Climate Change Regulation 2023 Comparisons

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, all the while pushing for climate finance and technology transfer from developed countries.

Mexico’s commitments under the Paris Agreement were updated as part of COP27 to include unconditional measures to reduce GHGs by 30% from a previous target of 22% reduction by 2030, and conditional measures, depending on outside financial support, for a reduction of 40%, from 36% previously set, by the same year. The reduction of black carbon emissions remains at 51% unconditionally and 70% conditionally.

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 (NDC) 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 include 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 US, 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 regarding 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 by the 2013 Energy Reform which favoured the development of renewable energy projects. However, Mexico has lost that leadership to countries such as Colombia, Perú, and 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 using the baseline scenarios and sector baselines established in the instruments regulated by the LGCC as a reference, 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 matters 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 legislators 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 to this date (July 2023). Likewise, municipal governments have issued regulations on this matter.

On 18 November 2021, the representatives of Mexico, USA, and Canada relaunched the North American Leaders’ Summit (NALS) in Washington, DC, which includes concrete actions to strengthen regional climate ambitions by addressing four pillars: Nationally Determined Contributions, methane emission reduction, nature-based solutions (NbS), and zero-emission vehicles (ZEV). This is the only action taken by the Mexican government with respect to climate change policy.

No bilateral agreements pursuant to Article 6.2 of the Paris Agreement have been achieved by the Mexican government.

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 UNFCCC 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), and the Transition Strategy to Promote the Use of Cleaner Technologies and Fuels in 2016. The creation of CEL as a market instrument to promote renewable energy was also a result of climate change policies.

METS

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. 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 equivalent to one tonne of CO₂. The participants in the trial period were facilities within the energy and industrial sectors which generate 100,000 tonnes 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 presently no specific obligation to reduce GHG per sector; but this 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.

Reporting Obligations

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 the 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:

• adaptation based on ecosystems;
• adaptation based on communities; and
• 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 historic buildings.

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 participate 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 UNFCCC, including the country’s own METS.

Given that the CBAM will impose a carbon tax on high carbon emissions 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. However, the basis for the operational stage of the emissions commerce programme is still pending to be issued. 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 could eventually lead to the project losing its “social licence” and result in 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 with the usual international standards, such as GRI, SASB, TCFD, etc, being 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 consumers 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, the 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 adopt a more renewable-friendly scheme.

The LGCC establishes:

• the regulation of gas emissions and greenhouse effect compounds;
• the regulation of actions for mitigation and adaptation to climate change; and
• 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.