The prospect of a tighter market for Brazil's carbon credit Cbios could intensify struggles between fuel distributors and biofuel producers over compliance with Brazil's national biofuel policy Renovabio in 2024.
A flurry of lawsuits filed by distributors opposing Cbio acquisition obligations established under Renovabio may alter Brazil's carbon credit market. Some injunction requests have been granted, others were denied, but all are preliminary with no rulings based on merit, Argus found. If the federal government manages to quash the injunctions, it could lead retailers who had hopes for a legal victory rushing back to the Cbios market. A victory for retailers, on the other hand, could put the Renovabio program in check.
"The account is unpayable [for distributors]. We are entering a reckless situation," a source linked to distributors with lawsuits told Argus. In addition to a fine, those who failed to meet 2022 Cbios targets are obligated to add the shortfall to their 2023 goals.
Legal uncertainty leaves market participants on alert, especially large distributors who are fully complying with the goals of Renovabio and fear unfair competition from those who are in default. Such concerns will gain more relevance if the price of Cbios strengthens over the course of 2024.
Participants expect Cbios prices will remain firm, between R100-110 ($20-22), in the coming months. If the 2022 shortfall and 2023 volumes be met by the March 2024 deadline for the 2023 target, 41mn Cbios will need to be accounted for. This will further erode carryover inventories, estimated between 6mn-9mn Cbios, that will be needed to meet the 2024 goal of 38.8mn between April-December.
Fearing a tight market, distributors interested in building inventories early could enter 2024 with a strong appetite. Strong demand could be balanced by cash flow needs among ethanol plants towards the end of the first quarter, after the harvest is wrapped up. These factors could increase Cbio price volatility in the new year.
The good news on the supply side is Brazil's national energy policy council CNPE's recent decision to increase the biodiesel blending mandate to 14pc from 12pc, a change that enters into force in March 2024. The CNPE also approved the creation of a working group to study the "technical feasibility" of raising the anhydrous ethanol content in gasoline to 30pc from 27.5pc.
Decarbonization debate
Legal challenges from regional distributors are part of a broader push for a change to Renovabio rules.
One of the main sources of pressure from distributors is their roles as the mandatory part, responsible for the demand side of Cbios, that they want to shift to the fuel refining and importing sector. Others are pushing for a change that would establish a term of sale obligation on the part of "emitters," which includes biofuel producers.
Renovabio's 2023 was marked by talks and responses involving associations of distributors and producers, especially when the price reached a high of R150 in July. In the final accounting, the government's decision to reduce the 2024 target to 38.8mn credits from an initial goal of 50mn decreased prices in the second half of the year. Prices ranged between R105-109 on 28 December, up from R87 on 30 December 2022.
Renovabio, by design, has the potential to encourage a reduction of the carbon footprint of fuel production, but still faces price obstacles that could hinder the increase in biofuel production, market sources say.
Under Renovabio, each Cbio generated from the sale of biofuel represents one ton of CO2 avoided. The program sets annual targets for reducing greenhouse gas emissions for fuel distributors. The goals are achieved through the acquisition of Cbios sold by biofuel producers.
