Mexico’s efforts in addressing environmental degradationMarket Watch
Mexico joined the United Nations' (UN) Framework Convention on Climate Change in 1994. Since then, the country has been working on policies aimed at addressing environmental degradation.
Climate leadership has been implemented through various instruments such as phasing out fossil fuel subsidies and encouraging the use of alternative energy sources.
From 2006 to 2012, Mexico's government prioritised environment and climate change policies. The country's political leadership played a leading role in developing the country's climate change strategy and implementing various environmental measures such as the establishment of a carbon tax applicable to fossil fuels; the submission of the Nationally Determined Contribution (NDC) to the UN; the approval of the Energy Transition Law (ETL) to promote the development of renewable energy projects; the national strategy for reforestation and forest degradation projects and the creation of a national carbon market.
After the entry into force of the Paris Agreement, Mexico's government established the Global Low Carbon Coordination Commission to implement the provisions of the Agreement. It also established an emissions trading system (ETS).
Climate change was the main topic of COP-21, or the Paris Climate Conference, in 2015, which brought together various countries to draft a new global agreement. During this period, Mexico's president showcased various achievements related to the implementation of its climate policies.
Promoting Clean Development Mechanism (CDM)
Mexico’s experience with implementing market-based mechanisms for climate change mitigation can be traced back to the Kyoto Protocol's entry in 2005. The Protocol established various flexibility mechanisms that were designed to help developing nations meet their greenhouse gas reduction goals, such as Joint Implementation (JI), the International Emissions Trading (IET) and the Clean Development Mechanism (CDM) to assist Annex I countries in the achievement of their emissions reduction targets.
To facilitate understanding of the CDM, in 2006, Ministry of Environment and Natural Resources (SEMARNAT), the National Bank for Foreign Trade (BANCOMEXT) and the World Bank Group signed a Memorandum of Understanding that formalised the cooperation for the design of the Mexican Carbon Fund, known as FOMECAR.
This mechanism was then created to help Mexico promote and develop greenhouse gas (GHG) reduction projects. Other countries, including the UK, France, Spain and Germany, also signed documents related to the CDM.
Through the Clean Development Mechanism, or CDM, over 180 Mexican projects have been registered. However, since the beginning of 2012, only 72 projects have issued emission reduction certificates (CERs).
The North American Climate Leadership Dialogue
At the North American Leaders Summit in 2015, the leaders of Canada, Mexico and the US committed to implementing 51 specific action plans and formed a partnership to address climate change and clean energy. The event was considered a major step towards addressing climate change. However, shortly after the inauguration of Donald Trump, the US withdrew its support for the North American Agreement.
In 2018, the three countries moved to a decentralised approach to accelerate climate policies, which included carbon pricing. Despite the lack of a carbon pricing instrument in the updated progress report, the new North American Climate Leadership Dialogue (NACLD) addressed carbon pricing instruments and by September 2018, at the Global Climate Action Summit in San Francisco, the parties were still committed to addressing climate change through various means.
Although its climate leadership was sustained over the next couple of years, it became less significant during the first years of the current administration.
Mexico’s activities targeting global environmental objectives, specially climate change mitigation
With the ratification of the Paris Agreement and the establishment of national emission reduction goals, the inclusion of market-based instruments to achieve mitigation objectives was a natural consequence of climate leadership in Mexico. Mexico began its actions with the entry into force of the National Registry of Emissions (RENE), whose objective was to collect information on GHG emissions from facilities that emit more than 25,000 tCO2e. For this purpose, many countries helped and provided flows to finance this effort.
This cooperation from the Development Assistance Committee (DAC) members to Mexico was dedicated to creating the necessary institutional preconditions and technical capacities of both public and private actors for establishing and implementing an ETS.
According to statistics from the Organization of Economic and Cooperation Development (OECD), from 2010 to 2018, Mexico received a total commitment of USD $4.64718 billion of bilateral aid —both grants and loans — from DAC members, for activities targeting global environmental objectives. Around 50% of that bilateral aid was for climate change mitigation.
Since 2012, Partnership for Market Readiness or PMR — an initiative managed by the World Bank to assist developing countries in the preparation and implementation of policies to mitigate climate change — has been supporting Mexico in the implementation of Nationally Appropriate Mitigation Actions (NAMAs) across different sectors (i.e. transport and housing) and for the design and establishment of the ETS in the country.
In 2013, Mexico's voluntary carbon market was able to allow companies to offset their emissions through a voluntary programme known as CAR 2015.
As established in the GLCC, the implementation of the CAR programme was divided into two phases. The first one was a pilot phase, while the second was the formal phase. This procedure was delayed to 2023 as it was not approved on time.
The need for a change in public policy and promoting green financing
At COP26, more than USD 600 million was pledged to the Adaptation Fund and Least Developed Countries Fund (LDCF), which will help vulnerable nations address the effects of climate change.
A new goal on climate finance will be set by 2025 to reach a floor of $100 billion annually. The goal is yet to be determined, but the increasing costs of adaptation are pushing the existing public financing gap to widen.
The global climate challenge seems almost impossible to tackle; as a result, many nations have agreed to establish public policies and allocate resources. Mexico is one of those countries that have signed some commitments but internally haven’t implemented such public policies or even set the base to promote green financing. The current policy is based on oil and gas and has proposed modifications to existing laws to recover the monopoly on electricity and harden the way to renewable energy.
After Glasgow, Mexico has the opportunity to revisit its commitments and align them with a long-term policy on this matter.
Also, at COP26, the need to reduce carbon production was emphasized on, but United States did not make any commitment. A reduction in inefficient subsidies to fossil fuels was also requested which, in the case of Mexico, is relevant as 4% of electricity comes from this source.
United Nations Framework Convention on Climate Change (UNFCCC) calls on developed countries to fully comply with the goal by 2025 and emphasises the importance of transparency in the implementation of their promises. This opened up doors for a new financing goal that is established through participatory mechanisms. Mexico called on the developed countries to comply with their resource mobilisation commitments and to significantly increase that sum. However, in 2020, the Climate Change Fund disappeared, and less than 0.6% of the federal budget is dedicated to the environmental sector and less than 0.9% to the Transversal Climate Change Annex, which directs more than 70% of resources to infrastructure for the transportation and storage of natural gas.
Even though it seems that Mexico is trying to resurrect fossil fuels to generate energy, many difficult changes need to be made to “swim against the current”, in which the world demands less fossil fuel usage and more renewable energy and climate change solutions to prevent the collapse of economies around the world. It is expected that Mexico, sooner or later, will change the course and better adapt their energy sources mix to comply with the global agreements and be part of the green economy and green post-pandemic economic recovery.
Given that the Mexican government’s commitments to address climate change is dampened by a lack of public investment, the private sector has now taken up the onus to find resources to finance the country’s green initiatives.
A great example is the fact that during 2021, the number of companies that issued thematic and sustainability-related bonds tripled against the previous year, according to HR Ratings. As 20% of the money issued in Mexico were mainly ESG related bonds, the agency estimates that the percentage for 2022 could be around 30% and for 2025-2026, probably 50%. During 2021, $36,565 million pesos (around US$1.8bn) were issued in the Mexican stock market, of which 46.76% corresponded to sustainable bonds, 29.80% to bonds linked to sustainability and the rest to green bonds.
Another relevant example is Fibra Uno — the first and largest FIBRA (REIT) in the Mexican market, designed as a total return investment vehicle that issued a total of $8,100 million pesos (US$400 million) in sustainable bonds. FUNO owns, operates and leases a wide range of real estate assets for leasing, primarily in the retail, industrial and office segments.
The emergency call is evident, but some opportunities can be foreseen. Climate finance is the opportunity to mobilise money to a globally important and humanitarian cause to keep the global temperature increase below 2° Celsius while helping other more vulnerable nations to adapt to climate change and achieve a green transition.