The introduction of a federal cap-and-trade system in the US would bring significant changes to carbon markets globally. Not only the market would increase, but also the underlying emissions reduction projects would have a more diversified basis. This will be possible if the Lieberman-Warner Climate Security Act of 2008, as proposed by a bill introduced in the US Senate by Senator Barbara Boxer on May 20,2008, is enacted.
The proposed Lieberman-Warner Act establishes a program to substantially decrease US emissions of greenhouse gases between 2007 and 2050 by creating a cap-and-trade system in which polluting entities (the "Covered Facilities") would be included. If the established pollution cap, which shall decrease annually, is not met by the Covered Facilities, they will have to purchase allowances in the market.
The bill establishes three different types of allowances: i) Emissions allowances, which are annually established and distributed by the Administrator of the Environmental Protection Agency; ii) Offset Allowances, which are issued and certified for greeenhouse gas emission reductions below a project baseline; and iii) International Emissions Allowances, which are allowances obtained on a foreign greenhouse gas emissions trading market.
The cap-and-trade system to be established under the Lieberman-Warner Act would create a large array of new bussiness opportunities for market players, once it would expand the possibility of carbon offseting through other types of projects that are not covered by the Kyoto Protocol. An example of this would be projects that avoid deforestation.
As a consequence, it would be possible to develop forest conservation projects that could generate emissions reductions. Brazilian investors would potentially benefit directly from such provision, considering that Brazil has one of the largest forestlands in the world. American investors could also benefit from this provision by partnering up with Brazilians to set up forest conservation projects, which implementation costs could be lower than in the US.
Two other areas that could drive the attention of both Americans and Brazilians, in light of the vast technological developments in Brazil in the past several years, are the production of biofuels and the agribusiness sector. Brazil has been in the forefront of agricultural production worldwide, because of its vast portions of highly productive agricultural land and good climate conditions.
Another type of project that could contribute with the capture of carbon dioxide from the atmosphere is the so-called "carbon farming". A few countries, including Australia, have been studying the idea and have reached the conclusion that carbon sequestration could be put into practice by farmers, through a process that involves raising grass-fed cattle instead of grain-fed. Studies proved that grazing animals help the capture of carbon dioxide by grass into the soil. This capture, moreover, is proved to be more efficient than the one resulting from trees and forests, since grass (and crops) cover more of the Earth's surface than forests, and grow faster. If this new technique comes into play in the carbon world, Brazil can greatly benefit from it, once it has a large part of its territory covered by crops, and mainly all the cattle raised in Brazil is grass-fed.
The possibility of using International Emissions Allowances (such as the emissions from the Kyoto Protocol, the EU Emissions Trading Scheme and from voluntary markets) to comply with the cap under the Lieberman-Warner Act may also contribute with the enlargement of allowances market. However, pursuant to a provision of the Lieberman-Warner Act, the owner or operator of a Covered Facility may satisfy only up to 15% of the allowance submission requirement of such Covered Facility by submitting International Emissions Allowances.
Should the Lieberman-Warner Act be enacted, projects that currently aim at generating VERs will become more atractive to investors. Thus, first movers in this field may benefit from being pionneers. These projects must be structured with some flexibility to allow for any future migration into the Lieberman-Warner patterns.
Investors in a number of natural resources projects, including energy-related projects, should pay close attention to the worldwide developments in relation to climate change regulations. The continuity of the Kyoto Protocol and the discussions under the Lieberman-Warner Act may represent real opportunities that may be capitalized in the near future.
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