Thought leadership from our experts

The Brazilian forest code and legal certainty for energy projects

On February 28, 2018, judgment of the constitutionality of several key provisions of the Brazilian Forest Code (Law 12,651/2012) was concluded by the Supreme Court, in deciding four direct actions for unconstitutionality (ADIs 4901, 4902, 4903 and 4937) and one direct action for constitutionality (ADC 42), all of them filed in 2013.

The Code has had a major impact on activities in the Brazilian electricity sector. Since the actions were filed, sector representatives have been working incessantly on the matters at stake, including acting as amicus curiae in the suits.

Despite these arguments, I believe that the Forest Code of 2012 has a much more technical and comprehensive text than the previous Code of 1965, resulting from lengthy discussions involving various entities about situations faced in that interim.

Therefore, except for a few points, the current Brazilian Forest Code is very technical and faces conceptual questions with sufficient clarity so as to bring legal certainty regarding some important aspects that were lacking in the 1965 Forest Code.

Therefore, whether good or bad for the different interests involved, the judgment was very important to make the Code's application definitive.

The outcome was a great victory for the Brazilian electric power sector, because the leading opinion of Justice Luiz Fux (the reporting judge assigned to the case) was in line with its interests, despite some divergences of interpretation.

Among the most important provisions of the Code ruled to be constitutional are Article 3, VIII, "b":

"Art. 3. For the effects of this Law, the following definitions apply:
VIII-public utility:
b) infrastructure works intended for public concessions and services for transportation, road systems, including as necessary for urban subdivisions approved by the Municipalities, sanitation, energy, telecommunications, radio transmission, as well as mining, except in this last case the extraction of sand, gravel and pebbles;"

This means that energy projects are considered as having public utility, allowing the invocation of eminent domain for the effect of permission to intervene in permanent preservation areas, always in exceptional cases when there is an absence of a duly demonstrated alternative location.

One of the most important victories for the sector, more specifically for hydropower, was to define that the permanent preservation areas around new reservoirs covering a surface area of more than one hectare formed by dams or dikes shall be established in the project's environmental license.

Without doubt, the licensing authority has the technical expertise to define the width of the area around artificial reservoirs for protection of natural resources. These must be between 30 and 100 meters in rural areas and from 15 to 30 meters in urban areas, according to the articles cited below:

"Art. 4. For the effects of this Law, the Permanent Preservation Area is deemed to be, in rural or urban areas:
III – the areas around artificial water reservoirs resulting from dams or dikes along natural watercourses, in the strip defined in the environmental license of the undertaking;
Art. 5. In case of construction of artificial water reservoirs intended for energy generation or public water supply, the operator must acquire, expropriate or establish an administrative easement for the Permanent Preservation Areas created around them, as
established in the environmental licensing, with observance of a minimum strip of 30 (thirty) meters and maximum of 100 (one hundred) meters in rural areas and a minimum strip of 15 (fifteen) meters and maximum of 30 (thirty) meters in urban areas."

The last example mentioned is the modality of legal reserve, which consists of a percentage of rural properties that must be preserved with native plant cover, as established by Article 12.

After much discussion and technical input from the electric sector defending the text of the Code, the Supreme Court held Article 12, paragraph 7, to be constitutional, as follows:

7. No Legal Reserve shall be required related to areas acquired or expropriated by the holder of a concession, permission or authorization for exploitation of the hydraulic energy potential in which undertakings exist to generate electricity, including substations, electricity transmission or distribution lines.

In summary, the Supreme Court ruled that most of the activities of the electric power sector are excused from establishing a legal reserve. This translates into a substantial reduction of costs, such as those related to the percentages of the huge areas flooded by reservoirs.

This waiver is due to the fact that such areas cannot be classified as rural, since they do not serve as venues for agriculture, stock breeding, vegetable extraction, forestry or agro-industry, according to the legal concept of rural area established in the Land Statute, enacted in 1964.

In the final analysis, the final judgment of the constitutionality of the Forest Code of 2012 has brought an important measure of legal certainty, so that companies can develop their activities related to generation of electricity along with protection of the environment in a balanced manner.