Mexico ETS delay likely to persist on regulatory uncertainty, lack of political will: sources

A lack of clear political will, regulatory uncertainty and the execution capacity of Mexico's Ministry of Environment and Natural Resources is likely to delay the advancementof an emissions trading system in Mexico until the end of 2024, sources told S&P Global Commodity Insights.

According to Mexico's Nationally Determined Contribution, the country's ETS aims to establish a carbon price, incentivize innovation, create cost-effective solutions for industrial mitigation and regulate emissions from major industrial sources. Three main carbon instruments at different levels have been proposed -- the ETS, carbon taxes at the subnational level, and a domestic offset market.

The preliminary guidelines published by the Mexican Government in 2019 established that after a test period, the Mexican ETS was slated to enter the Operational Phase in 2023, but that did not happen because of a delay in the publication of the operational rules, in which fundamental information such as covered sectors, eligibility criteria, improved compliance periods, auctions and sell procedures were to be notified.

Carbon allowance prices uncertain

A pilot phase did kick off in late 2023 for the ETS, but that is currently trading without cash transactions.

Currently carbon allowances are allocated by the Federal Government to industries without monetary value. However, market participants anticipate that once operational prices rise, they could range somewhere between $3-$4/mtCO2e.

"Industries and market participants within the Mexican ETS would not be receptive to a price exceeding $4/mtCO2e," a source said, adding that anything above that level would be expensive for companies.

Due to these uncertainties, Mexican state governments are now figuring out how to develop guidelines aligned with the main ETS. States such as Querétaro, Guanajuato and Tamaulipas are implementing their own carbon pricing mechanisms with the aim of aligning them with the national ETS once it becomes fully operational, a Mexico-based source said.

One of the major challenges facing the implementation of carbon pricing lies in the disparity across different states. For instance, the current carbon tax in the State de Mexico is $2.56/tCO2e, whereas in Queretaro it is sharply higher around $34.90/tCO2e.

This disparity not only reflects varying environmental priorities but also poses challenges for businesses operating across state borders, and thus requires a cohesive approach toward carbon pricing at the federal level, a second Mexico-based source said.

Domestic offset market regulations

Acknowledging the growing concerns and criticisms surrounding the volatility of Voluntary Carbon Market prices and the need for better rules, SEMARNAT unveiled the Draft Regulations for the General Law on Climate Change and the General Law on Sustainable Forestry Development concerning Voluntary Carbon Market Mitigation Projects and Other Economic Instruments at the end of February.

However, a third Mexico-based market source said the absence of a mandatory approach for participants might not be sufficient.

A fifth source said the current draft framework highlights the need for standards and methodologies to be reviewed and validated by the authority, which raises concerns about the timelines and capacity of SEMARNAT to assess the multitude of existing standards and methodologies in the market. This issue could lead to risks for market participants, so it would be more practical for SEMARNAT to adopt these pre-evaluated standards to avoid the duplication of efforts and delays.

Currently, Verra's Registry has 50 active projects in Mexico related to energy demand, renewable and non-renewable energy industries, agriculture, forestry and other land use, and waste handling and disposal, while Gold Standard has two active projects associated with energy efficiency.

Platts, part of S&P Global Commodity Insights, reported market indications for CAR certified Improved Forest Management credits at $14-15/mtCO2e on March 20 for Mexico.

Despite the challenges, sources from the private sector expect that with the upcoming change of government in Mexico at the national level anticipated by the beginning of October, the Mexican ETS will be prioritized and reactivated from the regulatory sector, as both leading candidates for the presidency are interested in climate change and sustainability.