is the IIS executive director; Juliana Almeida-Rocha is the technical-scientific manager; Bruna Pavani and Fernanda Gomes are researchers.