Introduction

On 1 October 2019 the preliminary bases for Mexico's emissions trading system (ETS) pilot programme were published in the Federal Official Gazette at the request of the Ministry of Environment and Natural Resources (SEMARNAT).

Mexico signed the Paris Agreement in 2015 and assumed various goals aimed at reducing greenhouse gas emissions and avoiding a global temperature increase of 2°C above preindustrial levels through mitigation, adaptation and resilience and the adoption of policies and strategies. The ETS is one such strategy.

Pilot programme

The pilot programme will focus on the industry and energy sectors, as they contribute 90% of the emissions reported through the National Emissions Registry. Further, the programme will consider only carbon dioxide emissions, as this is the most emitted greenhouse gas nationally. Other greenhouse gases will be considered for inclusion after the pilot programme has concluded.

Thus, any installation that forms part of the industry or energy sectors and generated at least 100,000 tons of direct CO2 emissions during 2016, 2017, 2018 and/or 2019 must participate in the pilot programme. Reductions in emissions after 2019 will not be grounds to opt out of the programme, even if the 100,000 threshold is no longer being surpassed.

The pilot programme aims to run from 1 January 2020 to 31 December 2022. It will consist of the following phases:

  • the pilot phase, which will run from 1 January 2020 to 31 December 2021; and
  • the transition period, intended to migrate into the ETS's operational phase, which will run from 1 January 2022 to 31 December 2022.

Following the above phases, the ETS should be fully operational and sustainable, as well as economically beneficial.

Emission rights

The ETS was designed under the cap and trade principle. Thus SEMARNAT will determine the emissions cap each year (at least for the duration of the pilot programme). The emissions cap is a restriction on the maximum amount of CO2 emissions that any given participant of the pilot programme or ETS can emit within a certain period.

The pilot programme is based on the trade of emission rights; each emission right grants the holder prerogative to issue one ton of CO2. Thus, to implement the pilot programme, SEMARNAT will determine the number of emission rights that will be freely issued to each participant based on the established cap and each participant's emissions.

Once the emission rights have been allocated, each company is free to trade with them. Each November (from 2021) participants must hand over a portion of emission rights that covers their reported CO2 emissions for the previous year. Reporting obligations for the pilot programme are independent to those considered under the applicable environmental regulations (ie, the National Emissions Registry or the Annual Transfer Report)(1) and consist of yearly measurements via an authorised and approved laboratory of CO2 emissions and the submission of the results to SEMARNAT each year.

Compensation credits

In addition to emission rights, the pilot programme allows for the issuance of compensation credits (offsets), each of which is equivalent to a reduction of one ton of CO2 emissions. Participants can use compensation credits to cover a maximum of 10% of the emission rights targets that should be delivered to SEMARNAT each November. Compensation credits are issued by SEMARNAT as a result of the implementation of air emissions reduction programmes or for securing compensation credits from international programmes.

Comment

The pilot programme will determine whether the ETS is a viable scheme for reducing Mexico's greenhouse gas emissions. Companies should follow the results closely, as these will be paramount in determining the characteristics of the operational phase, which could vary significantly in terms of emission rights auctioning versus allocation, offsets and absolute versus intensity caps, among other things.

Endnotes

(1) For further information on Mexico's general climate change-related obligations please see "Mexico's climate change regulatory framework and obligations".

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