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The impact of the global methane pledge on the Brazilian beef industry

April 4, 2022
Charles River Associates Nelore Cattle Herd in Confinement

This article was originally published by Web Advocacy.

Following the Glasgow Climate Change Conference (COP 26), Brazil and 104 other countries signed the Global Methane Pledge. Methane emissions reduction is important for curbing global warming, as methane causes approximately 80 times more warming than the same amount of carbon dioxide[1]. Brazil committed to reducing 30% of its methane emissions by 2030. However, should Brazil accomplish this commitment, its large beef industry must adapt, as livestock is the heaviest methane emitter in the country [2].

Due to its large bovine herd (220 million cattle, equivalent to 14% of the bovine global herd), Brazil is the fifth largest methane emitter in the world[3]. In 2020, it emitted almost 402,000 million metric tons of CO2 equivalent (MMTCO2E – around 2% of total world emissions). The heaviest methane emitter in Brazil is agriculture, which accounts for 78% of total emissions. Livestock, on its own, is responsible for 75% (300,000 MMTCO2E) of the country’s methane emissions (primarily from enteric fermentation and manure management). Therefore, to achieve a 30% reduction below the 2020 levels, livestock emissions must fall sharply.

According to Embrapa (The Brazilian Agricultural Research Corporation), it is necessary to reduce bovine herd enteric fermentation to address methane emissions in Brazil. For instance, dietary supplements can diminish fermentation and thus lower gas output. JBS, the largest Brazilian meatpacker, is adding a quarter-teaspoon of a feed additive to 30 thousand cattle that inhibits the enzyme responsible for producing methane. Shortening the lifespan of the cattle also leads to the reduction of methane emissions, as the same body mass is reached in less time. This depends on techniques such as genetic alterations and bettering the quality of pastures[4].

All these alternatives depend on the deployment of innovations and imply higher production costs. Unless meatpacking companies can pass these higher costs on to consumers, there may not be incentives to adopt techniques that will result in lower methane emissions. Thus, it is important to investigate whether consumers will agree to pay higher prices for “climate friendly beef”. A recent paper by Lucchese-Cheung et al. (2021)[5] sheds light on this issue, as they investigate whether Brazilian consumers are willing to pay more for carbon neutral beef (CNB).

Embrapa has set up a producers’ certification scheme in which beef producers not only adhere to CNB method of production, but also to a guaranteed quality standard. The certification is aimed at assuring consumers of high-quality carbon neutral beef, a market innovation (Alves 2015, apud Lucchese-Cheung et al. 2021). In fact, the CNB is an attempt to further differentiate beef by adding a characteristic that makes it possible for consumers to compare CNB and non-CNB and decide whether to pay more for carbon neutral beef.

According to Lucchese-Cheung et al. (2021), communication campaigns are vital for a large consumer base to be willing to pay a higher price for carbon neutral beef. However, the results of advertisement campaigns are uncertain, not to mention that they are sunk costs[6]. Hence, there is no guarantee that meatpackers will spend to advertise carbon neutral beef. If they do not, it is less likely that consumers will pay more for CNB. Consequently, producers may decide not to incur the higher costs necessary to produce carbon neutral beef and, as a result, the reduction of methane emissions can be compromised.

Lucchese-Cheung et al. (2021) investigate domestic consumers’ responses to an innovation (carbon neutral beef). However, Brazil is a relevant exporter, which makes it important to investigate whether foreign consumers are willing to pay higher prices for carbon neutral beef (CNB). In the case that they are, and Brazilian firms do not supply it, competitors may do so and therefore divert demand from Brazilian beef exporters. As a result, domestic firms would lose market share. Moreover, some countries may adopt carbon border taxes, which makes it even more costly and risky not to invest in methane emissions reduction.

Furthermore, the cost of capital for the Brazilian meatpackers may increase should they not invest to reduce greenhouse gases emissions. A recent episode helps to illustrate it. Inter American Development Bank (IADB) has blocked a USD 200 million loan for Marfrig, the second largest Brazilian meatpacker. The alleged reason was that Marfrig did not comply with IADB’s sustainability policy. This episode is interesting, as Marfrig was going to use the money to finance its Plan Green + (Plano Verde +), which aims at ensuring sustainability alongside its supply chain[7].

Thus, there seems to be a dilemma. For ranchers and meatpackers to access low-cost capital, such as green bonds or sustainability-linked bonds, they must invest in sustainability. However, to do so, they must have access to low-cost funding. If they do not, they may not invest.

It is believed that the global carbon market can help solve this dilemma. By reducing methane emissions, ranchers and meatpackers would sell carbon credits to companies who need offsets to reduce emission targets. By doing so, their revenue would increase. However, the role of carbon markets for methane emissions is not clear, as there have not been issuances and, therefore, the return on the investment is not known[8] [9].

Furthermore, full traceability of ranches that supply livestock into the supply chains is essential for the carbon credit market to work. Although Brazilian largest meatpackers trace cattle sellers, they are not fully traceable. Consequently, it is difficult to accurately estimate the amount of methane reduction and, consequently, the carbon credits to be sold.

Summing up, there is a lot of uncertainty regarding how to fund the methane emissions reduction and the industry transition to “climate friendly beef”. The potential competition faced by Brazilian exporters should be sufficient for the public sector to step in and launch financing schemes. Additionally, there are negative externalities[10] associated with greenhouse gases emissions, such as methane, which justifies public policies for reducing them.

There are two public policies addressing this issue in Brazil: The National Plan for Low Carbon Emission in Agriculture (ABC Plan[11]) and The Zero Methane Program[12]. The ABC Plan has the goal of reducing greenhouse gases emissions in agriculture. Regarding funding, it offers low-cost loans up to USD 1 million (BRL 5 million) per fiscal year. The Zero Methane Program was recently launched and offers funding for activities related to methane reductions, such as the sustainable use of biomethane[13]. It also aims at setting up the legal framework for developing a carbon market for methane emissions reduction.

Given the costs and uncertainties related to the transition to a “climate friendly beef industry”, it is difficult to predict whether these public policies will be enough for enabling it. Meatpacking and livestock companies’ incentives to invest in methane reduction will also be key to enabling this transition. These incentives, on the other hand, depend on their ability to pass higher costs on to prices. However, given the uncertainty regarding the ability to charge higher prices for “climate friendly beef”, and as the Global Methane Pledge is not binding, companies might not invest, which can result in a market failure. To avoid it, Brazil should consider reinforcing the public policies and legally enforcing its reduction commitments as part of the efforts to reduce methane emissions and thus start overturning its image as a climate villain.

[1] See: Why methane cuts pledged at COP26 may be key to meeting climate goals (nationalgeographic.com)

[2] Brazil is a key player in the world beef market. The country produced around 10 million tons of beef in 2020, 17% of world production. Brazil is the world’s largest beef exporter. Its foreign sales amounted to 2 million tons in 2020, 15% of global beef exports. See: Pesquisa da Pecuária Municipal | IBGEABIEC – Associação Brasileira das Indústrias Exportadoras de CarnesTop beef exporting countries 2020 (worldstopexports.com) and Brazil is the world’s fourth largest grain producer and top beef exporter, study shows – Portal Embrapa.

[3] See: Global Methane Initiative

[4] See: Brazil’s beef industry starts to tackle methane emissions | Financial Times (ft.com)

[5] Thelma Lucchese-Cheung, Luis Kluwe de Aguiar, Lilian Cunha de Lima, Eduardo Eugênio Spers, Filipe Quevedo-Silva, Fabiana Villa Alves & Roberto Giolo de Almeida (2021) Brazilian Carbon Neutral Beef as an Innovative Product: Consumption Perspectives Based on Intentions’ Framework, Journal of Food Products Marketing, 27:8-9, 384-398.

[6] See: Sunk Cost Definition (investopedia.com)

[7] See: BID decide cancelar empréstimo à Marfrig | Agronegócios | Valor Econômico (globo.com)

[8] See: Cop26 methane pledge needs “money and muscle” – (capitalmonitor.ai)

[9] Mootral, a Swiss agriculture technology company, claims to have issued the first carbon offset credits for cattle methane emissions reduction. See: Carbon credits issued for cow methane reduction in potential world first | S&P Global Commodity Insights (spglobal.com)

[10] See: Externality Definition & Examples (investopedia.com)

[11] See: Plano ABC – Agricultura de Baixa Emissão de Carbono — Português (Brasil) (www.gov.br)

[12] See: MinutaProgramaMetanoZero.pdf (www.gov.br)

[13] According to An introduction to biogas and biomethane – Outlook for biogas and biomethane: Prospects for organic growth – Analysis – IEA, “biomethane (also known as “renewable natural gas”) is a near-pure source of methane produced either by “upgrading” biogas (a process that removes any CO2 and other contaminants present in the biogas) or through the gasification of solid biomass followed by methanation”.

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