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Ethanol Summit 2007

Sustainability of fuels: Climatic Changes and the New Development Model (MDL and Carbon Credits)

Coordination Luiz Gylvan Meira Filho

Speaker: Flávia Frangetto: Member and Coordinator of the Sector of Siqueira Castro Attorneys, Counselor of the FIESP Higher Environmental Council Guilherme Fagundes: Head of the Department of Special Projects in the Commodities and Futures market. Roberto Schaeffer: Professor of the Federal University of Rio de Janeiro and member of the Panel for Base Line Methodologies and MDL Monitoring. Paulo Protásio: President of the National Association of Cargo Transport Users and the Thematic Chamber of Agro-business Infrastructure and Logistics.

Luiz Gylvan Meira Filho

The Inter-governmental Panel on Climate Change (IPCC), periodically evaluates the state of human knowledge on climates changes. Four reports were issued: in 1990, 1995, 2001 and 2007.

Whilst weather is the momentary state of the atmosphere, climates is its statistics, the average, standard deviation, amongst others, which functions in an infrared spectrum visible with solar energy. A natural greenhouse, the earth allows the entrance of visible radiation and partially or totally blocks the exit of infrared radiation. The climate tic change problem is associated to the increase in gases which retain infrared radiation in the atmosphere, in spite of the initiatives like the United Nations general Assembly, Climate Convention, Kyoto Protocol, Clean Development Mechanisms (MDL).

Another point is the reduction of oxygen in Earth’s atmosphere. Each fossil carbon atom, placed in the atmosphere by combustion, eliminates two oxygen atoms. The burning of fossil fuels is responsible for the increase in CO2. Instead, because of a question of mass balance, as well as not resulting in an increase of CO2 in the atmosphere, the renewable bio- fuels do not cause a reduction of the oxygen in the atmosphere.

There are questions in the air like “Has a change in climates been detected?” and “ Are there models capable of forecasting the climates for the next 100 years?”

In their first report, in 1990, the IPCC registered unequivocal detection of a change in climates would delay a little more than a decade. This was confirmed sixteen years later, in 2007, in their 4th report.

How can the scientists make this affirmation? By means of models, by the observed increase in the average sea level and the natural variations and the temperature, outside the range of the last 600 thousand years. To have stability, the annual world emissions would have to be reduced to the level of the oceans absorption capacity, of 2 billion tons of carbon. This signifies a cut of 60 to 70% to stabilize the concentration of CO2 at the current level of 380 parts per million. Even so, the temperature rises because there is heat stored in the oceans.

The German Chancellor, Angela Merkel, presented a proposal at the G8 meeting that a worldwide goal for limiting the increase in temperature to 2° Celsius was adopted. According to the report by Sir Nicolas Stern, from the economic side, to limit the climates change to two degrees, it is necessary to cut the worldwide emissions by half. It is a giant task, but is perfectly possible. This would affect 1% of the global gross domestic product in the next 40 years. The world would not be poorer, but there would be movements of this size.

The way to direct industry and the economy is by means of taxes, of business, or regulations, with policies to support the development of low carbon and high efficiency technologies.

The MDL is an interesting experience and the start of international commerce. It is strange the fact that renewable bio-fuels are not present.

In the World Economic Forum, the businessmen considered the carbon business more desirable than taxes on carbon. Brazil has the challenge relative to the management of their territory in the Amazon. The ethanol sector is ware of this and has been proactive in dealing with this problem.

Flávia Frangetto

The MDL is a financial instrument created for the first time in the range of an international treaty. According to the discourse of our President of the Republic: “We spent the XX century creating the problem and we will spend the XXI century resolving this problem.”

To implement a doable ordered strategy of the Climate Convention objectives, the stabilization of the levels of greenhouse effect gases in the atmosphere, the international community chose the adoption of the market mechanism.

Inaction is also an option. We leave the lights switched on and continue to emit light is not necessarily a possible reply from society is the market mechanisms allow the internalization of this cost and generate economic-financial benefits. Mitigation is also an option so as not to reduce them. The 12th Party Conference in the Climate Convention and the 2nd Party meeting at the Kyoto Protocol, on 16 November 2006, in Nairobi, in Kenya, pointed out the insufficiency of all that had been done until then. With satellite images, researchers proved the effects of global warming. With the current tendency, the sea level rises three centimeters per decade, at the same rhythm as the air. Between 1974 and 2005, there was stated a reduction in the quantity of ice in the de Artic of 20%.

As a result, there will be the necessity adapt investments to resolve the negative effects of the change in climate, with the creation of market mechanisms.

From the mitigation point of view, this will signify reducing the emissions or appropriating carbon, to partially avoid the change in climate, but there will be a cost. An emission today will cause a change in climate and damage for all in 40 years time

The reasoning of article 12 of the Kyoto Protocol was done in without a market mechanism. The debit in relation to the change of climate would be paid through investment made by countries made in the search for sustainable development, through MDL projects. An environmental credit for: a) Those who reduce the emissions of greenhouse effect gases; b) Help countries with a commitment to the reduction of emissions to pay this account.

The MDL is the right to a better future, in relation to that contaminated inheritance of environmental liabilities, with a metric to: a) Quantify and distribute the damages from the emission of a ton of greenhouse effect gases in time; b) Internalize the environmental costs and the profits to avoid a change of climate.

This, as a utility function, signifies evaluating how much it is worth and the well being forty years from now, without such a change in the climate as that received from previous generations. The calculation takes into account the costs of mitigating the emissions and damage expected from the change of climate. The MDL, by market logic, induces the transition to generation of energy less carbon intensive. The role of the renewable bio-fuels - ethanol, biodiesel and vegetable coal, renewable vegetable – is essential as part of the solution throughout the XXI century.

If international treaties developed this fist reasoning, “Why not go further then?” The Climate Convention has already established a common responsibility, however, differentiated, in obedience to the principle of proportionality of reasonability: Who has issued more since the Industrial Revolution, should be the first to pay the account.

Historic responsibility was adopted, but history continues under construction. The assumption of responsibility today, with mechanisms of financial support, helps to face the reality of climate change damage.

The Kyoto Protocol attributed the main responsibility to the industrialized countries and the accessories to the countries in development, with the solution through the creation of counterpart mechanisms.

In terms of judicial novelties, responsibility may go to a higher scale. As a result of the actions proposed by the prosecutors, the United States Supreme Court, to decide in favor of the reduction and control of emissions in the country, began to regulate in respect of this material. In 1974, also in Nairobi, the United States had already positioned itself in respect of the necessity for monitoring in global questions such as the climate. That is, the incumbency of the national and international community national to respond to the possibilities of requests for reparation of the damages that we cause.

In the case of objective and applicable responsibility, we are the cause and effect of any emissions made. The UN Security Council included the change of climate as a priority subject. The negative effect of the “change of climate” is not discriminatory, because it hits everybody. The post 2012 international regime will define the strategy of reducing, in 40 years, to half the emissions, on the logic of including the financial mechanism in the market, in that one pays for an ecological debit caused by another.

The role of the emerging countries with the know-how to implementation of the mechanisms of clean development has been the object of study and thought. For us, in ideological and practical, the call was: “who will be the new inducers of the global changes in respect of these subjects aimed at management of the climate change question”.

A project in the Legislative Assembly includes these concepts as a positive environmental balance and attributes benefits for who proposes to reduce emissions, with programs to promote adaptation incentive to mitigation.

In this exercise of ecological debit and credit, we exercise the right of crediting. We will not let it pass from the current generation to the next. Whom proposes a positive environmental action to reduce greenhouse gas effect emissions, in reply to a benefit of an economic order, for example, a carbon credit, promises, in a set period of time, to shown the payment of this account in place of the other who caused it. On the graph of the climate changes damages, we may, with the qualifications by metric and accounting, have a point of inflection until its amortization. Guilherme Magalhães Fagundes

From the market point of view, we have advanced with relation to the treatment of climatic changes in the last year. The volume negotiated has been much greater. We had the first crisis, with the divulgation of goals for the reduction of emission in the first national inventory of the installations.

With relation to the Brazilian market for the reduction of emissions, the initiative was born in 2004, by means of a Grant agreement with the Brazilian Government. The idea as to encourage the implantation of MDL projects in the country, with some instruments for the Grant to implement and potentialize this market through:

 An information system to confer more visibility, facilitate placement on the market and obtain financing for the implantation of the projects;  Provide organization of a negotiation system for carbon credits;  Provide implementation of a program for divulgation and qualification.

The project bank was implemented around one year ago. The objective is to give greater visibility and structuring to potential projects with credits available for sale.

As it contributes to the learning process, we accept:

 Projects without having been validated by UN credentialed entities. The potential for eligibility of minimally structured ideas in conjunction with the UFRJ, the “Climate Center”, that has a climate laboratory. It is the first analysis for projects to enter into the MDL implantation flow;  Purchase intentions on the part of overseas investors. To put, from the point of view of sale and purchase, the potential buyers and sellers into contact with each other, without payment and do business in the Commodities and Futures Market. The idea is to encourage doing business right on the market balcony. Especially with relation to the MDL market, we prepare and make available information on the characteristics of the market to the participants, with:

 The volume of business in 2006, of US$ 5 billion;  The lack of efficiency in the price formation process: oscillation and dispersion;  The degree of standardization of transactions still not fully advanced;  Specific rules for the emission and transference of credits, as in the MDL;  The potential participants: buyers in Brazil and sellers outside Brazil.

I front of this information, we conclude that the implementation of an auction model would be the most suited to the business, because:

 We can schedule the negotiation sessions with the existence of demand;  We concentrate the liquidity and the potential for negotiation on determined days;  The price formed and closing of business is fairer and more efficient;  Permit customizing the negotiation sessions to the profile of the participants.

The negotiation system continues, as occurs in the commodities negotiated in the Stock and merchandise Markets, with daily auctions and standardized contracts.

With the São Paulo City Hall, we signed a contract to organize the 1st auction of carbon credits, of RCE, in a regulated market in the world. It will be a primary market: first sale o the part of an owner of a project to a market. As part of the operational flow, we establish some steps:

 System of auctions aimed at the cash market: credits already generated will be offered;  Develop the called “term market”, the credits that will be sold and bought, with payment on a date later than the signature closing the business.

Different from the rules of a private entity, it is worthwhile to highlight the following stages:  Preparation and submission of the tender to the appreciation of the Stock Market Commission;  Publication of the tender with specific rules: minimum price, quantity of credit negotiated, credentialing of the participant in the auction (overseas buying entities with emission reduction goals), guarantee deposits to cover the risk of non payment etc.;  Holding the auction;  Procedures related to the MDL: to receive the credit in the MDL records system, the participant needs to obtain an approval letter from his government, called “Designated national Authority”;  Transfer of the payment to the seller’s account;  The electronic system, via internet, allows several projects to auction their credits in a single session, reduce the cost of the transaction and facilitate the access of small projects to the market.

We closed with the World Bank a program for technical support to qualify the participants, the financial institutions, the research institutes, the public entities etc. The work involves the preparation of studies related to the regulatory mark of the MDL market. As we get a clear definition of the judicial nature, the taxation and market model, we are consolidating an important instrument in the sustainable development of the country and the planet. Thank you.

Roberto Schaeffer

I will divide the presentation into two parts: climatic change, and the question of MDL.

The IPCC Work Group I, that evaluates the scientific aspects of the climatic system and the change in the climate, leaves clear the increase in speed of the concentrations of greenhouse effect gases atmosphere. The predictions are for continuity in the elevation of the average temperature of the planet.

The Work Group II, that evaluates the vulnerability of the socio-economic and natural systems in front of the climatic change as well as the possibilities of adaptation to the, call attention to the impacts on the supply of water and food, the eco-systems, the coastal zones and public health. The Work Group III, of mitigation, evaluates the options which allow limiting the emissions of GEE. In the last 35 and 15 years, the emissions increased, respectively, by 70% and 25%. The increase in CO2 of fossil origins explains 80% and 28% of the increases in these periods.

In 2004, 60% of the emissions of greenhouse effect gases are due to CO2 from fossil use, at which the bio-fuel will have a large potential of looking good. The IPCC points out that there are reasonable potentials for the reduction of emissions at acceptable costs, not greater than the order of 1% to 3% of the GNP of the countries.

For the countries in development, it is understood that it is easier and cheaper to act on an infrastructure under construction than that already consolidated. The potential for the reduction of emissions is enormous in the transport sectors. Resolution of the problem “climatic change” is no longer a technical problem, but of changing consumption habits like the private use of the automobile.

In the “menu” of renewable alternatives for energy, the IPCC cites:

 Greater participation in electric energy from the current 18% to 35% in 2030;  Replacement of fossil fuels by bio-fuels in the transport sectors;  Difficulty in the direct point with the bio-fuels in buildings and industry;  Obvious connection in agriculture, the forests and in residues.

Of the 700 MDL projects registered in the world, according to the United Nations Framework Convention on Climate Change (UNFCCC), India, with many small scale projects, is responsible for 35%; after Brazil and in following China.

In terms of the volume of the reduction, China represents 44%, India, 14%, and Brazil, 11%. In the case of China, there are some localized projects, of the destruction of industrial gases extremely powerful for the climate, like nitrous and nitric acid and Trifluoromethane (HFC-23). Few projects have a large impact. Brazil just had project number 100 registered. Around 40 are the co-generation of cane waste, on a large scale. It is a growing market, but there are problems.

In the best of hypotheses, MDL is neutral for the purposes of the climate. The supposed reduction of emission is a blank check so that a country annex I can issue the same quantity as country not annex I. It is a problematical question. The MDL is not a mechanism to help annex I countries comply with their commitments at a lower cost. If the MDL did not exist, the annex I country would have to comply with their commitment at a higher cost.

On the question of bio-fuels in relation to MDL, the problems are connected to:  The addition, which would not normally occur in the normal course of history;  The promotion of sustainable development.

A MDL project needs to guarantee that, to reduce emissions, for example, use biodiesel on the bus, does not cause an increase in emission by deforestation to plant an oily do bio-fuel generator.

If the bio-fuel replaces the fossil fuel in a vehicle, its agricultural production process emits. The nitrated fertilizers issue powerful greenhouse effect gases. Another difficulty is the shift of free project activities, from the expansion of Soya in a farming region to move the cattle to another space and cause deforestation.

Although the MDL projects are asked for by those who produce the bio-fuel, a true reduction of emissions is done by the bio-fuel consumer. and it is not easy to trace the path of a bio-fuel produced to its consumption. A biodiesel production project may have credit for a reduction of emission, if it was consumed in Brazil or overseas. There may be a problem with double accounting: the importer debits the lower use of diesel in his national inventory, because he consumes biodiesel; and Brazil sells carbon credit, because it assumes internal consumption of the bio-fuel. Then, in order to make the MDL bio-fuel projects advance, there still remains some methodological problems to resolve. Thank you. Paulo Protásio

In front of a challenge of a world schedule, in order to make a difference, Brazil needs to open space for innovation. The more innovative the country, the better will be the result as a player on a world level.

The group G8+5 reunites the leaders of the G8 countries (Canada, France, Germany, Italy, Japan, Russia, the United Kingdom and the United States), and the 5 countries with emerging economies (South Africa, Brazil, China, India and Mexico). On the 16th February 2007, in the meeting on the question of global warming, the group accepted that there is no doubt that the climatic change is caused by human action and that there should be a global system for control of emissions and a that carbon market should be adopted by industrialized countries and also by those in development. The group hopes that this will be true in the year 2009 and that it will replace the Kyoto Protocol, whose validity expires in 2012. This action lead us to consider four points:  Diffuse our technology;  Expand the methodologies to be approved. A large part of our advances are not taken forward because of “I don’t know what to do and how I am going to do it”;  Ensure that the government has a role of facilitator;  Organize in some way the Brazilian market for the reduction of emissions.

The opportunities most evident are those which reconcile the warming problem with the necessity for economic development in the country. Share our growth aspirations with social inclusion and protection of the environment. We have a process of strong geographic concentration in the national efforts. A large part of the projects are concentrated in the Southeast region. But it is possible for us to create an opportunity for the institutions to be mobilized in this direction.

The States of the Federation may advance, in a very differentiated manner, their capacity for perception. The Sao Paulo governor, together with the Mayor of São Paulo, announced a measure in relation to the use, habits and the position of the consumer in the face of automobiles. The governor of Amazonas traces a policy for activities to be performed in turn of MDL. Rio de Janeiro is organizing its schedule.

WE are faced with a process that should have a clearer idea of its perception. The government adopted an action in this direction. We have arrived at the one hundredth MDL project. Brazil is on the way to make a new proposition to the world in terms of non renewable energy. The Ministry of Development, the Ministry of Science and Technology and the Ministry of the Environment produced an exposition of inter-ministerial views for President Lula to declare, as from June oft his year to June next year, twelve months considered as the National year of Clean Development.

It is an opportunity to place Brazil in this relationship with the development for changes of the climate. To believe in the effects through action in the energy field, but in the vision of other projects. There will never be an ambient so propitious to innovation in the technological area.

Together with the minister Roberto Rodrigues, a little more than a year ago, in Germany, plus a group of businessmen of which I was a part, we became aware that the world needed to monitor the complexity of the field. This would be done by five satellites. We joined the forces of national institutions. We brought Embrapa together. We sought an image with Inpe and other national information organizations in two elements: soil and perception of the part of the climate.

Brazil has fifteen years of databases, with information on the climate and the region. The sum of this knowledge, together with logistics, will allow monitoring, organizing, defining and showing projects to investors. Even the need to expose the country in a more correct manner will be possible to do. With the application of technologies, it is possible to quantify the absorption of carbon gas by the native forests, or for those grown for industrial purposes. We are making other users aware of this. One of the first to be interested was the World Bank. Without being an isolated innovation, o Flex Fuel represents in Switzerland almost 30% of its automobile base . This technology will make the behavior, in market terms, translate itself in a differentiated manner. Brazil will show its ever broader vision in the difference that it will make for the XXI century.

In a certain way, MDL sums up the points. On one hand, we are on equality with agriculture, on the other, we are going to an action for processing the industrial area, with explicit and integrated technology, not only in sugar cane culture and oils but also in the process of transformation. The sum of this knowledge aggregates a higher value tom us.

In truth, is society does not perceive this gain, people will have very little influence in forming a political objective for the government. There are eleven ministries who sit at the table to approve a MDL project. This operation is done through an official strategy, otherwise we would be very far from the truth, the relationship with society and the government. Thank you.