Mexico is moving forward with efforts to curb greenhouse gas (GHG) emissions, even as the U.S. backs away from such efforts. Mexico's Emissions Trading System (ETS) is close to launch, and additional efforts will help to integrate Mexico's carbon trading with global standards and markets.
Key Takeaways
What is happening?
- Mexico's Emissions Trading System (ETS), expected to be fully operational in 2026, is expected to allow greater use of carbon offsets, creating new opportunities for compliance entities, carbon credit providers, and potentially other market participants.
- A new carbon standard and registry is under development by the Mexican Stock Exchange and carbon platform MexiCO2. Expected to launch in 2026 alongside the ETS, the registry will play a key role in supplying anticipated demand for offsets by ETS compliance entities and help Mexico meet its Paris Agreement commitments. With this new standard and registry, Mexico joins a growing list of countries developing national/regional frameworks to expand their domestic supply of carbon credits for meeting their climate goals.
Who is impacted? Compliance entities, carbon credit project developers, investors, and other carbon market participants.
What should I do? Monitor for the issuance of Mexico's final ETS regulations and the likely increase in the percentage of carbon offsets permitted for compliance requirements.
Context
Mexico's Emissions Trading System (ETS)
Mexico's Nationally Determined Contribution (NDC) under the Paris Agreement establishes an unconditional 35% emission reduction target by 2030, and a 40% reduction target conditional on international financing and cooperation. Mexico is in the process of updating its NDC. Additionally, Mexico's General Law of Climate Change sets a long-term target of reducing GHG emissions by 50% compared to 2000 GHG emissions levels by 2050.
Mexico's ETS plays a crucial role in achieving Mexico's NDC. Launched in 2020, Mexico's ETS developed through a pilot phase (2020-2021) and transitional phase (2022). The transitional phase was extended due to delays in finalizing regulations. Final regulations and the launch of the "Operational Phase" (i.e. compliance phase) are expected at the end of this year or in early 2026.
The ETS covers direct CO2 emissions from large industrial and energy sector installations (emitting >100,000 tCO2 per year), representing approximately 40% of Mexico's national GHG emissions. The emissions cap for the pilot phase was initially set at 271.3 MtCO2. The final regulations will establish the cap for the Operational Phase, (expected to cover 25-30% of Mexico's updated NDC).
Emissions allowances are currently allocated freely based on historic emissions. Auctions will begin during the Operational Phase. Participation under the pilot and transition phase has been limited to compliance entities and offset credit providers. Regulators may allow other market participants to join once the Operational Phase begins.
Use of domestic offsets is permitted and currently capped at 10%. This cap is expected to be increased for the Operational Phase: Reported statements from Mexican officials indicate that the offset cap could increase to 100% depending on Mexico's soon-to-be updated NDC. This approach would increase demand for domestic offsets significantly and incentivize carbon credit project development in Mexico for the compliance and voluntary market. Though the possibility of linking Mexico's ETS to other programs is provided for in the underlying legislation, credits from other compliance markets are not a near-term option for meeting this demand.
Mexican Registry for the Green Transition (RMX)
The carbon platform MexiCO2 recently announced the development of a new carbon offset crediting standard and registry in partnership with the Mexico Stock Exchange, the Mexican Registry for the Green Transition (RMX). RMX will focus on providing a framework for carbon offset crediting projects in Mexico.d
RMX intends to facilitate both small (<5000 tCO2e/yr) and large (>5000 tCO2/yr) scale project development through adapting major existing international standards (e.g., Climate Action Reserve, Verra, Gold Standard, and standards under Article 6.4 of the Paris Agreement) to circumstances and issues specific to Mexico. Priority project areas include waste management, renewable energy, transport, and agriculture, forestry, and other land uses (AFOLU). RMX will issue credits that will be an important source of offsets for Mexico's ETS, as well as state-level carbon tax programs, providing for the use of offsets as a flexibility mechanism.
The RMX is distinct from Mexico's national emissions registry (RENE) and from the national infrastructure that will be needed to authorize projects for use under Article 6 of the Paris Agreement and CORSIA. RMX's development is in its early stages, and there are no official timeframes for implementation.
With this initiative, Mexico joins Brazil, Malaysia, Thailand, and others contemplating and launching their own national standards by adopting methodologies that are better tailored to their local or regional conditions.
While Mexico is poised to expand and align its carbon market with global standards, the use of carbon offsets under the Mexico ETS may complicate efforts to ink trading deals under Article 6.2 or 6.4 of the Paris Agreement. As it grapples with these questions and prepares for a full ETS launch, Mexico could become the first North American nation with a robust, national compliance market, backed by a dynamic voluntary market.
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