All the loners mingle — Where do they all come from and belong? Regulating sectoral emissions and carbon markets in Brazil

Abstract

To comply with emissions targets pledged in their NDCs (Nationally Determined Contributions) to the Paris Agreement, several countries have opted for incentive-based instruments. Brazil sits among them, which prefer carbon markets over taxation to control emissions, on the one hand, while keeping the stimulus to economic development, on the other. Therefore, the country has just enacted its legal framework allowing its economic sectors for trading carbon credits and thus reducing emissions. However, one elementary yet puzzling question in the design of carbon markets is the selection of the sectors to be regulated. Too many of them turn the system costly and unwieldy; too few undermine compliance with the emissions target. Drawing on the linkage hypothesis, backward (BL) and forward (FL) linkage indices offer a rational criterion to guide sectors' regulation. These indices respectively rely on the relative importance (dependence) of each sector and utilisation of the (by-)product they supply. Applied to the latest (2018) Brazil's input-output table available, the analysis carried out here found that the sectoral scope of the country's actual regulatory provisions is either too narrow or too wide and leaves out important key sectors in the Brazilian economy.