At the COP28 in Dubai, Paraguay advanced in negotiations with Singapore and the United Arab Emirates. Paracel, one of the interested companies, is questioned in the voluntary markets.
Reporting and research: Maximiliano Manzoni
Editing: Andrés Bermúdez Liévano (CLIP) and Thelma Gómez Durán (Mongabay)
Design & illustration: Willyam Matsumoto & Naoko Okamoto (El Surti)
With “one of the most advanced laws in the world” on voluntary carbon markets, according to President Santiago Peña, Paraguay went to the Conference of the Parties to the Climate Change Convention (COP28) in Dubai with a major objective: to obtain buyers for its credits and demonstrate the effectiveness of its main climate policy.
Peña almost made it. Paraguay achieved at the climate summit “the conclusion of substantial negotiations” to advance in an Implementation Agreement in 2024 with Singapore and signed a Memorandum of Understanding with the United Arab Emirates (UAE) for the purchase and sale of carbon credits, both within the framework of Article 6 of the Paris Agreement that proposes to create a regulated market for these credits.
However, it seems that this “law so advanced in the world” – approved last October in an express manner after less than a month since its entry into Congress and in the midst of strong questioning – falls short for Paraguay to be able to implement these two agreements. Environmental organizations and opposition politicians doubt whether the law has lower quality standards than those required by these international agreements. Even within the Peña government itself, some officials diverge on the work that lies ahead to make the potentially lucrative agreements, promoted under the promise of millions of dollars for the country, effective.
In essence, there are two types of carbon markets: voluntary and regulated. The voluntary market is managed by private entities such as Verra and Gold Standard, with rules and methodologies proposed by these organizations. The regulated market is proposed by Article 6 of the Paris Agreement and aims to ensure that these transactions take place under rules agreed upon by the 194 countries party to the Climate Change Convention.
Article 6 allows countries to “voluntarily cooperate” with each other to ensure compliance with their respective climate objectives. This cooperation is divided into three types: bilateral agreements for the sale and purchase of carbon credits (Article 6.2), a global market for carbon credits with rules agreed upon by all signatory countries to the Climate Change Convention (Article 6.4) and a cooperation mechanism without market logic, where one country can financially support another to maintain a forest or avoid the use of fossil fuels without the reduced carbon being counted in favor of whoever paid for those projects (Article 6.8).
Paraguay has been expressing interest in carbon markets for years, considering it as a “national priority” both at the last COP28 and at the previous COP27 in 2022 in Egypt. This interest became state policy with the government of Santiago Peña, who took office in August 2023. The government decided to turn its attention to voluntary markets. The ruling party used its absolute majority in both houses of Congress, allied media and the spokesmanship of Environment Minister Rolando de Barros Barreto to pass one of the first carbon credit laws specific to the voluntary market in Latin America in less than a month.
The carbon credit law has been strongly criticized by environmental organizations and the opposition for the absence of articles guaranteeing the protection of the environment and human rights. Furthermore, it proposes a concept of additionality that is much more lax than that recommended under international standards for voluntary and regulated markets. Additionality is an essential aspect of carbon credits, and means that it must be demonstrated that a capture or reduction of emissions through a project – such as a forest – would not have happened in the absence of the money from the markets. The Peña government eliminated the obligation to guarantee this.
To make matters worse, the eucalyptus afforestation project of the Swedish-Paraguayan cellulose company Paracel – one of the main firms interested in the implementation of this new law – has encountered problems in being approved in the voluntary carbon market, precisely because of claims about its lack of additionality and outdated data provided by the company. This is demonstrated by documents on the project consulted by El Surtidor within the framework of the journalistic alliance Carbono Opaco, which brings together 13 media from eight countries to investigate how the carbon market is working in Latin America. Verra and Paracel confirmed the existence of such difficulties.
What Paraguay signed with Singapore and the United Arab Emirates
On December 6, 2023, following a meeting at COP28 in Dubai between Paraguayan President Santiago Peña and Singapore’s Chief Minister Teo Chee Hean, the two countries officially announced “the completion of substantive negotiations” to move forward in 2024 towards a carbon credit trading implementation agreement.
The negotiations had actually ended two days earlier in a meeting room inside the conference venue in Expo City, Dubai.
On that day, December 4, representatives of both governments were panelists at a discussion in the Singapore pavilion at COP28. Rodrigo Maluff, Vice-Minister of Foreign Investment, participated on behalf of Paraguay.
In simple terms, the two countries undertook to create a bilateral commission “to define the criteria” for projects in Paraguay from which companies in Singapore could purchase carbon credits and thus be exempt from paying a carbon tax on their emissions from fossil fuel use in their home country. No document was signed.
“What was agreed is to create a road connecting the two countries to manage the transfer of carbon credits,” was how Industry Minister Javier Giménez García described it. “It is a step to position Paraguay as the lung market for the world.”
According to the Singapore government statement, the potential implementation agreement to be signed in 2024 “creates the criteria and processes upon which carbon credit projects will be developed and traded…when signed, it would be Paraguay’s first such agreement and Singapore’s first in Latin America.”
With the United Arab Emirates, the Paraguayan government signed a “memorandum of understanding” on December 6 during the climate summit hosted by the oil-rich country. According to Paraguayan government sources, the memorandum does not yet mean the purchase and sale of credits.
Throughout COP28, the Paraguayan government maintained strict secrecy. The delegation refused several requests for interviews via WhatsApp and in person.
A “memorandum of understanding”, such as the one signed with the United Arab Emirates, is in practice a declaration of intent to move forward in more specific conversations in the future, while an “implementation agreement” such as the one being sought with Singapore does have a legally binding status and should be approved by the Paraguayan Congress, as indicated in article 141 of the country’s Constitution. The aim is to avoid, for example, that both countries count as “their own” the carbon they sold or bought and, therefore, the same environmental result is counted twice. This “deception of the atmosphere” is called double counting in the carbon world.
Negotiations with the United Arab Emirates and Singapore are taking place under the umbrella of Article 6.2 of the Paris Agreement signed in 2015, which proposes the creation of “regulated” carbon markets under the rules of the United Nations Climate Change Convention.
In the voluntary carbon markets, the rules of the game and the registration of projects are defined by private organizations such as Verra or Gold Standard. Those interested in registering a carbon project must comply with the rules and methodologies validated by these organizations in order to enter a database to which potential buyers can access.
Article 6.2, on the other hand, creates a bilateral regulated market that allows two countries to buy or sell greenhouse gas reduction credits to each other, enabling the nations to meet their mitigation targets committed under the Paris Agreement.
To what extent are the rules of this regulated market agreed upon by the countries, and what are the minimum standards to be respected in these purchases and sales of carbon credits? These are two of the main discussions that took place at COP28 in Dubai, without the nations having reached a consensus. Nor was there unanimous agreement on the standards of Article 6.4, which – in a similar spirit – would create a global market regulated under rules agreed by all the countries adhering to the UN Climate Change Convention.
Because several countries are already moving forward with bilateral agreements, even in the absence of these regulations, a temporary way out has emerged: using carbon credits that are registered in voluntary markets that conform to the rules and methodologies chosen by the countries signing the bilateral agreement.
An example is the own implementation agreement that Singapore signed during COP28 with Papua New Guinea, which includes guidance on the methodologies of the voluntary markets that may be used. With this, Singapore seeks to ensure that its companies can buy quality carbon credits in order to avoid paying the carbon tax that the Asian country has. To do so, the credits must meet the additionality standards that the Singaporean government adopted in October 2023.
The United Arab Emirates and its companies have already made progress in securing access to the environmental results of numerous projects in other corners of the world to “offset” their emissions. The most recent case is that of Blue Carbon, the company founded by a member of Dubai’s royal family, which bought carbon from forests in five sub-Saharan African countries equivalent, together, to the size of the United Kingdom.
This has been criticized by a score of international environmental organizations, which denounced that the projects could end up violating the rights of local communities to land ownership or to free, prior and informed consultation on activities carried out on the land, similar to what has already been denounced, for example, in Colombia or Kenya. In Colombia, an indigenous community denounced that a carbon credit project was carried out in their territory without them being consulted, and without them receiving the benefits for protecting the forest. In Kenya, reports from Survival International document how, under the guise of conservation projects for carbon credits, families have been displaced from their ancestral lands and intimidated and abused by private guards.
Is Paraguay’s law suitable for international agreements?
Despite having already found two potential clients for its carbon credits, there are doubts as to whether Paraguay’s law on carbon markets, which was passed between September and October 2023 in a rushed manner and amid irregularities, should be modified to bring it into line with the emerging agreements with Singapore and the United Arab Emirates.
The legislation was approved in both chambers of Congress amidst accusations by opposition senators of influence peddling to favor law firms advising carbon projects. Congressmen such as Celeste Amarilla and Esperanza Martínez denounced that the bill differed from the one that had been socialized with the legislative representatives, and that in a room next to the Senate chamber, the team of the Minister of Environment Rolando de Barros Barreto modified the bill to be voted on in real time.
During that session of Congress, the senator who promoted the law, Patrick Kemper, shouted accusing that this journalist was responding “to the interests of international corporations”, due to his critical coverage of the bill. The attack was condemned both by the Paraguayan Union of Journalists and by political parties, human rights organizations and media of the country and the region.
In essence, the law creates a mandatory registry of all carbon credits in Paraguay. While it provides, for example, for transfers of credits to other countries and a minimum percentage that must remain in national territory for the Paraguayan state to meet its mitigation commitments, it is specifically aimed at voluntary carbon markets and not those created under Article 6.
Asked whether the law would be useful for the international agreements with Singapore and UAE, the Vice Minister of Investment of the Ministry of Industry and Commerce, Rodrigo Maluff, and the legal director of the Ministry of Environment, Victor Gonzalez, suggested two different paths. For Maluff, the door is not closed to modify the law to adapt it to the standards to guarantee the integrity of the credits demanded by countries like Singapore, while Gonzalez believes that much of this work can be done in the regulatory process of the law that will begin this year.
This is not the only hurdle to overcome. Paraguay’s carbon credit law was approved without contemplating a system of environmental and human rights safeguards, an international standard that seeks to prevent, identify and sanction possible impacts of this type of project on local communities, especially indigenous peoples. These rules are mandatory for avoided deforestation projects (also known as REDD+) and serve “to enhance the work and do no harm” to the communities, explains Mirta Pereira, a lawyer and advisor to the Federation for Self-Determination of Indigenous Peoples (FAPI) in Paraguay.
Pereira was part of the Paraguayan delegation, led by then Environment Minister Oscar Rivas and indigenous leaders Julio Martínez and Carlos Picarenai of FAPI, that negotiated and supported the approval of these safeguards at COP16 in Cancun in 2010. “What these safeguards seek is to mitigate the negative impacts of projects and, above all, to defend the rights of the people. There are seven principles, among which participation, transparency and respect for the rights of indigenous peoples through, for example, the creation of complaint mechanisms stand out,” explains the lawyer. “They also seek to protect everything that a forest provides, not only carbon, such as biodiversity and water, and to avoid the danger of reversion: that forests are not only protected when there is money from a project and then everything returns to normal deforestation”.
Under “the rush because COP28 is coming”, in the words of the ruling party’s deputy Pastor Soria, the government majority in Congress rejected the requests for the inclusion of these safeguards by congresswoman Johanna Ortega and senator Rafael Filizzola. The ruling majority also rejected the creation of a mechanism for receiving complaints, consultations and referral of possible conflicts, another common standard in many countries with active carbon markets.
For Congresswoman Johanna Ortega, “the fact that Paraguay has returned from COP28 with only the memorandum with the United Arab Emirates shows a failed strategy of the country. We have to see what the reasons were, but I think there was some difficulty that the Ministry of Environment or the official delegation could not overcome to sign concrete agreements. The expectation was higher. A promise to sign something with Singapore that is still nothing concrete is a minimum result”.
For the opposition congresswoman, “it is highly probable that the carbon credit law that was passed in Congress without much debate does not meet certain standards and, therefore, will require a new modification. There was a mistake in not listening to those of us who had to contribute to a better bill. We have to move forward in having a carbon credit law that guarantees, for example, environmental and human rights safeguards”.
Without these safeguards it is much more difficult for communities to denounce possible irregularities in carbon projects that should benefit them, as has happened in Colombia with an indigenous community that has taken a case all the way to the Constitutional Court.
Another potential stumbling block is the concept of additionality in Paraguayan law. The government of Santiago Peña promoted, as one of the main arguments in favor of carbon markets, their use to finance the care of national parks and other protected areas in the country, which today have budget and personnel limitations that prevent them from guaranteeing their well-being in the face of invasions by, for example, marijuana growers.
The problem is that the Paraguayan state is already obliged by law to protect these parks and protected areas, so they should exist without the need for money from carbon markets.
The Santiago Peña administration’s solution was to add a crucial modification to the original bill in September 2023: it changed the concept of additionality.In essence, it eliminated the requirement to demonstrate that the carbon – from a forest, for example – is additional to what must be protected by law and could not be preserved without money from the market. When asked about the changes promoted by the Paraguayan government, Inigo Wyburd, a specialist researcher with Carbon Market Watch, said at the time that “Additionality is necessary. It is important that it is reflected in the text of the law. Areas that are not at risk of being deforested should not be eligible to receive carbon credits”.
This modification not only benefited the Paraguayan State in its intention to sell carbon credits originating from protected areas.It also benefits the powerful agribusiness sector, which was a crucial political supporter in getting the law passed. The Rural Association of Paraguay, for example, was part of the working groups, the public hearings and defended the law in media interviews.
With this change, cattle ranchers and soybean farmers were enabled to monetize in the voluntary carbon markets the forest reserves that they are already legally obliged to maintain in the Chaco or the Eastern Region.This is prohibited under Paraguay’s system of payment for “environmental services”, where only those who have forest remnants that exceed their legal obligations can receive money in exchange for not deforesting. This is one of the main policies promoted by the country as a way to reduce the alarming deforestation, especially in the Chaco, the second most important ecosystem in South America after the Amazon, which according to official reports has lost 4 million hectares of forest in the last 15 years.
The system of payment for environmental services has even been manipulated.
This was evidenced when a company owned by former President Horacio Cartes paid another company he owned to compensate for the environmental damage caused by his cement plant. And it did so with forests belonging to a different ecosystem and without any calculation of equivalence between them.
During that transaction, the environmental director of the cement plant was the current Minister of Environment, Rolando de Barros Barreto.
The law on carbon credits, approved in October, which does not include the concept of additionality, could also benefit reforestation projects with exotic timber species such as eucalyptus, which could receive extra income for their plantations, in addition to the tax benefits they already receive from the State.
Consulted during the public hearing on the bill, Víctor González, legal advisor to the Ministry of the Environment, said that the change in the issue of additionality was made “to make the law as broad as possible to all types of projects”.
However, the modification made by the Paraguayan government contradicts the very objective of carbon credits, which is to incentivize additional mitigation. It also goes against the standards recommended by the Integrity Council for the Voluntary Carbon Market (ICVCM), an independent body that seeks to raise quality standards in these markets.
The Paraguayan law also contradicts the Singaporean government’s criteria for allowing a credit to be used to avoid paying the carbon tax in the Asian country, since that nation requires that any project “must exceed what is required by any law or regulation of the country” where the projects are located.
When asked about the questioning of the law during his participation in the Singapore pavilion at COP28, Vice Minister Maluff responded that “measures such as the European Union’s anti-deforestation law” would help Paraguay adapt to better standards in carbon credits. This contradicts Paraguay’s position throughout the conference, which was openly critical of EU environmental policies in trade agreements.
The behind-the-scenes of the agreement with Singapore and one project under fire.
The negotiations between Paraguay and Singapore on carbon credits date back at least to the second half of 2023. During the United Nations summit in New York, on September 20 last year, President Santiago Peña had a meeting with “representatives of Paracel/Trafigura”, according to the official agenda.
Paracel is a Swedish-Paraguayan company that, among other investments, has 185,000 hectares of eucalyptus plantations in northern Paraguay. These plantations are destined for the production of cellulose in its own mill, which is still under construction. Paracel intends to monetize these eucalyptus plantations in the voluntary carbon markets, according to the project that the company presented to the U.S. certifier Verra, one of the largest in the world. Paracel had a strong interest in the carbon credit law, promoting discussions and participating in meetings in the framework of the law’s development. The company includes the sale of carbon credits as one of its three main products in its latest sustainability report published in 2022.
On the other hand, Trafigura is a Singapore-based corporation and one of the world’s leading independent traders of oil, metals and other commodities. According to the registry of official contracts, it is one of the largest suppliers of the Paraguayan State, to which it sells fossil fuels for the state-owned oil company Petropar. It was also a fuel supplier for Enex Paraguay, when its owner was still Horacio Cartes, President Peña’s political godfather.
Trafigura is also considered “the world’s largest trader of carbon credits”, according to the Los Angeles Times. According to a publication of the same newspaper, in August 2023, the company had found that most of the credits it had purchased to offset its emissions were “worthless” due to questions about the methodology used to calculate them.
On September 7, 2023, two weeks after the publication by The Angeles Times, the company’s president, Felix Guastavino, met with the president of Paraguay, Santiago Peña at the presidential residence in Asunción.
Two weeks later, on September 20, the Paraguayan president met, officially, with representatives of Paracel and Trafigura in New York City. In the photograph of that meeting, published by Santiago Peña on his X (Twitter) account, one can identify the president of Paracel, Per Olofsson. Also in the photograph is Benedict Chia, the national director of climate change of the Singaporean government. According to his biography on the United Nations website, Chia is in charge of “overseeing Singapore’s carbon credit policy and strategy” and was elected as part of the Article 6 monitoring team at the United Nations Climate Change Convention. Chia’s involvement was unannounced.
When asked if the meeting in New York was about the purchase of carbon credits, Paracel limited itself to talk about the presence of its top executive in all kinds of meetings. “Per Olofsson, as Chairman of the Board of Paracel, participates in meetings of various kinds, which aim to contribute to the positioning of Paraguay at international level, mentioning the experience of investing in Paraguay and talking about the conditions for international investment in our country and also works actively in dialogue with banks, financial institutions and other key stakeholders in order that Paracel continues to advance and thus can contribute to national development,” was the official response of the company.
Thus, Paracel did not deny that the meeting had to do with carbon credits.
On the same day of the meeting in New York, Paracel received a letter from Verra denying the registration of its crediting project in the voluntary carbon market. “This is not a final rejection, but rather that the projects have the opportunity to resolve the problems noted,” the U.S. organization told this journalistic alliance.
By “problems pointed out”, Verra refers to the lack of clarity on the issue of additionality in the project presented by Paracel.
Specifically, the certifier questioned that Paracel’s project argued that it needs the money from the carbon credits due to “investment barriers” to achieve the existence of eucalyptus plantations.
“However,” Verra’s letter states, “Paracel SA received a loan of USD 200,000,000 from the Inter-American Development Bank (IDB) for the implementation of the pulp mill and the eucalyptus plantations,” both included in the carbon credit project.
The IDB money is a problem, according to Verra, because under its definition of additionality, it is not just that the project captures additional carbon beyond what is required by law, but also “means that the reduction or removal of emissions must happen from activities that would not have happened without the proceeds from the sale of the carbon credits”. For Verra, the IDB loan to Paracel gives indications that, even without the money from the carbon markets, the plantations would exist.
Verra also questioned Paracel’s claim that its project was “the first of its kind,” while using outdated forest plantation data from 2015, when there were 77.5% fewer hectares under cultivation than in 2022. And that the company argues that “Paraguay is a risky country to do business in,” when in fact, Verra noted, the nation has a fairly high degree of investment security according to financial rating firms such as Moody’s and S&P.
As a result of these observations, Verra “put the project on hold” and denied its registration in the voluntary market it administers, a mandatory step to start selling these credits.
Consulted via email on November 27, 2023 about the observations made by Verra in its letter, Paracel replied that “it is important to clarify that the project is not rejected by Verra, [but] we are in a period of responses to the questions asked… Paracel is currently working on the answers and preparing the documentation requested by this institution,” replied its Communication coordinator, Marcelo Rojas. According to Verra, Paracel had until December 19, 2023 to present the corrections and thus avoid the definitive rejection of its project. As of January 15, 2024, neither the company nor Verra have published updates regarding the status of the project.
Asked about the debate on additionality in the Paraguayan law, Rojas responded that “Paracel views positively” the existence of a law on carbon credits “to clarify and standardize the rules of this market”. On additionality, he said, “we think that the fundamental rules are the international ones and those are the ones that determine the possibility of selling carbon credits. The most significant buyers are those that require compliance with the rules, and higher standards of additionality and sustainability.”
Verra also responded to queries about the Paraguayan law, acknowledging that they are aware of its existence and that it is their policy “to respect the autonomy of national governments and not to comment on laws, resolutions or regulations”. The organization noted that it has already included as a requirement for Paraguayan projects that they adhere to the requirements of local law. This includes the so-called “declaration of no objection” that the Paraguayan government will give to projects “that conform to the methodologies of the Intergovernmental Panel on Climate Change (IPCC)”, as explained by Victor Gonzalez of the Ministry of Environment at the public hearing prior to the approval of the law.
No consensus on transparency in carbon markets at COP28
Paraguay’s potential projects with Singapore and the United Arab Emirates are also traversed by the failed negotiations so far on how to organize Article 6.2.
At COP28 in Dubai, countries were unable to agree on minimum transparency criteria on the content of bilateral agreements between countries, including what the step-by-step process would be for verifying that the agreements meet quality standards or what limits there will be to any of the parties being able to renegotiate what has already been agreed.
“The absence of consensus on Article 6 at COP28 avoids replicating the mistakes already seen in voluntary markets,” said Gilles Dufrasne, an expert from the European organization Carbon Market Watch, which monitors the global carbon market, after the close of negotiations.
“Trading credits requires strong environmental and human rights safeguards, as seen in the numerous scandals related to voluntary carbon markets over the past 12 months. The text on the table (at COP28) simply did not provide that. If approved, it would have risked reproducing the mistakes of the voluntary markets, so by rejecting it, the negotiators made the best of a bad situation,” he concluded.
For Catalina Gonda, Argentine expert and observer of the negotiations in Dubai for the Climate Action Network Latin America (CAN-LA), the proposed text “was weak”: “Basically, the parties that participate in these agreements (countries and/or private parties) set the rules and there is no independent body to supervise them. The criteria for environmental integrity and socio-environmental safeguards are left largely to the discretion of these parties,” she explained.
For Gonda, “the only thing that would exist is a review of the reported information by a UN technical team: a mere bureaucratic procedure that would not have too many consequences”. Countries, she explained, would have the option of classifying the reported information as “confidential”, without having to explain the criteria. “Without transparency and publicly accessible information, it would further dilute any kind of accountability,” she added.
According to four people who closely followed the negotiations during COP28 and not linked to each other, the big driver for the bilateral agreements to have a lot of discretion was the United States, interested in offering carbon credits so that its airlines could reach the mitigation commitments made.
In the plenary on the last day of COP28, Malcolm Stufkens, vice-minister of the environment of Honduras, criticized the failure to reach a consensus on the rules. “Markets must have a solid regulatory structure, strict transparency. It is necessary to denounce those who work to degrade this structure, this transparency (…) in order to open the door to climate fraud, as happens in voluntary markets,” he said.
For Stufkens, while a large majority of countries, including the European Union, sought to have carbon markets regulated accordingly, “there was a powerful lobby pushing to continue this greenwashing.”
“The minimalist regulatory proposal” of Article 6.2 “would have allowed countries to define their own rules on what to report, trading credits flagged with problems, could have led to situations of double counting,” says Jonathan Crook, an expert at Carbon Market Watch. “The text would also have legitimized questionable confidentiality clauses,” he says.
The failure to reach consensus on Article 6.2 should not be celebrated, argues Crook, as more and more countries and companies are negotiating bilateral agreements, in the absence of comprehensive regulation. “This situation risks affecting transparency and making negotiations even more difficult in 2024, given the absence of clear direction,” he said.
Paraguay’s difficulties in reaching more substantive agreements on carbon credits at COP28 and the high possibility of having to modify its recently released legal framework suggests that the rush that inspired the approval of a law with so many questions was not justified, and may even have been for the worse.