How Carbon Markets Can Provide Business Opportunities in Mexico

Environmental, social and governance (ESG) goals are considered a major trend for transnational companies but as climate change continues to worsen, both policymakers and individuals are taking measures to achieve carbon neutrality, prompting the  huge development of carbon markets.

But how are carbon markets born and how much market experience is there in reality? These markets are derived from the Kyoto Protocol of 1997. Fast forward a few years and the European market was created, which specifically works as a regulated market where a price per ton of emitted CO2 is placed in a cap and trade system. Nowadays, we have more markets operating, as the graph from a 2020 World Bank publication shows.

At the moment, there are 68 carbon pricing initiatives that represent 11.83 GtCO2e, which accounts for 23.11 percent of the global GHG emissions. Carbon prices can go up to above US$$100 (like Uruguay at US$137, Switzerland at US$129.86 or Lichtenstein atUS$126.86). Just this year, Malaysia announced the creation of a voluntary market, paving the way for new countries to join this trend.

A market is created by both buyers and sellers. In this case, the sellers are project developers or owners that can register under a certain methodology ( CAR, Verra and Gold Standard are the most common) the project and the amount of CO2e that it can offset. Most projects are focused on renewable energy (Gold Standard has a keen focus on that), energy efficiency (Climate Action Reserve has specific methodologies for this) and forestry (Verra being a common standard for this). Once a project is registered and verified by one of these agencies, credits are awarded with a serial number and can be sold.

In this specific article, I want to focus on the voluntary market and how this can shape the modern economy as well as the opportunities it might present for governments and individuals. This market works on the premise that neutrality can be reached through mitigation of the carbon footprint; the offsets can be bought in an organized market where projects are verified by third parties regarding  how much CO2 can be captured by it, as well as a proven additionality of the project itself, which means a certain project could only be developed by the funding via offsets as well as a proven impact on the community and making substantial improvement in the community. This market reached a US$1 billion cap in October 2021. Now, forecasts from analysts and market players say  the market will reach a US$100 billion market cap by the end of the decade, with an average price of US$100 per carbon offset.

If the above predictions happen in the short term, we will reach a point of scarcity of carbon projects, prompting a new sustainable industry that can make real changes on the environment and still have a financial attractiveness for potential investors. The question is, how is Mexico going to play in this market?

Mexico has a trial version market that started in 2018 and that ends in December 2022. At the moment, there are more than 70 companies that have registered, according to the Ley General de Cambio Climático. All companies that surpass 100,000 tons of CO2 equivalent per year must register and decrease their emissions or offset them via carbon credits; nevertheless, there are more than 200 companies that offset their emissions in Mexico every year and this market continues to grow. That has prompted the newly created Mexican Carbon Association, whose objective is to procure the integrity of the local carbon markets. Not only does Mexico as a country have a carbon regulation as well as a carbon market, but state players also have joined the crusade against climate change, as is the case of Yucatan, Guanajuato, Jalisco, Sonora and Queretaro, by creating local carbon markets.

Eventually companies will have to meet the requirements of a global standardization in regard to ESG compliance. This will prompt more project development where both private investors and state governments can search for opportunities that could be available in this market. In the case of governments, this is especially true of municipalities, where there will be a bigger financial incentive for biogas landfills as well as urban parks and maintenance of green areas. Private investors can also develop forestry projects as well as landfills for biogas in farms or regenerative agriculture.This latter can provide ancillary revenue to small producers.

Revenues from these projects in the case of government agencies can be destined to the development of more carbon offset programs and the maintenance of current markets via a trust where there can be seats available to community leaders and NGOs, making the management of these resources more transparent and incentivizing the greater participation of the community in their maintenance.

In conclusion, carbon markets can be an efficient way to help fight climate change and can provide business opportunities for both private investors as well as the government itself.