Eduardo Piquero
MÉXICO2 Mexican Carbon Platform
View from the Top

Setting Foundations for a Carbon Market

Wed, 02/24/2016 - 14:16

Q: How is the fact that companies rate higher in the Mexican Stock Exchange Sustainability Index pushing the development of Mexico’s carbon market?

A: In 2014, the National Emissions Inventory was finally approved by SEMARNAT and now over 3,000 companies nationwide are requested to annually submit their emissions reports. This is the first step that will enable the development of a compulsory carbon market and will also allow companies to benchmark their positions with their competitors, which includes many sectors such as aerospace, automotive, construction, steel, and cement. No industry wants to be the most complacent, so this will incentivize many companies to regulate their emissions. Mexico is the first country in Latin America to do this and one of the few worldwide. There are now more countries taking steps to develop their own carbon markets such as China, South Korea, Chile, and South Africa. Mexico is moving quickly and is taking decisive steps toward creating a mechanism that tackles greenhouse gas emissions.

The Inventory is a crucial step for creating a solid carbon market, and once companies begin reporting, no company will want to lag behind. Large companies face pressure from investors to comply with environmental obligations so they will submit to the inventory. At the moment there is a significant knowledge barrier to be tackled since many companies are not familiar with this sort of inventory and they must learn how to calculate their carbon footprint. As a result, the market needs more professionals in the field in order to help companies incorporate these new requirements. The second step must be taken by the government to set a strong regulatory backbone for the carbon market.

Q: How will the mandatory requirement for clean energy certificates impact carbon credits?

A: An electricity company has carbon and renewable energy obligations to comply with, and these clean energy certificates can be accounted for in both markets. If this occurs then Mexico will have a de facto carbon market with incentives. Certificates cover energy, while carbon credits cover energy, electricity, and other industries such as transportation and agriculture. Mexico is gearing up to have an emission reduction based mechanism in the electricity sector.

Q: What are the respective roles of the public and private sectors in disseminating information surrounding the carbon tax?

A: The tax is not on emissions but fossil fuels and their CO2 content. The dirtier the fuel the more companies have to pay. At the moment there are only two companies that account for 90% of this tax, which are PEMEX and CFE. Once the hydrocarbons and electricity markets are fully deregulated, there will be more companies that will comply with this carbon tax. The Ministry of Finance needs to develop secondary regulations that include emission reductions and carbon credits. The private sector, on the other hand, must understand that it is good practice to lower emissions, and this sends a clear message that the players are thinking long term, and investors have always liked long-term visions.

The biggest lesson Mexico could learn comes from the European Union’s European Union Emissions Trading Scheme (EUETS). This scheme set the targets before knowing how much CO2 was being emitted and this miscalculation led to a drop in prices. Another important lesson Mexico can learn from this market is that it is essential to have institutional strength, and by this I mean that the authorities must be very clear and flexible. The private sector must understand that a low carbon economy is not only good for the environment, but represents an important investment in the long term.

Q: How can you help clients secure financing for projects that will decrease their emissions and, in some cases, help them produce their own electricity?

A: Mexico needs a deeply entrenched carbon market where companies can sign purchase agreements and use these as collateral. This year, there is a plan to develop a green bond market, where the debt programs will be labelled as either green or otherwise, which will allow investors the opportunity to invest in debt for green projects. When an investor picks a green project it knows the money will go to renewable energies, waste management, or agriculture. At the moment, there are questions surrounding the oil and gas industry, especially concerning oil prices so the attention is being drawn to renewables. This green bond market is an ambitious initiative and the first of its kind in Latin America.