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Brazil Demonstrates the Challenge of Balancing Growth and Sustainability

Stephanie Kim/ProMarket

The return of Luiz Inácio Lula da Silva as president of Brazil accompanies a renewed emphasis on sustainability. However, discrepancies in his rhetoric and the policy of his administration reveals a rift between the administration’s twin goals of sustainability and economic development, writes Stephanie Tondo.

Like many developing countries, Brazil faces the challenge of achieving the growth necessary to provide its citizens with a prosperity akin to those of developed nations but without sacrificing environmental sustainability goals. When President Luiz Inácio Lula da Silva (Lula) took office earlier this year, he became head of a nation experiencing above-target inflation, high interest rates, increased social inequality, and weakened climate policies, some the fault of macroeconomic conditions and others due to the policies of the previous administration of Jair Bolsonaro.

Lula promised to achieve this delicate balance between revamping industrialization and economic growth and ensuring sustainability while on the presidential campaign trail in 2022. As recently as late September, Lula and his Environment Minister, Marina da Silva, emphatically reiterated his administration’s commitment to environmental goals at the 78th UN General Assembly and Climate Week in New York. Silva said that Brazil would arrive at the 30th UN Conference on Climate Change, which the northern Brazilian state of Pará will host in 2025, “leading by example” and with even more ambitious environmental commitments.

Lula’s struggle between growth and sustainability is exemplified in Brazil’s energy sector. Brazil has made great strides with developing renewable energy sources, which account for more than 80% of the country’s electrical grid (compared to 20% in the United States). However, the oil industry still comprises 3% of Brazil’s gross domestic product and is growing. In August of this year, Lula launched his New Growth Acceleration Program (New PAC), which increases the projected funding for environmental sustainability projects and transitioning Brazil to a greener economy. It also foresees more investments in fossil fuels.

Take, for example, the allocation of resources within the “energy transition and security” category of the New PAC. This segment is set to receive BRL $449.4 billion by 2026. However, 61% of these funds are directed toward oil and gas investments, totaling BRL $273.8 billion. This amount is 13 times higher than what is planned for low carbon fuels.

On the other hand, investments in photovoltaic and wind power comprise 84% of the funding for “electricity generation,” equal to BRL $63.5 billion. 

Gassing Up Growth in the Energy Sector

This conflict between growth and sustainability that divides Lula’s aspirations, particularly as it relates to energy, is reflected in the clashing positions of Marina da Silva and Minister of Mines and Energy Alexandre Silveira. At the heart of their dispute is oil exploration at Foz do Amazonas basin, located in the state of Pará, where Brazil will host the UN Conference on Climate Change. Silva, who has been an environmental activist her entire life, supported the decision of the Brazilian Institute for the Environment and Renewable Natural Resources (Ibama)—which monitors environmentally protected areas and issues licenses for companies to operate in these regions—to deny the state-owned oil company Petrobras a license to explore oil in the region.

The minister’s statement conflicted with the interests of both Petrobras and the requests of members of Congress from states that could benefit from an eventual oil exploration in the Northern Brazilian Equatorial Margin. Silva previously clashed with other ministers of Lula’s administration when she served in his government during his first two terms from 2003-2011. She resigned in 2008 after infighting over environmental licenses for highways and hydroelectric plants. This time, Silva agreed to return to Lula’s government with the condition that environmental policy cease to be treated in isolation and rather be considered transversely by all sectors of government.

Nevertheless, Lula still advocates for the extraction and use of oil and particularly, natural gas, as part of his plans for the country’s reindustrialization. Recently, he defended a “new industrial revolution” in Brazil, claiming that “it is time for developmentalism to win so that we can once again generate opportunities.”

In fact, Lula’s pro-gas advocacy has come into conflict with Petrobras for an illustratively different reason than Silva’s. Silveira, Lula’s minister of mines and energy, has asked Petrobras to stop injecting hydrocarbons into its wells as part of enhanced oil recovery, which oil companies use to capture carbon dioxide. Instead, Silveria wants Petrobras to sell these hydrocarbons and increase the supply of natural gas on the market. Ironically, Lula and Silveria want more hydrocarbons on the market, whereas Petrobras’ president, Jean Paul Prates, prefers to use it to close wells and prevent the escape of greenhouse gasses.

Going Green Elsewhere

Although Lula has continued to encourage development of Brazil’s oil and natural gas sector, he has made more substantial strides in sustainability in other areas. Deforestation in the Amazon decreased by 34% in the first six months of the government, compared to the first half of 2022. Since January, Ibama has increased by 166% the fines applied for crimes against flora in the Amazon compared with levels from the previous four years.

Embargoes (prohibitions on the use of illegally deforested areas) grew by 111% and seizures of equipment by 115%. Destruction of equipment used in environmental crimes increased by 260% in the same period.

The resumption of remote embargoes (i.e. remote monitoring of protected areas), paralyzed in the previous government, has already resulted in the ban on the use of 206,000 hectares of illegally deforested areas in the Amazon. The goal is to eliminate deforestation in the Amazon by 2030.

Lula’s multiyear plan (PPA) for the years 2024 to 2027, delivered in August, similarly foresees decarbonization of the transport matrix, the reduction of CO2 emissions from Brazilian civil aviation, and the expansion of strategic mineral reserves vital to producing solar panels.

Moving Beyond Either/Or

Despite the sectoral trade-offs Lula has often made between sustainability and growth, his administration has also shown that this exchange does not need to be zero-sum. For example, Lula’s economic team has been working on improving the regulatory environment for green investments in Brazil. The National Treasury is preparing to issue its first public sustainable bond with guidelines for best practices in the environmental, social and governance (ESG) areas. The bond, which will be issued on the international market, should be available in the second half of 2023.

The Sustainable Sovereign Finance Committee will establish the criteria for monitoring the environmental and social impact of actions financed by these bonds. Funding can be used, for example, to combat deforestation and support energy transition. The government expects to raise around US $2 billion with the first bond issue.

Lula is also showing interest in the carbon market. The president recently sanctioned a law that expands the list of sustainable economic activities allowed in public forest concessions, including the sale of carbon credits. By 2030, Brazil could potentially generate US $100 billion in revenue through carbon credits, according to a study by the Brazilian representation to the International Chamber of Commerce.

At the same time, the government’s technical teams are drafting a bill to create a regulated carbon market in Brazil. The proposal calls for facilities that emit more than 25,000 tons of carbon dioxide per year to compensate for their emissions.

Still, Lula and his administration too often treat sustainability as a barrier to industrialization rather than as an opportunity to pursue new economic opportunities. If Lula truly wishes to pursue both an industrial and green revolution, his administration will need to adopt new economic models for Brazil in which sustainability plays a strategic role. Possible solutions already lie within Lula’s multiyear plan, including greater investments in mining and tourism.

Often seen as environmentally harmful, mining lithium and graphite is crucial for advancing solar and wind energy technologies. Brazil has some of the largest reserves of both minerals and could develop this market in such a way that respects environmentally protected areas and reuses mine waste. Mining already accounts for approximately 4% of Brazil’s GDP, but there is significant potential for further growth in this sector. The Brazilian mining industry anticipates $50.4 billion in investments from 2023 to 2027, the highest in a decade. Industry leaders think the Brazilian market could absorb investment double that over the next five years given demand for strategic minerals for the energy transition.

Tourism currently contributes approximately 7.8% to Brazil’s GDP and is another sector with significant growth potential. Particularly, ecological tourism stands out as a promising venture. The state of Amazonas, in the Amazon biome, received 174,000 tourists in the first half of 2023, or less than 5% of the 3.66 million foreign tourists Brazil hosted during that period. As a comparison, Paris alone received more than 22 million tourists during that same period. New York City expects to receive more than 60 million tourists by the end of 2023.

Redirecting resources to industries that are instrumental to the green transition need not come at the expense of industrialization or growth. This is a rare instance when Brazilians can have their cake and eat it, too.

Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.

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