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Helping Mexico design an effective climate policy

MIT researchers are working with the Mexican government on carbon pricing options to meet the country’s climate goals under the Paris Agreement.
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As nations gathered in Bonn, Germany, for this year’s UN climate summit, one item on their agenda was determining whether pledged climate efforts are sufficient to achieve the targets of the 2015 Paris Agreement. Researchers at MIT have been working with the Mexican government to explore policy options that can help the country meet its international commitment of reducing greenhouse gas emissions 22 percent by 2030, compared with business as usual. According to their analysis, this could be achieved by putting a modest additional price on carbon.

Carbon pricing has emerged as an important policy tool for countries (and subnational governments) as they work to reduce greenhouse gas emissions, the predominant cause of climate change. Policymakers confront a choice when developing carbon pricing policies: They can tax carbon emissions directly; implement a system known as cap-and-trade, wherein governments issue a limited number of pollution permits and allow companies to trade them; or they can use a combination of the two.

The MIT analysis, led by researchers Michael Mehling, deputy director of the Center for Energy and Environmental Policy Research, and Emil Dimantchev, a graduate student in the MIT Technology and Policy Program, focused on this third, hybrid approach, exploring how Mexico can implement a cap-and-trade program alongside its existing carbon tax. They identify and discuss a number of different combinations, for instance using the tax as a floor price to keep carbon prices from falling too low.

The authors concluded that adding a relatively low carbon price — $3 per ton of emissions in 2030 — to Mexico’s existing climate policies, including a carbon tax already in place, would be enough to help the country meet its commitment of reducing emissions by 22 percent compared with a baseline in which no new policies are adopted to slow Mexico’s emissions growth. This 22 percent reduction would cut Mexico’s emissions growth roughly in half, to less than 1 percent per year.

The analysis found that a number of factors, including low natural gas prices and a requirement that 35 percent of Mexico’s electricity sales must come from clean energy sources by 2024, would contribute to slowing emissions growth. A hybrid tax and cap-and-trade system would complete the picture, helping to drive emissions growth even lower.

Mehling highlighted Mexico’s experience in accelerating its rate of economic growth while decelerating its rate of emissions growth. “Mexico is proving to the rest of the world that a developing country can rein in emissions while continuing to grow its economy,” he says.

In 2012, Mexico’s Congress unanimously passed the General Law on Climate Change, making Mexico the first developing country with a comprehensive climate change law. In October 2016, Mehling and Dimantchev began advising the Mexican federal government on the design of its national climate policy.

Dimantchev, who is also a research assistant with the research group of MIT Associate Professor Noelle Selin and with the Joint Program on the Science and Policy of Global Change, says this kind of analysis can help policymakers manage uncertainty when developing long-term policies. “Our ability to forecast the future is very limited, which is why it’s important that policymakers not design policies based on a single projection of the future,” he says.

For this reason, Dimantchev notes, the report uses Monte Carlo simulations to estimate a range of emissions pathways and their implications for Mexico’s climate policy, allowing the authors to make recommendations for a hybrid carbon pricing policy that keeps prices from going as low as zero or as high as $100 or more per ton. “To induce action from the private sector, climate policies have to be more predictable, something with which hybrid carbon pricing can help,” Mehling adds.

The MIT researchers worked closely with officials from the federal Ministry for the Environment and Natural Resources (SEMARNAT) and the Ministry of Finance (SHCP), including Juan Carlos Arredondo Brun SM ’04, who now serves as director general for climate change policies at SEMARNAT, and Carlos Muñoz-Piña, director general for revenue policy at SHCP. Earlier this year, they traveled to Mexico City to discuss their initial findings with officials from both agencies, including Rodolfo Lacy Tamayo SM ’05, the undersecretary of planning and environmental policy at SEMARNAT.

“The MIT report has been helpful to my team as we explore how our existing carbon tax can operate alongside a future cap-and-trade system in Mexico,” Lacy says.

The German Agency for International Cooperation, which operates the Mexican-German Climate Alliance, funded the analysis.

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