Key Theoretical, Policy, and Implementation Experience Considerations for the Mexican ETS: Toward an Equitable and Cost-Effective Compliance Phase

Abstract

This chapter presents a brief overview of the policy design and theoretical environmental economic principles that underpin the concept of emissions trading systems (ETS) as a policy approach to address climate change. It discusses basic environmental economic principles pertinent to the development of market-based solutions to mitigate greenhouse gas (GHG) and co-pollutants. The chapter serves as the technical basis for the broader discussion that this book as a whole presents on the launch of the pilot phase of the Mexican ETS on January 1, 2020. Understanding international program design experiences, theoretical principles, and implementing best practices is key to ensuring Mexico’s success in the transition from the pilot or learning phase to an operational ETS compliance system. This will ensure Mexico fulfills its national climate policy goals and nationally determined contributions (NDC) under the Paris Agreement in a cost-effective manner, while also providing compliance flexibility to the industrial sectors covered under the program. A well-designed ETS ultimately provides the right incentives for industrial carbon emission reductions to drive cost-effective abatement and clean innovation. Secondly, this chapter presents a more in-depth review of policy developments focusing specifically on key implementation lessons from the two most advanced ETS systems in operation to date: (1) the European Union ETS and (2) California’s cap-and-trade program. In short, this chapter outlines a set of key policy lessons and design parameters to support the transition from the pilot Mexican ETS to an operational compliance phase in a socially just, environmentally sound, and cost-effective manner.