Preparation of an Emissions Trading System (ETS) in Mexico
Title: Preparation of an Emissions Trading System (ETS) in Mexico
Commissioned by: German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU) as part of the International Climate Initiative (IKI)
Partner: The Ministry of Environment and Natural Resources (SEMARNAT)
Lead executing agency: Mexican Agency for International Development Cooperation (AMEXCID)
Total duration: 2017 to 2020
In the context of the Paris Agreement, countries have defined national targets for reducing greenhouse gas emissions 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.
The country is currently defining well-suited policies and measures for achieving these targets. The energy and transport sectors are clearly key for reducing emissions, as they are responsible for around three quarters of the country’s emissions. Finding cost-efficient instruments will be crucial in reducing emissions while fostering economic growth in parallel. Hence the German and Mexican governments have agreed to collaborate on establishing an Emissions Trading System in Mexico.
The project partners have developed necessary institutional preconditions and technical capacities of both public and private actors for establishing and implementing an Emissions Trading Scheme (ETS) in Mexico.
The project is focusing on the following lines of work:
- Scientific analyses and policy recommendations to inform and support the Mexican decision-making on the design of the Emissions Trading System, such as what sectors will be covered by the system or what the overall allowed emissions limit will be.
- Capacity building and stakeholder engagement for other line ministries, companies and financial institutions, so that they can assume their roles and responsibilities in the market.
- International dialogue and exchange with jurisdictions that already have similar systems in place to facilitate learning.
These lines of work are facilitated through expert delegations, study trips, technical analysis and studies, as well as trainings, workshops and knowledge exchange. Germany has over ten years of experience with Emissions Trading, which is why the objective of the collaboration is to benefit from German and European good practices and lessons learnt.
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 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 minimise their emissions in the most cost-efficient way. The instrument therefore contributes to changing the behaviour of producers, consumers and investors so as to reduce emissions, while the inherent market mechanism provides flexibility on who takes which actions and when. At the same time, the cap assures that a country like Mexico achieves its climate targets.
The GIZ has assisted Mexico in setting up a National Emissions Registry, a database that collects information on greenhouse gas emissions from all major emissions sectors like energy, industry, transport, and others. Mexican companies have been obligated since 2016 to provide annual reports on emissions. This data can now be used to make informed decisions on what the Emissions Trading System will look like, including the sectorial coverage or the overall emissions cap.
German experts and government representatives have shared with Mexican actors their hands-on experience on the key steps for setting up an Emissions Trading System. This exchange of ideas and experiences has contributed to defining a Mexican roadmap for preparing a national system. The project is also advising the government on creating the legal framework, which will culminate in an Emissions Trading Regulation being published in 2018 and a mandatory pilot phase to start in 2019.
The Mexican process of stakeholder engagement has been informed by recommendations on how to best involve private and public stakeholders into the decision-making process. This resulted not only in the establishment of a public-private Working Group on Emissions Trading, but also in building trust between the public and private sectors in the negotiations around this new system.