An Emissions Trading System for Mexico

Carbon pricing as policy has become one of the main instruments available to governments for driving down emissions in a cost-effective manner. Its application has been structured around two main options: a carbon tax and an emissions trading system (ETS). The expected benefits, their technical requirements, and the complexities of each option has been widely discussed around the world in an number peer-reviewed articles, research documents, and policy briefs. In summary, a carbon tax provides certainty in revenue collection but without certainty on the emissions reduction effect, whereas an emissions trading system allows for a clear estimation of the mitigation effect but lacking the certainty of the revenue to be collected by the government. The application of each instrument is a matter of debate and sometimes heated discussions between government and private sector companies. Nevertheless, their use has become relatively widespread and specialized publications have been tracking the state of carbon pricing development and the policies supporting their adoption for over a decade.

Mexico is no exception to this trend. The General Law on Climate Change (LGCC) enacted in 2012 provided the Mexican government with the possibility to set up a voluntary emissions trading system with a view to promote emissions reduction at the least cost, in a measurable, reportable and verifiable manner. Since then, the Mexican government explored ways to materialize this possibility. A national emissions registry and its regulation was developed, and interaction with other jurisdictions with track-record on emissions trading systems initiated. Technical exchanges with California, Quebec, Ontario, and Germany started, workshops and capacity building events were organized, and regular conversations among jurisdictions took place. However, it was until a reform to the LGCC was proposed in 2017 that a more concrete possibility for an ETS in Mexico came to life.

In 2018 the law was reformed to incorporate, among other aspects, the goals and provisions of the Paris Agreement. With it, a "minor" but substantial modification to its article 94 also occurred. The new text for article 94 replaced the possibility for a mandate to establish an ETS in a gradual and progressive manner, limiting the exposure of Mexican industry to competitiveness threats from international markets, and in a measurable, reportable and verifiable manner. The goal remains on the promotion of emissions reduction at the least cost. The reformed law was enacted in July 2018 and gave the Mexican government 10 months to publish the regulation for a 36-months pilot phase, before starting the "formal" phase. The Mexican government, through the Ministry for the Environment and Natural resources (SEMARNAT), acquired the responsibility for the technical aspects of the ETS, its design, the formulation of the pilot-phase regulation, and the launching of the ETS operation.

Over the last 26 months, since the first discussions on reforming the law started, the Mexican government put its hands to work. Limited technical capabilities in the public and private sectors on the concept, components, and operation of an ETS was identified as a major concern and a need to be addressed immediately. In-person "basic" and "advanced" workshops on the concepts and operation of an ETS were organized for public and private sector personnel. A 10-month long simulation of an ETS using CarbonSim was developed and implemented with the support from Environmental Defense Fund (EDF), the Mexican Stock Exchange through MEXICO2, and the Partnership for Market Readiness (PMR) from the Word Bank. Technical factsheets for the ETS and its elements were prepared and disseminated to augment the outreach potential and for more people to become interested in the Mexico's ETS (http://iki-alliance.mx/portafolio/preparation-of-an-emissions-trading-system-ets-in-mexico/).

The design of the first Mexico's ETS ever required a sound and solid technical foundation for all of it components. With the support from the IKI-funded project SICEM, implemented by GIZ, a total of 14 technical studies were commissioned with a range of businesses and universities who had the experience to provide relevant analyses for making decisions on the design of the ETS. The studies brought to Mexico specialists from MIT, Stanford University, EDF, Öko-Institut, Vivid Economics, Carbon Trust, TÜV Rheinland, ICAP, CCS, IETA and NREL, as well as representatives from the governments of Canada, Ontario, Quebec, China, Germany, USA, and the European Union. Mexican institutions such as SENER, CONUEE, CRE, CFE, PEMEX, CENACE, SHCP, SCT, SEMARNAT, INECC, SRE, and SE, among others, joined the conversations, workshops, and interviews conducted as part of the technical design of the ETS. Similarly, private sector representatives from CCE, CESPEDES, CONCAMIN, CANACINTRA, CANACEM, CANACERO, ANIQ, the mining chamber as well as the pulp and paper chamber participated.

At the same time, with a view to learn from experiences from other jurisdictions, the Mexican government convened meetings to discuss technical aspects of carbon pricing, and the linkages with the Nationally Determined Contribution and the Article 6 of the Paris Agreement. Representatives from Colombia, Costa Rica, Chile, European Union, Honduras, Germany, Japan, Liechtenstein, Panama, Peru, Saint Lucia, Senegal, Singapore, South Africa, South Korea, Switzerland, United Kingdom joined the meetings. In addition, Mexico became an Observer of the International Carbon Action Partnership (ICAP).

All this work helped the process of drafting the regulation for Mexico's ETS. In October 2018 the draft regulation was submitted to CONAMER for public consultation. The change in federal administration caused for the ETS project to be reassessed in light of the new government priorities. A new team is now reviewing how to improve the proposed regulation to comply with the legal mandate of an ETS.

Nowadays, all the elements are there. The ETS design elements and the logic followed is publicly available (https://www.gob.mx/semarnat/acciones-y-programas/programa-de-prueba-del-sistema-de-comercio-de-emisiones-179414). The 10-month period defined by the reformed LGCC for the publication of the pilot-phase regulation ends in May 2019. As the problem of greenhouse gas emissions remains, the hope is for the regulation to be published on time and a pilot of Mexico's ETS is launched in 2020. By doing so, Mexico will be better positioned to set its economic activity in a pathway towards low carbon development and for national mitigation targets to be achieved. Fingers crossed.