The project’s objective is to create the necessary institutional preconditions and technical capacities of both public and private actors for establishing and implementing an Emissions Trading Scheme (ETS) in Mexico. First, scientific analyses and political recommendations, e.g. on sector coverage, emissions thresholds and economic impacts, will inform and support the Mexican decision-making processes. Second, stakeholders (ministries, companies, financial institutions) will be supported through capacity building and stakeholder management processes so that they can assume their roles and responsibilities in the market. Third, international dialogue and exchange with jurisdictions that dispose of an ETS will facilitate learning. At the same time, lessons learnt in the Mexican context will be disseminated at the international level. The project contributes to achieving the Mexican mitigation targets.
Implementing Climate Targets through Emissions Trading: The Mexican Case
In the context of the Paris Agreement, countries have defined national targets for reducing greenhouse gas emissions in order to keep global warming well below 2° degrees. Against this background, Mexico has set a national target to reduce 22% of greenhouse gases until 2030 compared to a reference case without climate action. Conditional upon international support and financing, Mexico could even reach 36% emissions reductions.
The country is currently looking at opportunities and costs for emissions reductions in order to define well-suited policies and measures for achieving these targets. It is clear that the energy and transport sectors are key for reducing emissions: They are responsible for around three quarters of the country´s emissions. Finding cost-efficient instruments will be crucial in order to promote low-carbon development: reducing emissions while at the same time fostering economic growth, hence decoupling emissions from growth.
German-Mexican exchange of experiences
As one of such instruments, Mexico is considering to develop an Emissions Trading System (ETS). In doing so, Germany and Mexico are collaborating closely through expert delegations, technical analysis and studies, as well as workshops and exchange of information. The German-Mexican bilateral project “Preparation of an Emissions Trading System (ETS) in Mexico” funded by the International Climate Initiative on behalf of the Federal Ministry for the Environment, Nature Conservation and Nuclear Safety is since 2017 assisting the country in developing and implementing a Mexican ETS. Germany has over ten years of experience with Emissions Trading and Emissions Reports, which is why the objective of the collaboration is to benefit from German and European lessons learnt: In order to benefit from best practices, but also to avoid repeating mistakes that might have been made in Europe.
Why Emissions Trading in Mexico?
An Emission Trading Scheme is a market-based instrument that is based upon the principle of “cap and trade”. A limit of overall emissions in one or more economic sectors is defined and is reduced each year. Within this limit, companies can decide to buy and sell emissions rights as these are needed in order to comply with the limit. Through this mechanism, companies have the flexibility to minimize their emissions in the most cost-efficient way and where it is cheapest. The instrument therefore contributes to changing the behavior of producers, consumers and investors so as to reduce emissions, while the inherent market mechanism provides flexibility on who takes actions and when, and what actions will be taken. At the same time, the cap assures that a country like Mexico would achieve its emissions reductions targets.
The European ETS remains the world’s biggest scheme, and, having been the first of its kind, it inspired, and continues to inspire the development of other national or regional schemes. Mexico will therefore not be alone in its endeavor. There are currently almost 20 ETS in the world, regulating around seven billion gigatons of greenhouse gas emissions. ETS will be in operation in economies that are responsible for almost half of the world´s Gross Domestic Product (GDP) and that cover more than 15% of the global emissions.
Germany has already assisted Mexico in setting up a National Emissions Registry, a database the collects information on greenhouse gas emissions from all major emissions sectors like energy, industry, transport, and others. Mexican companies are obliged since 2016 to annually report their emissions. These data can now be used in order to make informed decisions on what the system will look like, including inter alia, what sectors will be covered, or what will be the reductions defined by the emissions limits.
With regular technical and high-level political knowledge sharing seminars, German experts and government representative from the German Environment Ministry and the German Emissions Trading Authority have shared with Mexican actors their hands-on experience on the key steps for setting up and Emissions Trading System. Of course, international experience from North America or China is also always taken into account. This exchange of ideas and experiences has contributed to defining a Mexican roadmap for preparing a national system. The project is also directly advising the government on creating the legal framework, which will culminate in an Emissions Trading Regulation being published until June 2018.
Also, recommendations on how to best involve private and public stakeholders into the decision-making process have been taken into account. This resulted not only in mitigating concerns and potential resistance of the private sector, but also in the establishment of a Working Group on Emissions Trading.
Over the next months and years, Mexico and Germany will collaborate regarding the details of the Mexican system; on how to institutionally set up and manage it, on building awareness and capacities within the private sector, and how to implement a pilot phase in order to test the instrument. One key issue is also to develop the Emissions Trading Scheme in coordination with other policy instruments, that are for example supporting the development of renewable energy, or cleaner transport solutions. This is another topic where Germany, currently implementing its Energiewende, can share lessons learnt. After all, the right policy mix will ensure Mexico´s success in achieving its mitigation targets.