Mexico is a party to the main multilateral climate agreements, including the United Nations Framework Convention on Climate Change (UNFCCC), the Kyoto Protocol and the Paris Agreement.
As a developing country, but also the eleventh largest global contributor of greenhouse gases (GHGs), Mexico has taken a position of committing to contribute to the reduction of GHGs while, however, pushing for climate finance and technology transfer from the developed countries.
Mexico’s commitments under the Paris Agreement include unconditioned measures to reduce GHGs by 22% with respect to the baseline and black carbon emissions by 51% by the year 2030. These reduction goals can be increased up to 36% with respect to GHGs and 70% with respect to black carbon as expressly set forth in the General Law on Climate Change (LGCC).
Mexico’s conditional and unconditional goals have both been considered either insufficient or highly insufficient. Additionally, Mexico has failed to increase its National Determined Contributions under the Paris Agreement, effectively breaching commitments under the agreement.
Mexico has turned up its calls for more climate finance for the developing world as an excuse for the disappointing NDC it has assumed.
Mexico often participates in regional climate agreements, particularly in the Americas. Examples includes Mexico’s subscription to the Leaders’ Statement on a North American Climate, Clean Energy and Environment Partnership, on 29 June 2016, during the North American Leaders Summit in Ottawa, Canada.
Together with Canada and the United States of America, Mexico committed to an ambitious and enduring statement, assuming the regional goal of reducing methane emissions from the oil and gas sectors by 40% to 45% by 2025.
Other regional agreements include the ratification of the Escazú Regional Agreement on Access to Information, Public Participation and Justice in Environmental Matters in Latin America and the Caribbean. The country also participated in the annual European Commission EUROCLIMA+ meeting, related to the implementation of commitments under the Paris Agreement in the area of climate governance, and funding and technical assistance.
Mexico had been playing a leading role in Latin America regarding climate change regulation, being the first country in the region to enact a general climate change law (the LGCC) and to develop a robust institutional framework. These actions were accompanied with the 2013 Energy Reform which favoured the development of renewable energy projects. However, Mexico has lost that leadership to countries such as Colombia, Perú or Costa Rica, which have made more significant commitments to the decarbonisation of their economies and the transition to net zero.
Commitments made by Mexico through international agreement have been the main driver of climate change policy and regulations. Mexico, by enacting the LGCC, was the first country to implement the aims of the UNFCCC through national legislation. In 2014, the Regulations of the LGCC Regarding the National Registry of Emissions (RENE) were enacted to provide detailed and specific information to determine the GHG emissions by type of emission source, as well as by activity, sector and sub-sector.
Mexico’s commitments under the Paris Agreement include unconditional goals to reduce GHGs by 22% with respect to the baseline and black carbon emissions by 51% by the year 2030. Conditional goals include up to 36% with respect to GHGs and 70% with respect to black carbon as expressly set forth in the LGCC.
Mexico has focused on the implementation of both mitigation and adaptation measures regarding climate change, creating instruments such as Clean Energy Certificates (CEL) and Energy Transition Law (LTE) commitments to reduce its national GHG emissions and to increase the generation of renewable energy.
In 2018, the LGCC was amended in order to establish a mandatory Mexican Emissions Trading Scheme (METS), which in general terms will work as a cap and trade system, where the government will establish a certain emissions cap for different economic sectors to be reduced every year. The amendments to the LGCC that establish the METS also mandate the recognition of emissions reductions achieved through CEL.
CEL are traded in the Mexican Electricity Market which is regulated mainly by the Energy Regulatory Commission (CRE). The CRE grants a CEL for each MWh injected into the Mexican grid and these can be traded at the annual CEL market operated by CENACE or through bilateral contracts.
The idea is that the CEL market and the METS operate simultaneously, but also separately and independently, in order to complement each other.
The climate change mitigation national policy must establish plans; programmes; actions; and economic, political, and regulatory instruments to gradually achieve the specific emission reduction goals, sector by sector, and taking as a reference, the baseline scenarios and sector baselines established in the instruments regulated by the LGCC, such as the Climate Change National Strategy. These must take into account the nationally determined contribution necessary for compliance with the Paris Agreement objectives, access to financial resources, the transfer of technology, and the development of capacities, as well as any other international agreements subscribed to by Mexico on matter of climate change.
As a condition of the above, adherence to Mexico’s baseline aims must not limit the country’s economic growth, and the productive sectors must participate in its development.
At the federal level, the LGCC is the main statute that regulates climate change policy in Mexico. The Federal Congress enacted it based on Article 4 of the Mexican Constitution, which provides the right to a healthy environment for the development and well-being of the people.
The LGCC primarily sets forth the policy goals on climate change applicable in Mexico. These policies and principles are mandatory for the federal government, but also binding as pre-emptive laws for the state governments. Accordingly, the state legislatures may enact laws in accordance therewith as long as such laws do not contravene the environmental policies and mandates prescribed by the LGCC. This allows for a cohesive national policy and co-ordinated actions regarding climate change between states and the federal government.
In addition, and as explained in 2.1 National Climate Change Policy, in 2014, the federal government issued the Regulations of the LGCC Regarding the National Registry of Emissions, which regulates the operation of the RENE nation-wide.
At the state level, local congresses have passed legislation on climate change, which is in full force and effect to this date (July 2022). Likewise, municipal governments have issued regulations on this matter.
At the federal level, the regulation of environmental policy is entrusted to the Ministry of Environment and Natural Resources (SEMARNAT). Under federal statutory law, SEMARNAT has the power to formulate and direct the national policy on climate change and the ozone layer. Pursuant to its internal regulations, SEMARNAT is authorised to issue environmental policies and regulations on emissions and greenhouse gases, among others.
Under the LGCC, the National Institute for Ecology and Climate Change (INECC) was created as a decentralised body of SEMARNAT, whose main responsibility is the co-ordination, promotion, and development of scientific and technological investigation related to national policy on matters of biosecurity, sustainable development, environmental protection, preservation and restoration of the ecological balance, ecosystem and climate change conservation (including the mitigation of emissions), formulation and updating of the RENE, and climate change policy.
Additionally, the Inter-secretarial Commission for Climate Change (CICC) has the power to promote the co-ordination of actions of the federal public administration on matters of climate change, and approve the National Climate Change Strategy, among others.
In terms of regulatory enforcement, the Federal Bureau of Environmental Protection has the power to perform inspection visits to the persons subject to emissions reporting, in order to verify the information provided to SEMARNAT, in accordance with the regulatory provisions that derive from the LGCC.
Additionally, in accordance with the LGCC, the federation, states, and municipalities have concurrent powers for the formulation and application of public policies for the adaptation of climate change and the mitigation of GHGs. To that effect, both the states and the municipalities have issued normative rules on matters of climate change, in line with the distribution of powers provided by the LGCC.
Under the current federal administration, the institutional framework is intended to be made less robust by eliminating the INECC, justified by the, in the authors’ opinion, unconvincing argument of duplicity of functions with other administrative entities.
Mexico’s commitments under the UNFCC and the Paris Agreement have mainly been implemented through the LGCC and its Regulations. In addition, other instruments thought to help contribute to meeting these commitments where set to be part of the Energy Reform of 2013 through the LTE, the Electricity Industry Law (LIE), as well as the Transition Strategy to Promote the Use of Cleaner Technologies and Fuels in 2016. The creation of CEL as a market instruments to promote renewable energy was also a result of climate change policies.
Mexico is currently moving towards the METS being fully operational. In 2018, the LGCC was amended in order to establish a mandatory METS. The METS started with a pilot programme followed by a trial period with no economic or legal effects for participants. This trial period will end by the end of 2022 and it is expected that the METS will be fully operational in 2023.
In general terms, the METS will work as a cap and trade system, where the government will establish an emissions cap for certain economic sectors to be reduced every year. Facilities within such sectors will be able to acquire allowances, each one equivalent to 1 ton of CO₂. The participants in the trial period were facilities within the energy and industrial sectors which generate 100,000 tons or more of direct emissions of CO₂. The number of allowances issued each year will be fixed. The sectors that do not participate in the METS may voluntarily register projects that reduce GHGs and generate carbon credits that can also be traded in the METS.
There is not yet, a specific obligation to reduce GHG per sector; but his will be the case once the METS is fully operational. SEMARNAT will assign allowances to participants based on their last verified emissions report filed to RENE.
Other Policy Instruments
Other policy instruments include a carbon tax for fossil fuels at the federal level which is based on the carbon content of these types of fuels.
At the local level, some states, including Tamaulipas, Nuevo León, Querétaro, Baja California, the State of Mexico and Yucatán have established local carbon taxes applicable to fixed sources of emissions operating in the territory of the respective states. It is uncertain if these taxes will become permanent or if they will be successfully challenged in the courts. It is also uncertain if these will be effective as a tool to reduce GHGs or will just lead to industries moving from state to state in search of lower/non-existent carbon taxes.
Climate change mitigation is not properly considered by the Mexican authorities for granting environmental permits and/or authorisations. These are granted if and when the requirements established in the applicable laws and regulations are met. However, this could change in 2023, when the METS becomes operational.
As to reporting obligations, public companies in the Mexican Stock Exchange are now required to include in their annual report the description of the risks or effects that climate change may have on the entity’s business; including decreases in the demand for products which require significant GHGs and increases in the demand for other products which require less emissions. Furthermore, they are required to disclose any current and potential indirect consequences of market trends that could be faced by the company as a result of climate change.
Climate change adaptation in Mexico is charged to INECC through the General Office for Climate Change Adaptation (CGAACC).
The general policy approach is to generate synergies between mitigation and adaptation measures with a systemic view. This policy focuses on three main aspects: (i) adaptation based on ecosystems, (ii) adaptation based on communities, and (iii) adaptation based on disaster risk reduction.
The aim is to achieve the reduction of regional vulnerability, the increase of adaptive capabilities and the identification of ecosystems and species at risk due to climate change as well as the recovery of the functional basis of relevant ecosystems through conservation, restoration and the sustainable use of Mexico’s natural patrimony.
So far, the only identifiable instrument resulting from adaptation policy is the National Atlas of Vulnerability to Climate Change, completed in 2019.
Mexico took part in meetings ahead of COP25 to exchange information and good practices on combating climate change. Also discussed were the rules that should govern the international carbon markets under Article 6 of the Paris Agreement and strengthening the Warsaw International Mechanism for Loss and Damage.
Mexico intends to participle in the carbon market evolving from Article 6 of the Paris Agreement, provided that the integrity of the mechanisms will allow avoiding double accounting and ensure that international transfers of emissions reductions are real and verifiable.
Mexico will also look for the mechanism to be co-ordinated and congruent with other carbon trading schemes existing outside the UNFCC, including the country’s own METS.
Given that the CBAM will impose a carbon tax on high carbon emission products, Mexico will likely need to change current trends in policy implementation if it wants its exports to be competitive in the EU market. Therefore, it is very likely that the CBAM will impact Mexico by increasing the level of taxation on carbon emissions inside the country. This increment could potentially incentivise different industries and sectors to use cleaner sources of energy, thus reducing the carbon emissions of exports nationally. Otherwise, the Mexican economy stands to lose approximately USD25–50 million. In this regard, the jurisdiction will have to address the CO₂ externalities through taxation; otherwise, the Mexican government would have to find an effective manner of compensating for the economic loss that leaving the legislation unchanged would imply.
Thus far, Mexico does not seem to have implemented any changes in response to the CBAM and while their execution is still uncertain, the implications of the CBAM for Mexico are difficult to predict.
In Mexico, the only mandatory reporting obligation is related to direct and indirect GHG emissions under the RENE regulations and is for those industries, services and activities that belong to the transport, energy (both electricity and oil and gas), industrial, livestock, agricultural, waste management, commerce and services sectors. These industries generate, in total, 25,000 tonnes (or more) of GHGs per year.
However, climate liability and reporting of climate impact in or generated by public companies’ operation is still not mandatory under Mexican regulation. Public companies participating in the Mexican Stock Exchange do need to report potential material effects of climate change on their operations, but the scope of information required is still very limited.
Civil society in Mexico is a driver in reporting and transparency; however, climate change is still not at the top of the agenda, considering the other serious social issues with which the country is concerned – those to do with violence and gender, for example.
Bearing in mind that Mexico is still a middle income, developing country, public policy has traditionally been to favour and foster industrial development, without much consideration being given – until very recently – to the climate aspects of economic growth.
Thus, there has not been a legislative or regulatory framework punishing directors or even companies for the climate change impacts of their operations, beyond the standard requirements of air emission pollutants being within applicable thresholds.
Notwithstanding the foregoing, Mexico launched, in 2018, a pilot emissions commerce programme, which will become mandatory on 1 January 2023.
Operating under a traditional cap and trade scheme, this programme will penalise (with fines) those companies that do not bring their GHGs (either by implementing infrastructure overhauls or through the purchase of carbon bonds) under their allotted limits.
On the other hand, private and public projects that will have significant environmental impacts, as well as the loss of carbon sinks, are closely scrutinised by local communities and civil society actors, who may become quite vocal and combative, and this can eventually lead to the project losing its “social licence” and lead to its cancellation.
In Mexico, there is no piercing of the corporate veil; as a result, making shareholders or parent companies liable for breaches to climate change law is not possible.
In Mexico, ESG reporting (or integration) is not a regulatory requirement, so – as partially addressed in 6.1 Task Force on Climate-Related Financial Disclosures (TCFD) – most companies report on a voluntary basis, as part of the establishing of their corporate purpose, to attract investment or as a requirement by their parent companies abroad.
To be sure, the Mexican Banking and Securities Commission has made some ESG reporting mandatory for publicly traded companies, although the specific standards, criteria and content of such disclosure is not specifically regulated, so the format and thoroughness of such disclosure will be each company’s choice – albeit the usual international standards, such as GRI, SASB, TCFD, etc, are commonly followed.
Hence, climate change ESG reporting is not mandatory for stock-exchange listing, although it is considered best practice to do so, with those companies making such disclosure being recognised and rewarded by investors and costumers alike.
Climate change due diligence is an evolving requirement but, in the authors’ experience, it has not become a trend in Mexico.
The LIE and the LTE provide CEL as instruments to monetise and pay for the social benefits of generating electricity with renewable energy technologies by entering the wholesale electrical market.
Notwithstanding the above, this current political administration does not support the transition towards more renewable energy and the CEL market is currently not operating.
It is expected that future administrations will eventually return to a more renewables-friendly scheme in this matter.
The LGCC, establishes among its main objectives: (i) the regulation of gas emissions and greenhouse effect compounds; (ii) the regulation of actions for mitigation and adaptation to climate change; and (iii) the transition towards a competitive, sustainable and low-carbon economy.
The LGCC establishes among the powers of the CICC, those of promoting, disseminating and ruling, where appropriate, on carbon reduction or capture projects.
Official Standard NMX-AA-173-SCFI-2015 (NMX) sets a reference framework based on good practices and a cost-effective quality assurance process for forest carbon credits at the national level. This technical regulatory instrument describes the specifications and minimum requirements necessary to obtain the registry of carbon forestry projects and certification of the increase in carbon stocks generated by such projects. However, no forest carbon credits have – so far – been developed in Mexico under the NMX.
A Word on Mexico’s Emissions Trading Scheme
A brief introduction to the national greenhouse gas emissions reduction framework
Mexico is the world’s 13th largest emitter of greenhouse gases (GHGs), which is an accurate reflection of the size of its economy and gross domestic product. From 2006 until 2019, the country’s political and public policy framework for energy and climate change underwent a comprehensive reform, towards greater sustainability, competitiveness and security of supply.
On 12 June 2012, Mexico passed the General Law on Climate Change (LGCC), which set forth – besides the usual mitigation and adaptation measures – an aspirational goal to reduce GHG emissions. However, this law did not provide any clear policy, instruments or roadmap to achieve this goal – nor was there any significant pressure to do so, given the lapsing of the Kyoto Protocol.
This status quo changed after Mexico signed the Paris Agreement in 2015. Upon ratification by the Senate on September of 2016, the country was bound to the terms of the agreement, including the commitment to make the necessary cuts to its GHG emissions, in order to achieve the goal of keeping the global temperature under 1.5°C.
Pursuant to the terms of the Agreement, Mexico was under significant international pressure to disclose its nationally determined contribution. With the deadline soon approaching, on 13 July 2018, the federal government amended the LGCC, by setting forth:
The above-mentioned amendment asserted Mexico’s commitment to an unconditional reduction of 22% of its GHG emissions (as opposed to the aspirational or indicative goal provided when the LGCC was first enacted – a reduction of 30% of its emissions) and a 51% reduction of its black carbon emissions by the year 2030, with respect to its stated business as usual baseline.
Consequently, the 22% greenhouse gas emissions reduction is to be achieved with the commitment of different economic sectors, which will have the ensuing emission reduction goals:
Unfortunately, it is unlikely if not impossible for Mexico to comply with its already unambitious NDC. The main reason being the constant attempts of the current federal administration to roll back Mexico’s energy reforms, which had allowed for a significant increase in private renewable power generation. These measures from the federal government have seen renewable energy companies fighting administrative measure in the courts and have clearly damaged investors’ trust in the country for the development of new projects.
Mechanics of the Scheme
The Scheme as a vehicle to achieve the NDC
The amendment to the LGCC underpins the legal framework to get the Scheme running, envisioning it as one of the vehicles to achieve the specific emissions-reduction targets (per sector of the economy) required to meet Mexico’s NDC, pursuant to Paris Agreement.
The Scheme seeks to ensure that the decrease in emissions is cost-effective, measurable, reportable and verifiable.
Pilot emissions trading programme
Prior to the Scheme’s enactment, the preliminary rules for a 36 month pilot trading programme – without economic consequences for the participating parties – were outlined.
Operating under a traditional cap and trade framework this pilot programme was successfully rolled out in 2019, with participating companies and sectors joining voluntarily.
Under the pilot programme (and in the soon to be mandatory Scheme), Mexico’s Environment and Natural Resources Ministry (SEMARNAT) placed a cap on the amount of GHG emissions that companies could generate, creating the equivalent amount of emissions allowances – the Scheme’s compliance instrument.
For each ton of GHG emitted, participants must have an allowance. At the same time, companies are allowed to trade these allowances, creating a market that encourages the search for the most efficient way to comply with the cap. In addition, SEMARNAT will auction emission allowances and will account and credit any carbon bonds generated by emissions reduction or sequestration projects, if verified by independent auditors.
To opt in, participating companies had to be part of any of the sectors mentioned in the list above, and generate at least 100,000 metric tons of CO₂ (or its equivalent in other GHGs) per year.
This pilot programme had a lifetime of 36 months before the phasing in of the mandatory – industry wide – Scheme, thus concluding in December 2022. During its life cycle, it is expected that the pilot programme will cover approximately 40% of the national inventory of GHG and compounds.
The Scheme is to become mandatory
The Scheme is expected to become mandatory in 2023, when SEMARNAT will issue GHG emissions allowances to participating companies. The number of allowances per company is determined based on the last verified GHG emissions report filed to the National Registry of Emissions. The number of allowances companies receive annually will be reduced gradually.
After receiving its allowances, a company will have different routes of action.
These allowances may be traded between participating companies on a platform built and made available by SEMARNAT.
Facilities must monitor and report their emissions and an independent third party must verify these emissions to ensure their reliability. To be sure, companies must surrender enough allowances to the government to cover their verified emissions, thus demonstrating compliance. Failure to abide by these caps will generate economic penalties and, potentially, operational shutdowns or even plant closures.
Finally, an additional advantage of the Scheme is that the auctions carried out by the government can lead to a significant stream of income that can be reinvested in social or low carbon emissions projects, enhancing the socio-economic benefits of the emissions trading scheme.
Mitigation or carbon sequestration projects in sectors not participating in the Scheme, such as forestry, agriculture, livestock or waste management below the 100,000 CO₂ ton threshold, can go through a certification process that will generate offsets for which the involved projects can claim credit.
These offsets can then be sold in the emissions market and bought by the regulated facilities and used to credit compliance with the mandated cap.
The mitigation projects eligible to generate offsets or carbon bonds and credits must be undertaken in the Mexican territory, under the protocols set forth by SEMARNAT.
However, it should be borne in mind that the objective of the Scheme is to reduce emissions in the regulated sectors. Consequently, it is expected that once the Scheme becomes fully operational and mandatory, regulated facilities will only be able to offset an equivalent of up to 10% of their obligations.
Convergence with other instruments and emissions markets
It is intended that participants in the Scheme will be able to trade in foreign or international emission markets, such as CORSIA (ie, the Carbon Offsetting and Reduction Scheme for International Aviation), the regional carbon market between California and Quebec, the European Union Emissions Trading Scheme and/or the Clean Development Mechanism envisioned by the Kyoto Protocol.
Current political climate and risks
As mentioned earlier in this article, the current administration is searching for legal and constitutional avenues to do away with the energy reforms enacted in 2014, which made private investment and projects possible in the Mexican market.
Mexico’s president (in power from December 2018 until 2024) has been increasingly at odds with private power generators (renewable and conventional alike), blocking their ability to generate power, questioning power purchase agreements and barring their access to the national power grid.
The underlying argument of the administration’s position is that private companies have a dangerous and undue level of control over Mexico’s energy supply, which puts at risk the country’s self-reliance and ability to meet its own power needs, at a significant economic cost – or so the argument goes – to the general public and the government alike. The truth of the matter is the President’s intention is a return to a State monopoly on power generation.
While this article does not intend to address the political aspects of the government’s current position, these actions have already caused a halt to renewable energy projects in the private sector and also affected others already in operation. Consumers with private power purchase agreements will be forced to turn to government-generated electricity, which is produced in obsolete combined-cycle, fossil fuel-based plants and some large-scale hydropower plants.
The issue at hand is that – pursuant to the LGCC, its amendments and Regulations – regulated sectors must account for their direct (ie, generated in-plant) and indirect (ie, generated by the electricity supplier) emissions, the sum of which must be considered for the Scheme’s caps and allowances.
Hence, by returning to fossil fuel-based power generation, the current government is defeating the very purpose of the Scheme, which is precisely to reduce GHG emissions. Hence, under the present state of affairs, companies that need to comply with emissions limits, have fewer alternatives to reduce their indirect emissions from energy consumption.
Consequently, one can only hope that the next administration will consider Mexico’s international commitments seriously, since the current course of action will, in all likelihood, make meeting the country’s NDC impossible.
While the institutional, political, legal and economic frameworks have been steadily rolled out to make this Scheme a success, and consistent with other similar markets internationally, the current administration is inexplicably changing course, betting heavily once again on fossil fuel-based power generation.
This may destine the Scheme to fail, by turning compliance into an extremely expensive endeavour, to the detriment of Mexico’s economic growth, competitiveness and sustainability commitments.