The carbon credit acquisition target under Brazil's national biofuel policy Renovabio for 2025 should range between 36.2mn-48.9mn Cbios, according to preliminary goals defined at the end of 2023 and excluding an add-back of a credit shortfall in the current cycle.
Meeting notes from a mid-August session of the Renovabio Committee — the technical arm of the Renovabio program — confirmed that targets for the next cycle will be based on the 2023 proposal. "A [Ministry of Mines and Energy] MME representative presented the criteria used in the [regulatory impact analysis] last year and said that, for 2025, only one point will be defined in the curve already defined for the 2024-2033 decade," the notes said.
Now in the process of defining goals for the next cycle, MME told Argus that it will likely submit the regulatory impact analysis for public consultation in September. It will then be presented to national energy policy council CNPE.
Discussions of 2025 goals strongly influence current Cbio prices, as participants calibrate credit availability positions based on the spillover from the previous cycle. Market participants expect the shortfall in the 2023 cycle — partly the result of legal challenges launched by distributors — will be repeated in the current cycle, as distributors out of compliance continue to flout government-set targets.
Much of the market expects default levels in 2024 to range between 15-20pc of required volumes, similar to recent cycles. This means a surplus of around 10mn Cbios from the 2024 target of 46.4mn Cbios, which includes 7.6mn credits not properly retired by defaulting distributors in 2023.
A surge in Cbio generation is also supporting the potential for spillover of inventories into 2025. Around 27mn Cbios were issued in January-August, 25pc more than in the same period in 2023 — mainly the result of strong sales of hydrous ethanol, which retains a retail price advantage over gasoline. The increase in generation supports the view of surplus credits at the end of the 2024 cycle, putting downward pressure on Cbio prices.
The Cbio credits in inventories through August plus those already retired equal almost 80pc of the 2024 target.
"Our estimate of the final stocks of decarbonization credits in the target year 2024 increases from 12.1mn Cbios to 13.6mn Cbios," Brazilian investment bank Itau BBA's agro consultancy estimates. In the bank's view, distributors should retire only 35.8mn Cbios by the end of December, leaving a gap of around 10.6mn credits.
Legal challenges
The Renovabio default rate has steadily worsened in recent years, thanks to legal challenges relieving regional distributors of obligations established under Renovabio.
Between 2020 and 2021, compliant companies fluctuated between 96-97pc. That fell to 90pc in 2022. Compliance rates dropped to 81pc in 2023, with 63 of the 145 companies defaulting.
"The program is law, despite legal challenges," Lucas Brunetti, an analyst from Itau BBA's agro consultancy, said. "There is an interest of society in advancing the decarbonization agenda, and there are already relevant volumes of money moved in this market."
Under Renovabio, each Cbio generated with the sale of biofuel represents one ton of CO2 avoided. The program establishes annual greenhouse gas emission reduction targets for fuel distributors. The goals are achieved through the acquisition of Cbios marketed by biofuel producers.
