Can electricity reform help Mexico achieve carbon emission reductions?

Abstract

The energy sector is both a significant contributor to the problem of climate change and a critical factor in efforts to tackle it. With the use of a tailor-made system dynamics model, we aim to learn if the liberalisation of the power sector that has been proposed by recent changes to the Constitution in Mexico can lead to lower carbon emissions. This is in line with ecological modernisation's main claim that win–win opportunities may occur with the restructuring of the economy. However, our hypothesis is that it is not the simple liberalisation of the electricity markets which would bring environmental benefits, but some country-specific set of policies. One of our main findings is that a full liberalisation scenario would lead to higher carbon emissions as a consequence of an increase in coal capacity. But when compared to the initial emission rate prior to the reform and other reform scenarios, this policy could bring about decreases in carbon emissions. Combining a climate change instrument, such as a carbon tax, with the liberalisation process is effective at reducing carbon emissions further, but expensive in terms of power price hikes, and unnecessary if proper reform settings are put in place.

Keywords:

• electricity reform
• climate change
• Mexico

JEL codes:

• Q01
• Q48
• Q54

Notes

1. This reform entails changes to Articles 25, 27, and 28 of the Mexican Constitution. These changes were approved by Congress and promulgated by the President of Mexico in December 2013.

2. This restriction is not unrealistic. Most of IPPs’ investment is made on CCGT and the competition in power generation markets occurs in the marginal demand segment, which is normally met by fossil fuel technologies.

3. At present, CFE, being a public utility, does not take power prices in consideration in their dispatch decisions. As a public utility its objective is to meet demand at all times. This is one of the key changes in firms’ behaviour after the electricity reform.