6_energy transition_a path toward sustainable development for mexico

Energy Transition: A Path TowardSustainable Development for Mexico

Lourdes Melgar

This essay looks at the current situation of the Mexican energy sector as the nation’s oilproduction is declining and the government attempts to abate greenhouse gas emissions.It argues that the energy reform approved in 2008 was limited in scope to addressing thechallenges ahead. It states that the incentives to undertake a profound transformation ofthe energy sector encompass economic, energy security, and climate change consider-ations. It advances that Mexico should embrace an energy transition to a low-carboneconomy as a path toward sustainable development. The transition to a lower-carbonenergy sector requires innovative public policies and the political will to create a newinstitutional framework. The final section analyzes the potential to and the barriers toprompting this transition.

Este ensayo considera la situación actual del sector energético mexicano en un contexto decreciente caída de la producción petrolera y de la necesidad de llevar a cabo políticastendientes a mitigar las emisiones de gases de efecto invernadero. Se argumenta que laReforma Energética de 2008 presenta serias limitaciones para responder a los retos finan-cieros, de seguridad energética y de cambio climático del país. Por ello, se propone queMéxico emprenda una profunda transformación de su sector energético a través de latransición energética hacia una economía baja en carbono. Esta transición ofrece a Méxicoun camino hacia el desarrollo sustentable, pero requiere de políticas públicas innovadorasy de la voluntad política para crear un nuevo marco institucional. En la última sección seanalizan el potencial y las barreras para avanzar hacia la transición energética.lamp_6 98..113

Key words: energy policy, climate change, energy reform in Mexico, low-carbon economy

Over the past decade, an international consensus has been emerging regard-ing the need to address simultaneously energy security and climate change

concerns. As scientific evidence has grown on the origins and potential destruc-tive effect of anthropogenic greenhouse gas (GHG) emissions, policy makershave been designing policies aimed at advancing toward a low-carbon economy.Given its contribution to the problem, the energy sector is key to the solution.Achieving the double objective of ensuring energy security and mitigating green-house gas emissions is no easy task. Energy policy requires long-term planningand entails decisions that have an effect over the decades to come, whereas

Latin American Policy—Volume 1, Number 1—Pages 98–113

mitigation strategies carry a sense of urgency and a degree of uncertainty thatclash with the short-term goal of ensuring the availability of energy resources atthe most competitive price. As rarely before, in 2009, climate change issues,energy security matters, and economic concerns have converged, pushingforward the need to solve the “3Es” equation (environment, economy, andenergy) through a paradigm shift in the way energy is produced and used. Thisis the underlying force behind the concept of energy transition.

The preparations of the United Nations Climate Change Conference in Copen-hagen of December 2009 continuously brought to the table the need to limit theuse of hydrocarbons and develop cleaner energies. This objective was, at first, arequirement for oil-dependent countries wanting to reduce their reliance onimported hydrocarbon, independent of climate considerations. Thus, some coun-tries initiated the path away from fossil fuels as early as the 1970s. As the inter-national pressure to undertake mitigation commitments has grown, so have thechallenges for countries with significant consumption of coal, oil, and natural gasto diversify their demand. Moreover, despite the growing international experi-ence, the conversion to a low-carbon energy sector remains an expensive propo-sition. The arrangements to finance this transition are at the heart of the currentinternational negotiations and will significantly affect the outcome.

Few countries bring to the forefront the dilemmas and challenges of meetingthe triple objective of ensuring energy security, reducing greenhouse gas emis-sions, and simultaneously promoting sustained economic development thatMexico does at this point in time. This oil-producing and -exporting country hasentered the natural phase of maturity because its major oil field, Cantarell, israpidly declining, and the alternatives have proven to be less enticing thanexpected. For the first time in almost three decades, Mexico is showing a hydro-carbon exchange balance of less than one million barrels a day. The effect ongovernment finances, as well as on energy security, will be significant. At thesame time, Mexico’s GHG emissions have been growing, making it one of the top10 emitters in absolute terms (WRI, CAIT, 2009).1 In 1992, Mexico was clearly adeveloping country; today, it is considered an emerging economy that is beingcalled on to undertake serious mitigation action.

The case of Mexico allows us to fully explore the dilemmas faced by anemerging economy as it seeks to move to a low-carbon economy in an attempt toreach its development goals while meeting its international responsibilities. Thisessay looks at the current situation of the Mexican energy sector. It argues that theenergy reform approved in 2008 was limited in scope to address the challengesahead. It proposes that the incentives to undertake a profound transformation ofthe energy sector encompass financial, energy security, and climate change con-siderations. It advances that Mexico should embrace an energy transition to alow-carbon economy as a path toward sustainable development. The final sectionanalyzes the potential to and barriers against prompting a transition to a low-carbon economy.

Mexico’s Energy Reform of 2008: An AppraisalBy 2008, the Calderón Administration became deeply aware of the impending

crisis of the Mexican oil industry. The output of Mexico’s giant oil field, Cantarell,

Energy Transition in Mexico 99

which in 2004 represented more than 60% of total production, was rapidly col-lapsing, restitution of reserves was at historically low levels, and major bottle-necks were apparent in the upstream and downstream side of PetróleosMexicanos (PEMEX), the national oil company. Given that oil revenues accountedfor more than 35% of government total revenues,2 the accelerated decline in crudeproduction foretold of a potential financial crisis for the Calderón Administra-tion. It is in this context—well before the international financial crisis struck theworld—that President Calderón presented, in March 2008, a diagnosis of the stateof the oil sector and, on April 8, 2008, introduced before Congress an energyreform bill.

Considering Mexico’s political context, the president’s move was bold andcourageous. Since 1938, oil has been equated with national sovereignty, and thestate’s absolute control over oil resources, exploration, production, and process-ing is a fundamental emblem of the country’s identity.

Given the sensitive nature of the topic, the initiative of the Calderón adminis-tration was based on four premises: no constitutional change, no risk contracts,no privatization of PEMEX, and no challenge to the PEMEX union. This initiativewas the result of an internal negotiation within the federal government andaimed to address the decline in production and in the restitution of reserves, theincreasing importation of refined products (40% of Mexico’s gasoline isimported), the bottlenecks in product transportation, and serious managerialshortcomings within PEMEX, yet the underlying objective of the presidentialproposal was to maximize oil revenues to avert the collapse of governmentfinances.

The initiative took into account what was politically feasible and not what wasactually necessary to tackle the crisis looming in PEMEX. It was called “energyreform,” but centered on the oil sector. In this regard, it was limited in scope andhad a shortsighted view of the challenges and potential of the Mexican energysector, yet it had an unexpected advantage; for the first time, Congress, theprivate sector, and civil society undertook an in-depth discussion of the presentand future of the energy sector. Given the political distress the presidential billgenerated, the Senate Energy Commission convened a public forum on thematter. From May 13 to July 22, 2008, hearings were held, gathering more than160 experts who covered pertinent aspects of the issue. As a result, the scope ofanalysis and the range of solutions were wide. After the hearings, both opposi-tion parties in the Senate, the Partido Revolucionario Institucional and the Partido dela Revolución Democrática, issued their own initiatives, taking as a point of depar-ture the presidential one.

On November 28, 2008, Mexico’s energy reform was issued, containing sevennew laws: five directly related to PEMEX and two aimed at addressing issues ofenergy transition to a low-carbon economy. The result was greeted with initialeuphoria. The executive and the legislative branches both viewed it as a signifi-cant political success. A consensus had been reached on measures to moveMexico’s energy sector forward. The reform provided PEMEX with a new cor-porate governance, granting it greater budgetary and administrative autonomy. Itbroadened the PEMEX board to include four professional members, created theNational Commission on Hydrocarbons, strengthened the Energy RegulatoryCommission, revamped the National Commission for Energy Savings into the

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National Commission for the Efficient Use of Energy, and set the bases for thenew by-laws and regulations for contracting for PEMEX, as well as for promotingrenewable energies and energy efficiency.

A year later, however, it became evident that the agreed-upon reform hadsignificant shortcomings; some of them derived from its content, others from itsimplementation. The designation of the newly created high-level positions hasbeen the result of negotiations, with political considerations overriding technicalrequirements. By-laws and regulations are often vague, without clear goals oradequate mechanisms to reach the stated objectives. In the case of the oil industry,the approved by-laws are already under legal dispute, with questions of uncon-stitutionality having been raised, including by advocates of opening the oil sectorto private investors (Grunstein, 2009). The unequivocal proof of the limits of theenergy reform of 2008 is that, in his State of the Union Address of September 2009,President Calderón called for a second energy reform, but this time “the neededone, not the possible one.”

Advocates of the approved reform often state, not without some merit, that itis too early to evaluate its impact. During this first year, the architecture of thenew design has been slowly put into place, yet given the magnitude of theproblem faced by the Mexican energy sector, it is becoming increasingly evidentthat the tools provided barely address the short- and medium-term challenges ofthe oil industry. It is impossible for a new legal structure to rapidly reverse yearsof abandonment of the oil industry. Today, PEMEX is struggling as a result ofyears of financial exploitation, appalling underinvestment, poor decision making,and a governmental policy of short-term benefits to the detriment of the healthand viability of the oil company, which has been run not as an enterprise but asan infinite source of revenue for the government.

Output at Cantarell, the giant oil field that gave power and prestige to theMexican oil industry, has fallen from 2.2 million barrels a day at its peak inDecember 2003 to 659 thousand barrels a day in July 2009. According to PEMEX,crude production fell from 3.383 million barrels a day in 2004 to 2.621 in 2009. Partof the lost production from Cantarell was made up with production fromKu-Maloob-Zaap, Ixtal-Manik, and Crudo Ligero Marino, which produce lightercrude, improving the quality of the Mexican mix, but Chicontepec, the chosenalternative to balance production, has failed to yield the expected outcome (SuroPerez, 2009).

As a result of the significant decline in oil production, exports fell from 1.793million barrels a day in 2006 to 1.1 million barrels a day in August 2009. Inaddition, the imports of refined products have escalated. For the first time since1981, Mexico has registered a hydrocarbon balance less than 1 million barrels aday (Lajous, 2009). Some analysts contend that within the next decade, Mexicocould cease to be an exporting country, and increasingly, some argue that energypolicy should consider the possibility of setting limits on oil exports to pace therate of production and consumption of Mexico’s limited oil resources.

There are fundamental questions that ought to be addressed with regard to thefuture evolution of the Mexican oil sector, but in the short run, the main concernof the government is the effect that the collapse of net exports is having on itsrevenues. Between 2008 and 2009, oil revenues fell from 36 to 28% of governmentrevenues, partly because of the decline in oil prices, but also from the loss of net


hydrocarbon exports. Mexico has been unable to seriously address its fiscaldependency on oil revenues. The country is in urgent need of true fiscal reform,which would expand the taxable base and provide alternative sources of income.Without innovative fiscal reform, Mexico will be unable to promote sustainedeconomic development in the years to come.

Even in the best-case scenario, in which Mexico was able to reverse the declin-ing trends in its oil production and reserves, even if a scheme were agreed uponto rationally exploit existing reserves in the deep waters of the Gulf of Mexico, itwould take close to a decade to start new production. Hence, a second energyreform solely centered on the petroleum industry would not suffice to addressthe financial and energy security challenges the nation is facing. Additionally,Mexico is increasingly committing to undertaking its international responsibili-ties with regard to climate change. Mexico’s intention to abate emissions hasprofound implications for the energy sector, given the high concentration offossil fuels in the national energy balance. Hence, an energy reform that focusesmostly on increasing hydrocarbon production would fail to provide adequateanswers to the challenges ahead.

Thus far, the greatest shortcoming of Mexican energy reform is that it does notconsider energy policy globally and does not take into account crosscuttingissues such as climate change. In addition to being one of the top GHG emittersin absolute terms, Mexico is a country with high vulnerability to climate change.Hence, it has an ethical responsibility to promote the adoption of a comprehen-sive, legally binding accord and to move toward a low-carbon economy. Thus far,the international commitments Mexico has undertaken with regard to climatechange are not being translated into public policies that abate emissions at therate the country is claiming they would. Some of the policy documents thegovernment has recently issued have important limitations, particularly withregard to actions for the energy sector. The stakes are high, and the challengeahead is enormous, yet the transformation of the energy sector could be theanswer to directing the country back onto the path of sustainable development, asit addresses its “3E” equation: economic growth, energy security, and environ-mental concerns.

Energy Transition as a Mitigation StrategyEnergy transition to a low-carbon economy is a response to simultaneously

addressing energy security and climate-change concerns. Until recently, bothpolicy objectives, aimed at ensuring the availability of energy resources at com-petitive prices and mitigating greenhouse-gas emissions, had been disconnected.In the 1990s, the International Energy Agency (IEA) adopted a multidimensionalapproach to energy security that for the first time included an environmentalvariable, but it was not until this century that a conceptual shift took place interms of energy policy design.

Indeed, 2005 marks a turning point with regard to climate change conscious-ness and the need to take action, particularly in the energy sector. The KyotoProtocol entered into force, and the Inter-Governmental Panel on Climate Change(IPCC) presented a report stating that climate change was a greater problem thanhad been thought. With their significant destructive power, hurricanes Katrina


and Rita generated public apprehension concerning climate change. A majorinternational ministerial meeting gathered in Paris and announced the return ofnuclear power as an option to advance energy security and address climateconcerns. Most important, the Group of Eight (G8) invited Brazil, China, India,Mexico, and South Africa to join them in their deliberations in Gleneagles, estab-lishing the G8 + 5 dialogue on energy and climate change. At that meeting, the G8mandated that the IEA provide technical support to promote policies that wouldfoster compliance with the Gleneagles Plan of Action on “Climate Change, CleanEnergies and Sustainable Development.”

Two years later, in 2007, the IPCC presented an even more alarming report,concluding that, under a business-as-usual scenario, temperatures could rise upto 6°C by the end of the century. According to the latest data published by theWorld Resource Institute, the generation and use of energy accounts for 66% ofthe world carbon dioxide equivalent (CO2-e) emissions, the power sector pro-duces 24.9%, and the transportation sector produces 14.3%. Given the majorcontribution of the energy sector to the problem, stabilizing emissions at 450parts per million (ppm) of CO2-e by 2100 would require a significant change inthe way energy is produced and used. A viable agreement would necessitate theactive participation of emerging economies in the mitigation effort.

The proposal advanced by the IEA, which has been guiding the positions ofmost Annex 1 countries, was updated in 2009, before the UN Climate ChangeConference in Copenhagen. It delineates the following scheme for a 450-ppmscenario with the aim of limiting temperature rise to 2°C by the end of thiscentury (International Energy Agency, 2009b, p. 202):

• Organisation for Economic Co-operation and Development (OECD) Plus countries(including Mexico and Korea, two non-Annex 1 countries members ofOECD) would have to establish a cap-and-trade system for the power andindustrial sectors, adopt international sectorial agreements for industry andtransport, and implement national policies and measures for buildings.

• Other major economies would have to adopt international sectorial agreementsfor industry and transport and implement national policies and measures forpower generation and buildings.

• Other countries would have to undertake only national policies.

• In addition, international aviation and shipping would be subject to interna-tional sectorial agreements binding for all countries, and as of 2021, othermajor economies would have to participate in an international cap-and-trademechanism for the power sector and industry.

In other words, countries will have to start down the path toward lower-carbonenergy production, transportation, and use.

Addressing climate requires fundamental changes in the way things are donethat go well beyond the deployment of new technology; it calls for a new rangeof policies and regulations, new institutional frameworks, new forms of indus-trial organization. It entails a profound revolution in the realm of ideas.

Policy makers and private investors will have to make decisions using a risk-management approach. As Professor Mort Webster from the Massachusetts


Institute of Technology has pointed out, no technology is a silver bullet. There aresignificant uncertainties about the potential of future technologies, and localconditions will have to be assessed to determine the best array of options. Thefuture energy system will be a mix of several fuels and technologies. The most-effective strategy for public policy makers and private investors will be to adopta sequential approach to determining portfolios and generating options(Webster, 2009). This energy system will require a new financial architecture tosupport it, which will call for additional investments in the energy sector, on theorder of $10,500 billion, between 2010 and 2030 (International Energy Agency,2009b, p. 257). It will also require building, at the national and international level,the institutional infrastructure needed to launch a low-carbon economy.

In terms of energy policy, the move toward a lower-carbon economy entailsfostering energy efficiency; promoting fuel diversification; including nuclearenergy and rapidly expanding renewable resources; developing and swiftlydeploying new technologies for the generation of energy and for carbon captur-ing and storage; implementing a cap-and-trade mechanism to limit emissionsand to generate resources to finance this profound transformation of the energysector; and the use of fiscal instruments, such as a carbon tax, to favor carbonreduction.

Just as the 19th century saw the reign of coal and the 20th century that of oil, the21st century is looking to be the century of clean energies. Nonetheless, as theIEA stresses, fossil fuels will remain the dominant source of primary energy atleast for the first half of the century, representing up to 80% of the share of worldenergy demand between 2007 and 2030. In a business-as-usual scenario, duringthe same period, the projected growth of coal demand would be 53%, and that ofnatural gas, 42%. The demand for oil would recover starting in 2010, rising 24%over the next 20 years, reaching 105 million barrels a day in 2030 (InternationalEnergy Agency, 2009b, fact sheet). In a 450 ppm of CO2-e stabilization scenario, in2030, fossil fuels would constitute 68% of global primary demand. Even withstringent policies to curb the demand of fossil fuels, under this scenario, by 2030,the demand for natural gas and oil would be higher than in 2007; only thedemand for coal would decline relative to 2007 levels (International EnergyAgency, 2009b, p. 195).

Given the lifespan of energy infrastructure, the required investments to buildnew plants, the cost of fuel switching, and the technology needed to improveefficiency and reduce emissions, the change to a low-carbon energy systemcannot be an immediate one. It is a path that involves a transition period duringwhich, as Gramsci would say, “the old is dying and the new is yet to be born.” InMexico, this stage is being called “energy transition,” although some scholarsprefer the phrase “energy transformation” (Universidad Nacional Autónoma deMéxico, 2009). International agencies and other governments favor such terms as“green growth,” “lower-carbon economy,” and “move towards clean energies.”Recently, the IEA coined the expression “low-carbon energy revolution,” aphrase that captures the magnitude of the challenge ahead.

It is an enticing proposition for policy makers worldwide to have the rareopportunity to design and build a new architecture for the realm of energy, withits technological, financial, political, and social structures. From the perspectiveof energy analysts, the world is moving in fascinating directions: Current debates


are becoming dated, as emerging alternatives require innovative thinking andraise new concerns. It is also a time when major interests are at stake, leading tobattles over the outcome. In the power industry, for instance, arguments overprivately owned versus state-run electricity sectors lose relevance in the face ofthe arrangements needed for deploying smart grids, which would allow for amore-efficient entry of power generation into the grid, maximizing the advan-tages of each source of production, generating savings for producers and con-sumers, and leading to significant abatement of emissions. The launching ofsmart grids would entail a new form of organization for the electricity sector.

Most OECD countries already have started down the path toward energytransition. Within the context of climate policy, the European Union (EU) has putin place an emissions market and adopted stringent policies to promote renew-able energies and reduce CO2 emissions. The EU has a 20% target for renewableenergies by 2020. For its part, the Obama Administration has taken seriously theneed to mitigate emissions in the United States, the second-largest emitter inabsolute terms after China. Significant steps were taken in designing a compre-hensive energy transition policy with the Waxman-Markey Act, which passedCongress in the summer of 2009 and is currently being considered by the U.S.Senate as the Boxer-Kerry Climate Bill. Despite the tough debate and arduousnegotiations taking place in the Senate, it is foreseeable that the United States willeventually approve a blueprint to move toward a lower-carbon economy, and thatit will do so with the needed instruments to support it.

As mentioned before, for energy security reasons, some countries moved onto the path of lower hydrocarbon consumption early on. One such country wasFrance, which in the 1970s decided to turn to nuclear power generation to reduceits energy dependence. As a result, the country was able to cut its emissions by athird long before the question became an issue and ensure its energy security.Other countries, such as Denmark, Germany, and Spain, decided to promote thedevelopment of renewable energies in the 1990s and used a wide range of fiscaland regulatory instruments to spur their deployment. Some of these policiesincluded fiscal incentives to the cost of capital, soft credits, feed-in tariffs forgreen energies, and green quotas for power generation. In the developing world,Brazil became a world leader in biofuels after years of governmental support forresearch and development of ethanol, in addition to regulations for fuels andautomobiles that made mandatory the use of biofuels. The Brazilian policy wasdevised well before it became the oil-producing nation it is today, launching thecountry on to the path of lower-carbon energy, given that its power generation ismostly hydro-based. (Brazil’s GHG emissions are mostly derived from its agri-cultural sector, with deforestation a primary concern.)

The alternatives to fossil fuels are not without their own downsides. Cleanerenergies might produce no GHG emissions or smaller quantities of them, butthere are other considerations that ought to be taken into account. For instance,not all biofuels are equal; some require huge amounts of water in their produc-tion processes, and others, such as those made out of corn, generate more emis-sions than they limit and disrupt the food-supply chain, raising serious concernsover food security. Nuclear power has the advantage of delivering base-loadgeneration with zero emissions, but concerns about radioactive waste disposal,public acceptance, and risks of proliferation have yet to be solved. Wind and solar


energies are intermittent; sites with optimum conditions are not necessarily closeto the grid, and they face opposition to their deployment in some communities.

In designing policies for a lower-carbon energy sector, policy makers have totake into account the crosscutting nature of climate change, internalize the exter-nalities, price carbon so as to compare alternatives on an equal basis, and includea diverse energy matrix.

Thus far, in energy policy, the leading comparative element has been cost,giving an advantage to the cheapest options. For instance, in the power sector,coal-fired generation plants tend to be favored because the cost of a kilowatt-hourproduced is cheaper than that generated in a wind-power plant or a nuclearreactor. The initial cost of capital in a coal-fired plant is more than double that ofa gas combined-cycle plant, but the cost of fuel is one-fourth. A nuclear powerplant requires an initial investment almost 50% higher than that of a coal-firedpower plant, yet the cost of fuel is almost half that of coal, and the heating factoris higher. If GHG emissions were taken into account in the comparison and thecost of CO2 was factored in, the results for the most-competitive options would bedifferent. Decision makers need to consider the new variables urgently becausethey are choosing alternatives that will lock in certain technologies with theirresulting emissions for decades to come.

Over the past few years, most progress in terms of energy transition has beenobtained in the power sector. Improvements have been attained in energy effi-ciency for buildings and appliances, and steps have been taken to move forwardin the transportation sector, even if the results are still modest at the commerciallevel. Energy transition requires a profound transformation of society, a funda-mental change in consumption habits, and an awareness of the need to protectour environment. Some fear that the move to a lower-carbon economy will bringabout a decline in standards of living, although it could be argued that we arebeing offered the opportunity to improve our quality of life, because we wouldadopt new patters of production, consumption, and behavior that could becomethe motor for sounder, more-sustainable development.

Energy Transition: A Path toward SustainableDevelopment for Mexico

Internationally, the initial steps toward transition to a lower-carbon economyhave been the result of a search for energy security, a desire to reduce one’scarbon blueprint, or both. In some countries, the need to comply with mitigationcommitments agreed to under the Kyoto Protocol spurred the promotion ofrenewable energies or the implementation of a carbon tax. In the case of Mexico,initial measures were adopted in an attempt to follow international best practicesin terms of fuel diversification and energy efficiency, although over the past fiveyears, the push to promote cleaner energy production and use in Mexico hascome primarily from international and environmental sources. Given the declin-ing oil production, energy security objectives are bound to reinforce the urgencyto redefine the energy landscape of the country.

Since 1992, when the U.N. Framework Convention on Climate Change(UNFCCC) was adopted, significant changes have taken place in the internationalworld order. At the time, countries were divided into two broad categories: the


industrialized nations and transition economies versus the developing world.UNFCCC introduced the idea of “shared but differentiated responsibilities,”which became central to assigning binding commitments under the KyotoProtocol.

In 1992, Mexico was a developing country and a member of the Group of 77(G77). By 1997, the year the Kyoto Protocol was adopted, Mexico was already aNorth American Free Trade Agreement (NAFTA) partner and a member of theOECD that had voluntarily resigned its membership to the G77. Nonetheless,Mexico remained within the non-Annex 1 countries category.

The first voices demanding quantitative commitments from Mexico to abateemissions rose in the United States, as its Senate was considering the ratificationof the Kyoto Protocol. Mexico was grouped with China and India. The Senatewould not approve the protocol unless these three countries undertook verifiablequantitative mitigation action. Diplomatic steps were adopted to take thisNAFTA partner off the list of three countries. Ads naming Mexico as part of thethree countries that, according to the U.S. Senate, had to adopt GHG emissionsreduction targets before the United States could ratify the Protocol were swiftlychanged so as to mention only the Asian nations, but the message that the countryneeded to reduce had already been sent.

By 2005, Mexico, as well as Brazil, China, India, and South Africa, wereinvited to participate in a dialogue with the G8 in search for a consensus foraction, which would include emerging economies in an international effort toavert the foreseen effect of climate change. Since then, the Gleneagles Summitof 2005, the G8 + 5, as this group came to be known, has met yearly and agreedon voluntary steps, particularly for the energy sector through the promotion ofclean energies. These agreements have been taking place outside the UNFCCCnegotiations and thus do not carry the legally binding nature of the accordsunder the Kyoto Protocol.3

As the Copenhagen meeting approached, the expectations on emerging econo-mies mounted. Mexico has been pressed to abide by its OECD and NAFTA statusand adopt quantifiable mitigation actions. Even though the country accounts forless than 2% of world emissions, it is already the 10th nation in terms of totalemissions. In a business-as-usual scenario, Mexico would move up to the seventhposition by the end of the next decade. Contrary to what has happened withother emerging economies, since the Gleneagles Summit of 2005, Mexican dip-lomatic rhetoric has been on target: The President of Mexico has put climatechange at the top of his foreign affairs priorities.

In 2008, at the UN Climate Change Conference in Poznan, Mexico announcedthat it would undertake a voluntary commitment to reduce emissions by 50%below 2000 levels by 2050. This nonbinding goal is contingent on twoconditions—that there be a multilateral agreement to limit the rise of tempera-tures to 2°C and to stabilize emissions at 450 ppm of CO2-e, and that financialand technological support be available internationally—according to theUNFCCC principle of “common but differentiated responsibilities” (IEA,2009a, p. 139). This announcement was ratified at the UN Climate Change Con-ference in Copenhagen.

In July 2009, at the Meeting of Major Economies on Climate Change andEnergy, President Calderón signed the Final Declaration of the Heads of State and


Government (Declaration of the Leaders, 2009), which stated that (emphasisadded by author):

[Major economies] will undertake transparent nationally appropriate mitigationactions, subject to applicable measurement, reporting, and verification, and preparelow-carbon growth plans . . .

Developing countries among [them] will promptly undertake actions whose pro-jected effects on emissions represent a meaningful deviation from business as usual inthe midterm, in the context of sustainable development, supported by financing,technology, and capacity-building.

In addition, at the Summit of NAFTA leaders held in Guadalajara, Mexico, in July2009, Mexico signed a declaration that stated that:

[The three countries] share a vision of a low carbon North America . . .

[and] will work in conjunction to establish and implement [their] own ambi-tious medium and long-term goals to reduce national and North Americanemissions.

President Calderón has been an advocate of climate action in internationalforums, even promoting the creation of a Green Fund to support countriesfinancially in their transition to low-carbon economies. His leadership on climatechange was recognized in Copenhagen with the Global Legislators OrganizationAward. Now the challenge for his administration is to put Mexico’s internalpolicies in line with its international commitments.

Compelling action needs to follow politically correct rhetoric, not an easy taskgiven the legal framework of Mexico’s energy sector. Addressing climate changeimplies the adoption of innovative public policies. The transformation of thepower sector, which is responsible for almost one-third of Mexican emissions,calls for flexibility to expedite the diversification of the energy mix, foster thedeployment of renewable energies and clean technologies, and promote greaterenergy efficiency.

In 2008 the Calderón Administration presented an energy reform bill (PoderEjecutivo Federal, 2008a) to Congress that reflected limited awareness of thechallenge ahead. After the Senate hearings, Congress amended the proposal toinclude the Law on Renewable Energies and the Funding for Energy Transition (PoderEjecutivo Federal, 2009a) and the Law on the Sustainable Use of Energy (PoderEjecutivo Federal, 2008b). Thus far, the by-laws and regulations derived from thisbill have fallen short of expectations. They are limited in scope and reach and failto comply with international best practices on the matter. In this regard, it can beargued that the first constraint to energy transition in Mexico lies in the realm ofideas.4

Policy makers seem to believe that a low-carbon economy can be achievedthrough minor changes on the fringes instead of a deep revolution in the way thatMexicans conceptualize the energy sector. The challenge is enormous; thecountry needs to rethink its very essence. For decades, oil has representednational sovereignty. Mexicans, particularly politicians, have to imagine a nationwithout the political and financial safety net of oil in order to invest their politicalcapital in the design of a low-carbon economy. An effective energy transitionentails the redefinition of rules and players in the power sector, something policy


makers have not been willing to undertake because of the presumed conse-quences for the oil sector.

In 1994, the Law on Public Service in Electric Energy opened a small window forprivate participation in power generation. Fifteen years later, private investorsprovide about 7% of the electricity produced in Mexico for self-supply. Thepercentage would go up to around 30% if IPP were included. In fact, through theComisión Federal de Electricidad (CFE), the state controls decisions on powergeneration, transmission, and distribution.

Independent producers face economic and technical barriers to fostering thedevelopment of alternative generation in Mexico, particularly of renewable ener-gies, because the policies of the CFE and the Finance Secretariat are based solelyon cost minimization and do not take into account externalities. Furthermore,access to the grid can be difficult because of technical and geographical chal-lenges, in addition to CFE’s mandate to purchase electricity at the lowest cost.Finally, electricity fees do not vary with demand. Current regulations do notallow influencing demand by varying rates. This will have to be addressed ifMexico is to develop smart grids, in order to reduce transmission and distribu-tion losses and better dispatch intermittent power produced from renewablesources. The latter is not only a growing requirement of a diversified generationbasket, but also a commitment undertaken by President Calderón at the NAFTASummit in Guadalajara, as the three leaders agreed to “collaborate with low-carbon, climate-friendly technologies, including the construction of an intelligentNorth American network for more efficient and reliable electric connections”(“North American Leaders’ Declaration,” 2009).

In terms of renewable sources of energy, once again, nature has blessedMexico. The country has outstanding potential in geothermal, wind, and solargeneration, and significant potential in small hydropower. The main barrier tothe full development of clean energies is political. The decision makers at CFEare not convinced of the need to foster renewables; more importantly, they feelthreatened by them. The Mexican energy sector is filled with vested interests;CFE is not the exception. The Programa de Obras e Inversiones del Sector Eléctrico(POISE) 2009–2017, which presents the investment plan for the next six years,promotes further use of fossil fuels, including fostering coal, and allows foronly a minor push for renewables, to be developed mostly by private investors.Lip service is paid by establishing pilot projects for solar energy and a smallincrease in wind generation, but the majority of the investment goes to keepingbusiness as usual, that is, promoting natural gas combined-cycle generation andcoal, even if both sources of fuel have to be imported because domestic pro-duction is insufficient to meet demand. No legislation needs to be amended orissued for CFE to increase its geothermal or other renewable portfolio, butit does need the political will to do so and the full support of the FinanceSecretariat (Melgar Palacios, 2009).

Even if the financial aspects are taken into account, fuel shift is basically apolitical decision to be taken by the Energy Secretariat and CFE and supported bythe Finance Secretariat. Like other Latin American nations, Mexico is making themistake of assuming that fuel diversification entails the promotion of coal, whichis still one of the cheapest available fuels. The decision does not weigh the factthat, in a low-carbon world, coal-fired plants could become expensive if a tax on


carbon is levied or if abatement credits are eventually required. Mitigating emis-sions with carbon capture and storage is still a couple of decades away, and, if itactually works, will prove to be an expensive proposition. If Mexico invests innew coal-fired plants, the country will increase its CO2 intensive capacity, with itsirreversible “carbon lock-in.”

As mentioned earlier, establishing smart grids is not only desirable topromote a diverse generation basket, but is already an international commit-ment of the country. Yet this sole initiative challenges to its core the structureof the system that has sustained the Mexican power sector. Profound politicalwork is needed not only to convince CFE to give up some of its power andcontrol, but also to rally the support of the Finance Secretariat, which could seesmart grids, with their variable rates and transparency, as a threat to a sourceof revenue from CFE. In this specific area, a fundamental change in the way theMexican power sector is conceived is needed. Liberalization does not have tobe the absolute answer, but key changes are needed in terms of rates and rightsof entry into the grid. In addition, significant investments are required toupdate transmission lines to meet the technical challenges of a more-flexiblegeneration mix.

Given state control of PEMEX and CFE, co-generation could be widely pro-moted, yet even PEMEX finds it uninteresting to co-generate beyond its needsbecause of the low rates at which CFE buys its additional production. Industryfaces a similar dilemma. Purchasing rates ought to be revised if co-generationabatement potential is to be realized.

Even with its renewed interest, nuclear power generation remains highly con-troversial, yet the record in Mexico has been positive, and the option should notbe discarded out of hand. Legislation does not need to be passed to install twoadditional reactors in Laguna Verde, the current site of the Mexican nuclearpower plant, or to develop new sites. The problem, once again, is political. In acountry where the president inaugurates even the tiniest infrastructure project,the nuclear power plant of Laguna Verde has never been officially unveiled. Nopolitician wants to invest its capital in a debate that will undoubtedly arousefierce opposition from some sectors of the population. The challenge is notinsurmountable; the required awareness and public opinion campaign has neverbeen undertaken. Mexico could benefit from international best practices on thematter to reduce opposition to nuclear power generation. As the country loses thesecurity of supply derived from oil, increasing its nuclear generation will becomeimportant, particularly to ensure base-load generation, because renewable ener-gies (wind and solar) tend to be intermittent.

Mexico has agreed to participate in efforts to promote carbon capture andstorage in North America. Initial efforts can be made in the petroleum industry,with the injection of methane into oil caverns, but the full potential will not berealized within the next 15–20 years, because some of the technology, particularlyfor the power sector, is still in the stage of development and will not be commer-cially available before 2025. In addition to significant investments in research anddevelopment, carbon capture and storage poses geological challenges that willneed to be carefully weighed, given that Mexico is in a highly seismic region.

The Finance Secretariat has identified energy efficiency as a priority for actionin the current administration. It is seen as the “low-hanging fruit” that should be


the hallmark of the Calderón presidency. Unfortunately, the by-laws issued onthe subject reframe actions already under way or propose questionable methodsfor implementation. In addition, the repowering of thermoelectric plants and theimplementation of measures within PEMEX would require investments that areunlikely to take place at this point, given the financial crisis. Hence, most effortshave been directed to demand-side managing measures, such as appliances andlight-bulb substitution.

In terms of policy design, short-term political interests seem to have overtakenthe sound and rigorous technical work needed to set the ground for the future.A case in point is the rushed publication of the Estrategia Nacional para la Tran-sición Energética y el Aprovechamiento de las Energías Renovables (Secretaría deEnergía, 2009). The administration wanted to have something to show to complywith a deadline, whereas officials at the Energy Secretariat knew they neededmore time and the support of experts to produce the document. As a result, thecurrently available National Strategy is a collection of existing programs andaction, with no additional abatement effect. The Energy Secretariat is working ona new version, which should see the light in 2010.

In spite of the shortcomings mentioned above, over the past few years, Mexicohas been building the technical and institutional capacities needed to movetoward a low-carbon economy. In this process, it has received the financial andtechnical support of multilateral organizations, such as the Inter-America Devel-opment Bank, the World Bank, and the IEA as well as bilateral cooperation fromthe United Kingdom. Mexico has a much clearer understanding of its contribu-tion to climate change and of the potential consequences of not reaching aneffective international mitigation accord.

A study along the lines of the Stern Report, The Economics of Climate Change inMexico, known as the Galindo Report (Galindo, 2009), has been issued. McKinseyand Company produced a GHG Abatement Curve for Mexico and the WorldBank a study entitled Mexico: Study on Diminishing Carbon Emissions, known asMEDEC, which provides a blueprint on how to achieve the goals established inthe Programa Especial de Cambio Climático (Poder Ejecutivo Federal, 2009b).Mexico is working on developing the technical capacity to account for and reportGHG emissions and to establish performance standards and emissions baselinesto be ready to participate in a cap-and-trade mechanism. In addition, legislationwith the appropriate title is being issued, even if the content is not quite up tostandards; efforts are already undertaken to amend and improve existing texts.

ConclusionsEnergy transition provides a unique opportunity to foster sustainable devel-

opment in Mexico at a time when the future, under a business-as-usual sce-nario, looks grim. Through an energy transition to a lower-carbon economy,Mexico has the opportunity to diversify its sources of energy just as its oilproduction is declining, ensuring its future supply of electricity and using itslimited petroleum resources more effectively. In addition, developing new tech-nologies could become an area of industrial development in Mexico, becausewind generators, solar panels, and other equipment could be produced forinternal consumption and exports. Qualified labor already exists in some


depressed sectors, such as the automobile industry, that could be employed inthe clean energy industry. Research and development in clean technologiescould be fostered, and Mexican scientists could participate in internationalresearch teams to share their know-how, for instance in geothermal heat andpower generation, an area in which Mexico has had worldwide recognizedexpertise. In moving to a lower-carbon path, Mexico could benefit from existingand future financial mechanisms, including international funds, the cleandevelopment mechanism, and cap-and-trade markets.

An effective energy transition could spur Mexico’s sustainable developmentand provide the country with international prestige and recognition, but to do so,the Executive branch, Congress, and society have to be willing to pay the initialcost of moving in that direction. Change will not come about without affectingvested interests. Change will not come about without the appropriate policies,which in time, will do away with long-time granted privileges. For instance,Mexico will have to eliminate subsidies in gasoline and electricity to foster theappropriate consumer behavior. Politically, the decision will have a cost, but hardchoices have to be made if a profound transformation of the energy sector is totake place. Energy transition offers an opportunity for simultaneously achievingthe goals of energy security, climate change abatement, and sustainable develop-ment. It is an opportunity that Mexico should not miss.

About the AuthorLourdes Melgar, PhD, is a researcher and consultant on energy issues. She was

formerly a public official in the energy sector and a diplomat. She has been avisiting scholar at the Center for International Energy and Environmental Policyof the University of Texas (Austin). She has taught at the Instituto TecnológicoAutónomo de México and the Instituto Tecnológico y de Estudios Superiores deMonterrey and has written on energy security, trans-boundary resources, andenergy and climate change.

Notes1Most publications rank Mexico as number 13 in terms of total emissions worldwide. That ranking

has as year of comparison 2000. In preparation for the Copenhagen Conference, the World ResourceInstitute issued updated rankings using 2006 data. In this new ranking, Mexico is the number 10emitter in absolute terms.

2For most of this decade, oil revenues have accounted for approximately 35% of governmentrevenues. In the first semester of 2009, the percentage fell to 28% as a result of the combined declinein petroleum production and the international price of oil.

3The Copenhagen Conference is coming to an end just as this essay is being finalized. In its closinghours, the informal meeting of major economies overtook the UN process, with a last-minute non-binding agreement between the United States, China, India, Brazil, and South Africa. An analysis ofthe consequences of this outcome could be the subject of another paper.

4On December 15, 2009, the Chambers of Deputies passed an amendment to this law, which iscurrently under consideration of the Senate, to increase the required percentage of power generationwith clean energies.

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