Finally, the voluntary carbon market - Decree-Law 4/2024
SÉRVULO PUBLICATIONS 18 Jan 2024
The Decree-Law 4/2024, 5th January, which establishes the voluntary carbon market and sets out the rules for its operation, is now in force. The final text approved introduces some changes compared to the draft Decree-Law submitted for public consultation in 2023, which included 85 contributions. The content of this draft legislation was analysed in SÉRVULO's previous legal update “portuguese voluntary carbon market under public consultation”.
The following paragraphs summarise the main changes compared to the text initially submitted for public consultation.
a) Increase the amount of future carbon credits – 10% to 20 %
One of the major challenges for the Portuguese voluntary carbon market is how to attract new promoters through the creation of favorable financial conditions for the development of new projects. As analysed before, this challenge can be achieved by increasing future carbon credits, i.e., carbon credits issued prior to GHG emission reductions or carbon sequestration.
Taking these concerns into account, the legislator raised the percentage of future carbon credits to an amount “that does not exceed 20 % of the total carbon credits expected for the duration of the project” (article 14 (2)).
b) More serious consequences for “intentional reversals”
In the version submitted for public consultation, when there was an intentional reversal of emissions - attributed directly to the promoter - the promoter was responsible for replacing, within one year, “a number of carbon credits equivalent to the volume of emissions reversed and proceeding to its cancellation, or submitting one or more carbon sequestration projects, to which the credits it generated are discounted and cancelled”.
The final text approved establishes that, in the event of an intentional reversal, “the promoter cancels the credits issued by the project, in an amount equivalent to the double of the reversal that occurred” (article 21 (6)) and not simply in an equivalent amount. On the other hand, although the possibility of direct compensation through carbon credits issued by other projects has been expressly eliminated, it doesn't seem that a promoter is excluded from doing so, if it does so “within a maximum of one year”.
Another innovation related to this issue is the “possibility” (not mandatory) for the promoter to enter into insurance to cover possible situations of reversal of sequestered emissions, with the conditions and minimum capitals being defined by an order to be approved (article 21 (4)).
c) Reinforcing the “guarantee pool”
The regulation of the “guarantee pool” (known in similar international markets as a “buffer pool”) has also been significantly amended in the approved text.
The draft submitted for public consultation established that the guarantee pool, to safeguard against situations of “non-intentional” reversal, would be made up of 20 % of the CCVs issued by carbon sequestration project. If this pool did not have enough carbon credits, the Environmental Fund could also purchase carbon credits.
Now, article 22 of Decree-Law 4/2024 introduces significant changes to this issue:
(i) Firstly, the promoter is no longer obliged to contribute to the guarantee fund, but can only use his own insurance;
(ii) The guarantee pool is then made up of 20 per cent CCVs and, at the same time, CCFs, in order to avoid a “gap” situation until the CCVs have been issued;
(iii) The insufficiency of the guarantee pool is guaranteed by the promoters who must replace the number of missing carbon credits or submit new projects to compensate;
(iv) The promoter is “awarded” for the non-reversal of emissions (intentional or non-intentional), being returned up to 30 %/40 % of the credits it has sent to the guarantee pool.
d) The inclusion of coastal and marine ecosystems in carbon sequestration projects
In a country with one of the largest maritime spaces in the European Union and, at the same time, a privileged coastal zone on the Atlantic, it is comprehensible that the legislator envisages as the purpose of this market the “protection of the state of the marine and coastal environment and the development of a sustainable blue economy” (article 2 (2) (d) (vi)) and, at the same time, the planning of blue sequestration projects, whose methodologies will be approved by the APA, the Institute for Nature Conservation and Forests, and the Directorate-General for Natural Resources, Safety and Maritime Services (article 10 (5)).
Even so, priority continues to be given to forest carbon sequestration projects in the vulnerable territories identified in Order 301/2020 of 24th December, in burnt forest areas or in others that need intervention (article 7 (1) (3)), benefiting from exemption from the payment of fees provided for in this Decree-Law (article 7 (6)).
e) The promotion of demonstration projects by private entities
According to this legal regime, APA must encourage demonstration projects that “can be promoted by any public or private entity” in conjunction with the APA, ICNF (projects in the area of forest sequestration) or DGRM (projects in the area of blue carbon sequestration) (article 25 (2)). In this way, the promotion of these demonstration projects to be promoted by private entities (and not, as was initially planned, only by public entities), it is possible to boost the inclusion of foreign know-how in the Portuguese voluntary market.
f) The large area of regulation by administrative activity
This circumstance, although not really a novelty compared to the text submitted for public consultation, remains one of the main troubles of those potentially interested in this market, which was mentioned on the page of the Presidency of the Republic: the government's law was promulgated “despite referring, on very significant points, to administrative laws”.
In fact, the attractiveness, credibility and operation of the Portuguese voluntary carbon market is dependent on the regulation of Decree-Law 4/2024:
(i) Attractiveness, because the methodologies for carbon projects will be published after the creation of a technical committee for this purpose, submission to public consultation and approval by the APA (in coordination with other entities) (article 10);
(ii) Credibility in the market is closely linked to guaranteeing the necessary qualifications of the independent verifier based on criteria established in an order to be approved (article 12);
(iii) The full operation of the Portuguese voluntary market depends on the development and management of the platform for registering projects and carbon credits by the Energy Agency (ADENE) (article 18 (11)).
Ana Luísa Guimarães | alg@servulo.com
João Tomé Pilão | jtp@servulo.com
