Brazil’s transition to a low-carbon economy will require finance compatible with the climate target set by the country in its NDC under the Paris Agreement. Knowing the origin of the finance in pursuit of the intended target, however, remains a central question.
Despite the “economy wide” nature of Brazil’s NDC – i.e., a binding GHG emission reduction target is set for the entire economy, rather than having sector-level targets –, land use activities are undeniably relevant in view of the country’s emissions profile. Given this situation, finance strategies must be developed to promote the transition to low-carbon agriculture, protect forest, increase climate resilience, and reduce socioeconomic vulnerabilities to the negative impacts of climate change.
The climate finance ecosystem for land use in Brazil is complex, with no shortage of stakeholders and institutional arrangements of different kinds. This report tracks finance flows to agriculture and forest that are aligned with climate mitigation and adaptation objectives and provides a comprehensive view of which financial instruments and sources are driving investment, as well as how much is flowing and to which sectors. Publishing information on these flows is crucial to measuring progress, identifying gaps and optimizing the allocation of public and private finance, thereby providing greater transparency and holding the stakeholders involved accountable.
This work identified an average of US$ 6.6 billion in climate finance for land use in Brazil between 2015 and 2020. An important highlight is the fact that 95% of finance aligned with climate objectives come from domestic sources, which accounted for US$ 6.3 billion/year in the period under review. There is a strong expectation that the country will be successful in attracting large volumes of international finance to the climate agenda, but the numbers show that the inflow of international finance remains far below its full potential.
Furthermore, the public sector is relevant to climate finance for land use both as a source of finance itself and in mobilizing private finance. Expenditures from the federal public budget channeled 11% of tracked finance. A significant portion of the finance from private sources, however, is mobilized by public policies. This is particularly the case for rural credit, in which the agricultural policy requires financial institutions to allocate part of their funds to certain credit lines. It is also the case for CBIOs, as distributors that sell fuel are mandated to reduce CO2 emissions.
It should also be noted that 68% of financial flows are associated with mitigation actions, while 19% are geared towards adaptation and 13% have both mitigation and adaptation objectives. In a context where rural producers are increasingly impacted by extreme weather events, adaptation actions have become necessary to manage risk and increase the resilience of agricultural activities. Increasing climate finance flows for adaptation remains a global challenge (Buchner et al. 2021).
For climate finance to be improved and scaled up to the dimensions needed to tackle Brazil’s mitigation and adaptation challenges, a set of measures and actions must be put in place by public and private stakeholders in different areas:
Agricultural credit policy
Rural credit is the main source of climate finance for the land use sector in Brazil, with US$ 3.2 billion/year identified as aligned with mitigation and/or adaptation objectives. This amount, however, corresponds to only 8% of the total volume of rural credit for finance, investment and industrialization purposes.
Brazilian Agricultural Plan must be committed to sustainability, offering improved credit conditions to producers who employ modern, low-carbon practices. In doing so, the public policy will be encouraging innovation and increasing agricultural productivity and environmental protection. It is also necessary to ensure no credit is granted to properties engaged in illegal deforestation or embargoed by federal or state agencies in any biome (Stussi and Souza 2023).
The 2023/2024 Brazilian Agricultural Plan introduced relevant mechanisms to promote socio-environmental attributes in agricultural production and to prevent any illegality in the granting of rural credit. However, there are still important definitions and gaps that must be addressed for the policy to have a true impact on the transition to low-carbon agriculture and on the protection of native vegetation.
Agricultural risk management
Agricultural risk management instruments – the primary climate adaptation mechanism for making producers less vulnerable to extreme events – totaled US$ 1 billion/year between 2015 and 2020.
Brazilian agriculture has been suffering the consequences of increasingly frequent extreme events caused by climate change. In the 2021/2022 crop year, a severe drought caused widespread crop failure and rural insurance indemnities skyrocketed to more than four times the amount for the previous harvest, according to data from the Superintendence for Private Insurance (Superintendência de Seguros Privados – SUSEP).
The coverage of rural insurance and other agricultural risk management instruments, however, is still limited. Furthermore, the increasingly high risk of crop losses tends to reduce the supply of insurance and increase premium prices, which may further restrict access to insurance services. Public policy – including subsidies for rural insurance premiums, like the PSR – can encourage the expansion of this coverage to include as-yet underserved producers and regions, in addition to producers who engage in sustainable practices (Souza, Oliveira and Stussi 2023).
Federal public budget expenditures for land use with climate mitigation and adaptation objectives totaled, on average, US$ 767 million/year between 2015 and 2020, equivalent to 11% of the total tracked for that period. It is important to highlight the 39% drop in real terms in climate finance channeled via the public budget, from US$ 993 million in 2015 to US$ 394 million in 2020.
The public budget is the main instrument for channeling finance for policies in the forest sector, which encompass conservation, restoration and reforestation actions. The operations of the MMA and of agencies such as IBAMA, ICMBIO and FUNAI – which are essential for environmental preservation, the fight against deforestation and the protection of indigenous peoples – rely on such government expenditures.
The continuity of public policy is necessary for government programs and actions to produce effective and long-lasting results. As such, it is important that the planning and finance of government initiatives related to climate change be concrete and long-term.
Climate finance for land use raised via thematic bond issuances increased almost fourfold over the period under review, from US$ 685 million in 2015 to US$ 1.6 billion in 2020. Thematic bond issuances amounted to 16% of finance tracked between 2015 and 2020. Also relevant was BNDES’s approval of US$ 242 million/year for climate finance via low-cost credit in that period. An additional US$ 126 million in CBIOs were traded in 2020, the first year they were issued.
It is challenging to track and quantify the extent to which banking operations and fundraising in the capital market contribute to climate finance. Difficulties in accessing information mean that these climate finance flows tend to be underestimated. It is important to improve the transparency of data sources, establish guidelines for classifying flows, and increase the availability of granular data at the project level, as well as information on project locations. Clearer disclosure regulations and standards will allow for more accurate estimates.
Mobilizing private finance at scale is critical to finance the transition to a low-carbon economy. Public finance will not be enough to meet climate targets. Brazil’s potential to leverage sustainable agricultural practices and promote the conservation and restoration of forest is a great opportunity to attract private finance. The carbon market in particular can be an important source of finance for the agenda.
International cooperation and development
Sources of finance for international cooperation development channeled US$ 320 million/year in climate finance for land use in Brazil between 2015 and 2020, accounting for 5% of climate-aligned financial flows. International governments (US$ 136 million/year) and climate funds (US$ 125 million/year) are the main sources of finance, with emphasis on the Amazon Fund (US$ 53 million/year).
Much of the international finance was allocated to public policies and strategies related to deforestation reduction, protected areas, environmental and land regularization, and territorial planning.
To attract more international climate finance in Brazil, the country must have a government policy in place committed to the environment and the climate, with clear guidelines and ambitious targets. This includes a commitment to zero deforestation, the transition to low-carbon agriculture and a more widespread use of clean energy. Setting finance targets for specific sectors can help allocate flows to strategic areas.