On October 12, the President of Paraguay, Santiago Peña, approved and signed the Law on carbon credits sanctioned by the House of Representatives, to legally bring the carbon market to life for the first time in the country.
This new law aims to establish a regulatory framework to define ownership of the benefits of reduced, avoided and/or captured Carbon, and ownership of Carbon Credits generated by projects developed in Paraguay — what are these financial instruments about?
Carbon credits are certificates that represent removals or reductions of greenhouse gas (GHG) emissions. Its market was proposed in the Kyoto Protocol as one of the special mechanisms to combat climate change and promote the reduction of GHG emissions. Thus, as indicated by Paola Fonseca, legal director of VIVA Idea, “organizations that cannot reduce their emissions enough to comply with the established limits can purchase carbon credits from those that have achieved excess reductions.” In order to operate transparently, there are accreditation entities to verify the validity of carbon credits.
Luis A. Breuer, main partner of Aguilar Castillo Love in Paraguay, comments that this legislative advance in Paraguay shares the line of action of the government of Peña, recently elected president, which is focused on promoting the development of the country based on the vast availability of natural resources, clean and abundant hydropower, the introduction of renewable energy resources and the prevalence of the rule of law. This is evident in the recognition that the same law makes of its purpose and potential to “generate a positive effect for the environment through the reduction, elimination and/or capture of carbon dioxide” and “diversify sources of income.” of small, medium and large producers, property owners and other actors.”[1]
The Law on Carbon Credits positions Paraguay among the countries in the region that have decided to consolidate a framework of financial instruments aimed at social and environmental sustainability, in reaction to a diversification of the sustainable finance market at a global level. Within the context of the variety of financial instruments, it is essential to clarify that carbon credits differ from impact bonds; both are often confused, although they have different functioning and structure.
Bonds are financial instruments issued by a private or government entity, used to finance debt. They have been identified as tools to promote positive impact on the environment and society, financing projects for that purpose. In that sense, there are different types: impact bonds, green bonds, bonds with a gender lens, social impact bonds and thematic bonds related to the Sustainable Development Goals (“SDG-linked bonds”).
The Latin American effort to advance legal recognition of the carbon market and impact bonds includes countries such as Costa Rica, Ecuador, Guatemala and Panama. Aguilar Castillo Love's team from its different offices in Latin America comments on some relevant developments:
- Costa Rica has been an example of the creation of SDG-Linked Bonds, in line with its projection of economic and environmental sustainability. The approval of the Law to Promote Financing and Investment for Sustainable Development through the Use of Thematic Public Offering Securities in October 2021 was a major step for the region. It created an Impact Stock Market through the use of thematic securities.
- In June of this year, the Ministry of Environment, Water and Ecological Transition in Ecuador issued the Technical Standard Establishing the Ecuadorian Greenhouse Gas Emissions Compensation Scheme to regulate the retributive scheme without appropriation of environmental services.
- In Guatemala, efforts began in 2021 with the adhesion of National Stock Market to the United Nations Sustainable Stock Exchanges initiative. That same year, the National Stock Market Board of Directors authorized a regulation that allows labeling securities in Guatemala as green, social and/or sustainable. Regarding the carbon market, in 2022 the Emission Reduction Payment Agreement, a Guatemala Emission Reduction Program with the World Bank as Trustee of the Forest Carbon Partnership Facility was signed. Its Climate Change Framework Law (Decree 7-2013) expressly recognizes carbon market projects.[2]
- Panamá has been formally enabling its carbon market since the approval of Executive Decree 142 of December 2021, which progressively and gradually establishes Panama's National Carbon Market. Since then, the Emissions Registry has been consolidated, and the National Offset System and the Panamanian Carbon Exchange are under development, all necessary components for the opening of this market. On the other hand, Panama has reiterated its commitment to sustainable finance, announcing the private issuance of the first gender social bond in Latin America by Banistmo in 2019.
In response to a growing global reflection on business models and awareness of the repercussions and externalities of companies' operations, Paraguay's effort to join the path already being taken by other neighboring countries is evident. This country follows the regional position that visualizes the potential and is also experiencing the real impact of sustainable financial instruments.
For more information, please contact our partner Luis A. Breuer at lab@aguilarcastillolove.com.
Read this article in Spanish.
Junior Associate