The Market of Decarbonization Credits: How does it work and what does the first negotiation represent?

On June 12, the B3’s Trader platform had its first negotiation of decarbonization credits, also known as CBios. Launched on April 27, the system allows the listing and trading of these securities, which are part of a program aimed to drive the use of biofuels. The first negotiation conducted on the platform involved the purchase of 200 CBios, with each credit priced at BRL 50.00.
CBios are environmental securities that are part of Renovabio, the National Biofuels Policy. Credits are issued by fuel producers or importers and underwritten by financial institutions to be further traded in the financial market. The listed assets can be purchased by fuel producers, distributors, and other investors in the over-the-counter market. Currently, B3’s Trader is the only platform available for the trading of CBios.
Although the volume negotiated is still extremely low, the first trade has a symbolic meaning to leverage this new market.

“B3 operates as an infrastructure provider for this market, ensuring that the listing, trading and disclosure of information about the product take place in a safe and long-established environment,” explains Mr. Fábio Zenaro, B3 Director for Over-the-Counter Products and Commodities. The platform allows the disclosure of information in D+1 and helps investors follow the evolution of the offer and have a price reference for trading.
According to Mr. Paulo Costa, Coordinator of Biofuels at the Ministry of Mines and Energy, this first transaction demonstrates that the whole process is organized and in full operation. “Market agents have a clear understanding of the process, from the issuing to the negotiation of the assets. The definition of prices is also important to set the first standards for this market,” he says.
He explains that Renovabio is a policy that recommends market instruments with a view to promoting the replacement of fossil fuels by biofuels, which are less polluting to the environment, such as ethanol, biodiesel and bio QAV (aviation kerosene), among others. The decarbonization credits were created to foster the policy, which has no state subsidy. 

Decarbonization Targets and the Impact of the Pandemic

The decarbonization targets are important to understand how this new market works. They are set by an interministerial committee coordinated by the Ministry of Mines and Energy. “Decarbonization targets are calculated based on mathematical models to establish a ten-year decarbonization plan,” Mr. Costa explains. Targets comply with the Federal Law #13,576/2017.

The targets apply to fuel distributors and indicate a mandatory amount of CBios to be bought by them. It is important to mention that investors, pension funds and assets can also buy these credits as they seek return for their portfolios.
Decarbonization targets are valid for 10 years and revised on an annual basis. Today, they are under discussion and will be redefined. The negative impacts on fuel consumption levels, which also affect biofuels, is one of the problems this new market has been facing at this very start.
According to Mr. Costa, fuel consumption dropped by approximately 30% in the outbreak of the pandemic. Today, consumption levels improved, but the decline continues to range from some 15% to 20%. The decrease in consumption has been also pushing down CBios offers and is likely to negatively impact on the compulsory purchase of these assets by fuel distributors.
“Fuel distributors are waiting for the new targets, which are likely to be defined within a month,” foresees the Coordinator of Biofuels of the Ministry of Mines and Energy. This process will be also impacting on CBios’s prices. Accordingly, there’s little appetite for them. He believes the market will see an increase in liquidity in the second half of the year, mainly in the period close the end of the year.

Felipe Bottini, founding partner of Green Domus, the first inspection firm accredited to conduct the verification of biofuel companies, remembers that before the pandemic, the estimate on the purchase of CBios by fuel distributors was 9 million tons. With the pandemic, the demand for all fuels has decreased. “It is unlikely that distributors will buy CBios now as their price will probably fall after the targets review,” he says.
He restates that the first negotiation represents the birth of the program, but that its value is symbolic. “A larger trading volume will be attained after that targets are reviewed. That is the reason why the ongoing review should be conducted as soon as possible,” he says. If the process takes too long to be completed, it can delay the start of operations and the pace of the market.