On 19 October 2018, the Ministry of Environment and Natural Resources (SEMARNAT) of Mexico released draft regulations for public comment on the pilot phase of the national emissions trading system (ETS), which is scheduled to run for three years, starting in January 2019. The pilot will transition to the first phase of the Mexican ETS in 2022. The purpose of the pilot is to promote emissions reductions in Mexico, generate robust and high-quality information on emissions, and test the design of the system. It also gives participants the opportunity to familiarize themselves with emissions trading. The regulations contain information on the key design elements of the pilot phase:
  • Scope: The pilot will cover the energy and industry sector. The latter includes, among others, the automotive, cement, chemicals, glass, steel, metallurgical, mining, petrochemicals subsectors, as well as the pulp and paper subsector. Only direct CO2 emissions will be covered and participation is limited to entities with annual emissions greater than 100,000tCO2, amounting to a total of 308 entities (plus any new entrants). Overall, the pilot covers approximately 45% of national emissions.
  • Cap: Information on the cap for the pilot phase will be released before the start of the pilot. The cap will take into account emission reductions achieved through companion policies, such as the Mexican clean energy certificates scheme.
  • Allocation: annual allocation will be based on historical emissions and sectorial goals, in line with the country’s Nationally Determined Contribution (NDC). The allocation for individual entities will be released before the start of the pilot.
    • Auctions: Although a start date and precise rules for auctioning have not been set, five percent of allowances will be set aside for a reserve for auctions. A minimum price will also be set by SEMARNAT, updated annually for inflation. The Ministry also has the option of setting a maximum price.
    • Reserves: Two reserves will be filled with allowances additional to the cap. Ten percent of allowances will be set aside in a New Entrants Reserve, which may also be used for any increases in production, another five percent of allowances is set aside in a reserve for auctions in response to price spikes.
  • Offsets: SEMARNAT will establish a domestic program for the generation of credits that can be surrendered for compliance in the national ETS. Eligible mitigation projects or activities are domestic projects that have been validated and verified under internationally or domestically recognized protocols (as yet unspecified). Further regulation on offsets is yet to be released. Participants will be able to meet up to ten percent of their compliance obligations with offsets.
  • Banking: if participants are in compliance with their surrender obligations, then a share (unspecified) of their remaining allowances may be banked for use in subsequent compliance periods within the pilot phase. Allowances issued in the pilot phase will only be valid for that period.
  • Monitoring and compliance: Entities will be required to annually report and verify their emissions in accordance with the mandatory reporting system and National Emissions Registry (RENE). Participation with the pilot phase is mandatory but the pilot phase will not have penalties for non-compliance.
SEMARNAT will annually review the ETS, publishing reports on topics such as price behavior and emissions reductions achieved. An evaluation of the pilot phase will also be conducted to see if any adjustments to the ETS are necessary before the start of the first phase of the program.