The Ministry of Environment and Natural Resources (Semarnat) is nine months late in publishing the guidelines that will guide the Emissions Trading System in Mexico. This is a significant delay in reducing 22% of greenhouse gas emissions in 2030 in accordance with the Paris Agreement, says the organization MexiCO2.
“We need these instruments to work effectively and in an accelerated manner to achieve international commitments. The fact that these types of instruments do not see the light means that we are delaying that progress. If we see it as an indicator of how it is progressing over time, in reality what we have seen is that it has not progressed, that it has not presented results,” said Denitza González, operations coordinator of MexiCO2, the Mexican carbon platform that is subsidized by the Mexican Stock Exchange.
The Emissions Trading System is an economic market instrument consisting of an electronic platform where emission rights and compensation credits are issued, traded and canceled. It is created to contribute to the reduction of emissions of carbon dioxide (CO2), the main greenhouse gas, at the lowest possible cost, in such a way that it is measurable, reportable and verifiable.
González believes that this system could start operating once the 2024 federal elections have passed, where the country's presidency, senators and federal councils will be renewed.
“Considering a large part of the political pulse, Mexico is entering an electoral period, we believe that Semarnat will wait to publish them perhaps until the end of 2024, beginning of 2025, once this stage of elections or electoral phase has passed,” he said.
This scenario, from their perspective, raises the need to seek other strategies to reduce emissions in an accelerated manner and to achieve international objectives and commitments.
“If the government shows signs that it is not moving forward, the obligated subjects, the companies, will not feel committed to meeting these objectives, unless they have these objectives internally in their corporate vision. I think that this sign of uncertainty, of pausing, of little information about how it is going to move forward, gives you a slightly contradictory signal of how we are going to meet these objectives if the instrument that should be strengthened the most, the one that will support companies being forced to reduce their emissions, does not work,” he said.
Operation of the Trading Emissions System
Once the system comes into operation, the national carbon market will be created, which will establish an emission ceiling for companies that will have to inventory, quantify and reduce their emissions through internal initiatives such as: the acquisition of clean and renewable energy, technology changes and equipment upgrade.
For González, in an emissions trading system, companies have emission rights that the entity responsible for regulating allows them. “They assign them a ceiling and emission rights.”
If they exceed them, they have to find ways to compensate for that limit to reduce their permissible emissions, and they can do so by buying carbon credits in the voluntary carbon market, comprised of commercial systems in which private entities sell carbon credits; each one is equivalent to one ton of carbon dioxide reduced, sequestered or avoided by the entity that sells them.
In this way, carbon credits are one more option for reducing emissions. However, these come in when a company can no longer reduce emissions, either because it's too complicated or the investment is too strong to renew the technology.
“From this carbon footprint analysis, several strategies can be generated, ranging from having to replace very obsolete technologies with new technologies, changing the type of raw materials or energies used to the purchase of carbon credits,” explained Lesly Ortega, manager of environmental analysis and monitoring at the company Toroto, dedicated to providing nature-based solutions.
However, the emissions trading system in its test phase made it possible to compensate up to 10% of its emissions through carbon credits, according to Denitza González of MexiCO2, but it is unknown how much it will allow in its operational phase.
The voluntary market
In the absence of a national carbon market, a voluntary market has been operating since 2013 and is used by companies to help in their areas of social and environmental responsibility and improve their corporate image, González points out.
Through standards and protocols focused on measuring their carbon footprint, corporations and governments measure their carbon footprint, and voluntarily, without any obligation, they reduce and offset their emissions.
Carbon credits work based on the logic of supply and demand, Ortega said. On the one hand, there are the owners of the land, who can be ejidos, communities, private individuals or governments who develop projects that have been verified by an agency, known as a “third party”, to sell credits. On the other hand, there are buyers who can also be companies and governments that require them to meet their reduction goals or their sustainability strategy.
Regarding international protocols, one is the so-called CAR, which oversees the verifying bodies (third party) that are accredited by the Mexican Accreditation Entity of the SE. These verifiers are independent of the protocols and the owners of the land.
Credits are marketed through platforms where buyers access project information and choose them according to their needs. For example, a company buys loans from a certain year to pay for the reductions for the specific year it wants to attack, Ortega explained.
“Thus, transactions are carried out through this medium, and we can trace who issued, who bought, and how many credits he has in his record.”
In this way, companies review a portfolio of projects and decide through which type of projects they are going to offset their emissions and when making the transaction they receive a certification of their carbon reduction.
González points out that the regulated market helps to set a ceiling while the voluntary market offers carbon credits to compensate, so they are complementary.
Benefits of a domestic market
Currently, verified carbon credit compensation projects can only be consulted through the platforms of the verifying agencies that establish the protocols, standards and guidelines for verifying the projects.
On the other hand, if there were a regulated market, there would be a platform where all this information could be consolidated.
“We don't yet have a platform where all this information is grouped, it's something we're working on, but for now the protocols have their own records and that's where we can find information about these projects,” Ortega explained.
Other benefits expected from this national carbon credit market are technological changes in companies' production processes to make more efficient use of resources; that land owners improve their quality of life and adapt to the impacts of climate change, Ortega said, all of this integrated with the objective of moving to a low-carbon economy.
The same thing happens with the price, it fluctuates without there being a minimum or a maximum in the price for each credit, which represent the removal of one metric ton of carbon from the atmosphere. This decision is currently in the hands of the market.
“Currently, like us, we continue to operate in a voluntary market, what actually happens is that we don't have a base price or a fixed price that has already been determined,” said Ortega.
When the national carbon market was created, carbon pricing instruments emerged from the regulated market, the first through the emissions trading system and the trading ceiling, and the second through carbon taxes.
The fixed price must consider the complexity of the services provided by ecosystems, in such a way that it allows the restoration, conservation and use of natural resources, and improves the living conditions of land owners and ensures the permanence of projects, said Ortega.
Although for González it is not essential to set the price since the voluntary market has operated without this for more than 20 years, he recognizes that it is important that a good carbon price floor be established.
Future Challenges
In the end, the domestic market imposes emission ceilings, this will benefit the voluntary market, according to Denitza González, because “it will have more supply from companies that are necessarily going to have to offset their emissions at some point through carbon reduction projects”.
If the guidelines are approved, reducing emissions will be mandatory for every company and government, but González mentions that their implementation will be the same as other laws in which “there will be companies that are going to limit themselves to what is established and there are other companies that, even if they are regulated by the emissions trading system, it is possible that they will follow those guidelines and they will continue to emit (carbon), until the federation sanctions them”.
Ortega points out that sometimes the carbon credit market is an alternative that companies and governments use, but without making an internal effort to reduce their emissions.
Faced with this, he believes that “we have to be very clear that it is not going to be what will solve everything that climate change is causing in the long term. It's a very good alternative... but it's also necessary to know and analyze our processes in depth and to know what we can improve from the inside and also take advantage of other mechanisms that are being built as fair are carbon markets, but diversifying the sustainability strategy.”
Currently, the voluntary market for carbon credits in Mexico is composed mostly of forestry projects (300 in operation) and the livestock sector has the greatest potential to develop projects in the following year, according to Ortega.
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