Improving Greenhouse Gases Market-Based Mitigation Programs: A Case Study of Renovabio – the Brazilian Renewable Fuels Program

Abstract

The use of economic instruments aimed at mitigating the emission of greenhouse gases is gaining ground globally. Brazil’s first experience of a domestic regulated carbon market - Renovabio - the Brazilian Renewable Fuels Program, is a case in point. Operating since mid-2020, the Program generates decarbonization credits (CBIOS) that stimulate fuel distributors to shift to biofuels. However, the presence of design and operational flaws in Renovabio is evident. Limited resources and experience in the design of this type of market instrument pose challenges to the Program’s environmental integrity and credibility. To address this problem, I developed a methodological framework that identifies design flaws cost-effectively and transparently, focusing on these questions: Is there empirical evidence of design flaws in the implementation of the Renovabio Program? If so, is the evidence supported by a qualitative assessment? I hypothesized that one or more design/execution flaws could be present in the certification process of the Renovabio Program. This hypothesis stems from the perception that the output of the certification process could be systematically overestimated in some circumstances. I proceeded in four steps. First, I put together a novel dataset on the certification of 247 companies between 2019 and 2021. Second, I used simple correlation analysis to look for statistical anomalies in the data (correlations that, by premise, should not exist). Third, I consulted with Renovabio experts to validate the legitimacy of the non-association premises and obtained results. Fourth, I made an in-depth analysis of the regulation and proposed adjustments; I also proposed a framework to look for design flaws in the Program. The results suggest possible breaches of the environmental integrity in the Renovabio Program that urgently requires solutions. The analysis confirmed the hypothesis for four out of the six associations tested. First, an association was found that suggests a lack of independence of one Verification Body in its assessment of a company’s emissions outcomes. A second pointed to a benefit for sugarcane ethanol producers as compared to producers of soy-based biofuels. A third indicated inadequate auditing practices leading to the possibility of an underreporting of diesel consumption, which could inflate the result of the certification process. Finally, a fourth association indicated a design flaw that can lead to certification applicants gaming the system to obtain favorable outcomes. Finally, I developed a generalized framework that allows program managers to apply simple statistical techniques to assess the environmental reliability of market-based environmental programs.