Brazil’s 2026 election puts its regulated carbon market on the line

Why it matters: The SBCE is Brazil’s most consequential climate policy instrument since the Paris Agreement. Whoever takes office in 2027 will not inherit a blank slate but a half-built architecture: emission caps to define, allowances to allocate, and monitoring systems to stand up across sectors that include steel, cement, chemicals, and power generation. The risk is not that the law gets repealed (that would require Congress) but that a hostile administration simply stalls the regulations that give it teeth.

What is actually decided, and what is not

The law establishes the legal skeleton: a cap-and-trade logic, a registry, a financial market layer, and a destination for auction revenues (75% to the Fundo Clima, managed by BNDES). The Finance Ministry presented in May 2025 a proposal for the gradual inclusion of 17 sectors, and the current government intends to publish all implementing regulations by December 2026. But the critical decisions, the ones that determine whether the system actually constrains emissions, remain open. These include the absolute cap for each sector, the share of free versus auctioned allowances, penalties for non-compliance, and the rules for using offset credits. Each of those parameters will be set by executive decree or ministerial resolution, meaning a new president can reshape the system without touching the statute.

Who wins and who loses

For large Brazilian emitters (steelmakers, cement producers, petrochemical companies, thermal power generators), the SBCE creates a direct cost on carbon. Companies that have already invested in efficiency or fuel switching, such as mills with biomass cogeneration, stand to gain by selling surplus allowances. Companies that have postponed decarbonization face compliance costs that could reach billions of reais across the regulated sectors, though exact figures depend on the cap levels still to be defined. On the export side, the EU’s Carbon Border Adjustment Mechanism (CBAM) adds external pressure: Brazilian exporters of iron, steel, aluminum, and fertilizers will face tariffs based on embedded emissions starting in 2026. A functioning domestic carbon price could, in principle, be credited against CBAM charges, giving regulated companies a reason to prefer a domestic system over paying at the European border. Without the SBCE, those exporters pay twice: once in lost competitiveness and once in CBAM levies with no domestic offset.

The gap between rhetoric and mechanism

Experts interviewed by Reset flagged a recurring confusion in opposition platforms: treating the regulated market as if it were the voluntary market. The regulated system is domestic by design. Brazilian companies buy and sell allowances among themselves to meet caps set by the government. The voluntary market and Article 6 mechanisms are separate channels through which Brazil could monetize its forests and renewable energy abroad. A government that promotes voluntary credits while weakening the regulated cap would, in effect, offer the “carrot” of revenue without the “stick” of binding obligations. Economist Winston Fritsch noted that this pattern is common in democracies: the costs of emission caps fall on organized, politically influential sectors, while the benefits (avoided climate damage) are diffuse. The next administration’s willingness to absorb that political cost will determine whether the SBCE becomes a functioning market or an empty legal framework.

via Reset