COP27: The Preamble of a North American Energy Market?

From Nov. 6-20, the Egyptian government hosted the 27th Conference of the Parties (COP27) to the United Nations Framework Convention on Climate Change (UNFCCC) in the city of Sharm El-Sheik , where there were several decisions to continue pursuing efforts to limit temperature increase to 1.5 °C. In the energy sector the agreement focused on two topics. First, how to speed up the transition to a low carbon economy, in particular the uptake of renewable energy; and second, to continue developing and strengthening international cooperation platforms focused on a just transition, i.e., “maximizing opportunities for economic prosperity, social justice, rights and social protection for all, leaving no one behind.” In addition to the decisions on energy, there was a recognition that the transformation of the global economy will require scaling up investments in renewables from billions to trillions of dollars. To make this happen, there will be a need to transform the financial ecosystem, with both the public and private stakeholders working together to change the financial landscape.

In line with these decisions, since the last COP in Glasgow, one in six of the parties to the UNFCCC have updated their Nationally Determined Contribution (NDC). Mexico formally announced at COP27 its revised NDC, increasing its ambition for 2030, committing to reduce to 35 percent its greenhouse gas (GHG) emissions from the original 22 percent, where one of the actions would entail a target of adding 40GW of new clean power capacity by 2030. It would do this partly by mobilizing climate finance and developing strategic alliances, in particular with its North American counterparts.

However positive this increased ambition from the Mexican government (MXG) is, there is a mismatch with domestic energy policy. For instance, in the hydrocarbons sector from 2020 to 2021,, methane emissions grew and gas flaring increased from 10.8 percent of total production to 12.1 percent. Moreover, according to the Environmental Defense Fund, in a 17-day period during December 2021 at the Zaap offshore field in the Gulf of Mexico, near the coast of Campeche, the Zaap-C platform vented an equivalent of 3.36 million tons of carbon dioxide. Assuming the same rate of emissions throughout the year, that would imply this sole facility is responsible for 17 percent of Mexico's total emissions. If this level of emissions is typical for Zaap-C, there is a clear opportunity to immediately reduce from a localized source the environmental footprint of PEMEX, the national oil company (NOC). In any case, there are cost-effective solutions to reduce methane emissions, both to cut the NOC’s carbon intensity, and to get value from a currently wasted resource (natural gas production has decreased 18 percent since 2016, and imports last year increased 6 percent)., This is a great opportunity to implement innovative business models that can help PEMEX improve its efficiency. There are specialized companies that can implement recovery technologies, and they get paid by performance; therefore, there is no upfront cost for the NOC, the risk is borne by the service provider, and the upside is shared once an otherwise wasted (vented) product enters the market.

In the power sector, on the one hand, there has been a push to continue supporting hydrocarbon fuel assets. In the last couple of years, at the Federal Electricity Commission (CFE), the majority (96 percent) of the capacity expansion of the state-owned enterprise (SOE) is explained by additional combined cycle (849MW) and turbogas (168MW) power plants. On the other hand, changes in the legal and regulatory framework and a halt of the clean energy auctions have limited the addition of renewable capacity, delaying or even preventing these new investments from happening, creating international disputes with our Canadian and US trade partners, and setting Mexico off-course of the climate change commitments reflected in our current legal framework, including the Paris Agreement, the General Act on Climate Change, and the Energy Transition Act.

Yet, if there is the political will to change course; resume granting permits; set up new auctions with public and/or private participation, which could be regional, technology- specific, for storage; facilitate public-private partnerships; and reengage the SOE with the international community, Mexico as one of the top trading partners of Canada and the US could not only benefit from the wave of relocations from industry looking for safe havens, but contribute to consolidate a competitive and sustainable North America. Moreover, in the upcoming Canada-Mexico-US Summit to be hosted in Mexico, the agenda should include a point to discuss the merits of a single energy market. An integrated energy market not only would connect clean sources with the demand, but create a whole slew of investment opportunities, improve energy security and sustainability. Therefore, COP27 could be the preamble of a North American energy market.