Emissions Trading System The Challenge of Environmental Integrity

Already in 2018 Activists from Greenpeace hold a sign reading in Spanish “The air in Mexico kills”.
Already in 2018 Activists from Greenpeace hold a sign reading in Spanish “The air in Mexico kills”. Now Mexico is creating an emissions trading system. | Photo (detail): Rebecca Blackwell © picture alliance / AP Images

Mexico is the first country in Latin America to create an emissions trading system to reduce greenhouse gases. What does this controversial instrument consist of and what are the primary challenges it faces?

By Fabio Arturo López Alfaro

After the politicization of environmental issues sparked by the United Nations Climate Change Conference (COP 21) in Paris, Mexico committed to an unconditional 22 percent reduction in its greenhouse gas emissions by the year 2030 – this percentage will increase to 36 percent if there is international support, strengthening, and funding. In order to achieve this, among other things, the State opted to create an emissions trading system (ETS) for Mexico. But what is emissions trading?

The ABCs of Emissions Trading

Emissions trading systems are a type of carbon market whose aim is to mitigate emissions on regional, national, or state levels. Currently, they have been implemented in several jurisdictions and are being considered in several others. While their functioning depends on each particular legislation, there are two key components they all share: the emissions limit, which is the maximum amount of greenhouse gases that regulated sectors can emit, and the emission allowances, which are essentially permits to emit greenhouse gases equivalent to the global warming potential of one ton of CO2 (tCO2e).

Currently, one part of the emission allowances is assigned to the system’s participants free-of-charge to protect industrial competition, another is sold at auction, and another is safeguarded by the authority in case the emission allowances are needed during the cycle, allowing participants to purchase them.  

The synergy between these components makes it possible for emissions trading systems to work. Given that the number of emission allowances depends on the system’s cap, the participants must trade them to comply with the imposed mitigation obligations. For example, some may invest in structural changes within their organization to mitigate emissions while others might opt to purchase emission allowances at auctions or in the secondary market with other participants. The freedom to choose how to manage emissions encourages innovation, modernization, and the invention of new technologies in regulated industries.    

Since the number of emission allowances depends on the established cap, even with each participant’s freedom to choose mitigation actions, the sum of the total contributions from the participating industries will always be under the limit. Thanks to the concordance between an environmentally ambitious cap and the trading of emission allowances, the ETS represents an opportunity to achieve the jurisdictions’ climate goals.  

In theory, the aforementioned makes sense, but emissions trading has proven to be a double-edged sword, which is why it has not escaped fair criticism.

Economic Development and Environmental Protection?

Setting a price on emissions while keeping costs low for climate action is precisely what has sparked this controversy. On the one hand, from the neoliberal perspective on sustainable development, this is the most cost-effective way to reduce emissions. The mitigation capacity is reflected in the numbers reported by various jurisdictions, such as the EU Emissions Trading System (EU ETS).  

However, civil society and some environmental organizations point out the contradiction resulting from melding economic development with environmental protection. This has led to the labeling of carbon markets as greenwashing policies, under which stakeholders pretend to protect environmental integrity and work toward climate goals.

Reaching the carbon markets’ present form has not been easy. Although the system has undergone a number of changes, corruption is one of the vices that has delegitimized its original purpose the most, as it has given rise to dishonest practices within the market or to cunning arguments surrounding accountability. It is no surprise that some environmental organizations insist on excluding these initiatives from the international discussion.  

While emissions trading is the object of well-founded criticism, it is most likely that mitigation strategies based on the market will continue to be discussed and promoted from the highest levels. Proof of this is the imposing unfinished business from the Paris Agreement: the finalization of the rules for the international carbon market, included in Article 6.

Perhaps it is too soon to establish a market with a global scope when the results have been mixed and there is still much to learn, but it is necessary to understand that these systems will continue to be developed around the world. Furthermore, to ensure their proper functioning, it is important to monitor the jurisdictions that apply them.

The Case of Mexico

The Emissions Trading System of Mexico is the first in Latin America, and, to make it an example of success in the region, first, several challenges must be addressed. Our ETS has not only inherited trying issues that are intrinsic to the instrument, but it also faces variables such as the country’s unpredictable political situation and its institutions’ different capacities.

Mexico has support from the German international cooperation agency Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH and the World Bank’s Partnership for Market Readiness in order to improve the instrument, align it with global climate policy, develop skills, and learn from international experience. The objective is to establish an emissions trading system that is truly functional.

I think carbon markets are here to stay, and perhaps the best option is to work toward their proper operation and ensure the fulfillment of their environmental mission. They are imperfect instruments and, therefore, we cannot lose sight of the lessons learned from international experience. I believe this is the only way to safeguard the planet’s future.