Carbon Market

During the third Conference of the Parties (COP3) to the United Nations Framework Convention on Climate Change (UNFCCC) in 1997, several countries signed the Kyoto Protocol. This document established the mechanism now known as the carbon market, allowing the commercial transaction of carbon credits resulting from the reduction of emissions or carbon dioxide removal from the atmosphere. This tool aimed to encourage Greenhouse Gas (GHG) emission reductions by assigning a financial value to carbon.

Today, we have multiple ways to trade carbon. They have been sorted into two segments that we know as the Regulated Market and the Voluntary Market. One modality of Regulated Market is known as Cap-and-Trade, in which markets are established for a country, region or state where the government or regulatory body sets a GHG emission reduction target. This target is broken down into several sectors and an emission limit is set for each sector. Thus, companies that emit GHGs above the established limit must trade emissions allowances (Emission Unit Allowance - USA) from other parties that emit below the allowed limit in the same sector. In case the limit is exceeded, it is possible to buy carbon credits generated by emissions capture or avoided emissions projects. Certified Emission Reductions (CER) are issued through methodologies established by the Clean Development Mechanism (CDM), which are managed by the UNFCCC bodies.

The Voluntary Market also used the instrument created in the Kyoto Protocol, through the CDM and methodologies proposed for climate change mitigation. It was possible for not only the regions to generate credits, but also other organizations, such as Non-Governmental Organizations (NGOs), the private sector, and others. The objective of voluntary carbon credits is to mitigate emissions voluntarily, meaning that the carbon credits or Certified Emission Reductions are audited by an independent third party and not linked to the UNFCCC. As principais proponentes de metodologias e certificadoras são Verified Carbon Standard (VCS) da Verra, Gold Standard, Social Carbon, Gobal Carbon Council (GCC), além do próprio MDL da UNFCCC.

In 2021, at the 26th United Nations Climate Change Conference (COP26) the Rule Book for Article 6 of the Paris Agreement, established at COP21 in 2015, was finalized. This event made it possible to regulate the international carbon market, which will be driven by a new mechanism to be called the Sustainable Development Mechanism (SDM), which will replace the CDM. Further operationalization of this new mechanism will be defined and put into practice in the coming years.

The agreement regarding the regulated carbon market rules represents a historic breakthrough and, once put into practice, will be an important step towards a global decarbonization investment system.

The proposal approved for the regulated carbon market provides greater transparency, security and credibility to the system, with two stages of approval. The first, with the country's discretion to validate or not the climate project. In the second stage, the initiative goes through an international audit, which will be carried out by the UNFCCC.

To the extent that the approved number of projects is limited, the carbon credits that will be traded in the regulated market tend to gain significant valuation. As a result, financial resources will be raised in the scale and timeframe needed to invest in carbon emission reduction projects, leading to positive social impacts in regions where they will be developed.

In November 2022, we saw the COP27 in Egypt. One of the objectives of the meeting was to continue to operationalize the global carbon market and, consequently, Article 6 of the Paris Agreement. The clear definitions on how the agreements will be made will bring greater assurance for carbon credit trading, ensuring that the undertaken activities will be focused on emission reduction and carbon removal from the atmosphere and its co-benefits.

With regard to article 6.2 from the Paris Agreement, which aims to establish the rules of transfers between countries of the Internationally Transferred Mitigation Outcome (ITMO) in 2022, the negotiations have advanced on technical issues that will streamline and guarantee the eligibility of the transactions. ¹ 

For Article 6.4, which covers private sector transactions, the COP27 negotiations defined that all carbon credit accounting against Nationally Determined Contributions (NDCs), referred to as A6.4ERs, will be attributed to an NDC, either from the buying or selling country. The differentiator between credits is whether or not the corresponding adjustment is assigned. ²

For the upcoming years, the discussions shall be focused on finalizing the technical guidelines of the instruments for market functionality and agility, maintaining carbon credit quality, information transparency, implementation of a robust regulation that prevents double counting, among others. ³

Credit Generation Guidelines

We are working to decrease the concentration of Greenhouse Gases (GHG) in the atmosphere. Among some greenhouse gases, the main one is carbon dioxide (CO₂), used as a standard measure for the carbon credit. Therefore, one tonne of CO₂ not emitted or removed from the atmosphere is equivalent to one carbon credit.

To certify a carbon credit, one must develop a Carbon Credit Project. This project must follow a specific methodology and must respect the eligibility criteria. The main criteria are: 

• Additionality: is one of the criteria considered to determine carbon credit eligibility. Demonstrating the additionality of a project means demonstrating that it goes beyond business as usual (BAU) practices, i.e., that the activities foreseen in it have, as their specific purpose, environmental and/or social service benefits that normally would not be performed if the project were not implemented. A project's additionality cannot be precisely assessed, but some certification schemes indicate methods for testing it. Some carbon credit methodologies include additionality tests, which are useful for project development. The most up-to-date methodologies establish a control area for comparison and proof of which activities are additional;
• Duration/Timeframe: When it comes to a carbon credit project, one of the most important aspects is its longevity, which is directly linked to how long the developed activity - such as forest planting - will sequester carbon dioxide from the atmosphere. When we talk about avoided emissions projects, the process change accomplished, in most cases, will last for many years, but the methodological standards establish a limit for the emission of carbon credits;
• Dispersion/Leakage: especially for projects involving Land Use, Land Use Change and Forestry, an analysis is performed with respect to the activity displacement prior to the carbon credit project regarding what was done in the area, which means, it is necessary that reforestation activity in this location does not imply deforestation in another one;
• Monitoring: when designing the project, the management plan for the proposed activities is presented. This way, it is necessary to monitor the operational activities and the corresponding information generated from our databases and the proposed activities in the carbon credit projects. This monitoring is considered in the project's independent third party verification and issuing of the carbon credit.

Main Standards and Certification Agencies

UNFCCC - Sustainable Development Mechanism (SDM: the Clean Development Mechanism (CDM) was the first global environmental credit and investment mechanism of its kind, developed by the UNFCCC under the Kyoto Protocol (1997). By means of the Paris Agreement (2015), the CDM will be discontinued and replaced by the SDM established in Glasgow, Scotland, at COP26 (2021). At COP27, we noticed technical advances in the instruments that will implement SDM, as mentioned above. However, there are still aspects regarding carbon credit double counting, among others, that remain unclear for this system to operate in a way that leaves no doubt about the effective reduction of emissions and carbon removals from the atmosphere.

Verra – Verified Carbon Standard (VCS): Verra is an institution established in 2005, recognized worldwide as a specialist in certifying carbon credit projects. Sets methodologies that provide evidence of tackling climate change by removing carbon dioxide or reducing GHG emissions, besides attaching additional requirements that produce complementary benefits to the environment and society. The VCS methodology is one of the most widely used worldwide and was developed by the International Emissions Trading Association (IETA) Climate Group, the World Economic Forum (WEF), and the World Business Council for Sustainable Development (WBCSD).

Gold Standard: established in 2003 by WWF and other international NGOs to ensure that projects that reduce carbon emissions under the UN CDM also contribute to sustainable development.

Social Carbon: Developed by Instituto Ecológica, a Brazilian non-profit organization, it certifies carbon reduction projects for their contributions to sustainable development.

Global Carbon Council (GCC): New registration systems for carbon credits have emerged as a way to speed up the certification process, while maintaining rigor in the evaluation of eligibility, quality, and permanence requirements. One of the recent examples of a new registration system is the GCC. 

Carbon Credits at Suzano

Suzano intends to issue carbon credits considering its operations in the following main sectors: forestry, industry and logistics. Within the established methodologies we can mention the issuance of carbon credits through biological sequestration, considering the sustainable forest stewardship of eucalyptus cultivation in expansion areas, i.e., areas where prior to Suzano's operations there was pastureland or degraded areas. Furthermore, in native areas where we aim for environmental conservation and restoration, it is possible to generate carbon credits through avoided deforestation methodologies (Reducing Emissions from Deforestation and Forest Degradation - REDD), forest management improvements, and native forestation. Accordingly, we will act in the restoration and conservation of the Cerrado, Atlantic Forest, and Amazon biomes.

In industry and logistics our focus is on projects that consider GHG emission reduction in their activities by replacing fossil fuel consumption with renewable ones, as well as improving energy efficiency.

It is worth remembering that such projects, besides acting to tackle climate change, also lead to social and environmental benefits that are called co-benefits, with activities that can reflect in the improvement of air quality, amount and quality of water, biodiversity conservation, greater access to energy, income generation, among others.

In 2021, Suzano structured a process to develop carbon projects, analyzing the eligibility of potential areas, its suitability for different methodologies, and adapting internal processes for implementation and monitoring. Priority was given to develop the first project in the area of planting expansion in the Cerrado Project⁴, which is what we call the company's new factory located in Mato Grosso do Sul and that will come into operation in 2024. This Carbon project underwent a rigorous external audit in 2022 and was submitted for final registration at the certifier's platform.

Additionally, we built a network of external contacts, with potential clients, partners and interest groups, increasing Suzano's representativeness in associations and forums specialized in structuring the guidelines for global carbon markets.

All carbon credit projects follow important guidelines, such as additionality, non-permanence risk analysis, projects with unusual practices and that are unique.

In 2022, Suzano completed the Cerrado and Horizonte de carbono projects, both reforestation projects in the state of Mato Grosso do Sul. These projects were audited by an independent third party for their respective validation and verification. Both were submitted for final registration on the Verra platform. Find more information below.

Suzano's Credit Generation Projects

Cerrado Carbon Project
In 2021, Suzano began the Cerrado Carbon Project, consisting of Afforestation, Reforestation and Restoration (ARR) carbon credits, based on the Clean Development Mechanism (CDM) methodology ACM0003, and was submitted for certification by Verra.

A project located in a region of the municipality of Ribas do Rio Pardo (MS). The project relies on the implementation of integrated landscape, which combines fast-growing plantation and environmental conservation and restoration areas.

Considering the history of Suzano, which in 2022 reached its 98th anniversary and has had industrial operations since then, it is understood that the Cerrado project will last more than 100 years, considering that the wood grown in the area will be used in the new factory established in the city. For this purpose, Suzano owns the Cerrado Project operation areas. 

As a result of the credit revenue, several social projects will be developed in the Ribas do Rio Pardo region and go beyond the project area. Those are:

• Honey Production: under this initiative, local beekeepers receive support to implement new technologies, technical assistance for production processes, and training to improve product management and commercialization, in addition to promoting honey production within the project area. Moreover, a honey processing unit will be built in the city. The initiative benefits 40 families;
• Cerrado Circular: this project generates income for local families by means of circular economy, with innovative economic activities promoting the conservation of the Cerrado biome, such as functional foods, biomaterials, circular way, and sustainable extractivism. 180 people benefit from the initiative;
• + Alimento (Food): incentive for sustainable practices of production and without dependence on external inputs. Agro-ecological vegetable production mimicking the principles of nature ( always covered soil and diversity of species in the same environment), the so-called agroforestry system - AFS;
• Seedling Bank BRS - Capiaçu: the initiative will provide high-yield seedlings for multiplication within the communities. With the high-yield seedlings, we have a higher volume of dry matter and lower production cost if compared to corn and sugar cane. Its silage is a cheaper alternative for herd supplementation in dry periods, especially for dairy herds, ensuring food security for local communities. 
   https://www.suzano.com.br/a-suzano/historia/florestal/?ind=area-total-certificada-por-tipo-de-certificacao

Cerrado Project, listing on Verra's website
Video Cerrado Carbon Project:

Cerrado Carbon Project video (English subtitles): 

Carbon Horizon Project

In 2022, Suzano prepared the Carbon Horizon Project, based on Afforestation, Reforestation and Restoration (ARR) methodology of the Clean Development Mechanism (CDM) ACM0003, and submitted it for certification by Verra.

This is a project located in Três Lagoas (MS), which relies on the implementation of an integrated landscape, combining the planting of fast-growing species, namely eucalyptus, and the planting of native species in areas destined for conservation and environmental restoration. 

The project's proposed environmental restoration for the Cerrado biome includes activities for controlling erosive processes and rehabilitating degraded areas, control of exotic species, conduction of natural regeneration and the planting of native species. Each activity or set of activities shall be implemented after field evaluation and expert recommendation.

As a result of the credit revenues, the social projects will be implemented in the Três Lagoas region and will go beyond the project area. Those are:

• Inclusive Recycling: this activity will develop along with the Recycling Cooperatives in Três Lagoas (MS) municipalities actions to promote the inclusion of individual collectors with the purpose of generating income, developing, strengthening and fostering the productive organization of cooperatives in the territory. ÉIt is important to contribute with waste management and disposal to better public health in compliance with basic sanitation and solid waste policies, reducing the disposal of materials in the municipal landfill. To this end, the inclusion of individual collectors in recycling production chain will generate increased income for all the people contributing to the cooperative;
• Native and Ornamental Seedling Nursery: set up a nursery for Cerrado native and ornamental seedlings in a rural community, to meet the supply demands of these items for restoration of the company's areas and thus ensure species diversity and genetic variability in the planting.

Horizonte Project, listing on Verra's website.

Carbon Horizon Project Video:

Carbon Horizon Project video (English subtitles):

Both projects will enhance Suzano's current practices with elements that go beyond the usual, integrating four dimensions:

• Avoided deforestation;
• Assisted regeneration;
• Sustainable stewardship;
• Social and territorial development.

Both the Cerrado Carbon Project and the Carbon Horizon Project have undergone independent third-party validation and will soon be available on Verra's platform registration list.

Suzano will also be responsible for financing the activities, which, in addition to the costs related to commercial planting, will allocate resources for the aforementioned initiatives. For this purpose, the company makes financial planning to direct part of the funds from credit sales to social projects and forestry activities in addition to the commercial planting. If necessary, the funds can be secured from Suzano's results.

Suzano Forest Management (excerpt taken from the public summary of the MS 2021 Forest Management Plan) 

Suzano planting is done on its own and leased areas and its forest stewardship is conducted in a manner that reconciles eucalyptus cultivation with natural resource conservation, technological innovations and community respect. The entire production is based on renewable eucalyptus plantations, aimed at supplying the new factory in Ribas do Rio Pardo (MS) and the factory in Três Lagoas (MS). The seedlings used are generated with clonal technology and have one of the most advanced genetic bases for the formation of forests destined for pulp production.

The harvesting process adopted respects regional features and uses efficient systems that rely on state-of-the-art equipment. It is worth mentioning that Suzano has over 1.6 million hectares certified by the Forest Stewardship Council (FSC®) or PEFC/Cerflor⁵, and the cerrado project areas will also seek this recognition from the FSC. To this end, efforts have already been dedicated to this end.

 The Eucalyptus

• It is an exotic plant ( not Brazilian native), just like coffee, corn, soy, sugar cane and several other crops widely cultivated in the country.
• With proper management, water consumption is similar to that of native forests, and their roots remain far from the water table
• Eucalyptus takes approximately seven years to be harvested and can be grown on land with low natural fertility
• Properly managed, eucalyptus provides protection and conservation of biodiversity, as can be observed in the results of biodiversity monitoring in Suzano's areas
• With rapid growth, eucalyptus helps absorb carbon dioxide from the atmosphere, returning pure oxygen to nature. The role of eucalyptus forests is essential in mankind's effort to neutralize the greenhouse gases responsible for global warming.

1. Source: https://unfccc.int/documents/624474
2. Source: https://unfccc.int/documents/624417, page 8
3. Source: https://www12.senado.leg.br/radio/1/noticia/2022/11/07/cop-27-reune-liderancas-para-garantir-cumprimento-das-metas-de-reducao-das-emissoes-de-poluentes
4. To learn more about the Cerrado Project, access this link.
5. PEFC: Programme for the Endorsement of Forest Certification. Cerflor: Programa Brasileiro de Certificação Florestal.