LatAm carbon markets continue to evolve

Latin America's carbon markets are evolving from voluntary to mandatory as countries implement mechanisms adapted to their resources, such as carbon taxes or emissions trading systems (ETS).

But the region needs to increase its offer of nature-based solutions and guarantee that projects will benefit local communities.

"Ministries of environment are beginning to approve mitigation initiatives, as well as eligible certification standards and validation and verification bodies," Latin America lead at the International Emissions Trading Association (IETA) Camilo Trujillo said.

Four of the largest economies in the region — Brazil, Mexico, Colombia and Chile — already have or are in the process of designing an ETS. Mexico is the only country in the region that has implemented an ETS although it is still not fully operational. Its ETS was launched in 2020 in a pilot phase until end 2021, followed by a transition stage in 2022. The government is working to establish a carbon price. The country also has had a federal carbon tax since 2014 on fuel producers and importers, while some states have separate carbon taxes.

Brazil is waiting for the approval of its draft bill to create a carbon market. A last draft review was submitted to the senate in December last year. Disagreements on the role of the agriculture and transport sectors in this market are delaying the final approval.

Argentina's government under new President Javier Milei recently proposed the creation of an ETS in its omnibus bill. But the country's congress halted the approval process of the bill, making the future of the proposal unclear. Argentina has an operating carbon tax.

Colombia has a carbon tax with an offset program, both of which have been in place since 2017. Chile and Paraguay also have carbon taxes.

Those countries with less financial resources to develop carbon pricing mechanisms are leveraging the development of voluntary carbon footprint measurement and compensation programs as a first step. That is the case of Ecuador and itszero carbon program through which companies measure and reduce their carbon footprints voluntarily.Panama, Costa Rica and Peru have similar initiatives.

Around 22pc of global carbon credit issuances and 23pc of retirements come from Latin America, according to data from IETA. This can be explained in large part by its large endowment in natural climate solutions. But for a country to maximize emissions mitigation, offers need to increase, said Amy Kessler, director for Latin America at offset registry Climate Action Reserve. "More projects need to be developed by locals to guarantee they will receive benefits," she said.

Solutions from nature

Nature-based solutions are boosting carbon markets in Latin America as they not only preserve biodiversity and reduce carbon emissions, but they are also an opportunity to boost the region's economies.

"We are seeing that nature-based solution projects are expanding to other sectors beyond forestry such as agriculture or blue carbon," Trujillo said. "We see more of these credits entering the market."

Nature-based solutions refer to projects aimed at restoration, protection or management of ecosystems to intentionally address social challenges. Restoring forests to improve water supply or protecting coral reefs to reduce flood risk could be considered nature-based solutions.

Of the total carbon credit issuances in the region last year, 76pc were related to nature-based projects, IETA said.

By Jacqueline Echevarria