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...