22 companies will participate in a simulation of a cap-and-trade system in Brazil

22 companies operating in Brazil, including Latin America’s largest bank Banco do Brasil, America’s biggest petrochemical Braskem, mining company Vale and financial conglomerate Itau Unibanco, will participate in a nine-month simulation of a cap-and-trade system in Brazil starting today.

The experiment, organized by think-tank Fundacao Getulio Vargas (FGV) and Rio’s green exchange BVRio, aims to familiarize companies operating in Brazil with the system, which could be adopted in the country in the future.

A cap-and-trade system works by setting a hard cap on the amount of greenhouse gases (GHG) that a sector or a country emits. Businesses surrender emissions allowances distributed or sold by the regulator to stay within the caps. They can also trade those permits with other companies at a price determined by the market.

All the 22 companies taking part in the exercise regularly report their emissions in Brazil.  Those reports have been used to set the limits, fixed at 90 percent of total emissions in 2012, the baseline year. GHG emissions from the companies included in the simulation reached 22 million tonnes of CO2e in 2012.

Representatives of companies in the system will have access to an electronic trading platform provided via BVRio. “We trained them to operate the system and made some simulations of auctions and secondary market trading,” said FGV’s Renato Armelin, one of the project’s coordinators.

Brazil is not going to have a national carbon market shortly, but large states in the country, such as Rio de Janeiro and Sao Paulo, have plans for local emissions markets.

Europe’s ETS (Emissions Trading System) is the world’s largest cap-and-trade, operating in 28 countries and covering 45 percent of the bloc’s GHG emissions. China began six pilot markets last year and should start one more this year. California also operates a cap-and-trade system that will link with the Canadian province of Quebec later this year. Several other countries have plans to create cap-and-trade systems, including South Korea, Mexico, Chile and India.