EcoAct North America Nature-Based Solutions Portfolio & Partnerships Manager, Matthew Borden, recently travelled to Guadalajara, Mexico for the Mexico Carbon Forum. This conference takes place every year and the EcoAct team partook to learn about Mexico’s voluntary carbon markets. This year was pivotal, with the Mexican emissions trading system (ETS) scheduled to launch in 2023, after a pilot phase. And in the voluntary carbon markets (VCMs), growing international demand is generating major interest while scaling-up development of nature-based solutions and other voluntary carbon projects.
Flying over Western Mexico, the clouds gave way to rich, diverse landscapes from the pine-oak forests of the Western Sierra Madre mountains to the productive valleys of the state of Jalisco. I arrived in Guadalajara for the annual Mexico Carbon Forum. This conference is organized by MexiCO2, a subsidiary of the Mexican Stock Exchange Group dedicated to developing environmental markets and market instruments to advance Mexico’s contribution to the Paris Agreement. The purpose of the conference is to bring together Mexican government representatives, international partners, local non-profits, and private companies to discuss carbon pricing and market developments in Mexico and internationally.
Our team at EcoAct was eager to learn about what is happening in Mexico around progress on the national emission trading system and integration with voluntary carbon markets.
What does the Carbon Market Landscape in Mexico look like?
A major focus at the conference was the future of regulated carbon markets in Mexico. This is seen as the country’s pathway to delivering on its Nationally Determined Contribution (NDC) to the Paris Agreement. Mexico has committed to conditionally reduce its emissions by 22% below a business-as-usual (BAU) scenario by 2030 and up to 36% below BAU, conditional on receiving international support.
Until now, within Mexico’s borders, greenhouse gas emissions have been regulated only at the state-level, and by just a handful of states. This is similar to the United States, where some states have launched emissions trading systems – but national lawmakers have yet to agree on implementing any kind of compliance program, be it a carbon tax or emission caps.
In Mexico, as the Ministry of Environment and other agencies finalize the design of the national ETS, many expect the experience and lessons learned at the state level to influence and strengthen policy design at the national level.
Key questions include which industries to cover in the program, how quickly to reduce emission allowances, whether to permit the trade of allowances among regulated companies, and how to integrate carbon credits from voluntary markets into the compliance program. These decisions will help to put a price on carbon, with the goal of reducing emissions nationally, in line with Mexico’s NDC. Companies within Mexico, with activities included in the national ETS can expect significant changes as the national program shifts from its pilot phase to the first compliance period. For example, during the 2020-2022 pilot phase, companies within the energy and industrial sectors with emissions beyond 100,000 tons of CO2 equivalent per year were given free allowances totalling 270 million units annually. Allowances will begin ratcheting down in 2024, with the introduction of an allowance auction. Revenue from the auctions will be used both to operate the program and to finance emission mitigation activities across the country. Further, agencies are considering including other industries such as aviation and other transportation. Government representatives confirmed that companies will be permitted to retire carbon credits (aka offsets) at a rate of up to 10% of their obligations during the first compliance period. Under the Mexican ETS, rules on eligible GHG crediting programs and methodologies for offsetting are expected to be announced in 2023.
What does the Global Voluntary Carbon Market Landscape look like?
In Guadalajara, I had the pleasure of presenting an overview of the Global VCM at a workshop hosted by IETA’s Business Partnership for Market Implementation (B-PMI), on the sidelines of the Mexico Carbon Forum. I spoke about key trends and emerging governance initiatives in the VCM. While annual credit issuance has doubled from 2019 to 2021, the global weighted average carbon credit price has also increased – nearly doubling from about $2.50 in 2020 to $4 in 2021.
Credit issuance and retirement data from the largest GHG crediting programs (Including CDM, ACR, CAR, GS, and VCS) support what many in the industry have seen; that GHG crediting programs and verifiers are at capacity (stagnating issuances) and that corporates’ appetite for offsets (steady retirement growth) is only going up in the short term. In the long term, demand is expected to multiply as companies ramp-up their net-zero commitments toward 2030 and 2050 milestones. The supply crunch is likely to get worse before it gets better.
EcoAct Graph of 2022 Demand showing steady retirement growth
As the Global VCM grows, we see maturation through an increasing focus on quality and integrity. As a founding member of ICROA, EcoAct helped establish the Code of Best Practices, which ensures ambitious and high-integrity carbon management on the part of offsetting companies. The Code also requires the use of high-quality carbon credits, as certified by standard bodies. However, not all VCM participants follow such standards.
In response to market demand, governance bodies are promoting new frameworks to clarify companies’ offsetting claims and standardize quality thresholds across different GHG crediting programs. The Voluntary Carbon Markets Integrity Initiative (VCMI) published their provisional Claims Code of Practice for companies to use in making credible offsetting claims. And the Integrity Council for the Voluntary Carbon Market (IC-VCM) recently closed a public consultation on its Core Carbon Principles and Assessment Framework, meant to set a new, universal standard for high-quality carbon credits. EcoAct provided feedback on the VCMI Code here and our comments on the IC-VCMI code are forthcoming.
What is in store in Mexico, for regulated companies, project developers, as well as nature and its stewards?
Mexico has an abundant natural resource endowment and great potential to develop carbon projects that conserve nature, enhance carbon stocks, and generate social and environmental co-benefits. Already, the country is home to a significant number for forestry projects using CAR’s Mexico Forest Protocol, and new projects of diverse mitigation activities are coming online. With constrained global carbon credit supplies, Mexico is a fertile ground for new carbon project development.
We expect that credits could be used to meet compliance requirements under the national ETS, as well as for voluntary offsetting around the world. Understanding how to effectively harness Mexico’s carbon mitigation potential in an informed and compliant manner will be essential to helping companies meet their net-zero commitments and helping Mexico meet its contribution to the Paris Agreement.