Last Friday was published Decree-Law no. 4/2024 (“DL 4/2024”), establishing the voluntary carbon market (“VCM”) and its operating regime.

The creation of the VCM is essentially aimed at speeding up the transition to a carbon-neutral society, contributing to mitigate greenhouse gas emissions (“GHG”) in Portugal and the compliance with national, European and international commitments made by Portugal in terms of climate change mitigation.

As can stated in the preamble of this bill, the “creation of a voluntary carbon market in Portugal allows the involvement and participation of various operators (…), either on the supply side, through the promotion of projects to reduce GHG emissions or carbon removals that generate carbon credits, or, on the demand side, through the acquisition of these credits for the purpose of offsetting residual GHG emissions or making financial contributions to climate action.”

The VCM is composed by the following elements: (i) carbon projects, (ii) recognized carbon methodologies for each project, (iii) a certification system of projects and their credits, (iv) a registration platform, (v) market operators (promoters, purchasers and users of credits and certification entities) and (vi) competent authorities.

The VCM is governed by a set of principles deriving from the QU.A.L.ITY criteria (quantification, additionality, long-term storage and sustainability) already foreseen in the proposal for a regulation of the European Parliament and of the Council, establishing a European Union certification framework for carbon removals.

(i)          Carbon projects

For the VCM to work, it is necessary to develop carbon projects at national level that promote the reduction of GHG emissions or carbon removals.

Priority is given to promoting forest carbon removals projects that contribute to the conservation of natural capital, to the construction of more resilient landscapes, and consequently to the reductions of vulnerability to wildfires, for which tax exemptions and other benefits are established.

Promoters planning to have the credits generated by their carbon projects recognized, must (i) develop a project report in accordance with the applicable carbon methodology, (ii) obtain initial validation (prior to registration) by an independent and duly qualified certification / validation entity (iii) register the project on the electronic platform.

Carbon methodologies will establish the criteria and guidelines for the certification of projects and credits. These methodologies shall be based on the guidelines of the Intergovernmental Panel on Climate Change and will be developed and assessed by a technical monitoring committee, which will be incorporated under the coordination of the Portuguese Environment Agency (“PEA”).

(ii)        Carbon credits

Emission reductions or carbon removals obtained through projects within the ambit of the VCM, will generate carbon credits. These credits are valid for an indefinite period if they are not cancelled. Each credit corresponds to one tonne of CO2 equivalent. Carbon credits are marketable and have a unique serial number to guarantee their traceability.

Carbon credits can take the form of future carbon credits (FCC) or verified carbon credits (VCC). FCCs are issued before the project is implemented, based on an initial estimate of the potential for reducing emissions or removing carbon, after initial validation by an independent verifier, and may facilitate obtaining funding for the project. FCCs are issued after periodic verifications have been throughout the implementation of the project.

Credits generated within the framework of carbon removal projects that incorporate additional benefits in terms of biodiversity and natural capital can be categorized as carbon+ credits and will be identified differently from other credits.

Carbon credits may be used for:

a)  offsetting emissions (acquisition by a certain entity of a quantity of credits corresponding to the emissions resulting from any processes, activities or events); or,

b)  financial contributions (purchase of a certain amount of carbon without an associated compensation objective).

In any of these cases, carbon credits must be cancelled after they have been used, to avoid its be double counting.

Carbon credits can also be cancelled in cases of offsetting reversal situations of removed emissions (whenever there is a negative net benefit from a given carbon project in a given monitoring period). The consequences of the reversal will vary depending on whether the reversal is intentional or unintentional.

It should be noted that a guarantee fund will be set up to safeguard situations of unintentional reversal of emissions.  This fund will be incorporated with 20 per cent (or 10 per cent in the case of priority areas) of the FCCs and VCCs issued by the carbon removal projects that contribute to it. Promoters may choose to participate in this guarantee fund or alternatively to have their own insurance for the same purpose.

(iii)       Electronic platform

It is planned to create an electronic platform, under the responsibility of ADENE (Energy Agency), and supervised by PEA, which will make it possible to register carbon projects, carbon credits issued, market operators, transactions and the status of the credits.

This platform also aims to fulfil one of the fundamental principles of this regime - the principle of transparency - by guaranteeing public access to information on the activities carried out by the various participants in the MVC and avoiding double counting of carbon credits.

Regulation

Although this law came into force on 6 January, its implementation is still dependent, on a number of matters, to be regulated by the government, namely the methodology to be adopted for the certification of projects and the respective credits, the definition of the requirements and conditions for exercising the activity of independent certification / verification, and the definition of the general requirements for the electronic platform and the information to be made available. Some of these matters concern essential points for the success (or failure) of the VCM.