Why Mexico?Mexico has been chosen as the focus of this project for a variety of reasons. After researching a number of prospective countries, including Brazil, China, India and South Africa.

Mexico was the outstanding candidate. Significant factors that made Mexico stand out include the countries willingness to address climate change, the countries vulnerability to climate change and the potential for renewable energy. Other factors taken into account was if there was already LEAP teams working on that region, the type of  information available and the amount of available information.As mentioned above, a significant factor in selecting Mexico is the willingness the Mexican government has shown in recent years to address climate change on the national and international stage. In recent years, the Mexican government has demonstrated this commitment by supporting several mitigation and adaptation actions with national resources and most notably, Mexico has also expressed a willingness to achieve a legally binding agreement with the participation of all parties in order to keep the global atmospheric temperature below 2°C. 17The Mexican energy sector is currently in a period of profound change.

Energy policies are undergoing a historic transformation, which is considered one of the most ambitious and aggressive energy sector reforms in decades internationally. 18 In 2013, the Mexican government implemented a series of institutional reforms with agreement from all major political parties across the political spectrum, this put an end to a decade-long political bottleneck, in an attempt to enhance economic growth and competitiveness. The government has set a focus on the energy sector, among others, and set out a process of making it more competitive, lower cost and environmentally sustainable. A significant indicator of the countries intentions came when private investment into the electric and petroleum sectors became allowed through amendments made to the constitution by the government. These amendments, as well as a series of laws enacted in 2014 would end the 75-year-old monopolies held by two state-owned giants – Pemex and CFE. Hereafter, Mexico intended to attract domestic and foreign investment into the energy sector. Moreover, it initiated policies to harness its considerable renewable resource potential, such as solar, wind and geothermal power, which have long been underdeveloped. It would also begin the development of a modern energy infrastructure, utilizing inexpensive natural-gas imports from the USA.

19 The different aspects of this reform will be discussed in further detail below.Another reason for using Mexico as the case study is the countries vulnerability to climate change. Mexico’s geographic characteristics make it a highly vulnerable country to the adverse effects of climate change. The geographical, climatic, orographic, and hydrologic characteristics of the country, as well as economic and social conditions significantly increase Mexico’s exposure to extreme hydro meteorological events. 17, 20 According to the INDC, in the last 50 years, Mexico has experienced changes in temperature and mean precipitation.

The country has become warmer, with an average temperature increase of over 0.85°C. Concurrently, Mexico has suffered a rise in the number of extreme weather events such as tropical cyclones, floods and droughts, which have led to the loss of human lives as well as high social and economic costs. Impacts of hydrometeorological events have resulted in economic losses over an annual amount of 730 million pesos (approximately 48 million USD) between 1980-1999 and 21,950 million pesos (approximately 1.4 billion USD) for 2000 – 2012. 17 In 2014, there were 319 Municipalities considered highly vulnerable to the adverse impacts of climate change including droughts, floods and landslides. This is equivalent to 13% of all Municipalities in Mexico.

21 A number of vulnerability assessments for several climate change scenarios have been developed in Mexico over the last two decades. There is evidence showing that the effects of climate change together with other pressure factors will have very negative ecological, economic, and social consequences. 22As a country with significant amounts of sunlight, wind, geothermal and water resources, Mexico has significant potential for the development of renewable energy. Traditionally dependent on hydrocarbons for both energy and government funds, Mexico has already begun bringing renewable energy sources into their fuel mix to meet energy demand and to decrease environmental impacts. In 2008 Mexico passed a law establishing clean energy generation targets of 35% by 2024 and 50% by 2050. Mexico became just the second country to enact a legal framework with respect to climate control when it passed the General Climate Change Law in 2012.

The reform furthered these initiatives by publishing the “Programa Nacional para el Aprovechamiento Sustentable de la Energía 2014-2018” (PRONASE) – a roadmap describing best practices, policy guidelines and indicators to evaluate progress in the use of renewable energy. 193.6 Country OverviewMexico is a federal republic located in the south of North America. It shares a border with the USA in the north, and Guatemala and Belize in the south. The country’s official name is Estados Unidos Mexicanos (United Mexican States).

It is made up of 31 states and a federal district (Mexico City). Mexico is the 13th largest country in the world with 1,944 million square kilometres and is the tenth most populous country in the world with 127 million inhabitants. 23In many ways, Mexico is a country characterized by extremes. Geographically, there are mountains and canyons in central Mexico, deserts in the north, and rain forests in the south and east. Socially, there is considerable wealth and poverty, with a limited middle class. Mexico is a medium-income country, which suffers from high and persistent levels of poverty. Moderate and extreme poverty levels have consistently fluctuated at approximately 50% and 20% respectively. 24, 25 The political and economic failings in the past have kept much of the country in poverty.

In spite of these of issues, Mexico is one of the primary economic and political forces in Latin America.Mexico is a country that has significant issues but has great potential. It is rich in natural resources oil, silver, copper, and agricultural products as well as fantastic renewable energy resources. At present, fossil fuels dominate the primary energy mix, with oil being the dominant fuel, although over recent years there has been a significant shift towards natural gas.

26 Mexico has significant potential for renewable energy, and also has the potential to massively develop the RES found throughout the national territory. 27Figure 1. (Source: www.nationsonline.org)3.7 Policies & TargetsAs mentioned previously, Mexico’s oil, gas and electricity sectors are in a period of profound transformation, with considerable implications for all aspects of the country’s energy provision, trade, investment and environmental performance.

In December 2013, both houses of Congress approved the project following intense debates. In keeping with the Mexican Constitution, the proposal was sent to state legislatures for approval and on 20th December 2013 the energy reform decree was issued. The key amendments to the Mexican Constitution were related to Articles 25, 27 and 28, which had so far reserved large parts of the energy sector activities to the state. The reform decree also included 21 transitory articles, which outlined the main aspects for secondary legislation. 18The key principles of the reform were defined as follows:Reaffirming the constitutional principle of the state ownership over subsoil resources.Free competition among economic actors in the sector.Strengthening of regulatory agencies.Focus on transparency and accountability in new contracts.

Environmental protection and fostering clean energy.The energy reform is part of a wider set of sectoral reform initiatives of the Peña Nieto Administration. All of them respond to the urgent need to increase the rate of economic growth and improve productivity. Performance over the last thirty years has been lackluster with respect to its own history and relative to other middle-income countries. After growing from 1950 to 1980 at an average annual rate of 6.4 percent, GDP grew from 1980 to 2010 at a rate of 2.4 percent.

More recently, the average growth has been slower. Still, the increasing flow of direct private investment, gross fixed capital formation has remained stagnant as a proportion of GDP, at levels just above 20 percent. Inadequate investment in public goods is the source of serious gridlocks in physical and social infrastructure, and effective non-oil tax ratios are particularly low, even by Latin American standards, at less than 10 percent of GDP. Maintaining macroeconomic balances has resulted in a severely capital constrained state-owned energy sector. Hence, a poor state tending to have poor state-owned capital-intensive energy companies is not an unexpected occurrence. 28Figure 2.The principles mentioned above indicate a desire to move further in line with the IEA Shared Goals, and away from the traditionally closed and monopolised energy market.The INDC issued by Mexico has been divided into two parts, one for mitigation and another one related to adaptation.

The mitigation portion includes two types of measures: unconditional and conditional. The unconditional set of measures are those that Mexico will implement with its own resources, while the conditional actions are those that Mexico could develop if a new multilateral climate regime is adopted and if additional resources and transfers of technology are available through international cooperation. This is an unprecedented action taken by Mexico as it is the first time Mexico has assumed an unconditional international commitment to carry out particular mitigation actions. 17This INDC is consistent with Mexico´s pathway to reduce 50% of emissions by the year 2050, with respect to the year 2000, as mandated by the LGCC.Targets set for energy and GHG emissions are the following:Unconditional Reduction: Mexico is committed to reduce unconditionally 25% of its Greenhouse Gases and Short Lived Climate Pollutants emissions (below BAU) for the year 2030.

This commitment implies a reduction of 22% of GHG and a reduction of 51% of Black Carbon. This commitment implies a net emissions peak starting from 2026, decoupling GHG emissions from economic growth: emissions intensity per unit of GDP will reduce by around 40% from 2013 to 2030.Conditional Reduction: The 25% reduction commitment expressed above could increase up to a 40% in a conditional manner, subject to a global agreement addressing important topics including international carbon price, carbon border adjustments, technical cooperation, access to low cost financial resources and technology transfer, all at a scale commensurate to the challenge of global climate change. Within the same conditions, GHG reductions could increase up to 36%, and Black Carbon reductions to 70% in 2030. 17Business As Usual (BAU) scenario of emission projections based on economic growth in the absence of climate change policies, starting from 2013.

3.8 Current Energy SectorPrimary energy demand in Mexico has increased by 25% since 2000, a rise that mostly matches the expansion of the economy, meaning that the energy intensity of Mexico’s economy shifted only slightly over this period. This rate of development is around one-third of that of the Organisation for Economic Co-operation and Development (OECD) average. The absolute level is also relatively high in comparison with the OECD average, reflecting the structure of the Mexican economy. Mexico is also different from the OECD group as there is considerable potential for growth in energy consumption: per-capita energy demand in Mexico is the lowest among OECD countries, less than 40% of the average. While aggregate energy use in the OECD is set to decline in the decades to 2040 (despite growing economic activity), Mexico’s energy use is set to rise. 29Figure 3: Primary Energy Demand in Mexico (Source: IEA)Fossil fuels dominate the primary energy mix, with oil, natural gas and coal accounting for around 90% of primary demand for the past two decades.

Oil remains the dominant fuel, where Mexico is the eleventh-largest producer of oil in the world. Over the last decade, there has been a significant shift towards the more cost effective natural gas, primarily in power generation, which has decreased the share of oil in the primary energy mix from 59% in 2000 to 51% in 2014 (Figure 3). Demand for natural gas has increased by more than 70% since 2000, with its share in the primary energy mix increasing from 24% in 2000 to 32% in 2014. This has resulted in the production of crude oil steadily declining since 2004, down by nearly 1 million barrels per day (bpd), even though there has been significant growth in energy demand during this period. It is unlikely this trend will be reversed because of the maturity of Pemex oil fields and the high concentration of production in a limited number of fields. Fuel switching in the power sector, rising industrial demand and, more recently, the import opportunity that opened up for Mexico by the shale gas boom in the United States (and facilitated by Mexico’s policy of constructing new gas import pipelines) have accelerated the use of gas. The overall share of renewable energy has fallen slightly, to 8.5% of total primary energy, reflecting in part the declining use of solid biomass, mainly fuelwood used by poorer households.

28, 29Figure 4: Energy by fuel in sectors (Source: IEA)Over 40% of total final consumption in 2014 was owned by the energy demand for transport, this figure is considerably higher than the OECD average of 33%. The transport sector is the largest energy consumer of all end-use energy sectors in Mexico, substantially higher than industry (28%) and buildings (20%). Energy demand for transport has been increasing rapidly, at an average annual growth rate of 2.6% since 2000, this is largely due to the rise in passenger vehicle stock from approximately 9 million in 2000 to over 25 million in 2014, with rates of ownership more than doubling to over 200 vehicles per 1000 people over the same period. Unsurprisingly, transport sector consumption is almost completely dominated by oil products, and the increase in demand has led to problems of traffic congestion and air pollution in the larger cities. 29Energy demand in the Industrial sector has risen by approximately 14% since 2000.

The contribution to GDP made by industry has grown by about 17% during the same period, meaning that industrial energy intensity, has remained almost flat during this period. This has been caused the combination of two contrary trends: the continuous decline in energy intensity in the major energy-intensive industries, counteracted by a rise in energy intensity elsewhere. Many notable car manufacturers and their component suppliers but also other manufacturing firms, have set up operations in Mexico. Taking advantage of low labour costs, the proximity to the United States market and the free trade agreements in the region.

This has resulted in a significant increase in electricity consumption in recent years, rising by almost 70% since 2000. 29Energy consumption in the buildings sector has increased by just 10% since 2000. This relatively moderate growth is largely due to efficiency gains as solid biomass is replaced as a residential fuel by electricity and natural gas. Within the buildings sector, electricity demand has increased substantially in a shot period of time – more than 80% since 2000 – and has now become the main source of energy as the household ownership rate of appliances such as televisions and refrigerators has grown to more than 80%. Nonetheless, on a per-capita basis, electricity consumption in the residential sector is still only around one-quarter of the OECD average, highlighting the potential for additional growth as incomes rise further. 29


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