In the context of Mexico's Energy Reform and National Climate Change Strategy (see " Mexico Implementing Clean Energy Reform," The Climate Report, Spring 2018), on October 1, 2019, the Ministry of Environment and Natural Resources (Secretaría de Medio Ambiente y Recursos Naturales, or "SEMARNAT") published in the Federal Official Gazette, a national carbon market pilot program ("Pilot Program").

The Pilot Program aims to establish the preliminary basis for the operation of the country's first carbon market. The initial operation includes only stationary sources from the energy and industrial sectors generating more than 100,000 tons of direct emissions of carbon dioxide and will last for 36 months counted as of January 1, 2020 (ending December 31, 2022).

In accordance with the Pilot Program, SEMARNAT will post on its website the amount of "emission rights" that will be assigned free of charge to each participant, which will be deposited annually in the accounts of the same through a government-operated follow-up system (by October 24, 2020, at the latest).

Not later than November 1 of each calendar year, participants in the Pilot Program will be required to file with SEMARNAT the number of emission rights equivalent to the emissions reported and certified by an accredited verification unit from the preceding year. This obligation must be complied with as of 2021 with respect to emissions generated in 2020.

The participants who comply with the abovementioned obligation will be allowed to use the excess "emission rights" to engage in transactions with other Pilot Program participants or comply with their obligations in subsequent compliance phases within the Pilot Program. Transactions with "emission rights" imply the transfer of the same among the participants through SEMARNAT's follow-up system.

Likewise, the Pilot Program establishes flexible compliance mechanisms with its terms, including: (i) a compensation scheme through eligible mitigation projects or activities; or (ii) recognition of early actions for mitigation projects or activities that received external compensation credits prior to the start of the Pilot Program.

SEMARNAT will evaluate the results and information generated by the implementation of the Pilot Program by the first half of 2021 and will then publish the transition rules for the implementation of the definitive operating phase, formally establishing Mexico's Carbon Market Program.

It is important to note that the Pilot Program's reporting obligation does not exempt participants from complying with their greenhouse gas ("GHG") emissions monitoring, reporting, and verification obligations under other applicable laws and regulations, including 2012's Climate Change General Law ("CCGL") and its implementing regulations.

Despite the fact that CCGL has been in place for several years, there remains some confusion regarding how to comply with CCGL reporting requirements, including:

  • Lack of GHG calculation methodologies for several sectors, including food and beverages, landfills, and construction. In these cases, CCGL establishes that methodologies included in international standards or ad hoc methodologies can be proposed and adopted by the operations prior to SEMARNAT's approval. Nevertheless, SEMARNAT is not issuing such approvals and has adopted the position for operations to use "technically reasonable" calculation methodologies, generating uncertainty on what should be understood as such and confusion among the generators and verification units; and
  • Uncertainty of the procedure to report emissions generated by different facilities from the same corporate group (i.e., how to report GHGs from a subsidiary or branch company in the name of its parent and how to include all facilities in such a report since GHG reports from several productive sectors are generally filed per facility).

The mentioned challenges have forced the regulated sectors to find, along with advisors and authorities, legal pathways to assure compliance with CCGL's obligations.

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