SiCEM – Preparation of an Emissions Trading System in Mexico

Initial situation

The objective of the project is to create the necessary institutional preconditions and technological capacities in the public and private sectors to establish and implement an Emissions Trading System (ETS) in Mexico. First, the project informs and supports decision-making processes in Mexico through scientific analyses and policy recommendations, for example on sectoral scope, the emissions cap, and potential economic impacts.

In addition, it supports relevant stakeholders, including ministries, private companies, and financial institutions, in assuming their roles and responsibilities in the market through capacity building and stakeholder management. Finally, it promotes international dialogue and exchange with jurisdictions that already operate an ETS in order to facilitate learning. At the same time, it supports the systematization of lessons learned in the Mexican context for dissemination at the international level.

Implementing climate targets through an Emissions Trading System: the case of Mexico

Starting point

In the context of the Paris Agreement, countries have defined national targets to reduce greenhouse gas emissions and keep global warming below 2°C. Mexico set a target to reduce greenhouse gas emissions by 22% by 2030 compared with a business-as-usual scenario without climate action. With international support and financing, Mexico could reduce its emissions by up to 36%. These targets were confirmed in the update of Mexico’s Nationally Determined Contributions (NDCs) submitted in December 2020.

The country is currently defining appropriate strategies and measures to achieve this objective. The energy and industrial sectors play an important role in reducing greenhouse gas emissions, so identifying cost-effective mitigation instruments for these sectors is crucial to promoting low-carbon development, reducing emissions, and at the same time fostering economic growth—in other words, decoupling emissions from growth.

Exchange of experiences between Germany and Mexico

The project “Preparation of an Emissions Trading System in Mexico” (SiCEM), implemented by the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) on behalf of the German Federal Ministry for the Environment (BMU), has supported SEMARNAT in designing the pilot phase of the ETS, taking Mexico’s national context into account. On October 1, 2019, SEMARNAT published the Preliminary Bases of the ETS Pilot Program. This program will make a key contribution to meeting Mexico’s sectoral climate commitments and advancing low-carbon development.

Germany has more than 10 years of experience in emissions trading and reporting, so the objective of German-Mexican cooperation is to benefit from lessons learned in Germany and Europe. This helps identify best practices and avoid repeating mistakes made in Europe.

Why emissions trading in Mexico?

An emissions trading system is a market-based instrument based on the so-called “cap-and-trade” principle. Each year, a cap or maximum limit is established for the total amount of greenhouse gases emitted by one or more economic sectors, and this cap is gradually reduced over time. Within the established cap, companies can buy and sell emission allowances. These allowances ensure compliance with the overall emissions limit. Through this mechanism, companies can minimize the costs associated with reducing emissions. The instrument therefore influences the behavior of producers, consumers, and investors by creating incentives to reduce emissions. At the same time, the market mechanism gives participants the flexibility to decide which measures to adopt and when. The emissions cap, in turn, helps ensure that a country such as Mexico achieves its climate targets.

The European Emissions Trading System is the largest scheme in the world and, as one of the first, has served as a reference for the development of other national and regional schemes. Mexico is not alone in pursuing this initiative. There are currently 21 Emissions Trading Systems worldwide, regulating around 9% of global greenhouse gas emissions. Jurisdictions with an emissions trading system in place account for 42% of global GDP[1].

Results to date

Previously, Germany supported Mexico in implementing the National Emissions Registry (RENE), a database that collects greenhouse gas emissions information from facilities emitting more than 25,000 tonnes of CO_2eq in sectors such as energy, transport, and industry. Mexican companies have been required to report their emissions annually since 2014. RENE has been a key platform for designing Mexico’s ETS, as it provides the data needed to make informed decisions on elements such as scope—sectors and gases to be covered—and threshold levels, meaning the amount of emissions above which companies are required to participate in the system.

For the development of Mexico’s ETS pilot program, training sessions, workshops, and study tours were carried out, always promoting knowledge exchange between experts and government representatives, including the German Federal Ministry for the Environment (BMU), the German Emissions Trading Authority (DEHSt), and relevant Mexican stakeholders, to learn from their experience in implementing an ETS. Other international experiences, such as that of California, were also incorporated into Mexico’s implementation process. This exchange became a guide that helped Mexico establish the steps needed to create its own system.

A very important element in the design of the ETS was the early involvement of the private sector, which participated in the various training activities organized by the project. Under SEMARNAT’s leadership, representatives from the private sector formed a Working Group that met regularly to discuss ETS-related issues, particularly the regulatory framework.

Impacts

Since its launch in September 2017, the project has achieved the following impacts:

A regulatory framework for the pilot phase of the Emissions Trading System has been created [DOF].
More than 30 legal and technical studies have been prepared to support SEMARNAT in designing the ETS regulatory framework and implementing the pilot program.
Technical knowledge has been strengthened in leading companies from different sectors. For example, representatives from companies responsible for approximately 70% of the country’s total steel and cement production have received training, including Ternium, Cemex, and Holcim.
A book on the ETS in the Mexican context is expected to be published soon.

Project details

Commissioned by: German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU) under the International Climate Initiative (IKI)
Counterpart: Ministry of Environment and Natural Resources (SEMARNAT)
Total duration: 2017 to 2023

Contact: Comercio.emisiones-MX@giz.de

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