On October 1st, 2019, the Ministry of Environment and Natural Resources (SEMARNAT) published the Preliminary Bases of the Emissions Trading System (ETS) Pilot Program. This system, developed with the support of the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH (German Cooperation for Sustainable Development) on behalf of the German Federal Ministry of Environment (BMU), is a key instrument for the fulfillment of Mexico’s sectoral climate commitments and low-carbon development.
The Preliminary Bases detail some of the elements of the 36-month Pilot Program. With this, a greater generation of quality jobs and cost-effective mitigation of emissions from regulated sectors are expected. Together, the emissions covered by the Pilot Program correspond to 40% of the National Inventory of Greenhouse Gas and Compounds Emissions.
How will the Pilot Program operate according to the Preliminary Bases? The System will work under the “cap and trade” principle. In Mexico, the government will grant, for free and based on historical emissions, a number of allowances to regulated facilities. These allowances correspond to a proportional amount of direct CO2 emissions. This means that if emissions are reduced, regulated entities can trade these allowances, creating an allowances market and promoting more efficient mitigation. At the same time, by capping the global amount of emissions through the total number of allowances granted, the government ensures a reduction of Greenhouse Gases (GHG) in line with its environmental objectives.
In Mexico, only facilities from the industrial sector and the energy sector that have reported emissions greater than 100,000 tCO2 in 2016, 2017, 2018 or 2019 will participate, which represents around 300 units. To keep track of the transactions and tenure of the allowances, SEMARNAT will create a Registry that will keep track of the operations. Besides, each installation must create a Monitoring Plan based on the guide that will be published by SEMARNAT. Therefore, it is intended to establish a fair and transparent trading system.
At the end of each compliance period, each installation must have the same number of allowances as emissions caused. These emissions will be verified by independent third parties, giving solidity to the system. Also, in a limited way, offset credits generated in emission reduction projects outside the regulated sectors may be used to comply, which makes the system more flexible. Although the Pilot Program does not contemplate economic sanctions, for each missing allowance, two will be deducted in the first allocation of the Operational Phase (after the end of the 36 months of the Pilot Program). This encourages companies to comply without generating a strong impact on their competitiveness.
The Preliminary Bases lay the foundations for the formal establishment of an ETS in Mexico. This will contribute to the reduction of GHG in the country and will bring significant co-benefits, which will lead to economic growth that respects the environment. If you want to know more about this instrument, please refer to the attached informative brochure.