On July 13, 2018 the Decree amending the General Law on Climate Change (GLCC) was published in the Mexican Official Gazette. The Decree addresses several recent milestones in national and international climate policy. Following are some comments on the set modifications and their implications for industry and regulators:
1. National emissions market. The GLCC lays the foundations for the eventual start-up of a national market for greenhouse gas (GHG) emissions. As of today, it is known that the Ministry of Environment is developing, with the support of MÉXICO CO2-Plataforma Mexicana de Carbono, the rules for the operation of said market. Among other things, it is pointed out that the bases must be elaborated with the participation of authorities and representatives of the emitting sectors. In addition, the market bases should seek the following:
- promote the reduction of emissions in the most cost-effective manner,
- promote adequate reduction measurement, reporting and verification mechanisms, and
- avoid undermining the competitiveness of sectors vulnerable to international trade.
It should be noted that the law now provides that participants in the emissions market can carry out transactions and operations with other countries’ markets or even international markets. Beyond the European emissions market and the one operated under the clean development mechanism of the Kyoto Protocol, currently there are numerous voluntary markets, operating at national, state or even local level (such as certain municipalities in Japan, including Tokyo).
What will suit Mexico is to develop market bases similar to those of the emission markets with which it perceives integration potential (eg, including jurisdictions with which it shares a commercial exchange). It is known today that the officials and experts involved in drafting the rules of the new market will make an effort to emulate the provisions of the California Cap and Trade and the Quebec Cap and Trade, whose integration between both systems is in progress. The upcoming Mexican GHG market is expected to generate business and opportunities along the production chain in several sectors. Great attention should be given to the drafting of the rules during the following months.
According to the transitory articles of the amendment Decree, it is plausible that the market will begin to operate within a period of about four years, since it is foreseen that (i) a term of 10 months starting from the date of publication of the decree, will be granted for the preliminary bases to run a test program "without economic effects for the participating companies", and (ii) another term of 36 months in which the preliminary stage will elapse.
2. Goals and obligations under the Paris Agreement. The Decree of the GLCC incorporates a definition of the Agreement, as well as the Nationally Determined Contributions (NDC), proposed by each country party of the Agreement, intended to achieve the goal set in it to avoid exceeding an average increase in global temperature of 2° Celsius by 2100.
The amendment takes up the NDC of Mexico in the transitory articles of the GLCC, within the framework of the Paris Agreement. While the "ambitioned goals" consisting of a 30% reduction in GHG emissions to 2020 and a 50% reduction to the year 2050 (which depended on the implementation of an international regime funded by developed countries), are still being maintained (and have been since the entered into force of the law in 2012), the amendment recently enacted establishes "in an unconditioned basis", a GHG reduction of 22% and a reduction of 51% in black carbon emissions, by 2030. Significantly, the GHG reduction targets are established by sector: transport -18%; power generation -31%; residential and commercial -18%; oil and gas -14%; industry -5%; agriculture and livestock -8%, and waste management -28%.
The reduction of black carbon is in line with the provisions of the Paris Agreement and the IPCC opinions, in the sense that efforts must be increased to reduce this type of emissions and those that, while less persistent than CO2 and other gases, also contribute in aggravating the effects of climate change. The commitment established by the amendment is also consistent with the policy of increasing the supply and consumption of natural gas, for example, especially in electricity generation and in the manufacturing industry, which will progressively phase out the consumption of coal.
In addition, the support to the generation of electricity from clean sources (according to what the law defines as such) will also be relevant in achieving the new set of climate goals. For example, the new provisions of the GLCC sets forth that clean energy certificates (locally known as “CELs”), which are financial instruments representing each of them 1 MW of power generated from clean sources, shall be considered in the preliminary bases of the GHG market. This will potentially become an additional economic incentive especially but not limited to generators of renewable energy.