Ministry of Finance proposes global coalition for carbon market

“We believe the proposal is effective because it establishes an emissions cap; fair, because it takes per capita income criteria into account; and politically viable, because it does not require agreement among 200 countries to move forward. All that is needed is a coalition strong enough to make it happen,” says Rafael Dubeux, deputy executive secretary of the Ministry of Finance. “If it manages to bring together Brazil, the European Union, and China, it may encourage others to join.”

The Ministry of Finance has been developing the proposal internally and in coordination with other ministries. Mr. Dubeux was invited to present the idea to a group of economists led by Brazilian José Scheinkman, who was asked to form a team to advise COP30 President André Corrêa do Lago. “We had a conversation with Scheinkman and other economists, such as MIT professor Catherine Wolfram.” Ms. Wolfram leads a group studying how to make the coalition feasible and includes several Brazilian economists.

The Brazilian government and the ministry headed by Fernando Haddad hope the proposal will gain traction in Belém. “We expect to have a joint declaration from countries at COP30 to establish the coalition,” says Mr. Dubeux. In a recent tweet, European Commission President Ursula von der Leyen expressed support for COP30 in Belém, writing: “With Brazil’s leadership in carbon markets, we must make Belém a true milestone for the planet.”

Below are the main points from Mr. Dubeux’s interview with Valor, in which he explains the proposal in detail:

Day 1

On his first day in office, Minister Fernando Haddad asked me to begin working with the ministry team on what would later become the Ecological Transformation Plan. The goal was to reorient the Brazilian economy toward a low-carbon model that is more distributive and driven by technological innovation. It is worth noting that finance ministers typically take office facing a series of fiscal emergencies, and long-term strategic planning is rarely a priority at the outset.

We launched a collective effort involving teams from the Ministry of Finance, the Internal Revenue Service, the Economic Policy Secretariat, the Economic Reform Secretariat, and the ministries of Environment, Mines and Energy, and Trade, Industry, and Services. We structured the agenda around three main objectives: innovation, sustainability, and income distribution.

The Ministry of Finance’s role

The Ministry of Finance’s core responsibilities include managing GDP, inflation, unemployment, and other macroeconomic indicators, as well as improving the business environment for investment through tax, insurance, and credit reform. These initiatives form the prerequisites for development. But they are not enough.

Minister Haddad argues that, in addition to ensuring macroeconomic balance and improving the business environment, the Ministry of Finance and the government must open a third front: developing a long-term strategy for a growth model that replaces a reliance on exporting commodities without added value with one rooted in innovation; that decouples GDP growth from environmental degradation; and that distributes income more equitably, in light of Brazil’s history of profound inequality.

Brazil holds historical legitimacy on this agenda. It hosted the 1992 Rio Summit, has a power generation mix primarily based on hydroelectricity, has used ethanol on a large scale since the 1970s, possesses the world’s richest biodiversity, has invested heavily in renewable energy, and has combined economic and climate policy initiatives.

Socio-environmental reglobalization

By early 2024, we were already discussing what proposals Brazil, as host of the G20 and COP30, could present to help shape a financial architecture capable of steering global economic growth toward a low-carbon model. We have a role to play in this debate.

The minister argues that while globalization in recent decades has brought economic efficiency to certain value chains, the time has come for “socio-environmental reglobalization.” This means adding a new layer to international governance so that, alongside economic efficiency, global integration also incorporates social and environmental considerations. The goal is not to dismantle globalization, but to create a new model of productive integration that fully accounts for these elements.

Fund for tropical forests

As we prepared proposals for COP, we realized that, alongside the key topics already under discussion—such as NDCs (countries’ climate commitments), adaptation, and climate justice—there was a gap. What was missing was a proposal with a stronger economic focus at the heart of the climate challenge.

We had already developed a proposal with the Ministry of the Environment for the Tropical Forest Forever Facility (TFFF), a fund for tropical forests being launched by Brazil. If successful, it will become one of the most significant contributions of the COP30 process. Concrete in its design, it aims to generate a permanent flow of billions of dollars for developing countries that preserve tropical forests—a fund even larger than the resources of many multilateral banks.

The TFFF is set to become one of the largest global funds ever created. Our goal is for implementation to begin at COP30, with initial contributions coming from sovereign wealth funds, governments, central bank reserves, and philanthropic organizations. Yet, as crucial as the TFFF may be, it does not directly tackle the core issue of climate change: greenhouse gas emissions.

Unrealistic expectations

Some observers, in my view, hold unrealistic expectations that the “transition away” from fossil fuels approved at COP28 will prompt some countries to announce they will stop using or producing oil by 2030 or 2040. I do not believe that will happen.

What we can do is create mechanisms that enable an orderly phase-out of fossil fuels. This can occur once regulatory and financial frameworks induce the transition, either because low-carbon alternatives become more competitive or because continuing to exploit oil under current conditions becomes prohibitively expensive through carbon pricing or other regulations.

Four criteria

In the debate over decarbonization, four main criteria typically emerge. First, which producers face the highest and lowest costs? Those with the highest costs would likely be the first to halt production. Second, which producers have the highest and lowest carbon intensity per barrel? Third, per capita income: it makes sense for wealthy nations to cut emissions before poorer ones. Why should Nigeria stop producing oil while Canada continues to do so? That would not be fair. Fourth, energy security: countries must also weigh the stability of their energy supplies when planning emission reductions.

A global emissions cap

Given these criteria, how can we design an organized transition that reduces emissions quickly while ensuring fairness and equity? At the Ministry of Finance, in collaboration with the Ministry of the Environment, we developed the idea of creating a global emissions cap—one that would decline over time. Setting such a limit for the economy is fundamental to a regulated carbon market.

Market integration

Any activity that generates emissions would need to purchase allowances under this cap. As the cap decreases over time, the cost of these allowances would rise, creating a financial incentive for companies to decarbonize. We would start with a cap close to current emission levels and, ideally, reach net-zero emissions by 2050.

The most effective way to tackle climate change globally would be through a carbon price established by this emissions cap—a “cap-and-trade” system that gradually declines to zero by 2050. But such a system would require the approval of nearly 200 countries participating in the COPs. We already know that it is not realistic; one country even withdrew from the Paris Agreement.

The Open Coalition

We wanted to present a proposal that reflects Brazil’s ambition while remaining politically feasible. That led to the idea of creating the Open Coalition for Integrating Carbon Markets. The central goal is to bring together the world’s largest economies.

Three major objectives

In our view, the proposal must achieve three objectives at once: it must be effective in reducing emissions, fair, and politically viable. The solution we found is the Open Coalition: a group of countries sharing a common emissions cap, which would be reduced gradually over time.

Criteria for quotas

Each country’s quota would be determined using several factors. Population size is one—China and Luxembourg cannot receive equal quotas. Per capita income is another factor, ensuring social justice: higher-income countries would have stricter quotas, giving developing countries room to emit more while requiring wealthier nations to accelerate their decarbonization.

Finally, there must be a border adjustment mechanism—different from the European Union’s CBAM (which imposes a carbon price on emissions embedded in imported products)—to balance trade considerations fairly across coalition members.

Border adjustment

How does the EU’s proposal differ from ours? First, governance: the CBAM is unilaterally established by the EU, whereas in our coalition, all participants would share in governance. Only those unwilling to price carbon would remain outside—and they would bear the consequences. Moreover, our proposal would not create a financial flow from poorer nations to wealthier ones.

Money for adaptation

We propose directing part of the revenue collected from the carbon market and border adjustment toward climate adaptation efforts in developing countries. This would create a permanent financial flow to address the climate crisis.

In summary, the proposal is effective. It imposes a cap, it is fair because it incorporates a per capita income mechanism, and it is politically viable because it does not require consensus among 200 countries. All that is needed is a coalition strong enough to move forward. If it includes Brazil, the EU, and China, it could encourage others to join. Another relevant player is California, which—if it were a country—would rank as the world’s fourth-largest economy.

Social justice mechanisms

We are considering differentiated border adjustments based on per capita income—countries with lower income levels could be exempt from paying or required to pay less.

*By Daniela Chiaretti — São Paulo

Source: Valor International

https://valorinternational.globo.com/