The Position Of The Brazilian Regulator About Carbon Credits

On July 21, 2009, the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários – CVM) informed to the market1 that the Certified Emission Reductions, or CERs, also known as carbon credits2, are not derivatives or assets to which investment funds are linked (títulos de investimento coletivo), and consequently shall not be treated as securities (valores mobiliários) or regulated as such by CVM at least for the time being, and consequently are not subject to the requirements of the Brazilian Securities Law3. They are deemed to be assets whose sale can occur to meet emission-reduction goals or for investment purposes.

CERs are instruments issued by the CDM Executive Board, a body created under the United Nations Framework Convention on Climate Change. This body supervises the Clean Development Mechanism (CDM)4 that represents the voluntary reduction emissions of a certain quantity of greenhouse gases (GHGs), which hold heat within the surface of the Earth and contribute to its global warming.

However, some carbon credit products related to CERs, such as certificates, synthetic instruments or derivatives, depending on their specific characteristics and in view of their nature, may be considered as securities by CVM on a case-by-case basis. If this happens, such products will be subject to the Brazilian Securities Law.

Brazilian investment funds are duly authorized to acquire CERs or other carbon credit certificates or derivatives by force of the applicable rules which govern these funds5. In this regard, among the authorized financial assets, investment funds can apply their resources in warrants, trading contracts for the purchase and sale of products, merchandise or services for future delivery or future provision, titles or certificates representing such contracts and any other credits, titles, contracts and operational modalities if expressly stated in the funds' regulation6.

CERs are financial assets issued abroad (i.e. outside Brazil) and their acquisition is permitted by investment funds provided that this possibility is expressly stated in the fund's regulation and the CER is admitted to negotiation in the stock exchange and in the commodities and futures exchange, or is registered in the registry, custody or financial liquidation systems duly authorized in their original countries and supervised by a recognized local authority7. This registration shall also be performed in specific accounts opened directly under the...