Can Markets Save the Amazon Rainforest?

International rules on carbon trading hold the key to halting deforestation, says Brazil’s Joaquim Levy

September 21, 2021
Portrait of a smiling Joaquim Levy

China and the United States are capturing much of the world’s attention ahead of the United Nations’ COP26 Climate Change Conference in November. They are the top two carbon emitters and will need to agree on ways to transform their economies if the world hopes to reach net-zero emissions by 2050 and limit global warming. Yet for Brazil and many developing countries, a crucial issue is establishing rules for embedding nature-based solutions in international carbon markets, says Joaquim Levy, the country’s former finance minister and one-time managing director of the World Bank.

Brazil has many of the ingredients for a sustainable future with hydropower, wind, and solar generating most of its electricity, and a healthy biofuel sector. But deforestation has accelerated under President Jair Bolsonaro, who has relaxed law enforcement in the Amazon since taking power two years ago.

Carbon offsets could help arrest that trend by making the trees more valuable. Private trades have been taking place but they fall far short of Brazil’s potential and the world’s needs, says Levy. Concerns about how to verify nature-based carbon capture and avoid double-counting of offsets have stymied attempts to develop international carbon markets, which the Paris climate accord calls for, but Levy insists that technical solutions to those issues can be found if leaders have the political will.

“You need money for the Amazon,” he says. “It is important that global leaders find ways to embed nature-based solutions in regulated carbon markets. That will be important for Brazil and for most of the developing world.”

Levy discussed climate policy and solutions recently with the Oliver Wyman Forum.

Where does Brazil sit on the path to net zero?

Our emissions from fossil fuels are low compared with most countries, and many companies are committed to improving their carbon footprints and going towards zero. But roughly half of our total CO2 emissions come from deforestation, especially from the Amazon.

Let’s start with the broader economy. What are Brazil’s advantages?

Brazil can go towards net zero with minimal impact. The main source of global emissions is energy, and 90% of our electricity is clean in most years. Seventy percent is hydro and the rest is other renewables. Solar and wind are the cheapest sources for new generating capacity. Regarding transportation and part of the industrial sector, we already have biofuels and multiple options for green electrification. But this is one half of the picture.

What about your big question mark – the Amazon?

The Amazon can be part of the solution with the right incentives.  We have to show that living trees are valuable and protecting the forest goes hand in hand with development. Carbon markets can contribute to this. Such markets will send powerful price signals, even if carbon prices are lower in Brazil than in Europe. They will reduce emissions by helping change energy sources, industrial processes, and consumer behavior while generating revenue to reduce deforestation.

A carbon market proposal in the Brazilian Congress would allow offsets from nature-based solutions and conservation, and provide finance for further conservation and reforestation efforts. The World Bank has shown offsets can bring significant changes with a carbon price of $10 to $15 a ton. These arrangements are possible while ensuring full integrity of offsets and avoiding undue burdens to the most vulnerable in society.

At the international level people sometimes say those offsets are not good because they provide only temporary carbon sequestration, and forests can burn. But we can deal with that by creating penalties and insurance pools to minimize losses. A robust demand for offsets and carbon credits is crucial to protecting the Amazon. Voluntary markets and philanthropy are important but lack the size. Embedding nature-based solutions in regulated markets will be important for Brazil and many developing countries. If the only solutions accepted globally are high tech, capital-intensive and ready only 20 years from now, the road to net zero may not be fair. We would be gambling while there are solutions available now.

You have written that Brazilian farmers and livestock producers can conduct their business profitably without deforestation. What can be done to turn your suggestions into practice?

It's already happening. The soy moratorium banning the trading of products from deforested areas has been a success for more than a decade. Global investor and consumer pressures have led beef processors and local authorities to accelerate traceability of animals to ensure that no meat sold comes from deforested areas.

Also, producers are substituting restored pastureland for virgin land. There are 18 million hectares of degraded pastureland, and it is often more profitable to restore this land than to clear land in the Amazon. You can buy cheap degraded land and increase its fertility and yield by integrating crop, livestock, and forestry production. This requires patience, skills, and money, but many producers have them. Rotating soybean, corn, and grass for cattle grazing is good for the land, and profitable.

Not everything has been solved. But regional governments are starting to cooperate to strengthen traceability, and the national government is fostering the financing of low-carbon agriculture. Global support for these actions and a clear expression of expectations can be helpful.

You seem to suggest that Brazil has plenty of solutions if it can muster the political will to act. Is that correct?

Political will is important because we need rules to facilitate the transition. Wind power, for instance, provides almost 20% of our electricity today. A framework of auctions adopted almost 20 years ago provided long-term contracts to wind power suppliers, reducing the risk for those investing.

Carbon markets can play a similar role in guiding investors. With clear emissions targets and markets, investors will know that companies will be scrambling to reduce emissions and find offsets, and a carbon price will emerge. Then you will know how much one is willing to pay for saving or planting trees. With adequate governance these resources can transform the Amazon in a few years and improve the lot of local populations.