Mexico Climate Recommendation: Higher Ambition in the Emissions Trading System

Mexico recently published its 2020 National Determined Contribution (NDC), which leaves us a bit perplexed since it lacks ambition and would set the country far from meeting the 50% mitigation target by 2030 suggested by the UNFCCC. To achieve this goal, political interest must be met with abatement potential and cost-effective solutions.

These NDCs include an unconditional target to reduce greenhouse gas (GHG) emissions by 22% below the baseline by 2030 and a conditional target to reduce GHG emissions by up to 36% below the baseline by 2030. As part of their current strategies, a strong inclination towards social and environmental solutions (such as Nature Based Solutions and Adaptation Based in Ecosystems) is growing and clean energy strategies are being dismissed; this clearly indicates that the government is highly concerned about contributing to the social impact.

Mexico implemented an Emissions Trading System (ETS) pilot program that covers CO₂ from entities in the energy and industry sectors that produce at least 100,000 tCO₂ in direct emissions. When the program comes into full effect by 2023, it will cover entities that produce 25,000 tCO₂ or more. The ETS includes all operational stages of electric and fossil fuel generation, production, transport, and distribution within major industry sectors such as automobiles, cement, food and beverages, glass, mining, and pulp and paper.

Recommendation overview

Mexico’s effort and climate leadership are not to be minimized, but the aspiration could be higher if a wider range of considerations were included in the ETS. This post notices three main weaknesses that if addressed, the system could be significantly enhanced and thus bring the country closer to achieving its greenhouse gas reduction targets. The recommendations are: enforcing a tighter cap, incorporating other carbon intense industries and encompassing non CO2 greenhouse gases.

Policy Recommendation # 1 Enforcing a Tighter Cap

Mexican ETS is presently in its initial phase and the cap has proposed to reduce 1% of National Emissions (MexiCO2, 2019). According to the ICAP, “the cap represents the upper limit of GHG emissions allowed in a scheme, or in other words the total number (emissions budget) of allowances that is available to covered entities”. Currently, the Mexican scheme cap is established by its historical emissions. If this tendency is continued, a 50% reduction in emissions will be challenging as this policy jeopardizes ambition. Therefore we suggest that once the initial phase is completed, transition to an enhanced system where the cap is fixed by a determined target. This target can be calculated by the extrapolation of successful international ETS, such as the EU ETS and California-Quebec ETS.

Policy Recommendation # 2 Incorporating other carbon intensive industries

The current scheme excludes the transport, waste, and livestock sectors, which altogether constitute 41.2% of the national emissions (see Graph 1). Incorporating these sectors as a mechanism to increase ambition of the ETS will result in lower emissions.

Policy Recommendation # 3 Encompassing Non CO₂ Greenhouse Gases

We tend to think only of CO₂ as the main climate change precursor, but in reality there are other greenhouse gases (GHG) that have a significant warming effect. CO₂ is the most common greenhouse gas and it was set as a standard measure for the rest of the GHG which can be converted to its equivalent (CO₂e) using the Global Warming Potential (GWP) (i.e. 1 ton methane = 25 ton carbon dioxide equivalent).

The pilot phase accounts only CO₂ emissions, therefore we recommend to gradually include other GHG starting by the most abundant like methane (CH₄) and nitrous oxide (N₂O) seeking a complete coverage of GHG. This includes also to adapt the existing Measurement, Report and Verification (MRV) system to these gases.

Graph 1. 2015 National GHG inventory for Mexico (INECC, 2018)

How can these recommendations be addressed?

A lax ETS system results in low carbon prices not delivering the expected emissions reduction set by the Paris Agreement. Considering that the suggested carbon price aligned with a 1.5°C scenario is ~$85USD/tonCO₂e, tougher regulations will ensure the delivery of results.

The ETS has a multisectoral approach which is convenient because it controls the national emissions. Nowadays the pilot phase includes 300 entities from the Energy and Industry sectors responsible for ~37% of national emissions (ICAP, 2021) but this is not strict or ambitious enough to deliver such reductions. To ease the transition towards a more robust ETS, we suggest using a policy mix with the carbon tax that exists since 2014.

In order to incorporate more industries and GHG, a more sophisticated and complete Measurement, Report and Verification (MRV) system is crucial. Given that the carbon tax has been successful generating an annual revenue of about US$1 billion at US$3.5/tCO₂e (Climate Action Tracker, 2020), we suggest using the revenue of the carbon tax for the economic needs of ensuring the upgraded MRV system.

The ETS is currently managed by the Ministry of the Environment and Natural Resources (SEMARNAT) and by including the carbon tax labelling it will involve the Secretariat of Finance and Public Credit (SHCP). This will bring closer both efforts from different positions that expect a similar result.

These recommendations present two main obstacles: transparency and coordination. Corruption could mislead the data of any advances or regression on the climate commitments, therefore strengthening the MRV system will be key to ensure that accountability is at highest standards. Coordination between different government entities (specifically SEARNAT and SHCP) can be achieved by using technological platforms to ease communication and alignment.

Contact

Marco Antonio Heredia Fragoso, General Director of Policies for Climate Change

Email: marco.heredia@inecc.gob.mx

María Luisa Albores, Environment Secretary

Twitter: @Mary_Luisa_AG

Claudia Octaviano, General Coordinator of Climate Change Mitigation of the INECC

Email: claudia.octaviano@inecc.gob.mx

Arturo Herrera Gutiérrez, Secretariat of Finance and Public Credit (SHCP)

Twitter: @ArturoHerrera_G

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