On October 1, 2019, the Ministry of the Environment and Natural Resources (SEMARNAT) published an agreement laying out the preliminary terms for setting up a pilot program for the emissions trading system, to be run at no cost to participants.

In keeping with the international commitments acquired from the Paris Agreement, Mexico will have to unconditionally reduce 22% of its greenhouse gas emissions and 51% of its black carbon emissions by 2030, with respect to the baseline.

To achieve the national targets for reducing greenhouse gas emissions, the General Law on Climate Change envisages the creation of an emissions reduction system to be set up in two phases: an initial phase, consisting in the pilot program under the agreement, and an operational phase to start at the end of the transition period from the pilot program.

Set to run for 36 months starting on January 1, 2020, the pilot program will be applicable to any plants operating in the energy and manufacturing industries where their annual emissions were equal to or higher than 100,000 tonnes of direct emissions of carbon dioxide in 2016, 2017, 2018 or 2019.

In the energy industry, the hydrocarbons exploitation, production, transmission and distribution subindustries, and the electricity generation, transmission and distribution subindustries will be subject to compliance with the agreement.

The manufacturing subindustries that will be subject to the agreement include automotive production, cement and lime, chemicals, food and drink, glass, iron and steel, metallurgy, mining, petrochemicals, pulp and paper.

The pilot program will be split into two stages: the pilot phase, between January 1, 2020 and December 31, 2021, and the transition phase from the pilot program to the operational phase, between January 1 and December 31, 2022.

Before the pilot phase starts, SEMARNAT will publish a cap on the number of emission allowances that it will issue annually during the pilot program, along with the quantity of free emission allowance allocations to each participant for the three compliance periods.

The free emission allowance allocations will be deposited annually in the accounts of participants in the Monitoring System, by October 24, starting in 2020.

The reporting and verification obligations, together with the submission of emission allowances will start in 2021, in relation to emissions made in 2020. SEMARNAT will perform annual reviews of the pilot program.

By November 1 of each calendar year, program participants will have to submit to the ministry a number of emission allowances equal to the emissions reported and verified the year before.

For the pilot program, flexible compliance mechanisms are put in place in the form of an offsetting scheme through reduction projects or activities or recognition of early actions for any projects or reduction activities that have received external offset credits before the pilot program came into being.

Participants will only be allowed to use credits to offset up to 10% of their obligations to submit emission allowances during the pilot program.