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Climate activists around the world breathed a sigh of relief when Luiz Inácio Lula da Silva won Brazil’s election last year. His right-wing predecessor, Jair Bolsonaro, destroyed environmental agencies, turned a blind eye to illegal gold mining and undermined the rights of indigenous peoples. Lula, by contrast, has pledged to end illegal deforestation in the Amazon and lead international efforts to stem climate change. On June 5, the leftist outlined an ambitious plan to halt illegal deforestation in the Amazon by the end of this decade. “There should be no contradiction between economic growth and environmental protection,” he said. However, Lula’s green agenda has suffered setbacks.
In theory, Brazil is well positioned to lead efforts to combat climate change. In 2019, 82% of its electricity came from renewable sources, compared with a global average of 29%. Its carbon emissions come mostly from deforestation and agriculture, not energy.
Curbing deforestation promises to pay big dividends. The World Bank estimates that the value of the Amazon rainforest (mainly as a carbon store) is $317 billion per year, with almost all of the gains going to the rest of the world. That’s three to seven times more than the estimated value of the area’s farming, mining or logging. A Senate committee is working to create a carbon market that would allow Brazil to make money selling carbon credits. In April, the European Union (with which Brazil may soon sign a trade pact) passed a law banning the import of products that contribute to deforestation. All of these provide an incentive to prevent more felling of trees.
Several issues held Lula back. First, his popularity is much lower than in his previous two terms, from 2003 to 2010. Back then, he could influence Congress more easily. But he only narrowly won last year’s election.
What’s more, Congress has swung to the right. Lula leads a rowdy coalition that often does not support him. He had to resort to pork barrel tactics, which didn’t quite work. On June 1, Congress passed a law removing the Ministry of Environment’s registration of rural land and management of waste and water. It also stripped the newly formed Aboriginal Ministry of the power to delineate territories. The day before, the House of Commons passed a bill that, if approved by the Senate, would not recognize land claims made by Aboriginal groups after 1988.
Both bills are coups for the agribusiness lobby, the second problem facing the president. Agriculture is increasingly important in the country. First-quarter GDP figures released this month showed the agricultural sector growing 18% from a year earlier, a performance that was enough to prompt analysts to raise their full-year forecasts for the broader economy. This is partly due to better weather compared to last year, as well as higher agricultural commodity prices. In contrast, industrial output fell and the services sector rose slightly. According to World Bank statistics, the proportion of added value of agriculture, forestry and fishery in GDP will rise from 4% in 2010 to 7% in 2021.
The agribusiness lobby now holds 347 of the 594 seats in both houses of Congress, up from 280 in 2018.
Part of the expansion in the agricultural sector occurred during Lula’s previous two terms of government, when trade with China accelerated. However, Lula has struggled to win back the support of the pro-Bolsonaro lobby. In April, Lula’s agriculture minister canceled an invitation to the country’s largest agricultural fair after Mr Bolsonaro announced he would attend it. Later, Lula called the organizers of the event “fascists.” Mr Lupion complained that the left had made the green agenda an “ideological” issue.
The third issue facing Lula is the importance of state oil company Petrobras. In his previous two administrations, Lula celebrated Petrobras as a national champion for making one of the largest ever offshore oil discoveries in 2006, a so-called pre-salt field off the southeast coast. The discovery made Brazil the eighth-largest oil producer in the world. More potential oil will be developed this decade, which the government hopes could make Brazil the fourth-largest oil producer. Adtiya Ravi, an analyst at consultancy Rystad Energy, estimates that oil from pre-salt fields alone could account for nearly 4% of global supply by the end of the decade. Petrobras expects production to rise from the current 3 million barrels per day to more than 5 million barrels per day by 2030.
While developing existing projects, Petrobras is trying to secure a license to drill for offshore oil in an area near the Amazon Basin known as the equatorial rim (see map). The region could hold as much as 30 billion barrels of oil and its equivalent, a quarter of which is considered recoverable. Recent oil discoveries in Guyana and Suriname have encouraged Petrobras, which is poised to spend about half of its $6 billion exploration budget in the region over the next five years. On May 18, Brazilian regulators refused to grant the company an exploration license, but Petrobras has appealed that decision. Energy and Mines Minister Alexandre Silveira described oil exploration in the region as a “passport to the future” and called the regulator’s demands “incoherent and absurd”. Lula said he found it “difficult” to believe that oil exploration would cause environmental damage in the region.
Meanwhile, Petrobras’ five-year business strategy makes little mention of investing in renewable energy.The company said $4.4 billion, or 6 percent of its capital expenditures during the period, would be used to “enhance [the company’s] Low-carbon positioning”, much of which will be aimed at decarbonizing oil production rather than promoting renewable energy. By contrast, BP invests in renewable energy, hydrogen, biofuels and electric vehicle charging stations in 2022 Petrobas spent $5 billion, or 30 percent of its capex that year. Maurício Tolmasquim, who was recently named chief energy transition officer at Petrobas, acknowledged that the company is “behind” other major energy companies in terms of green initiatives. Official Jean Paul Prates boasted that Brazil could become “the last oil producer in the world”.
According to Rystad Energy, Brazil has approved or is preparing to approve the highest number of oil and gas projects in 2022 and 2023, after Saudi Arabia and Qatar (see chart). Oil production in Europe, Africa and Asia will decline over the next decade, while South America’s share of global production is projected to rise from 7.2 percent today to nearly 10 percent by 2030, thanks largely to Brazil, Guyana and Suriname.
Natalie Unterstell, head of the Talanoa Institute, a think tank in Rio de Janeiro, said Lula would need to abandon “his allegiance to oil nationalism” in order to fulfill his green pledges. But the government can smell money. Even without developing the equatorial margin, Petrobras expects to provide more than $200 billion in revenue to the state coffers over the next five years, or about 5 percent of total government revenue.
The final hurdle is the desire to develop the Amazon and the states near the equator’s edge. The northern and northeastern states of Brazil are home to three-quarters of the country’s poor (as defined by the statistical agency’s estimates), even though they account for just over a third of the country’s population. Northern governors want more investment. Last June, before his election, Lula said he supported building a highway across the Amazon that would link the soybean-growing interior with coastal ports. Lula’s transport secretary has also listed a massive railway linking the interior with the coast as his top priority. However, a 2021 study estimated that 230,000 hectares of trees on Aboriginal land would be cleared by 2035 if the railway was built.
Lula’s desire to boost the economy has clashed with his environmental agenda. Days before announcing plans to end deforestation, his government lowered taxes on cars and trucks to stimulate consumption. To go green, Lula will need to adjust many of his plans for a rich Brazil.
© 2023, The Economist Limited. all rights reserved. From The Economist, published with permission.Original content available at www.economist.com
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