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More than 70% of municipalities in Mexico experienced some degree of drought, from moderate to exceptional, this year. In addition, according to information from the National Water Commission, more than half of the country recorded temperatures of up to 45 degrees Celsius, some with a wind chill of 50.
The consequences of climate change are merciless: they do not listen to excuses or pay attention to deadlines or signed agreements. Every year, Mexico’s ecosystems lose biodiversity and suffer from an increase in extreme phenomena: flooding due to torrential rains, more regions with severe drought, hurricanes of greater intensity and frequency, extreme heat, to name a few.
Under the Paris Agreement, Mexico has set out to reduce its greenhouse gas emissions by 22% by 2030, and black carbon emissions by 51%. This commitment includes specific targets for various sectors, such as energy, transport, agriculture, waste, and forestry.
But there are signs that the country is lagging behind in its goals. A study by BBVA Research Published in March of this year, it revealed that in 2022 the country ranked as the ninth largest emitter of greenhouse gases in the world and, after Brazil, the second in Latin America.
For some actors fighting climate change, it is therefore worrying that the Mexican government is a year and a half behind in implementing the operational phase of the Emissions Trading System, as stipulated by law, and that it is still in the pilot phase.
The ETS is a mechanism that encourages companies to reduce their greenhouse gases by establishing an emissions cap and instruments such as carbon credits for when their fixed sources exceed the emissions threshold determined by law.
“Mexico should be very concerned: it needs to reduce carbon dioxide emissions by 30 million tons per year until 2030, and basic tools such as the creation of an emissions trading system are not available,” says Eduardo Piquero, general director of MEXICO2, a subsidiary of the Mexican Stock Exchange.
The pilot phase was supposed to end in 2022 and the operational phase to begin in January 2023, with fully applicable regulations for companies, mandatory emission limits and penalties, but this has not happened. “We are late in the race to combat climate change, and these emission reduction initiatives that companies must implement to meet their objectives continue to be a challenge,” says Fernanda Pérez, specialist in Sustainable Finance and Climate Change at KPMG Mexico.
The delay has implications for the country’s public and business sectors.
Lack of planning and incentives
One of the main challenges facing the ETS in Mexico is the transition from the trial period to the operational period. “We are still waiting for the publication of these rules under which the emissions trading system will officially operate. In the meantime, companies continue reporting and verifying their emissions as they have done in previous years,” says the expert from the consulting firm KPMG.
The trial period involved 300 company facilities, representing approximately 35% of national CO2 emissions, which will be required to participate in the ETS.
Until now, the General Law on Climate Change requires companies that exceed the threshold of 100,000 tons of CO2 per year to quantify their emissions inventories, verified by a third party.
Lack of clarity on operating bases limits companies’ planning to comply with future regulations and international agreements. “They don’t know what the emissions cap will be and the pace at which they will have to reduce their greenhouse gas emissions,” says Perez. Regulatory uncertainty can also discourage them from making significant investments in clean technologies, and affect the country’s ability to meet its commitments.
Carbon credits operate only on a voluntary basis
Until these guidelines are published, companies are operating in a test and simulation environment. For example, companies cannot trade carbon credits within the mandatory market until the operational phase begins.
Companies are supposed to measure their emissions and respect the carbon limits set by the state, implementing measures or technologies to reduce them. “Emissions that they can no longer reduce can be offset by acquiring carbon credits,” says Pérez, from KPMG. But for now they are not obliged to do so.
Carbon credits are financial instruments between individuals issued from specific projects that absorb or avoid CO2 emissions, such as reforestation and waste treatment plants. So far, carbon credits only operate in the voluntary market in Mexico, with some companies participating due to the demands of their investors or due to their international presence.
There are around 400 certified carbon credit projects in the country, which are mainly for reforestation, says Piquero, from MEXICO2. Most of them reduce carbon dioxide emissions for buyers outside of Mexico. “In three years, the market went from 300,000 tons of CO2 to more than a million. This is how much the projects have reduced and the companies bought.”
Without regulation there is no transparency
Regulation is also necessary to make information on the voluntary carbon credit market transparent and thus avoid the risk of greenwashing, that it is just a facelift by companies to appear more environmentally friendly than they are. Currently, offset projects do not need to be authorized by the authorities and there is no registry of them, with the characteristics of the project and the information of the buyer or the seller.
“One of the things that Semarnat [la secretaría de Medio Ambiente] “What could be done is to make public all carbon credit contracts, all compensation contracts, so that the projects could be public so that civil society could see the detailed conditions,” says Patricia Moles, coordinator of the Sustainable Finance program at the Autonomous Technological Institute of Mexico (ITAM).
“In this way, we could avoid companies being selective in their communication, and saying ‘I am already offsetting’ when, for example, their emissions are 10,000 and they offset 10,” says the expert who advocates transparency. The academic also calls for a standard contract.
Analysts also warn that delaying the mandatory implementation of the emissions trading system could have economic and commercial consequences. Soon, some countries will require foreign companies wishing to trade on their territory to have a mandatory carbon market in their countries.
“Starting in January next year, the European Union will evaluate, on a country-by-country basis, whether companies are required to reduce emissions locally,” says Piquero. His statements suggest that, in terms of sustainability, Mexico is lagging behind. If it does not implement the ETS, experts doubt that the country will be able to meet its international commitments to reduce emissions, with serious implications for the environment.
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