The Mexican emission trading system and the electricity market : influence of market structures and market regulation on the carbon market : case study report

This report analyses the interaction of the pilot Emissions Trading System (ETS) and the electricity market in Mexico. It does so along two main questions: a) How do ETS design features affect the environmental effectiveness of the system and the quality of the carbon price signal? b) How do electricity market design features affect the carbon price induced abatement in the power sector? Due to the absence of a carbon price during the pilot phase of the Mexican ETS, the assessment is based on expected effects based on publicly available data and expert interviews. The Mexican emissions trading scheme (ETS) started operation in 2020. The first three years are designated as a pilot phase with the expressed aim to gather experience in the implementation of an ETS in Mexico. At the time of writing, the first compliance cycle had not yet been finalized and – due to the specific rules for the pilot phase – there was not yet an established CO2 price. The Mexican electricity market is undergoing a period of great uncertainty, both in terms of the regulation of the electricity market itself but also in term of the ETS. It remains to be seen to which extent the energy reform of 2014 will be rolled back and which level of ambition the future climate policy will have. Together with the special rules during the pilot phase of the Mexican ETS it is unlikely that the trading system will have a noticeable impact in the short term on demand, supply, or investments. This case study is part of the project “Influence of market structures and market regulation on the carbon market” that aims to identify the impact of market structures and regulations on carbon markets and to investigate the interdependencies between carbon and energy markets in Europe, California, China, South Korea, and Mexico.