Brazil's Cbio decarbonization credit market is looking to stabilize in 2023 to counter fuel producers' criticism and gain biofuel producers' trust amid ongoing supply risks.
Brazil's RenovaBio biofuel policy reached its five-year anniversary on 26 December amid a volatile year of rule changes and prices on the Brazilian exchange B3.
The market continues to be influenced by debates about outgoing President Jair Bolsonaro's proposals to make structural changes to Renovabio in an effort to decrease decarbonization costs. President-elect Luiz Inacio Lula da Silva's victory assured a different outlook, propelled by the expectations that he will pursue a greener energy policy, but nothing concrete on the new policies has been revealed as yet.
Despite the uncertain future, the appetite for Cbios may regain momentum in early 2023, eventually rising back to the R100 ($20) mark from around R80-90 in late December, because of the risk of credit shortages for annual targets in coming years.
In November, the amount of Cbios available in the market met the 2022 decarbonization goal of 36.6mn credits, well ahead of the September 2023 deadline that replaced the original December 2022 deadline by decree. That same decree moved the 2023 compliance to March 2024.
This means distributors might focus their acquisitions for next year's target on the third quarter of 2023, potentially leading to a rise Cbios prices if purchases mostly take place at the end of next year and the beginning of 2024.
The rise in Cbios prices this year was absorbed by distributors, who had difficulties passing higher costs on to final consumers because of intense competition in the distribution resale market. The issue is especially complicated for smaller retailers, who are more vulnerable to cash flow erosion than market leaders. These conditions put Renovabio at a risk of legal challenges.
From the perspective of a Cbios producer, 2023 is starting at a disadvantage, as the government recently decided to maintain the current biodiesel blending mandate at 10pc throughout the first quarter. The blending level is set to increase to 15pc in April.
Brazil's mines and energy ministry (MME) sent two proposals to Lula's transition group that aim to increase Cbio generation from other sources, such as synthetic fuels, green hydrogen and other products with low carbon intensity. The idea is to improve competition among Cbios generators and reduce prices.
Biofuel producers are critical of Renovabio's "inconsistent rules". They argue that changing the rules during the game hinders their ability to plan investments for increasing production capacity and that uncertainty creates a troubling cycle: Without investment to increase supply and sales, the risk of a credit shortage remains.
A volatile second year
The second full year of Renovabio was marked by higher volatility for Brazil's decarbonization credit market.
Cbios had an average price of R112 from 1 January-12 December, ranging from R32 to R209 — a record high.
After starting 2022 near R50, Cbio climbed consistently because of increasing fuel distributor appetite amid a tight supply outlook for the next two years. Renovabio has set a target of 37.47mn for 2023 — down from 42mn originally — and 50mn credits for 2024.
Cbios prices reached the record-high — double the cost expected for this year — in June, as Brazil faced higher fuel prices. The federal government launched measures to curb inflation, including reducing taxes on gasoline and diesel, which affected ethanol hydrous sales because it became less competitive at the pump. Some changes were also announced to Renovabio, such as postponing deadline compliance targets and lowering the 2023 target. Consequently, Cbios prices slumped back to R50.
Cbios prices rebounded and reached R100 after Lula's electoral win at the end of October.
Under Renovabio, each Cbio generated from the sale of biofuel represents one metric ton of avoided CO2. The program sets annual targets for reducing greenhouse gas emissions for fuel distributors. The achievement of the targets occurs through the acquisition of Cbios sold by biofuel producers. Cbios started to be negotiated on B3 in 2020.
