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Initial Rules Issued for Mexico's Carbon Market Program

Mexico's National Carbon Market Pilot Program ("Pilot Program") was published last fall by the Ministry of the Environment and Natural Resources (Secretaría de Medio Ambiente y Recursos Naturales, or "SEMARNAT") (see "Mexico's Carbon Market Pilot Program," The Climate Report, Fall 2019), and was formally initiated on January 1, 2020. SEMARNAT has now published initial rules for the Pilot Program.

Greenhouse Gas Emissions ("GHG") Cap. As established by the Pilot Program, SEMARNAT has published on its website an annual cap of 271.3 million emission rights for 2020 and 273.1 for 2021, applicable to the energy and industrial sectors as a whole ("Emission Rights").

The publication includes the Emission Rights allocation for 2020 and 2021 based on the mentioned cap. In general terms, the electricity generation, cement, and oil and gas production sectors will receive the highest amount of Emission Rights, followed by the chemicals refining and metallurgic sectors. Also, a significant amount of Emission Rights are allocated as a reserve for future auctions and for the Pilot Program's new participants.

Based on the mentioned allocation, Emission Rights are distributed among the facilities of the Pilot Program's participants. Considering the Pilot Program's current terms, at this stage such distribution would be done without charge, but once it becomes definitive, the Emission Rights could also be allocated through governmental auctions at a price. Such auctions should begin during the second stage of the Pilot Program.

GHG Emission Rights and Trade. At the Pilot Program's initial stage, all facilities from the industrial and energy sectors exceeding 100,000 tons of GHG direct emissions annually will be enrolled by default. Such participants will be determined by SEMARNAT based on their last GHG annual report.

To date, SEMARNAT has not determined the quantity of Emission Rights to be allocated to each of the Pilot Program's participants—despite the fact that such allocation was to be done prior to the Pilot Program's start date—which is currently generating uncertainty among members of the energy and industrial sectors.

Likewise, the electronic platform required to deposit the Emission Rights among the Pilot Program's participants is currently under development and should be operational by October 24, 2020, or earlier. Thus, the participants must monitor SEMARNAT's website in order to learn their granted Emission Rights.

Once a company receives its Emission Rights, it has three different courses of action to consider:

  • Use the total amount of its Emission Rights granted by SEMARNAT (if sufficient);
  • If the Emission Rights granted are not sufficient, acquire the required additional ones in the GHG market from another participant or through the governmental auctions; or
  • If the company is able to reduce its emissions beyond the granted Emission Rights (and therefore has a surplus), it may consider selling them to other Pilot Program participants, creating economic incentives for companies to take GHG mitigation measures.

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