Mexico's Well Established Carbon Tax and Pilot Emissions Trading System with California and Quebec

Mexico approved Carbon Taxing in 2013 under the Fiscal Reform presented by the administration of former President Peña Nieto. The carbon tax is a tax rate applied to the emission of greenhouse gases into the atmosphere. By setting a tax rate on the carbon dioxide content of fossil fuels the tax results in establishing a price on the carbon.

Mexico’s carbon tax is part of a broader fiscal reform, implemented by way of an amendment of the Excise Tax Law (LIEPS, 1980). From 2014 onwards, fossil fuels – with the exception of natural gas – are subject to a carbon tax set at MXN$ 39.80 (US$ 3.50) per tCO2 released during combustion, translated into volumetric or mass-based rates for individual fuels.

Unlike an Emission Trading Scheme, the tax on carbon does not guarantee a maximum level of emissions but provides certainty on the marginal cost of CO2 emissions. Each fossil fuel is assigned a different tax level, determined by the annual review by the IPCC (Intergovernmental Panel on Climate Change), according to its content of CO2.

According to the Secretariat of Finance and Public Credit, the tax helps with two key goals: i) emissions reduction and ii) increasing the Federal Government’s budget by tax collection; during 2014 and 2015 it is estimated that tax resulted in approximately USD 950,000 million.

There are some exceptions when it comes to the application of the tax and these should be revised in order to ensure an effective implementation; for example, natural gas and jet fuel as well as fuel used for manufacturing and not combustion. Also under discussion and requiring a continued revision is the level of tax rate required, since there has to be a significant impact on price for users to divest to alternative energy sources.

Mexico is one of the OCDE member with the lowest amount of environmental taxes and is at the same time one of the highest emitters in Latin America, ranking number 13 worldwide on CO2 emissions.

In addition to the carbon tax and with the support of the local governments of California and Quebec, Mexico began its pilot program for the implementation of and Emissions Trading Scheme (ETS) in 2019. An ETS has the purpose of reducing the greenhouse effect emissions through setting a cap on emissions and allowing for the purchase of emission permits. The pilot program is set to run for three years, two years corresponding to the pilot phase and one to transition into the fully operational ETS which is scheduled to begin in 2023.

To facilitate the incorporation of the Mexican industry into this new instrument and to fulfill the mandate of the Congress (the Pilot Program must be without economic effects), it has been defined that the allocation during the Pilot Program will be free of charge, based on historical emissions and the country’s climate goals. The Allowances assigned to each facility must be published 30 days before the start of the Pilot Program.

Back in June 2018 Mexico concluded its first simulation of the ETS that involved 100+ Mexican businesses (from different sectors: electric energy, hydrocarbon, aviation chemicals, petrochemicals, steel, mining, automotive, cement, paper, forestry, glass, food, construction, consumption goods and finance) that together represent 67.8% of the country’s carbon emissions.

The simulation used the CarbonSim program which assigns the participants in the management of a virtual installation within a carbon emissions trade market. With the information that is then generated in the simulation participants make decisions on implementation strategies for carbon management to meet the regulatory targets while being cost efficient.

The Mexican Ministry of Environment and Natural Resources (SEMARNAT) announced in November of last year the cap for the upcoming pilot phase of 2020 and 2021 of its ETS, setting it at 271.3 million emission allowances. This will represent approximately 1% and 0.3% of the CO2 emissions reported to the National Emissions Registry (RENE) in 2016 by the entities covered by the ETS.

The ETS pilot is set to cover direct CO2 emissions representing approximately 45% of national emissions from around 300 entities with annual emissions greater than 100,000 tons of CO2. The pilot program will imply no economic impact on regulated entities and looks to test the system design, built capacity in emissions trading, and generate a reference value for emission allowances and offsets of the operational phase.

Activity Rating: *** Right Direction

Mexico is showing efforts to regulate carbon emissions, however as was mentioned in previous posts, the current administration’s focus on revamping the energy system poses a threat to the objectives of GHG mitigation and clean energy that the country has committed to.

Currently Mexico possesses the instruments (carbon tax, pilot for ETS) to target carbon emissions more efficiently but their implementation process needs to be enhanced by better planning and monitoring.

Take Action

Message:

Mexico’s efforts towards meeting it’s GHG mitigation commitments need to be matched by effective actions to manage and reduce emissions. It is crucial that the national government continues to implement the Emissions Trading Scheme in line with its 2023 schedule and incentives efforts to diversify it energy matrix and create policies that render renewable sources a plausible alternative.

Contact Information:

Secretary of Environment and Natural Resources- Victor Manuel Toledo

Emails: atencion.ciudadana@semarnat.gob.mx

Website: https://www.gob.mx/semarnat

Telephone: 54900900 Ext. 12000/12076/12001

Address: Ejercito Nacional 223,

Col. Anáhuac, Delegación Miguel Hidalgo,

Ciudad de México, México,

Z.C. 11320

Secretary of Energy- Rocío Nahle

Email: calidad@energia.gob.mx

Website: https://www.gob.mx/sener/es/#383