Mexico AND

Emerging

Carbon Markets

Investment Opportunities for Small

and Medium-size Companies

and the Global Climate Agenda

Commission for Environmental Cooperation

Commission for Environmental Cooperation

393, rue Saint-Jacques Ouest, Bureau 200

Montréal (Québec) Canada H2Y 1N9

Tel: (514) 350-4300; Fax: (514) 350-4314

E-mail: info@ccemtl.org

http://www.cec.org

ISBN: 2-922305-57-0

© Commission for Environmental Cooperation, 2001

Legal Deposit-Bibliothèque nationale du Québec, 2001

Legal Deposit-Bibliothèque nationale du Canada, 2001

Disponible en français - ISBN: 2-922305-59-7

Disponible en español - ISBN: 2-922305-58-9
Acknowledgements 

Preface 

Executive Summary 

1 Introduction: Finance and the Environment 

1.1 Environmental Issues and Risk Management 

1.2 Environmental Investment Opportunities 

1.3 Defining Environmental Expenditures 

2 The Climate Agenda 

2.1 The Kyoto Mechanisms 

2.2 The Role of Small and Medium-size Firms for Flexible 

Mechanism Projects: Challenges and Opportunities

3 The Electric Power Generation Sector: 

Demand- and Supply-side Opportunities

3.1 Introduction 

3.2 Structure of the Mexican Electric Industry 

3.3 Balance of Trade 

3.4 Energy Savings and Efficiency 

3.5 Overview of Emissions from Power Generation 

3.6 Power Generation and Energy Efficiency Projects under AIJ 

3.7 SME Market in the Power Generation and 

Energy Efficiency Sectors

3.8 Opportunities for Power Grid Emission Reductions for SMEs 

3.9 Energy Regulatory Framework 

3.10 Conclusions 

4 Flexible Mechanism Opportunities in the Steel Sector 

4.1 Introduction 

4.2 Overview of GHG Emissions from the Steel Sector 

4.3 Characterization of Small/Medium-size (i.e., Non-dominant) 

Firms in the Steel Sector

4.4 Project Opportunities 

4.5 Conclusions 

5 Land Use, Land-use Change and Forestry 

5.1 Introduction 

5.2 Mexico’s Forests and their Greenhouse Gas Emissions 

5.3 Small and Medium-size Enterprises and the Forest Sector 

5.4 Different Possibilities for Future GHG 

Emissions from Mexico’s Forests

5.5 Project Opportunities in Forest Sink Conservation 

5.6 Project Opportunities in Forest Sink Enhancement 

5.7 LULUCF Eligibility Uncertainties 

5.8 Conclusion 

References Consulted 

Annex A: Reducing Emissions Associated with Power Generation: 

Flexible Mechanism Opportunities on the Demand and Supply 

Annex B: Flexible Mechanism Opportunities in the Steel Sector 

Annex C: Potential Flexible Mechanism Opportunities 

in Industrial Plantations

Acknowledgements

This report has been prepared by several individuals and organizati

research initiative in Mexico was led by Cathleen Kelly, Senior Policy 

Center for Clean Air Policy together with Edmundo de Alba of Consultor A

Internacional, Edward A. Hoyt, Director General, EIC Consultores de Méx

de C.V., and Miguel Breceda. From the Commission Secretariat, the re

prepared by Scott Vaughan, Chantal Line Carpentier and Zachary Patterso

Environment, Economy and Trade program. The authors are grateful to 

Ouimet for editing and proofing this report. 

Views expressed in this report do not necessarily reflect those of th

to the Commission for Environmental Cooperation, or of the Secretariat. A

are those of the authors of the CEC Secretariat. 

Preface

When the environmental agenda began to take shape, many feared that 

that adopted high levels of environmental standards would find themse

competitive disadvantage. Although the echoes of this debate betwee

economic performance or high levels of environmental protection continue

a very strong body of empirical evidence suggesting that such a dichotomy 

either a strong economy or a strong level of environmental protection is n

More and more companies are adopting different kinds of environmenta

and benchmarks within their operations. They are doing this not simply b

makes environmental sense, but because it makes business sense as well.

Among the most exciting areas in which the green agenda is a

business perceptions and practices is in the financial services sector. A

the traditional focus of environmental policy has been on pollution-i

sectors alone, there is a growing body of evidence suggesting that 

markets—and the array of actors within those markets, from commerc

to venture capitalists, from equity investors to insurers, from large 

investors to producers who support “green” or sustainable objectiv

paying more attention to environmental issues, and are positively affe

environmental agenda in the process.

Perhaps no single environmental policy challenge is as great as 

change. The purpose of this report—the first in a series of reports int

provide information to the financial services sector on key environment

in North America—is to identify potential financing opportunities in 

related to the climate agenda. It is my firm belief that by engaging th

sector in the environmental agenda, in defining cooperative approac

combine regulatory measures with incentive-based and market-led app

innovative and cost effective solutions will be found that meet ou

demand for the highest levels of environmental quality.

Janine Ferretti, Executive Director, CEC 

Executive Summary

Over the past decade, progress has been made in identifying enviro

policies that are effective in ensuring high levels of environmental qualit

as cost effective. There is growing recognition that a “menu” of policy a

es—one that weaves command-and-control regulations with the use o

incentives and market-based instruments—can be highly effective in 

environmental challenges.

Nowhere is this search for a combination of approaches more evid

in international efforts to address climate change. As a global enviro

problem, climate change has spawned intensive work to define an

approaches combining domestic measures to address the problem, wit

designed to facilitate cooperation at the international level.

The logic behind the use of various “flexible” mechanisms at the 

tional level to address climate change is widely recognized. Differenc

marginal costs of reducing greenhouse gases (GHG) emissions vary sign

between countries. In particular, marginal costs differ between indus

countries—the source of the majority of GHG emissions—and econ

transition or developing countries. By way of illustration, some estima

that the cost per ton of carbon [emissions] that is reduced in industrialized 

is in the vicinity of US$35–50 per metric ton. In contrast, the estimate

reduce a metric ton of carbon [emissions] in developing countries is in t

of US$10 ton or less. 

Since 1997, an enormous amount of work has focused on elabora

the Kyoto Protocol is likely to proceed. At the time of this report's pub

the operating details of the Kyoto Protocol of the United Nations Fra

Convention on Climate Change (UNFCCC), despite domestic setbacks in th

States, awaits the resumption of the Sixth Conference of the Parties, to 

in Berlin in mid-2001. 

Discussion of any legal matters related to the UNFCCC lies entirely 

of the scope of this report. Rather, the purpose here is to identify in bro

the potential investment opportunities within Mexico in the context 

appears to be an emerging global market in which the buying or selling o

carbon (emissions, or their equivalent) continues. The jury remains out o

how large this international market already is, what its near-term growth 

will be, what rules will define how the market will function, or what the eq

price of a ton of carbon will likely be. However, while international negoti

clarify administrative rules and procedures continue, considerable ef

already underway by the private sector in addressing climate change

companies on a growing list have decided that the challenge of climate c

real, that the solution will rely partly on the leadership from the privat
viii

and that an international market related to climate change is quickly evolv

and is likely to reward front-runners on the climate agenda. For example, s

estimates suggest that under the Clean Development Mechanism (CDM)—

mechanism under the Kyoto Protocol by which Annex 1 countries and n

Annex 1 countries can undertake cooperative climate-related policies—the pote

market for carbon-offset policies could be between US$5 billion and US$17 bi

per year by 2010 (Austin et al., 1999). Other estimates suggest a carbon-of

market of more than US$20 billion per year (UNCTAD, 1998). Clearly, estim

of the likely value of carbon markets will depend on the assumed value of a 

per ton. As in any market, price volatility has to be assumed at the outset. At 

same time, a benchmark price range that seems to be gaining consensu

between US$10 to US$20 per ton of carbon. [The World Bank’s Clim

Investment Fund, launched in late 1999, refers to a price per metric ton of car

of US$20. Other estimates, including one by the Intergovernmental Panel on Clim

Change dealing with costs of carbon sequestration related to land use, land

change and forestry, suggest a price that is significantly less than US$10 per 

(IPCC 2000b).] Clearly, depending upon the project, and the realized value of car

credits, there will be opportunities for arbitrage in these credits and a poten

for high returns. 

Obviously, questions about the magnitude, operation, predictability 

assumed price range of carbon-related markets will be deeply affected by l

negotiations currently underway under the UNFCCC. Following the suspen

of the Sixth Conference of the Parties to the UNFCCC in The Hague in late 2

attention of various stakeholders has shifted back to the Article 4 Commitm

contained in the (1992) UNFCCC. In particular, some are examining the operati

implications of Article 4 (2) (a), which notes in part:

“The developed country Parties and other Parties included in Annex 1 commit th

selves specifically as provided for in the following: 

a) Each of these Parties shall adopt national policies and take corresponding

measures on the mitigation of climate change, by limiting its anthropogenic

emissions of greenhouse gases and protecting and enhancing its greenhouse gas

sinks and reservoirs. These policies and measures will demonstrate that develope

countries are taking the lead in modifying longer-term trends in anthropogenic

emissions consistent with the objective of the Convention, recognizing that the

return by the end of the present decade to earlier levels of anthropogenic emissio

or carbon dioxide and other greenhouse gases not controlled under the Montreal

Protocol would contribute to such modification, and taking into account the differe

in these Parties’ starting points and approaches, economic structures and resource

bases, the need to maintain strong and sustainable economic growth, available tec

nologies and other individual circumstances, as well as the need for equitable an

appropriate contributions by each of these Parties to the global effort regarding
that objective. These Parties may implement such policies and measures joi

other Parties and may assist other Parties in contributing to that achievemen

objective of the Convention and, in particular, that of this subparagraph ...”

(emphasis added).

It remains unclear how climate-related measures undertaken “join

translate into project-based climate initiatives involving two or more c

However, given the extent of pilot projects and voluntary measures 

underway or being considered, coupled with significant cost differentia

countries, it seems inevitable that the highly dynamic and quickly 

international carbon market will continue. 

The purpose of this report is to identify potential investment oppo

arising from possible carbon offset projects in Mexico. It is important 

that as a non-Annex 1 country, Mexico is not obliged to meet dome

emission reduction targets. At the same time, given the increasingl

economic links between Mexico and its other NAFTA partners—Canada 

United States—one scenario is for investment transfers linked to climat

to follow existing international investment and trade patterns. This ass

reflects the observation of von Moltke that as international efforts to 

climate change expand, the distinction between climate-related project in

and other types of investment flows will become increasingly blurred. 

Three sectors in Mexico are examined in this report, in order to 

their potential for carbon reduction: (a) electric power generation; (b) stee

tion; and (c) land-use change and forestry. This report does not attempt to 

a comprehensive inventory or baseline of total GHG emissions or potenti

offsets within these three sectors. Rather, it pays particular attention to 

related opportunities involving small and medium-size enterprises (SME

these three sectors. 

Particular attention is paid to SMEs, in Mexico, for several reaso

evidence already suggests that larger companies are better positioned to 

opportunities related to the international climate agenda. For example, co

as diverse as TransAlta, Edison Electric, Arizona Public Service, Niagara 

Beyond Petroleum (formerly BP-Amoco), Suncorp, Sumitomo and dozens 

have been engaged in different aspects of the international carbon 

Leadership continues both by these companies operating alone, as well as p

with such organizations as Environmental Defense, the World Re

Institute or the World Bank in demonstrating that climate-related initia

make environmental as well as sound business sense. 

By contrast, SMEs in general face several obstacles in identifying an

advantage of climate-related projects and associated investment oppo

Difficulties include higher entry and transaction costs, difficulty in a

capital markets—in particular, external capital markets—difficulty in es
x

individual baselines and inventories, and other barriers. It is worth noting that s

of these difficulties are generic to SMEs in general, while others (such as 

calculation of inventories) are unique to the climate agenda. It is also worth no

that barriers to SMEs in developing countries participating in international j

initiatives are even greater than those that exist in industrialized count

Despite these obstacles, among the conclusions of this report is that SME

Mexico in a number of areas present potentially attractive investment opportuni

What follows are the key findings for the three different industry sectors conside

Electricity

– The Mexican electric power sector continues to initiate or undergo

profound changes. (For readers interested in the changing electricity secto

the CEC will release an Article 13 report—Environmental Challenges and

Opportunities in the Evolving North America Electricity Market—in early

2002. For interim reports in relation to this initiative, please see

<www.cec.org/electricity>.) 

– The most significant carbon-related opportunities in Mexico’s electricity

sector are closely tied to the planned expansion of natural gas use.

According to the most recent estimates by Mexico’s Energy Secretariat, 

sector will use more than twice as much natural gas as oil in its primary

energy inputs in the near term (Secretaría de Energía 1999b).

– In addition to overall gains from the proposed switch from oil to natural g

the single greatest area of carbon-reduction potential involving SMEs is

found in such demand-side opportunities as energy efficiency and fuel

switching. Distributor-supplied users represent a group of considerable

potential, comprising SMEs and residential consumers. Such users will

receive a bundled service, consisting of delivery and the final sale of elect

ity. Among the initiatives underway in Mexico relating to the demand-sid

the promotion of super-efficient residential lighting, promising to increas

efficiency by more than 50 percent over current lighting fixtures. Given t

fact that residential electricity supply continues to grow at a rate higher t

that for the commercial/manufacturing sector, focusing policies on deman

side gains could lead to considerable reductions in tons of carbon.1

– Potential diseconomies of scale that may arise in the calculation/accoun

ing process may present problems in arranging deals involving demandside residential lighting. 

– However, a back-of-the-envelope estimate suggests that total sales in 1

in the residential sector were 33 TWh (terawatt hours), the generation of wh

produced approximately 0.75 million metric tons of CO2 per TWh. A conserva

estimate for the growth rate in residential electricity demand is five

1 In 2001, the CEC will release the results of a survey of electricity users in Mexico, measuring their interest 

willingness to pay for renewable electricity as part of their total electricity portfolio. Results can be fou

<www.cec.org>, under the “Green Goods and Services” area.
percent. Assuming that electricity efficiencies could reduce this dema

20 percent over the decade 1999–2009, electricity demand could be r

by 4.2 TWh, representing a savings of 3.1 million metric tons of CO

(assuming no changes in CO2 production per unit of electricity). Thi

be worth approximately US$31 million (using a proxy market value 

US$10/metric ton for carbon).

Steel Production

– A series of case studies and surveys was prepared for this report, in

surveying 13 large and medium-size steel producing companies in M

Among the results of the company questionnaires were the following

three-quarters of those surveyed said that they were aware of energy

potential in their operations, and more than half were already running

plans to run, energy-savings components. Translating energy-saving g

potential certified emission credits is complex, and is the topic of inten

ongoing work, which is outside of the scope and mandate of this repo

– Comparing existing furnace technologies with the application of best-

technologies, detailed information is provided on specified areas of ineff

such as in maintenance, preheating systems, incompatibilities betw

molding and fusion capacities and management, and pretreatment 

Findings for the 13 production units surveyed indicate a total potenti

emissions reduction of just under 121,000 tons of carbon. Using US$10/

ton as a proxy price for carbon, the potential market value arising fro

gains is approximately US$1.2 million.

– The quantity of carbon emissions from steel production in Mexico 

declined steadily over the period 1986 to 1996, from 0.50 metric tons o

emitted per ton of steel produced in 1986, to approximately 0.40 tons 

While this is obviously good news from all points of view, this tren

decoupling total tons of steel from tons of carbon emitted narrows so

the carbon offset opportunities in the sector. 

Land-use Change and Forestry

– Among the most difficult issues in the climate change debate remai

extent to which carbon sequestration can be calculated, related to l

land-use change and forestry.

– This study suggests that the climate agenda can contribute to chang

Mexican forests from their current state of being a net source of gr

house gas emissions, to becoming a significant carbon sink. Despite

numerous gaps in information and analysis in forwarding these esti
xii

including the absence of information on total land cover, rates of deforest

tion, inventories of aboveground biomass, and carbon densities of forest

different carbon offset scenarios are presented for Mexico’s forests. Under o

scenario, a range of 2.3 to 3.0 billion metric tons of carbon is identified a

the total possible carbon offset. Under a second scenario—accelerated

adoption of new technologies—an estimated range of 4.2 to 5.1 billion me

tons between 1990 and 2030 is suggested as possible. 

– Among the lessons of the forestry sector—characterized by small-scale

landholders and farmers—is the need to identify various non-carbon bene

that can be of immediate relevance to small-scale farmers and their communi

– Strategies for shifting Mexico’s forests from a net source of greenhouse ga

emissions to an important carbon sink are varied and include: improved m

agement within protected areas, improved forestry management generally,

more efficient wood-burning stoves, reduced rates of forest fires and bette

forest-fire management, and a range of carbon sink enhancement actions s

as reforestation, energy-biomass sources and agroforestry.

– Using the proxy market value of US$10 per metric ton, a rough calculat

of the potential market value of carbon-related investment opportunitie

identified in this report is approximately US$23 million at the low end, 

US$51 million at the higher end for the Mexican land use, land-use chan

and forestry (LULUCF) sector. 
1 Introduction:

Finance and the Environment

It has often been assumed that high levels of environmental protectio

easily fit with business interests. Some have argued that countries or co

that adopted strict environmental standards stood to lose markets, be

assumed drag in competitiveness often associated with environmental st

While this debate will inevitably continue, there is a growing 

empirical evidence that companies that adopt high levels of environmental 

are also well managed and highly competitive companies. Conversely, compa

ignore or attempt to circumvent environmental standards also tend 

various management, business planning and other problems. 

The responsiveness of companies to the environmental agenda is refle

host of initiatives, from the ISO 14,000 series to corporate environmental r

A McKinsey survey of 400 corporate executives worldwide found that 

percent agreed that the capacity of the private sector to integrate envir

priorities will be a key business challenge of this century (cited in US EP

A key question of relevance to the climate debate centers on identif

drivers that encourage companies to adopt environmental policies and p

attention to the environmental agenda. While it has broadly been assu

companies will respond only to direct regulations (in place or being prop

is now clear that other factors—in addition to mandatory regulations—

company’s environmental profile. For example, as markets become inc

global, companies must pay attention simultaneously to home and host 
2

regulations. There is also evidence suggesting a relationship between ex

intensity and the adoption of higher levels of environmental standards wi

companies. Other factors that have been identified as affecting the likelih

of a company adopting an environmental policy include the views of custom

the role of communities, and the ownership structure of the company itself. In t

a number of studies have shown a positive correlation between the impro

environmental performance of a company and the value of the firm, expre

for instance in shareholder value (Wisner and Epstein, draft, 2001).

Given the evidence that environmental policies are becoming an impor

part of corporate planning and policies, it is little wonder that the financial serv

sector is paying more attention to the environmental agenda. Although there 

several points of intersection between financing and the environment, two br

types tend to dominate this relationship: 

a) Risk Assessment and Risk Management: Environmental risk has been at the

center of environmental policies since their formulation. Environment-rela

risk is to some extent being weighed by the financial community as one fa

that can help overall business risk. Tools to determine, and where possible

quantify environment related risk, vary by sub-sector within the financial

services sector. Risk tools also differ depending on whether the financial

exposure is debt, equity, joint venture, mergers and acquisition or other type

financing. Moreover, the insurance sector—particularly European-based

insurers—have made impressive strides forward in identifying and quantif

ing specific types of risk, including real estate-related risk, as well as indire

risks, such as financial risks associated with the impacts of climate change. 

b) Green Investment Opportunities: The other way of looking at business ris

by measuring the financial performance of companies. The Environment

Capital Markets Committee, established by the US Environmental

Protection Agency (EPA), continues to study the environment-finance l

and has made a number of recommendations to improve indicators capa

of measuring this interface (US EPA 2000). Environmental consideration

continue to affect different kinds of investments, including so-called

“green” companies that market products or services that are relatively

cleaner or more sustainable than other products or services within a sim

category. The relatively small size of the so-called environmental indust

coupled with sporadic evidence that environmentally sensitive firms perfo

marginally better, suggests that the market share for green goods and serv

will remain roughly constant in the short term, but that as international

policies move into place to constrain future carbon emissions, investmen

related to the climate agenda will expand. 
1.1 Environmental Issues and Risk Management

One example of the importance of environmental issues to investors is 

the results of a 1999 survey of 50 of the leading financial institution

United Kingdom. The survey found that 35 of these institutions (or 70 

had developed an external environmental statement, an increase from 52 p

1998. Another survey, conducted by PricewaterhouseCoopers of over 150 si

to UNEP’s Statement by Commercial Banks on the Environment (a list that 

from North America, Salomon Inc., Royal Bank Financial Group, Republic 

Bank, Community Capital Bank), found that:

– 90 percent have some form of dedicated environmental management f

– 74 percent of those polled have environmental policies covering corpora

63 percent covering investment; and 53 percent covering investment 

– 60 percent of institutions surveyed have initiated or have in place s

integrate environmental considerations into core credit decisions, w

many fewer—20 percent—have policies covering portfolio manage

– 60 percent of institutions have developed various types of “green”

financial products (UNEP 1999a). 

Among the clearest areas of overlap between financial and enviro

management involves the assessment and management of risk. How envir

issues affect investments, assessments of risk, and actual risk managem

obviously varies by industry segment. Commercial banks often consider 

mental issues when evaluating the risk associated with an investment in a p

company since, for example, repeated reports of environmental non-co

could lead not only to fines and penalties, but also to consumer oppositi

company—as seen for example in the consumer boycotts of Shell—or 

the borrower or financier itself. Studies already show that sharehold

declines on average by one to two percent when an environment-relate

is pending, and that capital markets generally respond to the public disc

environmental performance such as the Commission for Enviro

Cooperation’s Taking Stock, which compares pollution emissions amon

Conversely, evidence shows that the market value of a firm increases by, on 

slightly less than one percent in shareholder value when firms are recog

strong environmental performance (Lanoie et al., 1997).

Other environmental risks can include industrial accidents, the disc

hazardous or toxic waste sites, and the opposition of communities to ne

management siting. Less frequently, risks to banks can entail more direc

liability issues. Since the Fleet Factors case of the early 1990s, efforts b

the American Banker’s Association, the US Environmental Protection 
4

and others have focused on clarifying liability exposure, including shielding borrow

against the deep pocket syndrome. At the same time, the distant prospect of len

liability has been a major catalyst within the banking sector to track and man

environmental risk, especially properly-related environmental risks.

Risk management tools used by commercial banks are generally tied to cap

intensive project finance, with risk tools applied to reduce potential liabilities ov

period of 10 to 15 years. Environmental due diligence procedures, especially those 

to loans for which real estate is used as primary collateral, are now applied regul

by many commercial banks in North America. Led by the Bank of America, the R

Bank Financial Group and others in the early 1990s, environmental due dilige

generally includes Phase I, on-site environmental audits involving checklists. Sim

tools are used by investment banks, which, in the course of preparing for the in

public offering, examine the extent of environmental liability exposure. This gene

includes procedures for the disclosure of environmental exposure, and the applica

of due diligence procedures, particularly for pollution-intensive industries.

Environmental and associated financial risks are now regularly examined 

the insurance sector. Like banking risks, insurance risks include industrial accid

related to catastrophic events such as large spills, or cleanup costs of abando

toxic or hazardous landfill sites. Where the two liability segments diverge is in 

area of climate change. Over the past two decades, insurers have been calcula

the business costs of a four-fold increase in natural disasters such as storms 

coastal flooding. For example, according to estimates by the insurance sector, 

number of natural and man-made disasters increased significantly in the late 19

and early 1990s. What is more, in 1998, insured losses arising from natural disas

exceeded US$17 billion; an increase of nearly 40 percent since 1995 (UNEP 199

Total economic losses from such events are estimated to exceed US$90 bill

A senior executive of Swiss Reinsurance Company recently warned that if th

hurricanes comparable in size to Hurricane Andrew were to reach the United St

in one season, it would likely lead to the collapse of the US insurance se

because of high and “unforeseeable” economic losses (Knoepfl 1999).

While the tools differ within industry segments, what risk managem

approaches share is the consideration of a probable increase or decrease in a

values over time because of environmental issues. The time element is import

risk management is not only about identifying current financial risks, but 

about estimating likely shifts in an initial price offering or asset value over t

Time horizons differ, but as noted for commercial banks as well as the insura

pension fund and other sectors, a time horizon of 10 to15 years is fairly stand

The future orientation of financial risk management helps explain why so m

large energy companies today are acting as if the climate agenda is already under
1.2 Environmental Investment Opportunities

While risk management remains the main area of convergence between the 

sector and the environment, so-called green investment represents the oth

the issue. Numerous examples exist which point to emerging business oppo

tied to the environmental agenda, coupled with an increased valuation of 

mental information across financial services.

The main channel for environment-related investments is mutual fun

commercial credit, mutual funds and pension funds together represent t

greatest source of investment capital. For example, an estimated 6,500 mut

exist worldwide, with a capitalization of US$4.5 trillion.

Green funds are generally categorized within socially responsible funds, 

of which include Domini Social Equity, Fidelity Select Environmental Service

Investors Fund, Calvert Managed Growth, Storebrand-Sudder Environme

Fund and Dreyfus Third-Century Fund, as well as others. Socially responsi

have an estimated total market value of approximately US$4 billion. Thu

investment funds make up only a small fraction of all mutual funds an

of total investment.

The fact that green investment funds make up such a small fraction o

mutual funds should not be perceived as a strike against green investing, b

as an indication of a segment of the mutual fund market with good growth p

since there are good reasons to make environmental investments. The first is t

is convincing evidence that environment-related investments pay in terms o

performance. Consider the performance of the Dow Jones Group and SAM Sust

Group of the Dow Jones Sustainability Group Index, launched in October 1

Index—drawn from the larger Dow Jones Index of 3,000 companies—

information on the link between environmental performance and the 

performance of over 200 companies worldwide. Market capitalization of t

exceeds US$4.3 trillion. Yet the real news is not how many companies are o

now, but where they and companies like them are going. Many financial 

including Dow Jones itself, are convinced that sustainability-driven comp

outperform the competition, because they look at long-term challenges. A

series of empirical studies shows that beyond compliance, corporate envir

investment increases financial performance and shareholder value. 

While interest in environmental issues by the financial sector over 

decade has primarily involved risk management and its implications for cred

the last 16–18 months has seen a shift in emphasis towards investmen

opportunities. This shift can be explained by the change in perceptions about 

ment-related business opportunities and, more importantly, by the track 

environmental investments. With the rise in eco-efficiency funds since 199

record now exists which proves that the performance of green funds 
6

exceeds that of standard industry funds. For example, a growing body of quantita

data comparing portfolios of sustainably-driven companies with industry aver

like the Standard and Poor’s 500 Index and the TSE 300 show the former o

performing the latter by an average of over three percent per year. 

Another reason that companies are making environmental investments is 

fact that there has been a shift in industry perception of these investment

recent report by World Resources Institute (WRI) notes that, whereas compa

had previously made environmental investments reluctantly as a matter of regula

compliance, now companies are beginning to move beyond minimum complianc

part of good business practices. The increase in eco-efficiency, the adoptio

internal environmental codes of conduct and company targets, and the increa

adoption of voluntary environmental standards like the ISO 14000 series, are exam

of this shift. In addition WRI notes:

Companies have even made a changing regulatory framework into a source of

competitive advantage by pre-empting environmental regulations and voluntarily

going beyond compliance on their own terms, knowing that rivals will likely be

compelled to react later (Repetto and Austin 2000).

Recent examples of such investment include giants such as General Mo

IBM, Interface, Johnson and Johnson, Pitney Bowes and others forming the G

Power market Development Group, committing their companies to accelerate 

use of environmentally-preferable power by 2010. Already, BP has announced it 

invest over US$1 billion on wind and solar energy in the next decade, while R

Dutch Shell will spend roughly US$500 million on renewable energy. When it co

to energy policy and the challenges of implementing the Kyoto Protocol, it is 

simply that the Global Climate Coalition—the industry group that worked to opp

climate change policies—is defunct. The real story is that more and more compa

are not waiting to see what happens with environmental regulations. They are mo

ahead now, over and above minimum compliance. 

From the preceding, the role that the environment plays in investment decis

should be relatively clear. The question remains, however, as to just how l

the environmental industry is. 

1.3 Defining Environmental Expenditures

The trickiest issue with understanding the size of the “environment industry

assigning an exact dollar figure to total environmental expenditures. This, in t

reflects the absence of a clear definition of what exactly, if anything, constitutes 

“green sector.” Unlike familiar and well-defined economic sectors such as minin

telecommunications, environmental expenditures, by definition, cut across a w

range of sectors, from pollution-intensive industrial sectors to energy, transporta

and agriculture as well as various service sectors, such as tourism.
Various efforts have been made to classify and measure environment

ditures. Rather than isolating a green “sector” per se, it has been argued 

transactions should be measured by the transformation of environmental c

tions into normal business activities as opposed to a specialized activity of 

mental experts.” One expert in this field has argued that environmental inv

should include all goods and services that improve the state of the envi

either by reducing the wasteful use of natural resources (e.g., eco-efficiency 

production techniques), or by reducing emissions (Gentry 1995). 

Table 1 provides some concrete examples of environmental expend

based on the preceding definition—divided into three categories: (a) eq

(b) services and (c) resources, with dollar values (1997 estimates):

Table 1: Estimated Environmental Expenditures

The above table gives a snapshot of environmental expenditures. Wha

important here is the relative size of this industry. At US$170.5 billion, it m

about two percent of US GDP, and approximately 0.7 percent of world GDP. W

is actually quite a large portion of US GDP for one industry, there is sti

potential. What is more interesting is the much smaller share of world GDP 

industry makes up, suggesting even greater opportunities outside of the Unit

US INDUSTRY (BILLIONS OF US$) GLOBAL INDUSTR

(BILLIONS OF US

EQUIPMENT

Water equipment and chemicals 13.5 34.0

Air pollution control 11.7 25.8

Instruments and information systems 2.9 4.6

Waste management equipment 11.2 26.7

Process and prevention technology 0.8 2.0

SERVICES

Solid waste management 31.0 88.3

Hazardous waste management 6.4 16.7

Consulting and engineering 15.3 26.5

Remediation/industrial services 8.6 14.7

Analytical services 1.6 3.1

Water treatment works 25.7 62.1

RESOURCES

Water utilities 24.2 64.9

Resource recovery 15.4 34.6

Environmental energy 2.2 4.4

TOTAL 170.5 408.4

Source: Ferrier 1996.
8
2 The Climate Agenda

Among the most intensive areas of work currently underway at the inte

level to address a global environmental problem is that related to climate 

While considerable attention continues to focus on the future steps that gov

will take in implementing the UNFCCC and its Kyoto Protocol, action i

underway within the market to address climate change. To take jus

numerous examples of action underway, during the 1990s, DuPont inves

US$50 million to reduce GHG emissions in their worldwide operations by 

of 45 percent. In 1999, DuPont further committed itself to reducing GHG e

by 65 percent by the year 2010. It also committed to allocating ten perc

global energy use to renewable energy by 2010.

While some marginal debate lingers regarding the scientific validi

global warming theory, overwhelming evidence shows that the global c

changing. In December 1995, the Second Assessment Report of the Intergove

Panel on Climate Change (IPCC)—a consensus-based report that dra

the largest gathering ever of scientists and other experts to address 

issue—shifted forever the debate about climate change. It concluded t

the end of the 19th century, global mean surface air temperature has 

approximately 0.3 to 0.6 degrees Celsius, and that “the balance of evidence 

that there is a discernible human influence on global climate.” An updated v

this report is currently under governmental review. 
10

The chair of the IPCC, in his report to the November 2000 Conference of 

Parties (COP VI), noted that current projections suggest an increase in gl

mean surface temperatures in the range of 1.5oC–6oC by 2100 (roughly dou

the 1995 IPCC predictions). In May 2000, the Intergovernmental Pane

Climate Change (Working Group III) released the Special Report on Emis

Scenarios: Summary for Policymakers (Intergovernmental Panel on Clim

Change 2000). It notes that future GHG emission trajectories are complex, g

that emissions vary in response to demographic change, social and econo

development, and the rate and nature of technological change. The IPCC re

makes use of four future emission scenarios:

– Scenario A1, characterized by very rapid economic growth, global populati

that peaks in 2050, and the rapid introduction of more efficient technologi

Other assumptions include a convergence in per capita income between

regions, capacity building and increased cultural interactions. This scena

outlines three alternative directions in technological change: fossil fuelintensive, non-fossil fuel sources, and a balance across all sources.

– Scenario A2, characterized by a very heterogeneous world, including sel

reliance of countries, very slow convergence in fertility rates among count

resulting in very high global population growth, and differences in per cap

income and technological change between countries.

– Scenario B1, characterized by a peaking of global population growth in

mid-century (as in Scenario A1), rapid changes in economic structures

towards services and information-based economies, the reduction in mate

intensity, and the introduction of clean and highly efficient technologies. I

this scenario the emphasis is on global solutions to economic, social, env

ronmental and other challenges.

– Scenario B2, characterized by continually increasing global population

(lower than A2 scenario), intermediate levels of economic development, 

less rapid and diverse technological change than in Scenarios B1 and A1. 

2.1 The Kyoto Mechanisms

The Kyoto Protocol was launched at the Third Conference of the Parties to 

UN Framework Convention on Climate Change held in Kyoto in December 1

Among the main outcomes of that agreement is the commitment by all Ann

countries to lower their emissions of six greenhouse gases—CO2

, CH4, N2O, H

PFCs and SF6

—by at least five percent below 1990 levels, with a target 

between 2008 and 2012. 

Reduction commitments within the Annex I Group of industriali

countries are not uniform. The member states of the European Union, the Cz
Republic, Bulgaria, Estonia, Romania, Poland, Slovakia and Switzerl

reduce their total greenhouse gas (GHG) emissions by eight percent e

United States will lower its total emissions by seven percent. Canada an

will reduce theirs by six percent. Some other countries are allowed to 

their emissions above the 1990 levels: these include Australia (eight 

Iceland (ten percent) and Norway (one percent). 

Three flexible market-based mechanisms are identified in th

Protocol: Annex I Joint Implementation (JI), the Clean Development Me

(CDM), and International Emissions Trading (IET).2 (A fourth approach, 

the “bubble” concept, is also allowed in the Kyoto Protocol.) 

These flexible mechanisms allow Annex I countries to meet a part 

GHG emission limitation targets through various types of international 

tion mechanisms. The logic of cooperating internationally in such effor

recognized, and includes the achievement of environmental objectives 

costs than would otherwise be possible if each country were to s

reducing GHG emissions independently. By introducing greater flexib

cost savings, various international mechanisms allow for sharing of r

costs between countries, and mobilization of private capital. 

The principle flexible mechanisms outlined in the Protocol are: 

– Joint Implementation, which provides for transfer of emission reduc

units (ERUs) tied to the implementation of specified projects. These

projects can be implemented between Annex I Parties.3

– Clean Development Mechanism enables non-Annex I Parties to host p

that contribute to their sustainable development goals and reduce gre

gas emissions, and allows Annex I Parties to use the certified emission r

tions resulting from the project to meet part of their commitment. 

– International Emissions Trading allows for transfers of assigned amount 

(AAUs) among Annex I Parties. A party’s assigned amount is its net GHG 

budget based on its emission reduction commitment under the Kyoto P

– Bubbles A bubble is a regulatory concept whereby two or more emi

sources are treated as if they were a single source. This creates flex

apply pollution control technologies to whichever source under the 

has the most cost-effective pollution control options, while ensurin

total amount of emissions under the bubble meets the environment

requirements for the entity.

Extensive work continues in determining the rules of each of these mec

to ensure that rules are transparent, equitable, and provide clarity and pred

to the private sector and governments. Although the mechanisms differ, they 

commodification of a metric ton of carbon, or its equivalent (one ton of 

2 Annex I JI is outlined in Article 6, the CDM in Article 12, and IET in Article 17. See UNFCCC (1997)

3 When ERUs are generated by one Party and sold to another Party, the seller Party subtracts the E

assigned amount, and the buyer Party adds the ERUs to its assigned amount. A Party's assigned 

net GHG emission budget based on its commitment under the Kyoto Protocol.
12

equivalent to 3.67 tons of carbon dioxide). This report concentrates on possible CD

eligible projects in Mexico, reflecting the unique trilateral (Canada, the United St

and Mexico) composition of the Commission for Environmental Cooperation.

2.2 The Role of Small and Medium-size Firms for Flexible Mechanism

Projects: Challenges and Opportunities

The particular focus of this report is climate-related project-opportunities invol

small and medium-size enterprises (SMEs) in Mexico. This issue is especi

important given the importance of SMEs in the Mexican economy in terms of 

total amount of capital invested, jobs created, and products manufactured. 

By way of illustration, Mexico’s agricultural sector comprises a large numbe

farmers working small plots of land on the one hand, and larger, irrigated plot

the other (World Trade Organization 1997). These enterprises tend to be n

dominant players within the markets they occupy.

In terms of geographical location, roughly half of Mexican micro-enterpr

are concentrated in seven states. Small firms tend to be located in the center of 

country and the metropolitan area of Mexico City, medium-size enterprises 

dispersed and big enterprises tend to be concentrated in the North. 

SMEs can play a role in the evolving international climate change agend

two ways. First, to the extent that they are engaged in production activities th

selves, they can do so by undertaking measures that reduce GHG emission

sequester carbon. These measures include: improving process efficiencie

installing technologies to reduce energy consumption, switching to less carb

intensive fuels, planting trees or improving forest management to sequester carb

and others. Second, to the extent that SMEs provide services that enable client

achieve greater levels of efficiency (e.g., energy service enterprises), they 

support trends toward greater efficiency. 

Put another way, SMEs can be just as involved in international effort

reduce the impact of climate change as larger companies. The difference is not 

type of activity eligible for SME-based projects. The difference relates to 

greater hurdles SMEs must face in: gaining knowledge of flexible mechani

under the UNFCCC or the Kyoto Protocol; meeting flexible mechanism accoun

requirements, including relatively high levels of informational and technical d

culties in calculating baselines and levels of additionality and affording third-p

certified emission reduction certification; generic difficulties in attracting exte

capital for climate-related investments; and other entry barriers including relati

high transaction costs, all of which may make SME activities appear less attrac

than those of larger entities. 

Despite these difficulties, it is argued that considerable investm

opportunities exist in Mexico’s SME sector Examples noted below cover 

electricity, steel and forestry sectors. Indeed, the purpose of the rest of this pap

to give examples of SME opportunities in Mexico that show promise for flex

mechanism-related investment.
3 The Electric Power 

Generation Sector: Demandand Supply-side Opportunitie

3.1 Introduction

The electric power sector represents opportunities and unique challenges 

in Mexico to participate in the evolving flexible mechanism marketpl

greatest opportunities for SME involvement in energy efficiency are twofo

First, SMEs in the industrial, commercial, and residential sectors can 

energy efficiency or fuel switching projects that will offset power-grid e

With the increased revenue generated by certified emission reductions, ene

ciency projects will have a shorter payback period than they would in the 

of the flexible mechanism. In addition to providing economic returns, ene

ciency projects can improve the productivity of the SMEs and enhance th

petitiveness in their respective markets.

Second, SMEs can take advantage of the potential business oppo

made available by operational flexible mechanisms. The profitability of ene

ciency measures is likely to expand the current market for energy efficien

nologies, products, and services. While energy services compan

energy-efficient equipment suppliers may not benefit directly from the 

emission reductions , these companies can take advantage of an indirect 

expanded market opportunities. 

Because of the status of the energy sector and the current re

framework, flexible mechanism opportunities in the power generation s
14

limited. Additional barriers specific to SMEs limit flexible mechanism opportun

for the power generation sector. However, the current regulatory structure is un

review. If proposals to increase private sector participation in the energy sector 

accepted, then opportunities for SME participation on the supply-side co

increase. At this time, the outcomes of discussions on power sector reform, as 

as on the time frame for reform are uncertain, although the new Fox administra

has reiterated its commitment to restructuring.

This section begins with an overview of Mexico’s power sector and trend

supply and demand. Second, an overview of GHG emissions from the power se

provides context for the potential for certified emission reductions. Mexico’s ex

rience with energy projects in the AIJ Pilot Phase is then highlighted. Third, 

current and potential role of SMEs in the power sector, whether as end-user

service providers and investors, is reviewed. A discussion of the most promi

segments in the power generation and energy efficiency markets follows. 

lastly, the limitations imposed by Mexico’s energy regulatory framework 

outlined. The section begins with a review of the power sector and the opport

ties for private investment.

3.2 Structure of the Mexican Electric Industry

3.2.1 Supply

According to 1998 data, the total effective electricity generation capacit

Mexico is 38,502 MW. Of this, some 90 percent originates from the Comi

Federal de Electricidad (CFE) and 2.2 percent from Luz y Fuerza del Centro (L

Sistema Eléctrico Nacional (SEN) companies. The state-owned corpora

Petróleos Mexicanos (Pemex) accounts for 4.4 percent of the total, and the pri

sector for three to four percent (Secretaría de Energía 1999b:45, 95 and 

1999a:12). In terms of supply, Mexico’s electricity market is thus thoroug

dominated by the SEN (combined capacity of 35,256 MW).

At present, the CFE and LFC meet slightly over 93 percent of the count

total electricity demand of 147.1 terawatt-hours (TWh). For 1998, direct electr

sales were 110.7 TWh (75 percent of the total) by the CFE and 26.7 TWh (18 perc

by LFC, which serves the Federal District (Mexico City) and some municipal

of Mexico, Puebla, Morelos and Hidalgo states. This latter company, it should 

noted, generates less than eight percent of the power it sells, getting the rest f

the CFE (Ibid. and CFE, no date: 4).

The two member companies of the SEN thus serve as the public electri

utilities. The current level of territorial coverage is around 95 percent. LFC co

the one-fourth of the country’s population of close to 100 million living in 

center of the country, while the remainder is served by the CFE.
The installed capacity of the private sector, authorized by the a

legislation, is 6,756.5 MW. In 1998, private sources only generated 5.93 

3.5 percent of the total gross power output in the country. Pemex g

5.42 TWh (3.2 percent) (Secretaría de Energía 1999a: 45).

The SEN plants break down by generation technology as follows: 7

electric units; 36 gas turbine; 29 steam; eight internal combustion; seven c

cycle; five geothermal; two coal-fired; one nuclear; one dual (fuel oil a

and one wind-powered. In other words, Mexico’s power production i

driven by fossil fuels (66.4 percent based on hydrocarbons, 10.5 on co

subtotal of 77 percent). Of the remainder, 14.4 percent derives from hy

tric, 5.4 percent from nuclear and 3.3 percent from geothermal and wind 

(Secretaría de Energía 1999b: 62 and CFE 1998: 12). According to CFE 

remaining useful life of the installed plant ensures that electricity can be g

under the current conditions and operating levels for the next 1

(CFE 1999a: 34). In recent years, the electric industry’s productivity and e

indicators have improved markedly (Table 2).

Table 2: Productivity and Efficiency in the Electric industry

Despite significant efforts to raise the productivity and efficienc

two companies, some specialists believe that these two companies a

staffed. In 1999, the 108,543 Mexican electricity sector workers (73,302 

and 35,241 for LFC) produced average annual sales of 1.33 gigawa

(GWh) per worker—a very low figure compared with other countries, e

those of North America.

CFE LFC

YEAR Interruption time Power sold per Interruption time Power 

(min/user) operations employee (min/user) operation

(GWh/employee) (GWh/e

1988 802 1.124 487 0.6

1989 567 1.299 447 0.6

1990 536 1.295 373 0.8

1991 495 1.319 414 0.8

1992 375 1.355 437 0.8

1993 447 1.447 408 0.9

1994 251 1.585 373 1.1

1995 242 1.654 401 1.1

1996 203 1.771 377 1.1

1997 236 1.853 352 1.3

1998 224.8 1.933 374 1.6

Source: Ministry of Energy web site.
16

Although the CFE’s economic efficiency may indeed be debatable, its 

financial and management indicators show this to be a healthy company wi

“sound financial structure” (CFE 1999a: 32). This is not the case for LFC, wh

according to some observers, received an indirect subsidy equivalent to $2.4 bi

in 1999 (Dessomes 1999).

In terms of future supply, an estimated 22,248 MW of additional insta

capacity will be required by 2008—the equivalent of 80 percent of Norw

current installed capacity, for example (Table 3). This represents 2,225 MW of 

capacity per year until then. The CFE has already taken steps within its investm

program to commission 6,444 MW of capacity in the coming years. The capa

gap of 15,804 MW, a little less than half the country’s current capacity, thus con

tutes the area of opportunity for the private sector in the Mexican electric indu

Table 3: Capacity and Demand, 1998–2008

3.2.2 Transmission

The SEN currently (1999) possesses an electricity transmission grid surpas

600,000 kilometers in length. This includes 34,079 of high voltage lines, 38

of secondary transmission lines, and 528,107 kilometers of distribution l

(CFE 1999b:16).

The time horizon for the current program of investment in the grid is 2

since beyond that year it is difficult to forecast the physical location of 

plants. Between 1999 and 2003, 20,237 kilometers of new transmission lines 

expected to be added, and between 2004 and 2008, an additional 12,273 kilome

(Secretaría de Energía 1999b:118).

At present, the independent producers are permitted to build transmis

lines for their own use; alternatively, they may access the SEN’s transmission 

through payment of charges established and published in the Official Gazett

the Federation (Diario Oficial de la Federación—DOF) on 24 November 1

and amended on 15 May 1998 (Ibid: 120).

(MW)

1998 2008 1999–2008

Effective Maximum Effective Maximum Total Capacity Capacity o

Capacity Demand Capacity Demand Additional developed by to priva

Capacity CFE sector

35.256 28.571 57.504 48.014 22.248 6.444 15.804

Source: Based on Secretaría de Energía 2000.
3.2.3 Demand

The supply forecasts and plans discussed above come in response to c

demand that has grown consistently since 1965, if not earlier. In tha

domestic electricity sales grew at an average annual rate of eight perce

faster than Mexico’s economy as a whole.

In the last 10 years, sales have grown by five percent per annum; t

is more than six percent for residential and medium-size business co

According to some Ministry of Energy estimates, demand growth in 

2000 has returned to the historical average near eight percent.

In 1998, gross generation by the SEN amounted to approximately 1

80 percent (137.3 TWh) of which was sold domestically. The market 

electricity sales was $6.9 billion4 and as indicated above, electrifica

reached nearly every one of the country’s residents.

The largest electricity consumer, absorbing 60 percent of the tot

industrial sector. It is followed by the residential sector with 23.1 percent; the 

cial sector with 7.7 percent; agricultural irrigation with 5.6 percent and 

with 3.8 percent (Secretaría de Energía 1999b: 40). The total number 

(accounts with the CFE or LFC) is greater than 22 million, more than 19 m

them residential (see Figure 1).

Figure 1: Electricity Consumption by Sector (1998)

In the last few years, the largest increase in electricity demand oc

the residential sector. From 1989 to 1998, sales to this sector grew by an 

6.5 percent per annum (Table 4). However, the industrial sector, especially 

size businesses, promises the fastest growth for the foreseeable future.

Industrial

59% Residential

23%

Commercial

8%

Agriculture irrigation

6%

Services

4%

Total users: 20 million

Residential sector:19 million

4 The data on sales revenues are taken from CFE, Estadísticas por Entidad Federativa 1998, p. 12. T

rate used (9.150160 = 1 dollar) is taken from CFE, Precios Internos y Externos de Referencia de lo

Energéticos, 10th edition 1999, Figure A.1.
18

Table 4: Average Annual Growth of Electricity Sales (CFE and LFC) (%)

Mexican demand will continue to grow by an estimated total of 72 per

in the next 10 years. To meet this new demand, the country’s energy plan

call for an expansion of the installed capacity by 63 percent. Under a scenari

normal economic growth,5 sales are expected to rise from the current 140 T

annually to 236 TWh in 2008.

The SEN has organized the task by dividing the country into nine geograph

areas: Northwest, North, Northeast, West, Central, East, Peninsular, B

California and Baja California Sur. In the last decade, top sales growth occurre

Baja California and Baja California Sur, with annual averages of 8.2 and 7.2 perc

respectively (Table 5). The largest overall consumers remained the Wes

region, taking up 23 percent, and the Central and Northeastern regions w

approximately 19 percent each.

Map 1 shows past growth and projected average annual growth of electr

sales in Mexico under three hypothetical economic growth scenarios devised by 

Federal Government and applied by the CFE for the period 2001–2010. The “h

scenario assumes average annual GDP growth of 5.8 percent; the “plann

scenario assumes 5.2 percent and the “moderate” scenario assumes 3.8 perc

Pratically all market forecasts issued to date by Mexican government plann

including those at CFE, have adopted the “planning” GDP assumptions. Thus, w

an anticipated GDP average growth of 5.2 percent per annum, electricity dem

will grow by 5.5 percent per annum from 2001–2010 (see Map 1).

Sector 1989–1998 1999–2008 80%

confidence interval

Residential 6.5 5.0 4.5–5.5

Commercial (1) 3.7 4.8 4.0–5.5

Services 1.5 4.7 3.5–5.8

Industrial (2) 5.8 6.3 6.0–6.6

Agricultural 1.9 0.9 -0.1–1.8

Total (excluding exports) 5.3 5.6 5.4–5.8

(1) Users charged general low-voltage rates, primarily commercial, service and micro-industrial establishments.

(2) Users charged general high-voltage rates (large industrial units) and medium-voltage rates (primarily medium-size 

and small industrial establishments as well as retail businesses and large service establishments).

Source: Secretaría de Energía 2000, p. 88.

5 The CFE planners made their power demand projections by considering three possible scenario

“Moderate,” with average GDP growth of 3.8% from 1999 to 2008; “Planning” with 5.2% and “High” with 

CFE no date. Desarrollo del Mercado Eléctrico 1994–2008, p. 11.
Table 5: SEN Planning Regions: Sales, Capacity and Demand

Map 1: Past and Projected Regional Electricity Sales in Mexico (1991–2

Source: CFE no date pp. 11, 23.

TOTAL

1 Northwestern

2 Northern

3 Northeastern

4 Western

5 Central

6 Eastern

7 Yucatán Peninsula

8 Baja California

9 Southern Baja Californi

Past

growth

(1991–2000)

Projected

growth

(2001–2010)

5,4. 5,5

7,6 7,4

4,3 4,9

4,7 6,4

5,4 5,5

5,4 6,2

7,1 6,5

4,0 4,7

6,1 4,7

4,2 4,5

7,0 7,4

8

1

2

9

4

3

5

6

7

Area1989 sales 1998 sales 2008 sales Growth Growth

1989–1998 19

(%) 

(GWh) (GWh) (GWh)

1 Northwest 6.796 10.020 16.681 47 

2 North 7.280 11.113 20.098 53 

3 Northeast 13.479 23.746 43.943 76 

4 West 16.966 29.724 54.028 75 

5 Central 22.062 29.026 44.310 32 

6 East 15.584 22.337 34.138 43 

7 Peninsular 2.073 3.961 7.738 91 

8 Baja California 3.640 6.347 13.595 74 

9 Baja California Sur 610 863 1.569 42 

Small systems 47 71 119 51 

Total 88.537 137.208 236.219 55 

Source: Extrapolated from data in Secretaría de Energía 1999b.
20

3.3 Balance of Trade

Electricity supply and demand data include imports and exports. In the last 10 ye

the balance of trade has varied somewhat erratically, but there was a gen

trend of declining exports and increasing imports. A total 562 GWh were impo

and 1931 GWh were exported in 1989, rendering a favorable balance of 1369 G

but by 1998, the trade balance had turned negative by 1,434 GWh beca

imports had increased to 1,510 GWh while exports dwindled to 77 GWh. 

projections include minimal exports for the next few years.

3.4 Energy Savings and Efficiency

Energy savings and efficiency plans implemented mainly by government agencies 

as the National Energy Efficiency Commission (Comisión Nacional para el Ahorr

Energía—Conae) and the Electrical Energy Savings Trust (Fideicomiso de Apoy

Programa de Ahorro de Energía del Sector Eléctrica—Fide) may significantly augm

energy savings so that some new capacity creation can be postponed. Con

programs in particular may diminish new power plant requirements by 7,531 

or 13 percent of the total capacity required for 2008, as well as reducing the amo

of electricity sales by 25,754 GWh or 11 percent of sales for that year. Yet, altho

profusely discussed in the Secretaría de Energía’s Prospectiva del Sector Eléc

1999–2008 (Outlook for the Electric Industry, 1999–2008), this energy efficie

potential is not factored into the planning calculations, perhaps because the ac

results of any given efficiency program are hard to predict.

3.4.1 Rates

In 1962, shortly after the nationalization of the electric industry, the governm

set the pricing policy that would remain in effect to this day. In a coarsely dra

highly schematic classification, the CFE and smaller affiliated companies div

their customers into 13 different rate categories by business and individ

consumer type. After 1988, the number of categories was increased to 31. 

price of electricity to the consumer is now set “as a function of power vol

demanded, voltage, temperature [of the user’s zone of residence], type of 

and guarantee of service” (Secretaría de Energía 1999b:44)

The current rate structure consists of the following sectors (CFE no date:1

Residential

Users paying rates 1, 1A, 1B, 1C, 1D and 1E for domestic service.
Commercial

Users paying rates 2 and 3 for general low-voltage service; these are p

commercial, service and micro-industrial establishments.

Service

Users paying rates 5, 6 and 7 for public lighting, wastewater and drinki

pumping and temporary service.

Industrial

(Includes medium-size and large business users)

Medium-size business: Users paying rates O-M and H-M for general 

voltage service; these are primarily medium-size and small in

establishments, as well as commercial and large service establi

Large industry: Users paying rates H-S, HSL and HTL for gene

voltage service; these are essentially large industrial establishm

major water supply systems.

Agricultural

Users paying rates 9 and 9M for agricultural irrigation pumping.

Exports

These consist of sales to US and Belizean companies.

The rate structure is gradually being adapted to reflect the comp

the productive apparatus and the various consumer types, including re

service and industrial consumers. The last group can opt for hourly ra

makes for more efficient administration of demand and streamlining 

demand management for the provider.

Historically in Mexico, electricity prices, especially for domestic rat

have tended to lag behind the cost of production. Sharp real rate increas

early 1990s constituted an effort to bring rates in line with costs, but 

almost 22 percent in constant currency from 1994 to 1999, with the a

average price6 declining steadily from 6.43¢ to 5.28¢ per kWh (Figure 2)

Figure 2: Aggregate Average Price per kWh (1994–1999)

94 95 96 97 98 99

Ye

¢/KWh

6.43

5.63

5.46 5.59

5.41 5.28

22% decline in rea

6 The aggregate average price includes maintenance charges, but does not take account of the LF

or the value-added tax (VAT). 7 CFE, Annual Report, p. 20. The exchange rate applied is 9.56 pesos to the dollar according to Bank of 
22

Fluctuation in the price/cost ratio has been an ongoing preoccupatio

defining the country’s rate policies. The authorities have tried to apply policie

such a way that average price tracks cost more closely, and periods of dispa

are shortened.

From 1997 on, almost all rates were automatically indexed on a mon

basis for inflation in the cost of basic inputs into production, transmission 

distribution. The affected rates are those applicable to the commercial se

(rates 2 and 3 for general low-voltage service), the service sector (rate 7 o

temporary service), and the industrial sector, as well as the so-called “Interrupt

service” rates (I-15 and I-30).

The indexing formula for all voltages is a function of the average Prod

Price Index (PPI) for “Machinery and Equipment” (IPPME), “Raw Met

(IPPMB)8 and “Other Manufacturing Industries” (IPPOM). In addition, the h

and medium-voltage rates are indexed to international fuel prices (fuel 

diesel, coal and natural gas) using an index called ICC (ibid). In calculation of 

index factor for medium-voltage rates, the change in the average of the three 

is assigned a weight of 71 percent and the ICC is weighted 29 percent; the co

sponding weighting for the high-voltage rates is 59–41 percent.

Indexing has rendered pricing more transparent, and it is now possibl

extrapolate price scenarios for the future from inflationary trends in var

inputs, including fuel. These scenarios are fundamental to the design of pri

investment projects in the electric sector.

In order to make comparisons with alternative investment projects, the pri

sector needs to know the production costs incurred by the CFE per kWh. As var

Mexican electricity analysts point out, the true figures are a well-kept secret. 

publicized average costs exhibit distortions due to the inclusion of financial expe

and the aggregation of generation, transmission and distribution costs. In short, t

do not provide accurate information about the net costs of power generation.

Evidently, spot estimates of generation costs are laborious and comp

given the dimensions and complexity of the CFE’s installed facilities. Consider

efforts to establish the marginal short- and long-term costs of generation h

been made over several years, but the results have not been made public.

In 1999, CFE sales revenues stood at approximately US$8.223 billion9 

total costs slightly over $7 billion. The aggregate average cost per kWh delive

was reported as $0.047, and the aggregate average cost of generation 

US$0.033/kWh.10 These figures do not strictly reflect the true cost of product

though, since they include all manner of government transfers and subsid

After all, the price-cost ratios given in the income statements in 

Commission’s 1998 and 1999 annual reports were 0.75 and 0.73, respectiv

meaning that the average revenues fetched by the CFE for its products are curre

25 percent short of its costs. Thus, the operating surpluses habitually repo

8 Prospectiva, p. 46. For more details, see: http://www.cfe.go.mx/gercom/tarif100/ti.chtml.

9 Figures taken from CFE, 1999 Annual Report and converted to dollars (1 dollar = 9.56 pesos). 10 Assuming that the cost of generation is equivalent to 70% of the aggregate average cost.
by the company are due to a wide range of government subsidies and to 

sui generis accounting practices.

Moreover, the aggregate costs are estimated by a cumbersome and 

calculation of financial and operating costs. The complexity is due to 

range of power plants at different stages in their useful lives, using a v

technologies and having disparate levels of amortization or depreciation

other factors.

3.4.2 Rate-setting Policy

According to recent information, except for those rates applied to the reside

agricultural sectors, all rates were sufficient to cover the average cost of pro

For rates applied to the industrial sector, the largest power consumer, the p

ratio is approximately equal to 1.

Normally, all rates are composed of fixed charges corresponding to the 

quality of service requested, plus variable charges for power consumption 

For the residential sector, which consumes 23 percent of power, the 

power is subsidized on the order of 58 percent since the current price/cost 

this sector is 42 percent. The fiscal cost to the federal government due to thi

is estimated at approximately US$2.4 billion in 1999. For the agricultur

(irrigation pumping), the rate subsidy amounts to almost 70 percent, but 

be added that this sector only represents six percent of the national marke

Rate-setting policy is not established by the CFE but rathe

Secretariat of Budget and Public Credit (Secretaría de Hacienda y Crédito 

authorities. The decision to eliminate subsidies is, in the final analysis, a 

one, and the improvement of the price/cost ratio in both sectors dep

economic policy decisions in the immediate future.

As of January 1 of 2000, a Ministry of Finance order authorizing 

adjustments and modifications goes into force. For 2000, rates for reside

agricultural irrigation (rates 9 and 9M), public lighting (rates 5 and 

wastewater and water supply pumping (rate 6) were expected to rise by 0.0

per month. The aim of these adjustments is to raise the price/cost ratio 

rates, as stated in the document in question: “the rate-setting proposal 

to narrow the gap between these rates and the real cost.”12

In the last ten years, electricity prices in Mexico have remaine

invariant in real terms. Despite some fluctuations, the median price f

years (the weighted average of all rates) remains stable, and the rates a

to the industrial sector in particular show average annual growth of -2.1 

while the other rates increased (Table 6).

11 Estimates produced from database of Gutiérrez Santos, 1999:47.

12 On CFE web site, section “Gerencia Comercial,” http://www.cfe.gob.Mexico.
24

Table 6: Electricity Rate Trends 1989–1998

(1998 Constant Cents/kWh)

Short-term projections (5–10 years) of Mexican electricity prices are only v

if done by consumer sector, since the sectors obey different parameters. Reside

rates are set basically as a function of economic policy criteria. The key question 

determine the speed at which the authorities intend to rectify the price/cost r

For industrial rates, the methodology is defined and the foreseeable p

trends may be plotted by taking account of trends in the producer price ind

and in forecasts of the price of fuels used for power generation.

3.5 Overview of Emissions from Power Generation

Mexico’s electricity generation capacity is dominated by thermal power pla

Thermal power generation accounts for approximately 65 percent of total gen

tion, the majority of which is from oil-fired plants. Coal, gas, and diesel pl

supply the remaining thermal generation. Hydroelectric capacity provides 

next largest contribution to overall power generation, approximately 29 perc

The remaining 6 percent of installed capacity is met by nuclear, geothermal, 

wind capacity. Table 7 (below) provides a summary of the country’s genera

capacity by fuel type and region. 

Carbon dioxide emissions from the power sector comprise a significant 

of Mexico’s total contribution to global greenhouse gas emissions. Accordin

the most recent national communication by Mexico on its emissions invent

Year Commercial Industrial Lighting Residential Agricultural Average P

1989 10.46 4.82 8.47 4.80 1.15 5.39

1990 11.05 4.86 11.77 5.57 1.35 5.85

1991 13.01 5.55 13.53 6.89 2.62 6.92

1992 14.94 5.59 14.92 7.68 3.60 7.71

1993 15.56 5.4 15.62 7.79 4.42 7.81

1994 14.85 4.52 14.54 7.41 4.04 7.04

1995 9.80 2.82 9.40 4.68 2.19 4.35

1996 10.29 3.37 10.25 4.97 2.27 4.70

1997 11.57 4.21 11.32 5.50 2.50 5.45

1998 11.28 3.98 11.96 5.49 2.47 5.25

Average 

annual 

growth in % 0.8 -2.1 3.9 1.5 8.9 -0.29

Source: CFE 1999a, domestic electricity price table (no page number).
the electric sector contributed approximately one-quarter of total emis

about 108,500 billion metric tons of CO2 (INE 1999). This emission estim

not include CO2 emissions from fossil fuel combustion for electricity ge

in the industrial, residential, or commercial sectors of the economy.

Expansion plans for Mexico’s generation capacity through to the y

favor additions of natural gas-fired capacity, complemented by some hydr

geothermal and coal-fired facilities. Based on the latest version of CFE’s e

plan, the overall increase in generation capacity will be on the order of 

with about 70 percent, or some 15 GW, provided by natural gas-fired 

mostly combined cycle plants. Table 8 provides a summary of planned 

additions (further detail is provided in Annex A). 

The increased proportion of natural gas in the fuel mix used for e

generation will likely decrease the overall carbon intensity of the power ge

sector (i.e., kg CO2

/kWh). As noted, natural gas has a lower carbon cont

thus emits less CO2 per unit of energy, when compared to either oil or 

extent to which this decline in carbon intensity on a per kWh basis oc

depend on resource utilization patterns. In addition, while the carbon 

of the sector will decrease, the overall CO2 emissions from power ge

activities will increase due to the necessary increase in production.

The ability for flexible mechanism projects to generate certified 

reduction credits will depend on its ability to reduce emissions compared 

would have happened in the absence of the flexible mechanism. Basel

benchmarks are important tools for measuring these emission reductions. 

at which the baselines are set will determine the amount of certified emissio

tions a given project can achieve and the additional revenue flexible mechan

ticipation is likely to afford. For example, if natural gas-fired, combined-cy

are the typical plant that is installed, in order to generate certified emissio

tions, flexible mechanism projects must have emissions lower than such 

Such a baseline would provide Certified Emission Reduction credits for r

energy technologies and energy efficiency measures. 
26

Table 7: Installed Generation Capacity, as of December 1997

Thermal Generation

Hydro Combined Gas Dual

Area and wind Fuel Oil Cycle Turbine Diesel2 Fuel3 Coal Geothermal Nuclear Total

Northwest 941 2,162 130 3,233North 28 1,074 200 253 1,555Northeast 118 1,715 378 170 2,600 4,981Western 1,797 3,466 218 2,100 88 7,669Central 1,902 2,474 482 374 5,232Eastern 5,250 2,217 452 43 40 1,309 9,311Peninsular 442 212 328 1 1,083Baja California 620 177 2 620 1,419Baja California South 113 96 75 284Isolated Systems 47 47

Total 10,036 14,283 1,942 1 671 125 2,100 2,600 748 1,309 34,814

28,8 % 41 % 5,6 % 4,8 % 0,4 % 6,0 % 7,5 % 2,1% 3,8% 100.0%

1 Wind capacity is 1.6 MW installed at La Venta, Oaxaca.2 Internal combustion.3 Generally runs on fuel oil and natural gas or fuel oil and diesel (Eastern Subdivision).

Source : Secretaría de Energía, 2000.
Table 8: Summary of Planned Evolution of Electricity Generation Capaci

1997–2007

3.6 Power Generation and Energy Efficiency Projects under AIJ

Mexico’s portfolio of JI/AIJ projects has only recently been expanded t

energy projects. This reflects the initial reluctance of the Secretariat o

and other parts of the Mexican government to support projects in th

sector, due to concerns about the implications of such projects for Mexico

sector, given its contribution to the country’s GHG emissions. Some ener

officials expressed concerns that issuing credits for projects in the energ

might limit the country’s ability to reduce emissions at some point in th

In effect, some officials have counseled that Mexico’s energy sector 

potential emission reductions to meet any future targets Mexico may fa

in the history of Mexico’s JI/AIJ program, the National Ecology 

(Instituto Nacional de Ecología) signaled its preference for forestry proj

indeed the first three projects to receive registration in Mexico’s Reto V

y Registro de Acciones (RVRA) were alternative agriculture and forestry p

3.6.1 Past Lessons with JI/AIJ Projects in the Electric Power Sec

Mexico has been involved in both power generation and energy ef

JI/AIJ projects. With the approval by the San Juanico wind generation f

a JI project in 1999, Mexico acquired its first energy sector JI project r

with the US Initiative on Joint Implementation. On the demand-side, the 

project in the Mexican states of Nuevo Leon and Jalisco developed u

Existing Existing Planned Total 

1995 1997 1997–2007 2007 

Geothermal 753 748 215 963 

Hydroelectric 9,331 10,036 2,465 12,501 

Combined Cycle 1,890 1,942 14,703 16,645 

Coal 2,250 2,600 2,700 5,300 

CITD 129 125 131 256 

Gas Turbine 1,682 1,671 1,154 2,825 

Conventional (with CC and Dual) 15,695 16,383 150 16,533 

Nuclear 1,309 1,309 - 1,309 

Total 33,037 34,815 21,518 56,332 

Note: Due to technology mix at several proposed projects and name changes at some plants, classification may no

Source: CFE 1999a, domestic electricity price table (no page number).

13 These are Proyecto Salicornia (alternative agriculture, 1996), Scolel Té (forestry, 1997), Sier

Querétaro (reforestation, 1998), and Sierra Norte de Oaxaca (forestry, 1997).
28

World Bank’s AIJ Pilot Program, reduces grid emissions through a high efficie

lighting project.

The San Juanico wind generation project dates back to a commitment m

by Arizona Public Service (APS) under the US Climate Challenge to reduce emiss

below 1990 levels, together with a transaction between APS and Niag

Mohawk Power Company (NMPC) involving a swap of SO2 emissions per

and CO2 reductions. As part of the transaction, APS acquired the commitmen

invest in an emissions reduction project, and chose to work with CFE in Mexi

The San Juanico project involves the replacement of a diesel-fired genera

station at San Juanico that provided electricity for an isolated grid in the town 

about three hours a day with a 117-kW system powered by 100 kW of wind tur

generators and 17 kW of solar panel capacity, with an upgraded 80-kW diesel 

providing back-up power. The key to the system is a 70kW power processor 

balances power from the two renewable resources, and a bank of batteries provi

power storage capacity. 

The project cost a total of about US$1 million, of which APS and NMPC prov

US$300,000, government agencies another US$250,000, and the government

Baja California Sur state and the town of San Juanico another US$260,000. 

municipal government contributed land and local villagers provided labor. 

villagers recognized the economic potential of the system and as a result agr

to move from the old system in which they paid a flat rate of 50 pesos a mo

for electricity to a system of metered billing. According to the project’s develop

a fish processing plant in the town was not operating before the project 

completed, but could do so afterwards. This would permit the fisherman to s

and preserve fish in the event that prices are unacceptably low, substanti

improving the revenue potential of their catch. Previously, fishermen w

obliged to sell their fish at the going price or lose it to spoilage.

The GHG emission reductions from the project are limited, howe

According to APS, the estimated reduction in emissions is about 350 tons of 

a year, or some 10,000 tons of CO2 during the lifetime of the project. Given 

sizeable investment in the project, the cost per ton of the carbon reductions gener

by San Juanico is about US$100 per metric ton. The costs of carbon offsets f

these projects are not publicly available, but the price offered and, in the cas

the USIJI forestry project Scolel Té, paid for carbon credits from these proj

has normally been US$10 per metric ton of carbon. Clearly, this cost is substant

more competitive than the cost associated with the reductions achieved at 

Juanico, again confirming the initial assessment that the capital costs associ

with San Juanico were comparatively high.

The project was implemented under a cooperative agreement between 

and CFE. According to the APS team responsible for the project, CFE’s involvem

and in-kind support for the project was crucial to its success. However, o

14 Personal communication from C.V. Mathai, APS project manager, October 1999.
agencies also played a part in implementation, and it is likely that it would 

been completed without their support. USAID and the US Department of 

Sandia National Laboratory both contributed additional funding to the 

3.6.2 Other Pilot Projects

Since the San Juanico project (which is of limited usefulness as a model f

quent projects because of cost and time involved), several energy e

projects have been submitted to INE and USIJI for registration. These i

series of demand-side management projects implemented by a Mexica

services company submitted for registration by financial advisors E

International Corporation (EIC). These projects have been implemen

commercial basis, with almost commercially-priced financing, and could 

an example of flexible mechanism projects as viable investments. At 

these projects are under review by USIJI and INE.

3.7 SME Market in the Power Generation and Energy Efficiency Se

This section seeks to characterize the SMEs that are involved in th

generation and energy efficiency sectors in Mexico, and the opportun

new entrants in these markets in the future. While the ability of SMEs to p

in the generation sector, in particular, has been limited in the past, the re

changes that seem likely in the next several years could alter the market 

ment substantially. On the other hand, in the energy efficiency sector, 

the companies currently involved are SMEs, and the opportunities 

entrants are probably greatest for larger, established firms from overseas, e

energy service companies.

3.7.1 Energy Efficiency Sector

The energy efficiency sector in Mexico is made up of a large number 

and an increasing number of larger, international firms. No formal, 

available registry of companies exists, and efforts to characterize the 

detail have been limited to date. The assessment presented in this paper 

largely on anecdotal evidence and observation. 

In recent industry meetings organized for the energy efficiency an

services company sectors in Mexico, the companies present were ex

small engineering firms with between five and 20 employees. Howev

foreign energy services companies have also been active in the market, esp

the last five years, and it seems unlikely that the group in attendanc

recent meeting in Mexico was representative of these newer players. 
30

The presence of larger firms is likely due to the wave of US investmen

Mexico resulting from NAFTA. Larger energy services companies from 

United States have followed their larger clients into Mexico to perform ene

efficiency projects at Mexico-based facilities. More recently, with Fide’s eff

to promote the energy efficiency sector in Mexico, there has been increa

interest on the part of US and other international energy services companie

the Mexican market. 

Regardless of the broader factors, however, the primary determinant 

investor interest in the sector is the potential for identifying and implemen

profitable projects. As energy costs edge higher and the need to become m

competitive in international markets sharpens, companies with energy-inten

processes will look for cost-effective energy savings, and will employ exte

expertise to the extent that they lack this expertise in-house. As noted ear

energy prices have moved quite dramatically higher since mid-1999, in part 

result of the increase in crude oil prices, but also due to the significant stren

of the Mexican peso, which has appreciated by about 20 percent since late 1

Together, these factors will increase the incentives for industrial and comme

energy users to reduce their energy costs.

3.7.2 Power Generation Sector 

The scope of investment opportunities in flexible mechanism projects in Mex

power generation sector will depend on the extent to which the regulatory struc

is reformed. The current framework allows participation of the private se

under only four modalities. These modalities include independent power produc

(IPP) over 30 MW; cogeneration plants; small-scale production under 30 M

and self-supply to service private needs. In any case, however, power genera

projects have high capital requirements that may well exceed the resources 

capabilities of SMEs, even when the additional revenues generated by certi

emission reductions are taken into account. Based on the number of private se

projects that have been approved by the Energy Regulatory Commiss

(Comisión Reguladora de Energía, or CRE) for new project development, th

appear to be relatively few SMEs currently involved in this sector.

– Self-supply. The average size of the generation facility for which self-sup

permits have been issued is roughly 30 MW. This size represents substan

tially more capacity than the average small or medium-size company wou

be able to consume by itself. Also, at about US$30 million, this requires a

substantially larger investment than most SMEs, with net assets in the

neighborhood of $1 million to $10 million, would be able to finance. Whi

possible, it does seem unlikely that a large enough group of SMEs would 
able to agree on a project of this size. Even so, there may well be so

smaller firms, especially in sectors where energy consumption is hig

have developed some of the smaller projects for which permits have 

issued. Accordingly, of the project types open to private investment at 

the self-supply sector is probably the most attractive to SMEs.

– Cogeneration. The average size of the cogeneration facilities for which 

have been issued is substantially larger, about 75 MW. This confirms a

tions that only a few cogeneration projects with favorable demand ch

istics can actually be implemented, and suggests that these projects 

even more clearly the province of larger firms, since the investmen

required would likely average about US$75 million. Given the techn

complexity of cogeneration projects in general, this sector would ap

be a less attractive area of opportunity for SMEs in Mexico.

– Import. Import permits have been issued to companies that are mos

maquiladora subsidiaries of large, multinational corporations based 

United States or Asia. The list of import permit holders includes six 

totaling some 10 MW of transmission capacity, under the following 

Bose (consumer electronics); Minera Múzquiz (mining); Seihwa (pr

electronics); Paulson Mexicana (unknown sector, but a foreign com

Hyo Seung de Mexico (probably electronics); and Mecox Resources

(unknown sector, but a foreign company). 

There are several explanations for the relatively low level of investment 

power, especially under the cogeneration, self-supply and small-scale pr

provisions of the energy law. Barriers to private sector involvement in the pow

that are applicable to both large and small companies are discussed late

section. However, there are other issues that make it even more difficult for 

opposed to larger enterprises, to get involved in private power production: 

– Investment size relative to balance sheet assets of developers. Power ge

projects require substantial initial capital investments. This factor, t

with the transaction costs involved with executing such projects, is 

the most important limitation on the participation of SMEs in the p

sector. While the list of permits issued to date by the CRE contains 

names of companies to which permits have been issued, it is difficult 

discern whether relatively small companies have received permits.

However, while this list does not provide detailed information on e

company, anecdotal and empirical evidence does suggest that small

companies are in the minority.

– Transaction costs. Conversations with Mexican enterprises that have con

developing generation facilities since 1993, and to a lesser extent since 
32

reveal that the process of permitting and securing project permits, sales

agreements, freighting arrangements with CFE, and obtaining gas supply

contracts (previously with Pemex, a complicated process) have played a

important part in slowing development, increasing costs and, ultimately

dampening the viability of the projects. However, there are changes

underway in the market that could help reduce some of these transactio

costs. Since gas transportation and distribution were opened to private

companies in 1995, for example, private investment in this sector has

increased, and numerous market entrants are developing large customer bas

based on rapid conversion to natural gas from other fuels. 

3.8 Opportunities for Power Grid Emission Reductions for SMEs

Mexico’s rapid growth in electricity demand and consumption must be me

construction of new generation capacity, very likely complemented by increa

investment in energy efficiency measures and demand controls. This nee

compounded by the fact that some generation capacity, albeit a small segm

will be decommissioned in various areas of the country in the next several ye

With adequate support from energy policy initiatives, private power, u

cogeneration or renewable energy technologies, could play a significant rol

meeting Mexico’s capacity requirements in the next decade, especially in reg

where access to natural gas will be limited because of considerations regar

the cost of infrastructure development or limited sales potential. More immedia

energy efficiency measures can play a role in reducing demand for electricity

addition, these measures can offset carbon emissions by reducing power genera

and the need for additional capacity.

While SMEs could ultimately play a part in both the power generation se

and the energy efficiency sector, both as end-users as well as project developer

seems most likely that they could play a role in the development of the ene

efficiency technology and services market. Their role as end-users of serv

provided by energy service companies offers the most potential. To the ex

that SMEs do take part in the power generation and renewable energy mar

the opportunities to do so may well include developing off-grid capacity. 

example, taking advantage of renewable energy opportunities to displace cur

use of fossil fuels for thermal energy requirements in some production proce

as well as space and water heating for commercial and tourism businesses. O

promising areas might include fuel switching to natural gas, and possibly 

development of generation capability under a self-supply permit. 

There are seven major market segments that are likely to emerge as sig

cant markets for development of flexible mechanism projects in Mexico. 

important to note that the role of SMEs in most sectors (government is 
exception) may be either as service providers (on a financed basis, as in 

ance contracting, or straight sales), or as service consumers (simila

varying contractual arrangements). Table 9 highlights the different 

energy projects that may be most attractive in each sector and the 

SMEs can potentially play.

The potential applications of energy technologies and the particip

SMEs are addressed in the following section. First, opportunities for b

connected as well as off-grid applications in the power generation se

examined. Second, energy efficiency opportunities on both the demand 

supply side are discussed.

Table 9: Potential Flexible Mechanism Opportunities 

for SMEs by Market Segment

3.8.1 Energy Efficiency Sector

Energy efficiency projects offer significant opportunities for SMEs, esp

the nascent energy services company sector. There are numerous sm

specializing in energy engineering that have provided services to indus

commercial clients, generally limited to fee-for-service contracts as op

performance contracting, which requires larger capital resources or a

financing, which has traditionally been lacking in Mexico.

Market Segment Energy Efficiency Power Generation Role of 

Opportunities Opportunities

National power supply Generation Renewable energy Limited, 

Transmission power sales competi

Distribution larger fi

Renewa

equipme

Industrial and mining Electricity Renewable energy for End-use

Thermal energy use self-supply generation Energy s

Fuel Switching Cogeneration compan

Fuel Switching

State, municipal Lighting Renewable energy for Energy s

and federal Cooling self-supply generation compan

government Heating and thermal energy needs Energy e

buildings Pumping Equipm

Commercial Lighting Renewable energy for Energy s

Cooling self-supply generation compan

Heating End-use

Hotels Lighting Renewable energy for Energy s

Cooling self-supply generation compan

and thermal energy needs End-use

Residential Lighting Renewable energy Service 

Cooling for electricity and 

Heating thermal needs

Hot Water
34

The promotion of energy services company activity in Mexico is the fo

of a major initiative by Fide, with support from the Interamerican Developm

Bank (IDB). Fide’s multi-year Programa de Eficiencia Energética (PEE), whic

funded through a US$23-million loan from the IDB, includes a range of activ

intended to support the strengthening of energy services companies in Mex

The Fide program is intended to help enhance the technical and business ca

bilities of Mexican companies that could become energy services compan

with technical training, development of contractual mechanisms, and effort

create a certification system for energy service providers. Fide will also crea

rebate program that will give end-user companies a greater incentive to participa

the program. In addition, a Decentralization Program funded by Banobras, also w

resources from a US$400-million loan from the IDB, will provide resources 

state and local governments to undertake a wide range of programs—which c

include energy efficiency projects. To the extent that the program leads to the incr

in demand for energy services company services, this program will complement 

conditioning of the energy services company supply provided by Fide. 

There is increasing awareness of the opportunities that energy efficie

investments offer—even if they are not utilized to the greatest extent poss

There is significant regional variation with regard to the receptivity and viabilit

energy efficiency projects. For example, several areas of the country boast clim

conditions and rapid energy demand growth that make energy efficiency investm

a far easier proposition to sell to clients than in other regions. Several sectors h

become targets for the development of an energy services company sector in Mex

– Industry, commerce and hotels. Industrial, commercial and hotel companies 

becoming increasingly aware of the potential savings that may be generate

by energy efficiency programs. This increased awareness is attributable to 

a large extent to the efforts of Fide and Conae, but is also due to tariff increa

The adjustments in electricity tariffs in the period following the 1994 devalua

tion, coupled with significant seasonal variations in tariffs in some regions 

the country, have made the economic benefits of such projects clear. 

At the same time, industrial companies have limited their energy effici

cy efforts to conducting energy audits. About 60 percent of companies poll

by Fide indicated they had undertaken audits; of these, some 40 percent

reported that energy consumption was higher than necessary. However, the

scope of measures implemented by this segment seems to have been limited

(IIEC et al. 1996). Tight budgets and numerous attractive non-energy-relate

investment opportunities tend to relegate energy efficiency investments to

second- or third-tier priority—in spite of the potential savings. Accordingly

interest in performance contracting, or “outsourcing,” has increased.

Compared to the industrial sector, the commercial sector appears to h

done far less in terms of identifying energy use patterns through audits
(32 percent in the Fide survey), and of these, 45 percent reported h

than necessary energy consumption. Lighting fixture changes and t

installation of independent circuit breakers appear to be the most p

measures adopted (IIEC et al. 1996).

The economic returns on energy efficiency investments are gr

regions where cooling requirements tend to be the greatest, which is t

in the regions of the country where demand growth is the fastest and

dentally, where the seasonal variation in energy and capacity charges 

greatest. In other regions with more temperate climates, such as the V

Mexico and Guadalajara, the returns on such investments tend to be a

in larger industrial and commercial facilities, and not so much in hotel

Prior to the decline in the peso in August 1998, as of mid-1998, in

tariffs nationwide averaged about 4.5¢/kWH, while commercial tariffs 

10.5¢/kWH. These levels are sufficiently high to make project econom

attractive, even in more temperate regions if the consumption volumes 

ficiently high. Elsewhere, in the hotter northwestern and northern reg

well as the tropical climates of the coastal regions, these rates are more 

sufficient to make projects economically viable. Indeed, these areas of

higher than average tariffs as well: in Sonora, for example, an industria

faced summertime peak tariffs in the range of 9 to 11¢/kWH, and bas

tariffs in winter as low as 2.3 to 2.8¢/kWH. As noted earlier, depreciat

the peso reduces the dollar value of these tariff rates for a short period

the inflation component in the tariff escalator will permit tariffs to rec

most, if not all the decline in dollar terms within a few months. In the 

situation, in which the peso is much stronger, tariffs in dollar terms ha

increased, especially relative to tariffs imposed on the Mexican firms’ 

tors in the United States and elsewhere. This will only reinforce the de

of implementing energy efficiency measures.

– Municipal and state governments. Local governments also offer attr

projects, especially in the area of efficient lighting. Fide has helped 

about $2 million in demonstration lighting and pumping efficiency 

for 135 municipal governments. Figures for these projects suggest an 

repayment period of between one and two years, based on investm

ranging from US$10,000 to US$20,000 (Torres 1998).

Based on these demonstrations, municipalities have finance

projects using multilateral and private bank resources, the former ch

through Banobras (Banco Nacional de Obras Públicas). The total 

financed by Banobras is about US$24 million, covering another 100 

palities. (Data on the amount of investment privately financed, 

municipalities, are not available.) 
36

Fide estimates the current market for efficiency projects is made up 

about 1,000 municipalities, each with a population of about 50,000 inhabitan

where projects have not yet been undertaken. A recent Fide study of th

market’s scope suggests the potential for 1.4 billion pesos of investment 

425 MW of capacity reductions and 1,800 GWH of energy savings. 

In energy efficiency projects for municipalities, the issue of collecti

by energy services companies has been of greater concern than in the indu

trial projects. While lease contracts are generally signed in both project

types, the potential for political change leading to cancellation of contra

is clearly greater at the local level. Some equipment suppliers/developer

have addressed this situation by including clauses permitting the owner 

remove equipment in the event of non-payment under public contracts.

Given the political ramifications of having street lighting removed,

incoming governments have tended to seek alternatives to canceling

contracts that they do not wish to continue.15

– Power supply. Another major energy efficiency sector is that of the electric

sector itself. CFE is only beginning to address the opportunities for supply-

efficiency measures. However, the field of competitors for CFE bids is large 

dominated by major firms. It seems unlikely that SMEs can play a significant r

here unless they provide a specialized technology, possibly one that offers 

alternative to conventional equipment. This is extremely rare, and more like

to be the providence of a foreign firm rather than a domestic SME.

3.8.2 Power Generation Sector

There are opportunities for both grid-connected supply as well as off-grid ap

cations in the power sector using cogeneration and renewable energy techn

gies. With respect to grid-connected applications, there are several major ma

segments that exhibit varying levels of development and activity. More lim

opportunities are available in terms of off-grid applications due to the lim

population not served by the grid. However, the prevalent use of diesel te

nologies does offer potential to reduce emissions that would occur in the abse

of the any flexible mechanism.

For grid applications, there is significant variation between sectors in te

of sophistication and interest in private power projects, in addition to substan

regional variation. From a regional perspective, there is substantial variatio

terms of the growth in demand and consumption of electricity and the availab

of renewable energy resources. These are key factors in determining the dem

for such services and technologies.

15 Personal communication, Esteban Torres (Municipal program director, Fide), 13 August 1998.
– Cogeneration: The National Commission for Energy Conservation (C

Nacional para el Ahorro de Energía, or Conae) has prepared an asse

of cogeneration potential in Mexico, but this assessment considers 

renewable energy applications primarily. It references a limited set 

renewable energy opportunities in the country, especially in the su

industry. Industrial cogeneration using natural gas has been extens

studied, and a significant amount of potential capacity has been ide

However, as noted earlier, the likelihood that cogeneration projects 

economically viable at a size that might be financially feasible for a

or group of SMEs is limited, especially due to the transaction costs 

ated with developing, permitting and financing such projects.

– Biomass: In addition to the Conae work, a study by Winrock Internatio

assesses the viability of specific projects in the forest products and sug

industries (Conae 1998). In general, the opportunities for biomass coge

in the sugar sector are substantial, but they are hindered by the extrem

poor financial condition of most sugar mills. Ever since their privatizat

the early 1990s, the sugar mills have been burdened by large amounts 

with little prospect of an improvement in prices to aid recovery. An ad

barrier to project development is the fact that sugar is a controlled com

in Mexico, and exports, especially to the United States, are controlled 

quota system. Furthermore, imports of high-fructose corn syrup have 

the mills’ market share in the important soft drinks sector. 

– Hydroelectric: Conae has completed a study of small-scale hydroelectr

potential in the Veracruz-Puebla region, including preliminary feasibi

analyses for specific projects, and the CFE has extensive information 

broader potential for hydroelectric generation in the country (Conae 1

CFE is very interested in finding ways to spin off the small hydroelect

ities that it has throughout the central part of the country, but it can d

until the fate of the Zedillo Administration’s restructuring proposal is 

– Solar: According to recent information provided by Conae, there is 

substantial amount of work to be done to characterize the solar res

The institutional and technical infrastructure available is not suffic

complete the characterization and to maintain substantially credibl

records. There appears to be substantial potential in this area, howe

example, CFE is in the midst of developing a major pilot solar-the

generation station with World Bank and GEF funding.

Solar thermal energy is also an abundant resource in Mexico. Recen

studies performed by the Institute of Engineering at the UNAM sug

that widespread conversion of LPG-fired residential water heaters t

water heaters is both technically feasible and financially attractiv

major limitation appears to be education and promotion of a conve
38

program, combined with the provision of low-cost financing to low-inco

buyers of such equipment (Conae 1998).

– Wind: Wind power faces similar limitations as solar power. Basic research h

been performed by the Instituto de Investigaciones Eléctricas (IIE) for the

Tehuantepec Isthmus region, yielding very favorable results (IIE 1996). Sti

IIE contends that further studies are required to adequately characterize th

renewable energy resources of several regions, including: the Baja Californ

Peninsula, the eastern coast of the Yucatán Peninsula, the northern altiplano

(central highlands) including the area around Mexico City, the Gulf of Mex

and Pacific coastal regions, and the southern part of the Tehuantepec Isthm

The economic feasibility of projects in these various renewable energy subsec

is mixed. Even the most recent studies may need to be updated to reflect chan

exchange rates and international market conditions. However, it appears that s

of the sugar mill projects assessed in the Winrock study could be attrac

investments, even under the changing financial conditions of the country. In 

case of the Conae mini-hydroelectric study, the feasibility of certain projects lo

equally promising, although further financial analysis is needed.

Mexico has a relatively high rate of grid-connection; about 95 percent. 

rural population requiring off-grid electricity in Mexico is roughly 4.5 mil

(Secretaría de Energía 2000).16 The opportunities for renewable energy projects 

off-grid application are thus more limited. Of the rural population, some are ser

by community-based diesel-fired or other off-grid generation in mini-grids, w

the remaining unserved population segment forms the core of the market 

household-scale systems (e.g., solar home systems) and other small-scale renew

energy generation systems. The size of this unserved segment varies from stat

state: as of late 1995 in the state of Sonora, for example, some 91,000 inhabitant

about 5 percent of the state’s total population of about 2 million, did not have ac

to electricity other than from batteries (INEGI 1996). Experience with such proj

indicates that rural populations are keen to acquire renewable energy technolo

but may not understand the technical limitations of off-grid generation installati

3.9 Energy Regulatory Framework 

In accordance with the reforms to the Law on the Public Service of Electricity 

del Servicio Público de Energía Eléctrica, or LSPEE) passed in 1992 and implemen

in 1993, private sector entities can build, own and operate power plants under 

different “modalities” of private power activity. Private parties may also build 

operate transmission lines as long as they are not interconnected with the nati

grid. The private sector activities permitted by the Energy Regulatory Commis

(Comisión Reguladora de Energía—CRE) are as follows:

16 Mexico’s population in 1995 was about 91.12 million.
– Independent Power Production. The CRE allows private companies to b

own, and operate plants over 30 MW and sell power to CFE under a lo

purchase power agreement. To date, these projects have necessarily b

planned and initiated by CFE, with the private investors participating 

responding to competitive bids for the long-term purchase power agre

However, CFE is beginning to give private developers more leeway in 

location, fuel supply and technology than it has in the past. For exam

recently proposed bid, CFE will entertain proposals for new capacity fo

delivery near the border with the United States, either in the form of a 

generating station, to be located in Mexico or the United States, or fro

tricity imported via a new cross-border high-voltage interconnection.

– Cogeneration. Under this option, cogeneration facilities can generate e

ty for self-supply or sale to CFE under a long-term purchase power ag

ments. Since cogeneration plants are less likely to have been planned 

it is more likely that cogeneration plants will be developed and operat

the purpose of self-supply than as independent power production fac

However, this situation may change as CFE is becoming increasingly o

alternative proposals in response to its tenders for new generation cap

– Small-scale production. The CRE allows facilities under 30 MW to p

power for sale to CFE, either on a short-term basis or under a long-

purchase power agreement.

– Self-supply. The CRE allows a private company or group of compani

build, own, and operate a plant serving multiple clients, who are ow

of the plant. The owners of the plant are defined as nominal shareh

in the company. This requires that projects be developed by compan

through a company specially created to serve their own needs. Proj

may rely on the CFE’s transmission and distribution infrastructure un

contract for freighting services, or must build their own lines and sub

In order for private firms to participate in power sector supply and tran

they must obtain a permit from the Energy Regulatory Commission (

Reguladora de Energía, or CRE), the governmental body created in 1993 to 

the energy sector. Although the CRE has nominal authority over the electr

its influence in practice is limited to reviewing applications for permits to 

import or export electricity. Electricity tariffs are established by the Secr

Hacienda y Crédito Público (SHCP), based on recommendations provided 

with some input from CRE. As such, electricity tariffs remain a policy in

for the government’s macroeconomic policymakers. 

Since the electric sector reforms of 1993, the CRE has been char

issuing generation permits to private firms in accordance with the four m
40

described above. However, only a relatively small number of permits have b

issued since 1994. According to data from the CRE, 107 self-supply permits 

29 cogeneration permits have been issued. In addition, not all of the permi

projects have actually been built.17 The Secretariat of Energy reported in 1

that just 64 percent of the projects that received permits through March 1

had been implemented and were in operation (Secretaría de Energía 199

Of the total number of permits issued through April 2000, self-supply per

account for 70 percent, with cogeneration providing another 20 percent, indepen

production five percent and permits for power import and export accounting 

less than five percent. Although one small-scale production permit was authori

it is no longer in effect since the developer failed to build the proposed pro

within the period of validity of the permit. 

Of the 9,500 MW in total capacity permitted, independent production 

self-supply account for about 37 percent each, compared to 23 percent f

cogeneration. Import and export account for only three percent. However, 

permits do not reflect actual installed capacity due to the fact that not all proj

permitted are implemented. For example, by March 1998, independent produc

projects amounting to 530 MW in new capacity were in operation, but permits 

some 3,250 MW had been issued (Secretaría de Energía 1999a). The total indepen

production capacity permitted stood at 3,525 MW by April 2000. The numbe

independent power production projects issued per year has increased since 1

and this segment of the private power market is expected to increase dramati

ly over the next several years as CFE accelerates its expansion program. 

Figure 3 for an analysis of the number of permits issued per year for each ty

Figure 3: Permits Issued by CRE

Source: CRE, data through 6 April 2000. 

Note: Only one small-scale production permit has been issued, 

and it has since been revoked due to failure to implement the project for which it was issued.

0

10

20

30

40

50

60

1994 1995 1996 1997 1998 1999 2000

Import/export

Small-scale produc

Independent produ

Cogeneration

Self-supply

17 Many of those built were already in place before the permit was requested, as part of the CRE’s effort to 

permits for hitherto unpermitted facilities.
3.9.1 Barriers to Private Sector Investment

While the pace of permit issuance may have quickened, as the Secretariat o

argues, many of the regulatory, economic and financial, and technical c

that have been responsible for the low level of project development sin

especially through 1997, still remain, although there has been improvement 

areas. Some key barriers to project implementation include:

– Artificially low electricity tariffs. Perhaps the most important deterre

project development during the first years after the new power sect

were promulgated was Mexico’s artificially low electricity tariffs in t

immediate aftermath of the peso devaluation. At the time, the tariff

include automatic adjustments for fuel cost and inflation, hence bec

artificially low (in dollar terms) at the lower exchange rates for the p

Once a new tariff adjustment formula accounting for these factors to

effect in 1996, tariff levels recovered in dollar terms. Since 1999, tar

dollar terms are likely to have increased still further in real terms be

fuel prices have moved higher with the rebound in oil prices, and th

has gained value versus the dollar. Tariffs vary by region, time of da

season. Although these tariffs in some regions in Mexico can be qui

by international standards, in other regions tariffs may be competiti

international rates. While it is too soon to determine whether this la

shift has entirely eliminated the price obstacle to project implement

seems likely that electricity costs that, until recently, had been compar

low will increase. This tariff increase will make both private generation p

and energy efficiency projects comparatively more attractive.

– Low purchase price for electricity by CFE. The low purchase price for e

offered by CFE—which is in effect a monopolist in the market for priv

produced electricity fed into the grid—has been a deterrent for small-

producers. The rates that CFE pays for capacity made available to the m

often inadequate for projects to reach an acceptable rate of return. In th

of renewable energy projects, especially wind, CFE capacity charges a

limited due to concerns about the reliability of that capacity—a probl

encountered by wind projects in other countries as well. Accordingl

vast majority of permits issued, and investments that have actually 

completion, is composed of self-supply and cogeneration projects.

– Technical requirements of cogeneration. In order for cogeneration pr

to be viable, of course, the technical requirements of the presence 

steam host, and adequately balanced steam and electricity loads with

industrial facility, must all be present. Since not all firms interested in 

projects have facilities that meet these technical criteria, the set of
42

potential project sites is correspondingly small. 

– Legal restrictions on self-supply projects. The restriction on self-supply

projects that requires all purchasers of power to be equity participants in t

plant reduces the set of potential projects. 

– Ongoing shortage of bank credit. The relatively difficult financial and

economic conditions prevailing in Mexico from 1995 to 1996 and the c

tinuing shortage of bank credit have limited participation by investors. 

credit drought is well documented, most notably by data that show

Mexican bank lending dropping from 40 percent of GDP in 1994, before

the peso crisis, to about 16 percent in 1999 (Economist 2000). This limit

tion affects small and medium-size firms more than larger entities, whi

make up a large part of the project permit holders. 

– High upfront capital investments and low rates of return. Power generation

projects require significant up-front capital investments. Furthermore, the

stiff competition that has prevailed in the CFE-sponsored bids for indepen

ent power production projects appears to have driven down returns on inv

ment for large-scale projects in the electric sector in the last two years. In 

recent review of the bids received by CFE for power sales from independen

power production projects, prices have ranged from a high of 2.94¢/kWH

offered by Intergen at the Bajío plant to the 2.38¢/kWH offered by Iberdr

at Monterrey III (industry sources). In addition, high transaction costs in

energy generation projects reduce the rate of return, limiting the profita

ity of projects, which has significant impact on small-scale projects.

3.10 Conclusions

The greatest opportunity for SME involvement lies in the energy efficiency se

where SMEs can play a role in two potential capacities. First, SMEs in the indus

commercial, and residential sectors can develop energy efficiency or fuel switc

projects that will offset power-grid emissions. Second, SMEs can take advantag

the potential business opportunities made available by operational flex

mechanisms. Flexible mechanism opportunities in the power generation se

are limited due to the current energy sector and regulatory framew

Additional barriers specific to SMEs limit flexible mechanism opportunitie

the power generation sector. However, the current regulatory structure is un

review. If a proposal by the Zedillo Administration to increase private sector par

pation in the energy sector is accepted, the opportunities for SME participa

in the supply-side could increase. At this time, the outcome of discussions on po

sector reform, as well as the timeframe for reform are uncertain. 
4 Flexible Mechanism

Opportunities in the Steel Sec

4.1 Introduction

The steel industry is an energy-intensive industry: the largest industrial e

and coke user and the second largest consumer of natural gas in Mexico. 

sector industry in Mexico is a strategic economic sector, both in terms of th

of jobs it creates and its contribution to overall exports. 

In the early 1990s, the steel industry in Mexico underwent priva

The government sold Altos Hornos de México S.A. (AHMSA) and Si

Lázaro Cárdenas Las Truchas S.A. (Sicartsa) to the private sector, under c

that incorporated additional measures to protect the environment. 

owners made important investments to improve the facilities and effic

the sector level, investments in modernization over the last 10 years hav

approximately US$4.9 billion. The steel producers’ organization, 

Nacional de la Industria del Hierro y del Acero (Canacero), calculates that 2

of the modernization investments directly contributed to improved envir

protection, including GHG emission reductions. 

The modernization process is relatively recent in comparison wi

countries, and opportunities for further efficiency improvements 

particularly in small and medium-sized enterprises. As a capital- and tec

intensive industry with a large amortization, further technological cha

unlikely, given current world steel markets and high energy costs. H
44

opportunities for cost-efficient improvements to small and medium-size enterpr

may be available.

This section provides an overview of energy use and emissions in the s

sector, as well as information on opportunities for emission reduction

24 enterprises. Special attention is given to the small and medium-size enterpr

For the purpose of initial estimation of GHG emission reduction potentials, c

contact was established with Canacero. 

4.2 Overview of GHG Emissions from the Steel Sector 

As an energy-intensive industry, the steel sector contributes to GHG emissi

which are closely related to the amount of energy consumed and the mix of f

fuels used. Total energy consumption in the steel sector is a function of the produc

volume (i.e., tons of steel produced), the process used and the efficiency of 

production process, and the end-product mix.

As shown in Figure 4, from 1990 to 1999, Mexican iron and steel produc

increased annually by an average of 7.1 percent, reaching 15,299 thousand 

in 1999 (Canacero 2000). About 80 percent of steel production in Mexic

attributable to five enterprises: AHMSA, HYLSA, Imexsa, Sicartsa and TAM

Mini-mills represent the remaining 20 percent of production. 

Figure 4: Steel Production by Company, 1990–1999

0

5000

10000

15000

20000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

AHMS

HYLSA

Imexsa

Sicarts

TAMSA

Mini-m
4.2.1 Technology Changes

Recent growth in Mexico’s steel industry reflects in part its modernization

making, pig iron production increased 32 percent, from 3,665 thousand tons i

4,822 thousand tons in 1999. During those same years, use of newer techn

make sponge iron (also known as Direct Reduction Iron [DRI]) pushed its pr

up 140 percent, from 2,525 thousand tons to 6,070 thousand tons (Canace

Technology has also changed the shares of primary steel production am

blast furnace (BF), open hearth furnace (OHF) and basic oxygen furna

processes. In the early 1990s, OHF steel production disappeared comple

was replaced by BF/BOF production in the integrated plants. Similarly, pr

of secondary steel by the DRI, electric arc furnace (EAF) and scrap proces

also changed. Steel production by EAF has increased due to the growt

production and to the expansion of the installed capacity of the scrap-ba

secondary steel plants (Ozawa et al. no date, see Figure 5). 

Figure 5: Steel Production by Process, 1989–1999

Similarly, in manufacturing semi-finished steel products, newer co

casting technology has quickly replaced ingot casting. Since thinner sh

be obtained using hot rolling, this production mode has increased, w

rolling production has declined. 

Most of the scrap consumed in the Mexican iron and steel industry 

imported. Due to the high cost of imported scrap, Mexico produces large q

of DRI. Moreover, HYLSA developed its own technologies for DRI producti

and HYLIII, which show reduced energy intensity compared to tra

processes (Ozawa et al. no date).

0

5000

10000

15000

20000

Open heart

Electric arc 

Basic oxyge

1989 1991 1992 1 1990 993 1994 1995 1996 1997 1998 1999 Year

Thousands of tons
46

Energy Intensity and Energy Efficiency Measures

The rate of energy consumption by this sector has declined over the years

measured by GJ/ton of steel. Energy intensity per ton of steel produ

decreased 31 percent between 1989 and 1997, from 25.5 GJ/ton to 17.5 GJ/

(see Figure 6). Efficiency gains are due to: closing of open hearth furnace

1992; increased use of continuous casting (from 9.8 percent in 1970 to 

percent in 1996); and increased use of coke oven gas and blast furnace gas 

electricity cogeneration in the integrated plants (Ozawa et al. no date)

addition, production of DRI in Mexico has increased and is carried out using 

highly efficient HYL technology. 

Figure 6: Trends in Energy Intensity (steel sector), 1989–1997

However, it has been estimated that the energy efficiency of the Mexican s

sector still has an important improvement potential [37.7 percent (Ozawa 

Sheinbaum, no date)] in relation to best practices in 1995, including measures 

energy saving at the different stages of the iron and steel making processes

large integrated plants, the potential for energy conservation is high. At th

plants, pellet, oxygen and nitrogen production, as well as water treatment are d

on-site, hence increasing energy consumption compared to other facilities in w

the corresponding energy is consumed off-site at the providers’ plants.

Figure 7 suggests that the steel sector makes intensive use of many type

fuels. It is the largest industrial sector for electricity consumption, accounting 

11.1 percent of the total. This sector remains one of the country’s two lar

industrial consumers of natural gas, accounting for about 16.4 percent of 

15

20

25

30

1989 1990 1991 1992 1993 1994 1995 1996 1997 Yea

GJ/ton of steel
industrial national total—second only to the petrochemical industry. 

the steel sector accounted for 10.5 percent of total Mexican industria

consumption. And while steel making is a major consumer of coke, the 

of DRI production, which relies more on natural gas as an energy sou

tempered the growth in coke consumption (Canacero 1999). 

Figure 7: Energy Consumption by Fuel Type, 1986–1997

4.2.2 Carbon Dioxide Emissions

Carbon dioxide emissions from the steel sector in Mexico have grown mo

recent years, reaching 5,600 ktC in 1996 (see Figure 8). According to the 

Greenhouse Gas Emissions Inventory (INE 1997), from 1987 to 1993 the 

steel sector was the largest industrial source of CO2 in Mexico, accounting 

20 percent of total industrial emissions, which were in the neighborhood of 

18,000 ktC during this period. 

However, it is important to note that the carbon dioxide intens

emissions/ton steel produced) of the sector decreased by 37 percent, from 0.6

of steel produced in 1988 to 0.43 in 1996. This decoupling of total outputs f

emissions (or carbon output per unit of overall output) is a result of the ch

the factors mentioned above, in particular, improvements in energy effici

the substitution of coke by natural gas due to the increase in DRI producti

0

50 000

100 000

150 000

200 000

250 000

300 000

1986 1989 1990 1991 1992 1993 1994 1995 191987 1988 

TJ

Electricity

NG

LPG

Diesel

Fuel oil

Coke

Year
48

Figure 8: Steel Production and CO2 Emissions, 1986–1996

Figure 9: Carbon Intensity of Steel Production, 1986–1996

4.3 Characterization of Small/Medium-size 

(i.e., Non-dominant) Firms in the Steel Sector 

Based on a survey and analysis undertaken for this report, assessing flex

mechanism project opportunities among small and medium-size companie

the Mexican steel sector entails the difficult task of gathering information 

energy use and technology. There is very little awareness of climate cha

0.4

0.5

0.6

0.7

0.8

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Ye

tC/ton of steel produced

0

3000

6000

9000

12000

15000

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

Total emissi

Steel produ

Year

Thousands of tons
issues among companies (with the exception of the larger ones), but t

general idea that climate change is a problem that could eventually me

investments and stricter regulations for the steel industry rather than op

ties. In addition, data about energy consumption and technology at the 

level is not readily available. This is partly a consequence of the small 

large number of small and medium-size industries in the Mexican ste

In order to produce an in-depth analysis of opportunities for flexbile m

projects for non-dominant companies in this sector, it would be nece

carry out a census and an effective climate change information campaign

the activities of this study has been to inform some of the steel compani

opportunities that could arise from flexible mechanisms. As a first ste

direction, questionnaires, together with background information on CD

distributed to Mexican Steel Chamber members, with the help of Canace

efforts are likely to continue, since the Committee on Environment an

and the Environmental Office of the Mexican Steel Chamber are intere

aware of the opportunities that reducing greenhouse gas emissions cou

for its members. Therefore, in addition to providing information to p

investors, this the CEC project has helped raise awareness within th

about potential opportunities and capacity-building needs related to 

mechanisms, in general, and CDM, in particular.

4.3.1 Smelting Industry

In Mexico, the smelting industry provides employment for over 54,000, 

79 percent are blue collar workers. An estimated 618 companies are in o

of which information is available for only 250 companies, with an average pr

of 701,243 tons/year (CEC 1999). Fifty-one percent of the cast metal cor

to gray iron smelting, 33 percent to nodular iron, three percent to ste

percent to aluminum ingots and one percent to copper and alloys. Seventy 

of this production goes to the national market and the rest is exported. 

4.4 Project Opportunities 

Information on specific company data was collected from six different 

listed below:

– CEC case study of a smelting company (CEC 1999),

– technical data for some Mexican electric-arc furnaces (Iron and Ste

Magazine 2000),

– study by the Centro de Producción más Limpia (IPN 1998),

– Environmental Impact Assessments (Iron and Steel Magazine 2000)
50

– Fideicomiso de Apoyo al Programa de Ahorro de Energía del Sector Eléctr

(Fide) (Fide 2000), and

– results from questionnaire submitted as part of current study.

4.4.1 CEC Case Study of a Mexican Smelting Company

The 1999 CEC study entitled “Pollution Prevention in Steel Smelting Proces

identified pollution prevention opportunities at a Mexican smelting comp

This case study represents a specific example of characteristic opportun

related to GHG emissions mitigation in small smelting companies. 

The company studied has 80 workers; a small company by the Mex

industrial classification criteria. It smelts steel pieces up to 1350 kg and h

workshop for fabricating models, machines and tools. The company’s abilit

vary production by batch size, type of alloy, and shape enables it to reach a ma

that includes enterprises manufacturing equipment used in the steel, cem

petroleum, metal-mechanics, cellulose and paper sectors, as well as compon

for pumping equipment, valves, turbines and general machinery. 

During visits to the plant, production data and the energy balances w

collected. The 1999 production was 303 tons, about 70 percent of which was 

to exporting clients. According to data provided by the company, LPG consump

was 10,200 liters and electricity consumption was 47,280 kWh for the yea

1999. Total power demand for each stage of the process is shown in Table 

Table 10: Power Demand by Process Area, kW

Using these data, potential environmental and economic savings w

estimated. The study finds that the most significant GHG emission abatem

would result from the installation of lids on the induction furnaces. Since n

of the plant’s furnaces are currently equipped with these lids, there is an ene

loss during smelting due to heat radiation. The CEC study found that there 

loss of 0.5 kWh/kg of steel produced, which would mean a total of 54

GJ/year, for the year’s production of 302.9 tons. The carbon emission sav

associated with installation of lids on induction furnaces would be 28.2 tC/y

Process Areas kW

Lathes and millers 50.9

Model elaboration 16.1

Interior and exterior lighting 56.7

Finishing 279.2

Sand recovery 4.7

Fusion 210.3

Total 617.9
Other measures that were considered in the pilot case that wo

to marginal GHG mitigation include:

– scrap storage,

– thermal treatment furnaces,

– using hot gases from the thermal treatment and the induction 

to preheat the pot,

– replacing standard motors with high-efficiency motors,

– optimizing the casting process, and

– developing a project to install an adequate electric system in the c

Although the types of mitigation efforts will vary from plant to plant, t

list of measures, which would lead to a reduction in energy losses during 

should be of relevance to the other approximately 617 companies in Mexico

4.4.2 GHG Mitigation Potential of EAFs 

Used by Selected Mexican Steel Companies

Potential GHG emissions mitigation opportunities were identified by co

the energy intensity of 13 EAFs used by Mexican companies with th

best available technology (see Table 11). Specifically, calculations we

comparing electricity consumption of the furnaces with a Specific 

Consumption (SEC) of 308.6 kWh/ton of crude steel using best availa

nology. The electricity consumption per ton of steel produced could be 

by an average of 162 kWh/ton of steel produced, or 34 percent using best 

technology. In terms of emissions reductions, this would translate into m

levels of 30.2 kgC per ton of steel produced. Assuming that the EAF w

full nominal capacity during the year, there would be a maximum total r

of 120,674 tC/year. Using our estimate of US$10 per ton of carbon, th

translate to US$1.2 million in potential carbon credits. 

4.4.3 The Mexican Center for Cleaner Production’s Smelting Proj

The Mexican Center for Cleaner Production (Centro Mexicano para la Pr

más Limpia) carried out a study on the environmental and production co

at seven smelting companies. The study was done at the request of t

Governments of the Corridor México-Querétaro-San Luis Potosí, and 

support of INE and CANACINTRA. This study found 103 opportunities fo

production in the areas of energy efficiency, efficient use of mater

equipment, and labor risk reduction.

In relation to GHG emission abatements, the main opportunities we
52

Annual Annual Carbon

Current SEC SEC Improvement Potential Production Emission Reductions

Company No. of Furnaces Start Date (kWh/t) (kWh/t) (%) (x103 ton) (t C/year)Ispat Mexicana, S.A. de C.V. 4 1988 660 352 53 717 46961.7Siderúrgica de Tultitlán, S.A. de C.V. 1 1985 610 302 49 181 10198.7Aceros D.M., S.A. 1 1993 490 182 37 331 11208.8Aceros San Luis, S.A., Four 1 1 1973 470 162 34 80 2404.9Aceros San Luis, S.A., Four 2 1 1979 470 162 34 80 2404.9Aceros San Luis, S.A., Four 3 1 1986 470 162 34 80 2404.9Tubos de Acero de México, S.A. 1 1987 470 162 34 762 22955.7Aceros Corsa, S.A. 1 1988 461 153 33 122 3483.9Talleres y Aceros, S.A. de C.V. 1 1993 460 152 33 254 7178.0Siderúrgica de Yucatán, S.A., Four 1 1 1977 436 128 29 102 2417.1Siderúrgica de Yucatán, S.A., Four 2 1 1977 436 128 29 102 2417.1De Acero, S.A. de C.V., Saltillo 1 1986 345 37 11 435 2975.3De Acero, S.A. de C.V., Celaya 1 1998 330 22 7 907 3663.0Total 120674.4

INE’s Environmental Impact AssessmentsSiderúrgica de California, S.A. de C.V. 1 1991 430 121,4 28 432 9756Usine HYLSA du Nord du pays 1 1991 341 32 10 588 3545

Total 13301Source : Technical information on EAFs was taken from Iron and Steel Magazine 1999.

Table 11: Mitigation Potential at Selected EAFs
– preventive maintenance or redesign of EAF lids,

– improvement of the EAF doors,

– improvement of the pot preheating system, and

– automatic controls for fuel/air balance at the thermal treatment f

If the seven companies were to apply all the improvements recom

by the study, the Centro Mexicano para la Producción más Limpia calcul

the energy savings would add to 3,869,000 kWh/year, implying total 

reductions of 737 tC/year. By mid-1998, six months after the study, 42 

of the 103 opportunities for improvement were implemented, 36 percen

the process of implementation and the rest were programmed for the f

months or were not to be implemented for technical or economic reason

4.4.4 INE’s Environmental Impact Assessments

Based on the studies presented to INE for environmental impact assessme

have been obtained for two steel companies: 

– Siderúrgica de Baja California S.A. de C.V. in the State of Baja Califo

– HYLSA, North plant producing construction rods.

Both facilities together represent a total maximum reduction pote

GHG emissions associated with electric consumption of 13,300 

4.4.5 Fide’s Study on Electric Energy Saving for Four Smelting

Companies

The Fideicomiso de Apoyo al Programa de Ahorro de Energía del Sector Eléctr

carried out energy audits at four Mexican smelting companies to identif

energy saving opportunities and energy efficiency opportunities. A profi

energy consumption at each of the four companies is provided in Table 12.

Table 12: Energy Profile of Four Mexican Smelting Companies

Company Products Monthly Electric LPG Natural Gas 

Electricity Energy (%) (%) 

Consumption (%)

(MWh) 

1 Shafts 558 76.2 6.2 

2 Iron parts for cars 239 85.4 14.6

3 Shafts 99 100

4 Valves and connections 32 96.2
54

This study found 18 opportunities for energy savings and efficient 

of materials and equipment, through measures that could be incorporate

the short and medium term. In relation to GHG emission abatement, the m

opportunities were:

– preventive maintenance and management of EAF lids,

– improvement of the preheating system,

– correcting incompatibilities between molding and fusion capacities, 

– controls for pretreatment and quality of feedstock.

Fide calculated electric energy saving potentials for three of the four compan

Based on these data and figures and the 1996 carbon emission factor for po

generation in Mexico, the expected annual emission reduction potentials w

estimated. Table 13 provides energy and carbon savings potential, based 

conservative estimates.

Table 13: Estimated Energy and Carbon Savings

4.4.6 CEC Questionnaire

Based on results from a questionnaire submitted for the present study, data 

obtained from one integrated steel company. The plant statistics are shown in T

14. Based on the average potential mitigation of carbon emissions at the 13 sele

EAF furnaces discussed above, potential savings may be up to 17,000 t C per y

This estimate is based only on average mitigation potential and the produc

capacity of this plant. To determine the electricity and carbon savings, a deta

audit on the production process is necessary.

Table 14: Production and Energy Data of Integrated Steel Company

Company Tech Age Prod. Type of energy %

(Type) (Years) (t/year) Coal Gas Electricity Othe

Integrated Co. EAF 14 600,000 None 54 35 11

Company Electric Energy Saving Potential Emission Reduction Potentia

(kWh/ton) (tC/year)

1 197 286.8

2 260 137.4

4 285 19.5
4.5 Conclusions

Technical audits and studies of energy efficiency opportunities in the ste

have found specific investment opportunities for energy savings at 

plants investigated. It is to be expected that for many other small and med

steel enterprises, additional detailed studies could identify similar inv

opportunities to reduce energy consumption. 
56
5 Land Use, Land-use 

Change and Forestry

5.1 Introduction

Mexico’s forests are currently a net source of carbon dioxide and gre

gases to the atmosphere. This section considers two different scenario

conversion of Mexico’s forests from a source to a sink of greenhouse ga

potential sink could represent valuable opportunities for implementing 

mechanism projects in the land use, land-use change and forestry (LULUC

were such projects to become eligible under the CDM or other flexible mec

In fact, analyses presented in the current paper show that Mexican fore

the potential to be managed as a very large net carbon sink. Assuming tha

credits will be worth US$10 each, and using a back-of-envelope calcula

cumulative potential undiscounted value of carbon offset credits for the 

land use, land-use change and forestry (LULUCF) sector between the ye

and 2030 is in the range of US$ 23 million to US$ 51 million.

This section begins with a brief description of the extent of Mexico’

how those forests are used, and how they contribute greenhouse gas emi

the atmosphere. The section continues with a description of greenhouse gas 

saving scenarios and how these different scenarios could be realize

through conservation of already existing carbon sinks or through fo

enhancement, emphasizing the role that SMEs could play in these red

Apart from the worthwhile goal of reducing emissions to the atmosph

reduction of carbon dioxide emissions presents an opportunity to earn 
58

emission reductions through the CDM flexible mechanism. A final sec

describes uncertainties facing CDM eligibility of land use, land-use change 

forestry (LULUCF).

5.2 Mexico’s Forests and their Greenhouse Gas Emissions

Mexico’s forest vegetation covers a surface of 141,736,169 hectares (ha), accordin

the 1994 forest inventory of the Secretaría de Agricultura y Recursos Hidráu

(SARH), which accounts for temperate and tropical forests, arid zones vegetat

hygrophilous and halophyte vegetation, and disturbed areas. Temperate and trop

forests account for 56,851,500 ha. An estimated 15.7 percent of the country's t

forest area is classified in the inventory as disturbed forest, defined as forest areas 

have lost forest resource “quality” due to degradation and fragmentation proce

related to the reduction and loss of biomass and the loss of productive potential of 

area, as well as to the alteration of soils and associated flora and fauna. 

Mexico's land use change and forestry sector is currently a net sourc

greenhouse gas emissions. According to the Instituto Nacional de Ecología in 

Greenhouse Gas Emissions Inventory, deforestation and forest degradation repre

the second largest source of greenhouse gas (GHG) emissions in Mexico, with 

emissions of 37 million metric tons of carbon/year in 1990. These emiss

accounted for 31.4 percent of the total CO2 emissions in the country in that 

(INE 1997). 

Forests are cleared for a number of often interrelated reasons. Lan

cleared in order to expand agricultural production, including crop production

well as cattle raising activities. Forests are also lost to forest fires (Conabio 1

Food and Agricultural Organization 1999). In addition, forests are cleared 

timber for Mexico’s timber-related industries. 

5.3 Small and Medium-size Enterprises and the Forest Sector

Defining the participation of SMEs in Mexico’s forest sector is somewhat tri

and can be examined based on the number of workers within a firm, or on 

amount of land owned. Forestry industries (manufacturing enterprises) can 

categorized using the classification established for the manufacturing se

based on the number of workers. As of March 1999, these industries are cla

fied as follows: micro, 1 to 30 workers; small, 31 to 100; medium, 101 to 500; 

big, greater than 500 workers (Diario Oficial 1999). 

Forest enterprises (producers) can be classified according to the amoun

land they own. In the case of private landowners, the smallest land parcels 

under 20 ha and the largest are 20,000 ha (the largest amount allowed by l

Communal organizations, however, are not bound by these limitations and 

size of their holdings depends mainly on the organization. 
For the purpose of this paper, the following classification accordin

of land owned is used: micro, 1–300 ha; small, 300–1,000 ha; m

1,000–5,000 ha; and large, >5,000 ha. As a result, all of the commercia

tion projects described in Annex C could be considered as small or med

and cover both private and communal lands. 

Mexico's forestry industry consists mainly of small-scale, low-e

wood processing plants, mainly sawmills. This industry can be clas

shown in Table 15, below.

Table 15: Number of Timber-Related Enterprises by Industry Branch

As shown in Figure 10, annual timber production declined from 8.

cubic meters in round logs (m3r) in 1990 to 6.3 million m3r in 1993. T

was reversed from 1996 onward, and in 1998 total timber production 

8.3 million m3r with a value of 3,668,504,853 pesos (Anuario de la pr

forestal 1998).

Industry Number of enterprises

Sawmills (1) 2,058

Panel and triplay factories 48

Board factories 17

Box factories 515

Secondary workshops 525

Furniture factories 60

Impregnators 11

Cellulose factories 7

Other (2) 256

National Total 3,497

(1) Includes sawmills, sawmill-factories, sawmill-box factories and sawmill-secondary workshops. 

(2) Establishments that do not report industrial branch. 

Source: Anuario de la producción forestal 1998.
60

Figure 10: Timber Production, 1990–1998

Source: Anuario de la producción forestal 1998

In 1998, the sawmill industry used 74 percent of the total raw mate

production, followed by the cellulose industry (15 percent) and the board indu

(4 percent); the remaining (7 percent) was used to produce poles and f

(firewood and charcoal).

The lack of road infrastructure in forest production regions, together w

the inadequate access of many industries to markets and resources due to g

graphic factors, translates into high costs per unit of product, excessive transp

related costs, and lack of competitiveness compared with other countries. 

situation contrasts notably with the United States and Canada in the forest secto

part because of low transport costs arising from established infrastructure.

Mexico’s competitiveness in the forestry sector is hindered by the need 

the following: improved access by producers to market information, mechani

to reduce the use of intermediaries, a regional market structure to minim

transport distances, and the development of commercial norms and measure

addition to these barriers, producers face difficulties in accessing private funding 

to the poor profitability of some forestry activities and the fact that governme

promotion banks have not yet found a way to increase the flow of resource

the forestry sector.

The CDM or other flexible mechanisms may offer an opportunity to red

these and other obstacles. For example, the CDM could facilitate the transfe

more efficient management practices and technologies from Annex I counterp

to Mexico's small-scale, low-efficiency plants. The sale of certified emission reduct

could provide a sufficient financial incentive to develop and implement m

efficient transportation plans. The monitoring systems needed for CDM proj

could be used to facilitate the development of quality certification systems 

Mexico's forestry products.

0

2

4

6

8

10

1990 1991 1992 1993 1994 1995 1996 1997 1998
5.4 Different Possibilities for Future GHG Emissions 

from Mexico’s Forests

This section reviews work done by Masera (1995) that considers three 

scenarios for the future net carbon intake of Mexico’s forests. Critical to de

such scenarios is establishing actual deforestation rates. This, however, 

straightforward task. In fact, there are wide differences between official an

ficial estimates of deforestation rates in Mexico. As a result, “high” and “low” 

for deforestation were used by Masera et al. (1992) in their study. 

The “high” estimate uses the rates (percentage of total forest area

by Masera et al. (1992) of deforestation and disturbance by forest fires 

forests, and incorporates SARH (1992) estimates of deforestation rates 

forests. The “low” estimate uses SARH (1992) estimates for open an

forests. Using the suggested procedure, annual deforestation rates clos

percent for temperate forests and approximately two percent for tropica

were obtained under the “high” estimate, giving an estimated total of 82

deforested per year. 

Using the “low” estimate, the annual deforestation rates are 0.5 per

approximately 0.8 percent for temperate and tropical forests, respecti

a total of 370,000 ha deforested per year. For open forests, a deforesta

of 0.08 percent was obtained (INE 1997). Deforestation rates used in th

estimate include all areas affected by forest fires, while the “low” estimate 

rates only those areas affected by forest fires that, it is assumed, will not re

Mexico’s future carbon emissions and sequestration in the forest sec

been estimated up to the year 2030 taking into account 3 possible scenarios: a 

as usual scenario and two mitigation scenarios (policy and technical p

described in Table 16.
62

Table 16: Future Emissions/Sequestration Scenarios 

in the Forest Sector in Mexico

Source: Ordóñez 1999. 

The business-as-usual scenario assumes that the deforestation rates mentio

above will continue into the future. This scenario would lead to emissions ran

from 23.9 to 62.4 million metric tons of carbon/year (MtC/year—based on 

low and high deforestation rates, respectively) in the base year of 199018 to 17.5 

28.1 MtC/year in 2030. Emissions are lower in 2030 than in the base year du

the fact that total forest area in the future is estimated to be lower and, as s

the percent decrease in smaller areas will also be smaller, resulting in lower ov

emissions. Cumulative emissions are estimated to be between 0.8 and 1.7 bil

metric tons of carbon between 1990 and 2030. 

Scenario

Base Year 

Projections 

Population growth

Macro-economic context

Deforestation rates

Mitigation options

Conservation

Reforestation

Reference

1990

2000, 2010, 2030

Historic.

Historic trends continue.

High (1.5% annual average in

closed forests).

Same effort as in the base year.

Same deforestation rates 

as in the base year.

Policy

1990

2000, 2010, 2030

2.0%, 1.8%, 1.6%, 1.4%

Economic growth improves

after year 2000.

Reductions of the rate reach

50% in 2010 and 75% in

2030 with respect to the low

estimate. 

Governmental goals for

2000/2010 are achieved: 

better preservation of Natural

Protected Areas, more than 2

million improved wood-burning

cookstoves are distributed,

wood demand is covered with

improved cultivation systems

in natural forests.

Governmental plans for 

the period 2000/2010 are

achieved: restoration 

plantation survival rates are

improved. Up to 100% of the

pulp and paper demand is

produced by the plantations.

About 20% of the reforested

lands will be used to produce

bioenergy in 2030. 20 kha/year

of agroforestry shade systems

will be established up to 2030. 

Technical potential

1990

2000, 2010, 2030

2.0%, 1.8%, 1.6%, 1.4%

Economic growth and inc

distribution improve afte

year 2000.

There is no further 

deforestation after 1990. 

At least 10% of the fores

by type of forest is set ap

as Natural Protected Area

All of the commercial nat

forests are cultivated sus

ably, 2 million improved

wood-burning cookstove

are installed in the year 

Restoration plantations a

established in half the lan

currently degraded, planta

satisfy the domestic pulp 

paper demand, 50% extr

exported. 25% of degrad

forest lands are used for

bioenergy. Agroforestry s

systems are established 

an average of 40 kha/yea

between 1990 and 2030.

18 In contrast, the Inventory calculates a range of 10.8 to 61.9 million metric tons in 1990.
The two mitigation scenarios show that Mexican forests have the 

to shift from being net sources of greenhouse gas emissions to being si

carbon sinks in a 40-year period. The two scenarios are based on two 

options: conservation (of natural protected areas, commercial forest man

improved wood-burning cookstoves), and reforestation (plantations f

estation, plantations dedicated to pulp and paper production, plantations 

to energy production, and agroforestry systems).

The estimated cumulative future carbon sequestration between 1

2030 is between 2.3–3.0 billion metric tons of carbon under the “policy” 

and 4.2–5.1 billion under the “technical potential” scenario (see Ta

Assuming that carbon credits will be worth US$10 each, and using a 

envelope calculation, the cumulative potential undiscounted value of carb

credits for the Mexican land use, land-use change and forestry (LULUC

between the years 1990 and 2030 is in the range of US$23 million to US$5

Table 17: Cumulative Carbon Sequestration for Different 

Options in Mexican Forests

The land area involved in implementing these mitigation option

from 22.3 million ha for the policy scenario to 39.4 ha for the technical 

scenario. Neither the policy nor the technical potential scenarios wer

mented prior to 2000. Nevertheless, the calculated potential and the a

actions could be implemented irrespective of the initial year as long as th

assumptions are maintained. Calculated potentials in both scenarios are hig

mistic, although possible, as they require massive interventions in forest a

Million ha Total cumulative ca

(billions of metric 

Option 2030 2030 1990–2030 19

(Scenario) (Policy) (Tech. Pot.) (Policy) (T

Conservation

Natural protected areas 3.8 6.0 0.37–0.57 0.

Forest management (commercial) 13.2 18.7 1.36–1.81 2.

Improved wood-burning cookstoves 2.0 2.0 0.05 

Reforestation

Reforestation plantations 0.8 4.2 0.19–0.20 0.

Pulp and paper plantations 0.2 2.4 0.13–0.14 0.

Energy plantations 0.8 4.2 0.17 

Agroforestry systems 1.5 1.9 0.08 

Total 22.3 39.4 2.35–3.02 4.

Sources: Ordóñez 1999; Masera 1995.
64

Even a much lower figure suggests very attractive opportunities for develo

and implementing CDM or other flexible mechanism projects in the forestry se

Small and medium-size organizations and landowners could participate significa

in the achievement of part of the potential by implementing carbon sequestra

and sink conservation projects, as described later in this paper. The next two sect

describe and explain each of the different options for the reduction of car

dioxide emissions into the atmosphere from Mexican forests.

5.5 Project Opportunities in Forest Sink Conservation 

The aim of the two following major sections is to provide an estimate of the typ

carbon benefits associated with various sink conservation and sink enhancem

options in Mexican forests, including those that could potentially involve s

or medium-size enterprises.19 There may also be considerable opportunitie

implement sink conservation and sink enhancement projects on rural agricult

land. However, other than some discussion of agroforestry opportunities be

the assessment of Mexico's agricultural sink potential under the CDM or o

flexible mechanisms falls outside the scope of this paper. 

Much of Mexico’s forested land is owned pubicly or communally. As such

order to be effective, any project focused on the sustainable management of 

forests should consider the specific needs of the communities and small l

owners. There have been encouraging experiences with social forestry enterpr

in Mexico that show the viability of the social focus in this field. 

It should be noted that carbon conservation is not a priority for local inh

tants (“carbon conservation” should be understood as encompassing policie

diverse as carbon sequestration, biomass conservation and restoration, agrofore

and reforestation projects). Forestry projects must be evaluated on a broader b

and should have as their central goal the promotion of a healthy economy 

production of tangible local benefits. Carbon conservation must be considered a

additional benefit. Projects designed to account for these considerations wil

more effective and more likely to provide long-lasting carbon benefits. Th

consistent with the dual goals of the flexible mechanism which are to sup

sustainable development objectives and help mitigate climate change.

The carbon conservation options included here, if properly implemen

could meet the needs of the variety of social actors present in the rural sec

from small owners of agricultural and forest lands via agroforestry and so

forestry projects, to the big forestry industries via implementation of large-s

pulp plantations and, in some cases, improvements in manufacturing efficie

Medium-size enterprises, sharing characteristics of both, are likely to ben

from the whole range of opportunities. There may be additional opportunitie

19 The assumptions were taken from the study carried out by Masera in 1995. The estimates come from M

and Ordóñez (1997) and Ordóñez, (1999).
expand the activities undertaken through the various forestry program

and federal governments to include the production of carbon benef

explicit program objective.

In the analysis in this section, the characteristic total net carbon 

have been estimated assuming a reference scenario given by alternat

uses. Total carbon benefits refer to the average carbon stored in the 

pools (above- and below-ground vegetation, decomposing matter, soi

products and the carbon saved by burning wood for energy instead 

fuels) during a period of time long enough to allow them to reach equ

Rough carbon estimates for short-term projects can be obtained by 

the total long-term carbon sequestration average with a factor used to calc

value of having one ton of carbon out of the atmosphere for the limited 

the project.20 The ton-year approach was used in order to provide so

rough annual carbon sequestration estimates for some of the options p

here. In developing this model it was assumed that a “perpetual ton” o

(or a ton of carbon not emitted) is equivalent to one sequestered for 60 

is to be noted that in this case, the ton-year is a very limited approach 

means assuming that the different carbon pools involved in a project w

stability at 60 years. Actual annual carbon sequestration associated w

option will depend on a wide variety of particular project circumstances

In the case of forest fire prevention programs, project benefits are calc

terms of net emission avoidance. For bioenergy options, the net carbon 

due to fossil fuel savings are estimated on an annual basis, assuming 

project lifetime is 40 years (the typical lifetime of a conventional powe

Estimates include high and low values that reflect the uncertainties r

the carbon content in soils, the net change in carbon content in soils a

with each option, and other parameters.

5.5.1 Protected Natural Areas/Forest Conservation Projects

The carbon sequestration estimates presented below were original

explicitly for Protected Natural Areas. However, provided that the same ass

are applied, they are relevant to individual forest conservation projects.

If the land area protected by the federal government (111 Protected 

Areas) and the area protected by the states and municipalities (176 P

Natural Areas) are considered together, Mexico currently protects 13,746,

which represents 7 percent of the country’s area. Counting only the 52 P

Natural Areas for which information is available, the area covered by ve

in 1997 reached 113,949.95 km2 (see Table 18) (Conabio 1998). 

20 The assumptions were taken from the study carried out by Masera in 1995. The estimates come 

and Ordóñez (1997) and Ordóñez, (1999).
66

Table 18: Surface Protected by the Federation by 

Vegetation Type for the 52 Protected Natural Areas

In 1996, the annual fiscal budget devoted by the Mexican federal governmen

conservation of protected natural areas was about US$1 million, which is a comp

tively low figure: the current budget means spending 10 US cents per prote

hectare per year in the country. From 1995 onward, there has been an increase in f

resources for PNA operations. Since then, US$420,800 has been allocated annu

The amounts for 1996 and 1997 increased to US$1,409,600 and US$2,829,300, res

tively, through an additional allocation by diverse programs. Other forest conserva

activities, such as forest fire prevention and control had, during 1997, a budget 

operating expenses (not including salaries) of US$4.6 million from Semarnap. 

contribution of other sectors to these activities was estimated at US$4.4 million.

Effective protection of the Protected Natural Areas is difficult, since man

them are inhabited. In 1994, an estimated seven million people inhab

Protected Natural Areas. At present, given the noticeable increase in the num

of Protected Natural Areas, this figure could reach 10 million people. For 

reason, sustainable management of these areas could be secured only if tang

benefits for the local inhabitants were generated. The Mexican system for de

nating a region as a natural protected area does not involve a land purchas

the Government; instead, there are occasional compensations, including s

of money, that have worked with varying success.

It has been estimated (Masera 1995) that a minimum 10 percent of the t

forest area (about 5,685,150 ha) could be set apart for long-term preserva

(through Protected Natural Areas or individual projects) without conflicting w

the inhabitants’ forest use needs.

As discussed above, the objectives of the CDM and other flexible mechan

can be compatible with both the environmental (carbon conservation, biodiver

protection, etc.) and the social needs of communities in Mexico. Well-desig

Vegetation Protected surface (km2)

Conifer and oak forests 4,867.96

Thorny forests 1,297.81

Mesofilous mountain forests 1,049.74

Tropical deciduous forests 2,881.54

Tropical evergreen forests 14,884.99

Tropical subdeciduous forests 1,151.9

Xerofilous shrubland 44,896.02

Grassland 1,369.30

Aquatic and subaquatic vegetation 8,073.07

Sea 33,477.62

Total 113,949.95

Source: Conabio 1998.
projects should not only provide protection to forests, but also be pr

enough to at least offset the lost opportunity costs to the inhabitants of und

the project (i.e., the income or other benefits inhabitants would rece

forest exploitation in the absence of the project). These kinds of proje

be applied especially within the buffer zones of Protected Natural Area

productive activities are allowed. The sale of certified emission reductions g

by CDM or other flexible mechanism projects could provide an addition

of income that could make sink conservation activities more economically a

and competitive with other land uses. 

It is Mexico’s official position that carbon conservation projec

established Protected Natural Areas should be able to produce certified 

reductions within the flexible mechanisms, following agreed criteria and 

rules. Such projects would generate carbon benefits, and the improve

expansion of the existing Protected Natural Areas would represent an a

effort on the part of the country both to protect biodiversity and to avoid 

additional emissions. Sources and sinks associated with land-use cha

accounted for by Annex I countries in relation to their base year. If, in th

the government introduces the possibility of protecting additional (be

“normal” protection effort) areas with resources obtained through 

sequestration, this could become an important opportunity to sell e

reduction credits, thus enabling proper maintenance of these areas and 

to improve the conditions of the communities involved.

A CDM project involving a PNA would benefit the participant com

and, at the same time, increase the resources devoted by government t

the adequate management of the area. Communities would profit from t

and economic benefits of the project, while the federal government, which 

the PNA and guards it on behalf of the nation, could negotiate with the 

project partner to receive a share of the resulting certified emission r

credits and could use the resources obtained from their sale to manage 

and to provide additional social services to the population of the P

Annex I partner would likewise receive a share of certified emission re

corresponding to the size of its investment in the project.

There is also the possibility of expanding already established P

Natural Areas through the private or public sector. For example, an AIJ p

Querétaro, Forest Rehabilitation and Conservation in the Sierra Gorda B

Reserve, Mexico (Woodrising Consulting 2000), is seeking to purcha

1,200 ha through the Joya de Hielo Land Trust. This project would inc

5 percent the protected lands in the Sierra Gorda Biosphere Reserve. 

This initiative seeks to use AIJ, and potentially the CDM, to ext

protection efforts in Mexico’s Sierra Gorda Biosphere Reserve, particular

buffer zones surrounding lands that have already been protected be
68

their importance for biodiversity or other ecological reasons. While the land 

remain the responsibility and property of the Land Trust, the carbon sequeste

or protected will become the property of the investor. This type of project co

be replicated in other locations throughout Mexico and the world. 

Mexican forests inside Protected Natural Areas or included in conserva

projects have the potential to sequester between 33 tC/ha and 173 tC/ha. 

figure assumes that immediate and subsequent emissions from deforestation 

avoided, 10 percent of the biomass burned in forest fires is converted to charc

and there is a soil carbon loss from deforestation ranging from zero percent (

estimate) to 30 percent (high estimate). It is assumed that the alternative 

use is the production of annual crops or degraded pasture with five tC/ha of car

density in vegetation and decomposing matter (in temperate regions) or 10 tC

(in tropical regions). Based on this estimate and using a ton-year appro

annual carbon benefits could be in the neighborhood of 0.55 tC/ha/year 

2.83 tC/ha/year.

5.5.2 Natural Forest Management

This mitigation option involves two management systems: selective managem

of temperate forests (mainly pine and oak), and selective management of trop

forests (medium and tall). 

About 95 percent of the commercial timber production in the countr

conducted in natural temperate forests. Currently, only 6.1 million ha of 

12.8 million ha of commercial temperate forests are managed. Commercial yi

in these forests range between 0.5 and 1.5 ton/ha/year (SARH 1989). It 

been assessed that with more efficient forest management and harvesting pract

commercial yields could rise to 3.5 ton/ha/year, reaching up to 10 ton/ha/y

in the warmest regions (Masera 1995). Revenues from the sale of certified emis

reduction credits could improve the cost-effectiveness of improvements in prod

tion and harvesting efficiency. 

While five percent of Mexico’s total commercial timber production is car

out in tropical evergreen forests, these cover 5.9 million ha, representing 36 per

of the total commercial forest area. About 0.9 million ha are currently harves

One of the main challenges affecting the implementation of sustainable managem

of these forests is the large diversity of tree species, of which only a small p

portion has commercial value. The most common commercial species 

mahogany, Honduras mahogany and chicle. 

Areas with lower concentrations of commercial species are more suscept

to land-use conversion. However, incorporating carbon sequestration into 

current assessment of benefits derived from managing tropical forests could 

critical to identifying new conservation incentives that are cost-effective.
The potential net carbon benefits of natural forest management are e

to be between 98 and 182 tC/ha based on the following assumptions:

– immediate and subsequent emissions of biomass carbon from defo

are avoided and 10 percent of the biomass burned in forest fires is c

to charcoal; 

– deforestation causes soil carbon emissions ranging from zero (low e

to 30 percent (high estimate); 

– harvests are based on selective low-impact logging so that total forest 

in managed forests is similar to that of the original natural forest; a

– carbon in wood products is taken into account and added to the net 

tration. It is assumed that these products have a constant decompo

between 0.05tC/ha/year and 0.02tC/ha/year. 

Following the ton-year approach, natural forest management 

could have annual carbon sequestration rates of between 1.63 tC/ha/

3.03 tC/ha/year.

5.5.3 Improved Wood-burning Cookstoves

About 93 percent of the total fuelwood demand currently comes from the 

sector (i.e., 34.6 million m3) (Masera 1993). The average fuelwood consum

a typical household using traditional wood-burning cookstoves reaches 

year. Due to low incomes in rural households, the cultural practices associa

the use of fuelwood for cooking, and the dispersion and reduced size of v

Mexico (currently there are 154,000 villages with less than 2,500 inh

with an average size of 146 people per village), the use of improved wood

cookstoves represents a good approach for reducing firewood deman

short and medium term. 

Improved wood-burning cookstoves, at a direct cost of US$10 to 1

per stove, can reduce fuelwood consumption by about 30 percent. Over a 

period, the cost of saved energy would be 5–7 US$ (1994) per ton of woo

Wide dissemination of more efficient stoves in the rural sector coul

wood consumption by 6.2 million tons (10.4 million m3) per year (Mase

This option could produce emissions reductions of about 1 tC/stove/year 

vative estimate) (Ordónez 1999). This calculation accounts for the f

saved at the point of use corrected by a factor for the total wood logg

harvesting site. 
70

5.5.4 Forest Fires

From 1983 to 1993, an average of 200,000 ha (ranging from 80,000 ha in 199

518,000 in 1988) were affected by fires annually. In 1993, 14 percent of the 235,00

burned were adult trees, 9 percent were re-growing trees and 29 percent w

bushes and semi-arid vegetation. The number of fires caused by humans grew du

the 1980s, becoming the main factor causing deforestation of temperate for

in Mexico. These fires were often deliberately set to increase pasture produc

and to declare trees as “dead wood” in rural areas where logging is not allowed. 

A large number of forest fires occurred in 1998 (see Table 19). From Janu

to August, 14,302 forest fires occurred in Mexico, affecting an area of 583,66

(equivalent to 0.4 percent of the total forest area of the country). Pasture, b

and brushwood were burned in an area of 425,850 ha (73 percent of the to

while 157,007 ha (27 percent) of forested areas suffered diverse degree

impact. Each fire affected an average area of 40.81 ha.21 However, an impor

proportion of the disturbed area was reforested in the country during 19

From January to July of that same year, Semarnap alone (not taking 

consideration the contribution of other governmental dependencies, s

governments or international support) devoted 185 million pesos to fire control

average estimate of fire control costs for this period is about 317 pesos/ha burn

Table 19: Profile of Forest Fires in 1998 (preliminary figures)

Affected surface (ha) Efficiency indicators

Most- Number (average)

affected of fires

Semarnap Surface/

Delegations/ fire Time in hours

Totals Grass-lands Forests Others* Total (Ha) Detection Arrival Le

Chiapas 405 85,335 65,883 47,590 198,808 490.88 9:42 8:23 91

Durango 436 24,191 20,422 24,347 68,960 158.17 1:30 2:30 49

Oaxaca 419 144,694 35,340 61,674 241,708 576.87 10:20 6:33 42

Results 1998 14,445 352,242 198,487 298,903 849,632 58.82

Percentage 41.5 23.4 35.2 100

Average 1:17 1:22 16

Average 

1992–1997 7,198 70,184 49,269 61,650 181,103 25.16 1:08 1:28 9

Comparison 

1998/Average 

1992–1997 

(%) 101 402 303 385 369 134

* Includes thorny forest and shrubs.

Source: Anuario de la produción forestal 1998.

21 At the beginning of 1999, the official estimate of the area affected by forest fires in 1998 was updated f

period January–November to 849,632 ha. 22 Based on the budget from January to July and the number of hectares burned from January to August 
Fire prevention projects and projects to reforest, and later to protect

areas could represent an opportunity to avoid greenhouse gas emissions a

to sequester carbon, thus generating certified emission reductions. Howev

methodological issues should be taken into account, such as the average e

avoided by reducing the burned area and the rate of natural regenera

improved capacity to prevent and control fires could potentially qualify as 

tional project activity in the context of the CDM or another flexible me

Estimating the benefits of this kind of project could be very challenging

since it would require the calculation of a hypothetical baseline for averag

deforestation due to fires under a business as usual scenario. 

5.6 Project Opportunities in Forest Sink Enhancement 

5.6.1 Reforestation Plantations 

There are almost 30 million ha of degraded lands with varying levels o

in Mexico. An estimated 18 million ha of degraded lands and 3.5 m

severely degraded lands are located in areas previously covered by close

under different property regimes. 

Experience has shown that, for a reforestation plantation to be succ

must offer alternative benefits for the landowners that provide incen

protecting and managing the forests. In order to capture the large pot

reforestation plantations and to secure their sustainability, it is impo

design projects that provide goods and services for the landowners a

inhabitants (Bellón et al. 1994). 

Potential net carbon sequestration up to equilibrium for this optio

from 35 to 150 tC/ha, based on the following assumptions:

– the plantations are established on degraded lands with carbon 

of 5 tC/ha (temperate) and 10 tC/ha (tropical);

– plantations reach a carbon density of 70 percent (vegetation pl

of the carbon density of natural forests;

– there is a 50 percent carbon increase in the soils of degraded forest 

a result of reforestation; and

– there is an assumed range of carbon content in soils. 

Annual carbon sequestration of reforested plantations under the 

approach could be between 0.58 tC/ha/year and 2.5 tC/ha/year.
72

5.6.2 Industrial Plantations

Industrial plantations are devoted mainly to pulp and paper production. While p

and paper plantations result in moderate net carbon sequestration when establis

in pasture or agricultural lands, they are not economically feasible in areas w

commercial productivity below 10 tons wood/ha/year or with rotation per

of over 20 years.

For these reasons, most of the current initiatives are focused in the southeas

states (e.g., Tabasco), where large areas are agronomically suitable for high-producti

pulp plantations and short rotation periods. These areas can reach a productivity l

up to 20 ton wood/ha/year (Masera 1995). However, for these plantation

be profitable, they must be located in contiguous areas of at least 20,000 ha 

be geographically accessible. 

Annex C lists many small and medium-size cellulose plantations currentl

place. CDM or other flexible mechanism projects could, in some cases, amelio

the cost-effectiveness of present and future plantations. 

Potential long-term net carbon sequestration for industrial plantation

between 67 and 101 tC/ha, provided that:

– plantations are established on agricultural lands/pasture with car

densities of 8 tC/ha (temperate) and 10 tC/ha (tropical);

– plantations reach 70 percent of the carbon density of natural fore

– there is a 50 percent increase in soil carbon stocks as a result of the alterna

land use; and

– pulp and paper have a constant rate of decomposition over a period of one y

Following the ton-year approach, annual carbon sequestration for 

option could vary from 1.12 tC/ha/year and 1.68 tC/ha/year. These estim

vary according to the assumed carbon content of soils.

5.6.3 Biofuel Plantations

The use of biomass for energy generation offers a promising alternative for 

production of GHG benefits through the management of Mexican fore

Currently, there is no experience with these systems in the coun

Nevertheless, if only 10 percent of the 18 million ha of degraded forest la

were converted to economically viable energy plantations, with expected biom

yields of 10 t wood/ha/year and 15 GJ/ton of energy content in wood, 240 

of energy generated by fossil fuels could be offset per year (Masera 1995).

This figure represents about 6 percent of the total energy produced during 1

in the country, or more than double the total energy consumed for agricult
activities during the same year. In addition, this activity could help avoi

emissions of 6 MtC/year from fossil fuel combustion (assuming that the po

using biomass replaces a plant working on oil having an efficiency of 30 

The potential long-term net carbon benefit of this option is 215 tC/h

into account the incremental carbon content in degraded forest land

would be a 50 percent increase in soil carbon stocks as a result of the al

land use) plus the additional annual carbon mitigation resulting from 

burning of fossil fuels and electricity consumption (Ordóñez 1999; Mase

It is assumed that biomass is burned using steam turbine injection ge

replacing thermal power plants of similar efficiency running on bunk

The carbon emitted by bunker fuels is 0.023 ton/GJ (Swisher 1991). 

5.6.4 Agroforestry Systems

For many centuries, indigenous cultures in Mexico used a diversity of agr

systems, especially in evergreen and deciduous tropical forests. In 199

were 0.9 million ha under shade agroforestry systems in Mexico (around 0

ha planted with coffee and 0.1 million with cacao). A large but currently unm

area of fallow land is also managed as agroforestry systems. Total abov

dry biomass productivity in coffee shade systems has been estimated at 

8.4 and 10 ton/ha/year and between 6 and 8 ton/ha/year for cacao 

(Masera 1995). 

Agroforestry systems, particularly those in evergreen and deciduou

forests, can offer a promising economic alternative to the conversion o

to pasture and agricultural lands. 

Potential long-term net sequestration for agroforestry systems is 

43 and 74 tC/ha. This also assumes that agroforestry systems result in a 50 

increase in soil carbon content (Masera 1995). 

Annual carbon sequestration could be between 0.72 tC/ha/year and 

ha/year under a ton-year approach.

5.7 LULUCF Eligibility Uncertainties

The most significant potential problem associated with land use, land-us

and forestry (LULUCF) is that its eligibility for flexible mechanism project

to be determined. A decision is expected upon termination of Part Two of 

Conference of the Parties (COP VI (II)) negotiations to be held in 2001. T

great deal of controversy surrounding the treatment of LULUCF projec

flexible mechanisms and, in fact, failure to reach agreement on these issues 

of the main blocking points of the latest round of COP negotiations. 
74

Much of the controversy surrounding the treatment of LULUCF proj

under the CDM can be linked to two central issues: 

– concern that the potentially large magnitude and low costs of the GHG ben

from LULUCF projects in non-Annex I countries could influence Ann

Parties to focus their initial efforts in this area and delay making the ene

sector investments that will be needed to ensure long-term climate cha

mitigation and sustainable development; and 

– potentially significant differences between LULUCF projects and projects in o

sectors (particularly energy and industry) with regard to measurem

certainty and permanence of the GHG benefits. 

These issues are closely linked. Ideally, if emission reductions or 

enhancements in the LULUCF sector are used to offset emissions from other sec

then the certainty and permanence of GHG benefits from LULUCF projects sh

be comparable to those of projects in the other sectors. This is not always the c

In the case of a forest conservation project, the magnitude and timing of 

carbon benefit depends on three factors: the biomass and soil carbon stock

the project site; the rate at which the carbon would have been emitted in 

absence of the project; and the length of time over which the developer can pro

against the loss or reversal of project benefits. 

Measuring the site’s carbon stocks requires on-site sampling, statistical anal

and modeling, all of which involve a higher degree of uncertainty than the estima

of benefits for the fuel-switching project. Determining the rate at which the s

carbon would have been emitted in the absence of the project can be a v

challenging analytical process that involves the assessment of historical and proje

land-use trends at the project, regional, and/or national levels. 

Moreover, when claiming benefits from forest conservation, the develo

needs to evaluate the potential for leakage: the net loss of project benefits wh

rather than being eliminated, the land-use pressures threatening the project 

are merely displaced from the project area to an unprotected area. 

Finally, the GHG benefits of forest conservation can be lost or reverse

the forest is cleared at some time in the future, whether due to natura

anthropogenic causes. 

Therefore, a forest conservation project may not produce GHG benefits w

the same degree of permanence as a fuel-switching project. It may be possibl

compensate for the differences in measurement certainty and permanenc

LULUCF projects by discounting the benefits from LULUCF projects or by maintai

a contingency reserve of GHG benefits that can be used to offset the loss or reve

of benefits in the future. 
Although intensive work has led to progress in estimating the rela

between land use and forestry in the climate agenda, considerable un

remains. These uncertainties include estimating the carbon cycle of land 

forest, the composition of the carbon pool, and accounting procedures n

assess either reductions in greenhouse gas emissions or increases in 

uptakes related to land use and forests. Questions include how to mea

accumulated carbon uptake over the duration of a project, the spatial 

the project, methods to measure emissions avoided over a project lifet

emissions avoided calculated for the specific spatial unit. 

However, given earlier estimates that land-use change and defo

account for approximately 22 percent of annual carbon dioxide emis

would be surprising at this point if land use and forestry were not inc

some manner as flexible mechanism eligible projects.

5.8 Conclusion

This chapter was intended to give some ballpark estimates as to the pot

emissions reductions in Mexico’s LULUCF sector. Based on these estim

provided that LULUCF sector investments are accepted as flexible me

eligible projects at the upcoming round of COP negotiations in 2001, 

forests and forest-related industries have tremendous potential for carbon 

emission reductions and therefore for the creation of valuable carbon dioxid
76

References Consulted

Austin, Duncan, Ronaldo Seroa da Motta, Claudio Ferraz, Carlos 

Young, Zou Ji, Li Jungfeng, Milind Pathak, Leena Srivastava. 1999. H

much sustainable development can we expect from the Clean Developm

Mechanism? World Resources Institute, Washington.

Bellón, M. R.; Masera, O. R. and Segura, G. 1994. “Response options 

sequestering carbon in Mexican forests.” LBL report, Energy and Environm

Division, Lawrence-Berkeley Laboratory, Berkeley (not published).

Cairns, M.; J. Barker, R. Shea and P. Haggerty. 1995. “Carbon dynamic

Mexican tropical evergreen forest: Influence of forestry mitigation options 

refinement of carbonflux estimates.” Interciencia, 20:6, pp 409-416.

Cámara Nacional de la Industria del Hierro y el Acero (Canacero). 2

Ten years of steelmaking statistics 1990–1999. Mexico.

Canacero. January 1999. Perfil de la industria siderúrgica mexicana.

Chomitz, Kenneth M. 2000. Evaluating carbon offsets from forestry and en

projects: How do they compare? Development Research Group, World Ba

Rev 1.0 (March 1)

Comisión Federal de Electricidad (CFE). 1999a. Precios internos y exter

de referencia de los principales energéticos, 1970–1998, 10th edition.

CFE. 1999b. 1999 Annual report. Mexico.

CFE. 1998. Estadísticas por entidad federativa 1998. Mexico.

CFE. No date. “Desarrollo del mercado eléctrico, 1994–2008.” Internal docum

Mexico. 

Comisión Nacional para el Conocimiento y Uso de la Biodiversi

(Conabio). 1998. La diversidad biológica en México: Estudio de país 1998. Mex

Comisión Nacional para el Ahorro de Energía (Conae). 1998. “Estudio 

potencial nacional de ahorro de gas LP por el uso de colectores solares planos.” Mim

Conae. 1997. Estudio de la situación de la minihidráulica nacional y potencia

una región de los estados de Veracruz y Puebla. Mexico City: SE.

Conae. 1995. Potencial nacional de cogeneración. Mexico City: SE.

Commission for Environmental Cooperation (CEC). 1999. “Pollut

Prevention in Steel Smelting Processes.” Montreal.

Dessomes, Arturo. 8 January 1999. “Electric power equipment in Mexi

US Department of Commerce.

Diario Oficial de la Federación, 30 de Marzo de 1999.

Economist. 2000. “PRIde before the fall.” 26 October 2000. Consulted on

<http://www.economist.com/displayStory.cfm?Story_ID=403112>.

Ferrier, Grant. 1996. Financing the transfer of environmental technology. sust

able development finance: Opportunities and obstacles. United Nations, New Y
Fideicomiso de Apoyo al Programa de Ahorro de Energía de

Eléctrico (Fide). 1993. Oportunidades de ahorro de energía en la ind

la fundición.

Food and Agriculture Organization. 1999. State of the world's forests 199

Gay, Carlos; Martínez, Julia; Estrada, Manuel; Bauer, Mariano; 

Omar; Quintanilla, Juan and Sheinbaum, Claudia. 1997. Globa

change mitigation assessment: Results from 14 transitioning and de

countries. US Country Studies Program; Chapter mitigation analysis for 

Gentry, Bradford. 1995. “Making private investments work for the envir

Gutiérrez Santos, Luis E. April 1999. Electricidad, precios y bienest

Examen, no. 114.

Instituto de Investigaciones Eléctricas (IIE), Non-Conventional 

Sources Unit. December 1996. “Estudio de prefactibilidad de una 

eoloeléctrica de 150 MW para la zona de ‘La Ventosa’,” Oaxaca, Méxic

prepared for the CEC. Mimeo.

IIEC, Marbek Resource Consultants and Fide. 1996. “Energy perf

contracting in Mexico: Market study.” Prepared for the CEC, 15 Novemb

Instituto Nacional de Ecología (INE). 1997. Reporte ejecutivo del in

nacional de emisiones de gases de efecto de invernadero, por fu

sumideros, actualizado para 1990.

INE. 1997. National greenhouse gas emissions inventory by sources a

1990 (updated in 1996) (in press).

INE. 1999. Mexico inventory of greenhouse gas emissions and sinks. 

INE. 2000. Manifestaciones de Impacto Ambiental, Biblioteca.

Instituto Nacional de Estadística Geografía e Informática (INEG

Conteo 1995: Resultados preliminares. Mexico City: INEGI.

INEGI. 1997. Anuario estadístico, 1997. Mexico City. INEGI.

Intergovernmental Panel on Climate Change (IPCC). 2000a. Sum

policymakers. A special report of Working Group III, Geneva and Ne

IPCC. 2000b. “Land Use, Land-use Change and Forestry.” IPCC Plenary XVI, 

IPN. 1998. Guías de producción más limpia, 2. Fundición, Centro Mexic

la Producción más Limpia. 

Joshua, Frank T. 1999. “UNCTAD and UNEP launch international 

group on the Clean Development Mechanism.” Global Greenhouse E

Trader, 6. Pp. 1-4.

Knoepfl, Ivo. 1999. In UNEP Insurance Industry Initiatives for the Envi

Lanoie, Paul et al. April 1997. “Can capital markets create incentives for 

control?” World Bank, Policy Research Working Paper 1753.
78

Masera, O. R. 1993. Sustainable fuelwood use in rural Mexico, Volum

Current patterns of resource use. Report no. LBL-34634, Energy 

Environment Division. Lawrence Berkeley Laboratory. Berkeley, California, (Ap

Masera, O. R. 1995. Future greenhouse gas emissions and sequestration scena

from land-use change in Mexico. Report to the UNEP from the Mexico’s Cou

Study (Coord. by C. Gay), National Institute of Ecology. 

Masera, O. R.; Ordóñez, Y J. A. 1997. Forest management mitigation opti

In press. 

Masera, O. R.; Ordóñez, M. J. and Dirzo, R. 1992. “Carbon emissions f

deforestation in México: Current situation and long-term scenarios.” In W. Maku

and J. Sathaye (eds.) Carbon emission and sequestration in forests: Case stu

from seven developing countries: Summary. Lawrence Berkeley Laboratory re

no. LBL-32665, University of California, Berkeley, California, (August).

Ordóñez, A. 1999. Captura de carbono en un bosque templado: El caso de 

Juan Nuevo, Michoacán. Instituto Nacional de Ecología. 

Ozawa, L. and C. Sheinbaum. no date. Análisis específico de energía y de 

emisiones específicas de carbono de la industria siderúrgica Mexicana. Insti

de Ingeniería de la UNAM, Grupo de Energía y Medio Ambiente.

Ozawa, Leticia, Claudia Sheinbaum, Nathan Martin, Ernst Worrel, 

Lynn Price. No date. Energy use and CO2 emissions in Mexico ́s iron and s

industry. Instituto de Ingeniería, Universidad Nacional Autónoma de Méx

Grupo de Energía y Medio Ambiente; Energy Analysis Department, Lawre

Berkeley National Laboratory, Berkeley California.

Repetto, Roberto and Duncan Austin. 2000. Pure profit: The financial im

cations of environmental performance. World Resources Institute. Washington, 

Rodríguez, Guillermo. 1994. Evolución de la industria eléctrica en México

El sector electrico de Mexico. Edited by La Comisión Federal de Electricitá 

Fondo de Cultura Económica, pp. 251–253, Mexico.

Scolel Té: Carbon sequestration and sustainable forest management in Chia

Activities Implemented Jointly.” Third Report to the Secretariat of the Un

Nations Framework Convention on Climate Change. Washington, DC.

Secretaría de Agricultura y Recursos Hidráulicos, Subsecretaría Fore

(SARH). 1992. Inventario nacional forestal de gran visión, 1991–1992. Info

principal. Mexico.

SARH, Subsecretaría Forestal. 1989. Informe técnico sobre auditorias op

cionales de unidades para el desarrollo forestal. Mexico.

Secretaría de Energía. 2000. Prospectiva del sector eléctrico: 1999–20

Mexico.

Secretaría de Energía. 1999a. Balance nacional de energía, 1998. Mexico, 

Secretaría de Energía. 1999b. Documento de prospectiva del sector eléct

1998–2007. Mexico City: Secretaría de Energía.
Segura, Gerardo. The state of Mexico’s forest resources, management, 

servation. Consejo Técnico Consultivo Nacional Forestal (C

<http://www.semarnap.gob.mx/ssrn/conaf/statfor.htm>.

Secretaría de Medio Ambiente y Recursos Naturales y Pesca (Sem

Anuario Estadístico de la producción forestal 1998.

<http://www.semarnap.gob.mx/ssrn/DGForestal/anuario1998/presentacio

Semarnap. Programa forestal y de suelo, 1995–2000. 

Swisher, J. N. 1991. “The incremental costs of terrestrial carbon st

forestry, bioenergy and land use.” Biomass and Bioenergy, 1(6): 317–328

UNCTAD. 1998. International emissions trading update. Geneva.

United Nations Environment Program (UNEP). 1999a. Financial ins

initiative 1998 Survey. UNEP Geneva.

UNEP. 1999b. Financial services and sustainability: Industry and environme

US Environmental Protection Agency (EPA). 2000. Green Div

The Relationship Between Firms’ Environmental Performance and F

Performance, EPA-100-R-021, May 2000. Washington, DC. 

US Environmental Protection Agency (EPA). 1998. “USIJI uniform r

document: Activities implemented jointly under the pilot phase.” Washing

Von Moltke, Konrad, presentation to "Hemispheric Trade and Sus

Development," International Institute for Sustainable Development, Que

April 2001. Winrock International. February 1997. “Biomass-fueled 

energy generation in Mexico.” Mimeo. 

Woodrising Consulting Inc. 2000. “Forest rehabilitation and conserv

the Sierra Gorda Biosphere Reserve, Mexico.” February.

World Resources Institute. November 1999. “How much sustainable 

ment can we expect from the Clean Development Mechanism? Climate 

World Trade Organization. 1997. Trade policy review: Mexico. Geneva
80

Annex A: Reducing Emissions Associated with Power Generation

Flexible Mechanism Opportunities on the Demand 

and Supply Sides

Table A-1: Self-supply Permits Issued by CRE

Permit Location Capacity Energy Primary Fuel Technology

Number Mw Gwh/Year

02/Aut/94 State Of Mexico 2.66 19.81 Water Hydro Turbine

03/Aut/94 State Of Mexico 1.35 10.17 Water Hydro Turbine

04/Aut/94 State Of Mexico 2.73 19.48 Water Hydro Turbine

05/Aut/94 Sonora 2.80 13.40 Diesel Internal Combu

09/Aut/94 Campeche 7.52 7.40 Sweet (Low Sulfur) Gas Turbine

Natural Gas

16/Aut/94 Sonora 26.60 140.00 Water Hydro Turbine

17/Aut/94 Sonora 23.00 123.70 Water Hydro Turbine

18/Aut/94 Sonora 30.00 167.40 Water Hydro Turbine

19/Aut/94 Sonora 23.00 120.20 Water Hydro Turbine

20/Aut/94 Veracruz 1.26 3.27 Water Hydro Turbine

27/Aut/95 Querétaro 11.52 2.80 Diesel Steam Turbine

28/Aut/95 Chihuahua 2.73 7.60 Diesel Internal Combu

33/Aut/95 Coahuila 198.00 1,261.00 Imported Coal Fluidized Bed

34/Aut/95 Oaxaca 27.00 134.00 Wind Fluidized Bed

35/Aut/96 San Luis Potosí 250.00 1,750.00 Coke Fluidized Bed

36/Cog/96 Nuevo Leon 617.30 4,143.00 Natural Gas Gas 

and Steam Tur

36/Cog/96 Campeche 35.50 33.80 Sweet (Low Sulfur) Gas Turbine

Natural Gas

39/Aut/96 Campeche 2.12 2.60 Diesel Internal Combu

40/Aut/96 Campeche 3.24 4.25 Sweet (Low Sulfur) Gas Turbine

Natural Gas

41/Aut/96 Campeche 1.70 3.09 Diesel Internal Combu

42/Aut/96 Campeche 5.97 9.60 Sweet (Low Sulfur) Internal Combu

Natural Gas

43/Aut/96 Campeche 6.23 11.65 Sweet (Low Sulfur) Gas Turbine

Natural Gas

44/Aut/96 Campeche 2.11 2.95 Diesel Internal Combu

45/Aut/96 Michoacan 2.20 4.58 Diesel Internal Combu

47/Aut/96 Tamaulipas 0.85 1.04 Diesel Internal Combu

49/Aut/96 Querétaro 22.70 133.92 Natural Gas Gas Turbine
Permit Location Capacity Energy Primary Fuel Techno

Number Mw Gwh/Year

51/Aut/96 Quintana Roo 30.00 75.00 Wind Wind T

52/Aut/96 Querétaro 69.00 504.60 Natural Gas Combin

53/Aut/96 Nuevo Leon 0.80 2.33 Diesel Interna

54/Aut/96 Campeche 16.74 30.35 Sweet (Low Sulfur) Steam 

Natural Gas Interna

55/Aut/96 Tamaulipas 2.89 1.25 Diesel Interna

56/Aut/97 Nuevo Leon 9.20 40.20 Biogas Interna

58/Aut/97 Quintana Roo 32.14 234.00 Fuel Oil Interna

59/Aut/97 Nuevo Leon 1.60 14.02 Biogas Interna

62/Aut/97 Veracruz 59.20 175.20 Natural Gas Gas Tur

63/Aut/97 Veracruz 48.00 336.00 Natural Gas Gas Tur

64/Aut/97 Tamaulipas 6.00 15.02 Natural Gas Steam 

65/Aut/97 Tabasco 92.00 420.00 Natural Gas Steam 

66/Aut/97 Tabasco 24.80 152.57 Natural Gas Gas Tur

67/Aut/97 Veracruz 8.00 70.80 Natural Gas Steam 

68/Aut/97 Tabasco 64.00 245.00 Natural Gas Gas 

and Ste

69/Aut/97 Puebla 60.00 166.00 Natural Gas Steam 

70/Aut/98 Oaxaca 30.00 50.00 Wind Wind T

71/Aut/98 Baja California 60.50 166.00 Wind Wind T

78/Aut/98 San Luis Potosí 9.00 18.00 Fuel Oil and Steam 

Sugarcane Bagasse

79/Aut/98 Guanajuato 79.50 470.00 Natural Gas Steam 

and Fuel Oil

80/Aut/98 Veracruz 76.80 128.00 Gas Natural Gas Tur

81/Aut/98 Tabasco 9.00 18.90 Fuel Oil and Steam 

Sugarcane Bagasse

82/Aut/98 Veracruz 76.40 296.50 Natural Gas Gas 

and Ste

and Fuel Oil

83/Aut/98 Nuevo Leon 64.00 308.00 Natural Gas Steam 

and Fuel Oil

84/Aut/98 Sonora 36.50 287.61 Fuel Oil Steam 

85/Aut/98 Veracruz 10.00 10.80 Fuel Oil and Steam 

Sugarcane Bagasse

86/Aut/98 Morelos 8.60 20.50 Fuel Oil and Steam 

Sugarcane Bagasse

87/Aut/98 Veracruz 3.70 5.45 Fuel Oil and Steam 

Sugarcane Bagasse

88/Aut/98 Veracruz 24.20 38.15 Fuel Oil and Steam 

Sugarcane Bagasse
82

Permit Location Capacity Energy Primary Fuel Technology

Number Mw Gwh/Year

89/Aut/98 Chihuahua 3.20 2.62 Diesel Internal Combu

90/Aut/98 Veracruz 6.00 8.20 Fuel Oil and Steam Turbine

Sugarcane Bagasse

91/Aut/98 Michoacan 1.60 1.96 Fuel Oil and Steam Turbine

Sugarcane Bagasse

93/Aut/98 Tamaulipas 65.00 270.60 Fuel Oil Steam Turbine

94/Aut/98 Coahuila 184.30 1,102.00 Natural Gas, Steam Turbine, 

Coke Gas, Kiln Gas Turbine an

Gas, and Fuel Oil Combined Cycl

95/Aut/98 Nayarit 12.00 22.10 Fuel Oil and Steam Turbine

Sugarcane Bagasse

97/Aut/98 Oaxaca 115.00 609.00 Natural Gas Steam Turbine

and Fuel Oil

98/Aut/98 Jalisco 12.00 25.56 Fuel Oil and Steam Turbine

Sugarcane Bagasse

99/Aut/98 Jalisco 4.50 11.96 Fuel Oil and Steam Turbine

Sugarcane Bagasse

100/Aut/98 Sonora 1.67 1.40 Diesel Internal Combu

103 Campeche 9.80 12.26 Sweet Natural Gas Turbine an

Gas and Diesel Internal Combu

104 Campeche 10.30 11.40 Sweet Natural Gas Turbine an

Gas and Diesel Internal Combu

105/Aut/98 Campeche 3.15 6.13 Sweet (Low Sulfur) Gas Turbine

Natural Gas

106/Aut/98 Campeche 18.73 31.76 Sweet (Low Sulfur) Internal Combu

Natural Gas

107 Campeche 8.10 21.35 Natural Gas Gas Turbine

108/ Nayarit 5.50 8.50 Fuel Oil and Steam Turbine

Sugarcane Bagasse

109/ Tabasco 36.80 22.00 Sweet (Low Sulfur) Gas Turbine

Natural Gas

110/ Tabasco 99.15 186.80 Natural Gas Gas Turbine

111/ Coahuila 16.20 102.00 Natural Gas Steam 

and Gas Turbin

114/ Veracruz 15.00 45.60 Water and Hydro Turbine

Natural Gas

115/ Durango 4.44 12.91 Water and Diesel Hydro Turbine

116/ Jalisco 10.47 27.14 Fuel Oil and Steam Turbine

Sugarcane Bagasse

117/ Sinaloa 10.50 20.90 Fuel Oil and Steam Turbine 

Sugarcane Bagasse Internal Combu

118/ Tabasco 1.90 16.64 Diesel Internal Combu
Permit Location Capacity Energy Primary Fuel Techno

Number Mw Gwh/Year

119/ San Luis Potosí 6.40 13.20 Fuel Oil and Steam 

Sugarcane Bagasse Interna

120/ Campeche 1.45 4.10 Diesel Interna

122/ Coahuila 0.55 1.00 Wind Wind T

123/ Durango 10.00 18.80 Fuel Oil Steam 

125/ Sinaloa 5.60 9.90 Fuel Oil Steam 

Interna

126/ Quintana Roo 42.73 318.15 Fuel Oil Interna

129/ Veracruz 12.00 30.25 Fuel Oil Steam 

130/Aut/1999 Guerrero 30.00 101.30 Water Hydro T

134/ Coahuila 10.20 13.04 Diesel Interna

137/ Veracruz 4.00 17.42 Water and Hydro T

Natural Gas

138/ Estado Mexico 10.00 43.80 Natural Gas Steam 

141/ Michoacan 40.00 180.40 Natural Gas Steam 

142/ Oaxaca 13.50 21.60 Fuel Oil and Steam 

Sugarcane Bagasse

143/ Oaxaca 13.50 21.60 Fuel Oil and Steam 

Sugarcane Bagasse

145/ Chiapas 9.60 12.62 Fuel Oil and Steam 

Sugarcane Bagasse

146/ Oaxaca 20.00 99.00 Water Hydro T

147/ Jalisco 8.00 37.00 Water Hydro T

149/ San Luis Potosí 260.00 1,850.00 Oil Coke Fluidize

150/ Veracruz 5.73 26.92 Water Hydro T

153/ Durango 20.00 79.00 Water Hydro T

155/ Jalisco 20.00 101.00 Water Hydro T

156/ State of Mexico 10.69 59.00 Natural Gas Gas Tur

158/Aut/2000 Chiapas 9.50 11.40 Sugar Cane Steam 

Bagasse

159/ Hidalgo 11.13 30.00 Gas Natural Interna

and Diesel

160/ Campeche 7.78 22.63 Sweet Natural Gas and 

Gas and Diese Turbine

161/ Jalisco 6.00 12.00 Sugar Cane Steam 

Bagasse

162/ Durango 7.99 23.93 Diesel Interna
84

Table A-2: Cogeneration Permits Issued by CRE

Permit Location Capacity Energy Primary Fuel Technology

Number Mw Gwh/Year

06/Cog/94 Coahuila 8.38 55.5 Natural Gas Gas Turbine

07/ Nuevo Leon 18.46 96.61 Natural Gas Gas and Steam

Turbine

11/ Veracruz 422.4 130 Natural Gas Gas Turbine

12/ Jalisco 12 17.5 Natural Gas Gas Turbine

14/ San Luis Potosí 2.55 19.75 Natural Gas Gas Turbine

16/ Querétaro 10.5 70.9 Natural Gas Gas Turbine

22/Cog/1995 Veracruz 6.25 44 Natural Gas Steam Turbine

23/ Hidalgo 30 229.7 Natural Gas Gas Turbine

24/ Hidalgo 35 182 Natural Gas Steam Turbine

25/ Jalisco 2.33 17.5 Natural Gas Gas Turbine

26/ Quintana Roo 29.5 192 Combustoleo Internal Combu

36/Cog/1996 Tamaulipas 120 832.2 Natural Gas Gas Turbine

46/ Estado Mexico 2.1 14.12 Natural Gas Internal Combu

48/ Sonora 4 21.25 Fuel Oil Steam Turbine

50/ S. Baja Calif. 5 20.5 Solid Waste Caldera De Par

61/Cog/1997 S. Baja Calif. 19.9 164 Fuel Oil Steam Turbine

73/Cog/1998 Chiapas 120.7 315.16 Natural Gas Gas Turbine

74/ Veracruz 172 490.76 Natural Gas Gas and Steam

Turbine

75/ Veracruz 163.5 762 Natural Gas Gas and Steam

Turbine

76/ Veracruz 58.5 202 Natural Gas Gas Turbine

96/ Tamaulipas 10.6 88.93 Natural Gas Gas Turbine

113/ San Luis Potosí 3.53 20.3 Natural Gas Gas and Steam

Turbine

131/Cog/1999 Sonora 470 3000 Natural Gas Combined Cycl

143/ Michoacán 10 31.54 Combustoleo Steam Turbine

144/ Jalisco 13.3 56.94 Combustoleo Steam Turbine

148/ Campeche 306 1971 Natural Gas Steam Turbine

151/ Quintana Roo 114.5 848.84 Natural Gas Combined Cycl

154/ Tlaxcala 6.64 37.27 Natural Gas Gas and Steam

Turbine

157/Cog/00 Tamaulipas 16.3 140.83 Natural Gas Combined Cycl
Table A-3: Independent Power Production Permits issued by CRE

Permit Location Capacity Energy Primary Fuel Techno

Number Mw Gwh/Year

57/Pie/97 Yucatan 531.5 3400 Natural Gas Combin

and Diesel

124/Pie/1998 Sonora 252.7 1800 Natural Gas Combin

128/ Tamaulipas 568.6 3700 Natural Gas Combin

and Diesel

133/Pie/1999 Coahuila 247.5 1650 Natural Gas Combin

and Diesel

135/ Guanajuato 545 4081 Natural Gas Combin

139/ Veracruz 535.56 3707.45 Natural Gas Combin

and Diesel

152/ Nuevo Leon 570 3685 Natural Gas Combin

164/Pie/2000 Campeche 275.00 2102.97 Natural Gas Combin

Table A-4: Importation Permits Issued by CRE

Permit Location Capacity Energy

Mw Gwh/Year 

31/Imp/1996 Sonora 4 18.4

60/Imp/1997 Coahuila 0.75 6.57

101/Imp/1998 Sonora 0.85 4.75

102/Imp/1998 Sonora 1.5 8

112/ Sonora 1.5 8

132/ Sonora 1.6 11.7

163/Exp/2000 Baja California 257.60 2119.12
86

Table A-5: System Expansion Plan, 1997–2007

Bid Required Capacity (MW)

Project Location Type Date 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 

Samalayuca Chihuahua CC 1992 522 

Merida III Yucatan CC 1996 499 

Cerro Prieto Baja California Geo 1996 100 

Rosarito 8 and 9 Baja California CC 1996 550 

Chihuahua Chihuahua CC 1996 418 

Monterrey III Nuevo Leon CC 1996 490 

San Carlos BCS CITD 1997 38 

Guerrero Negro BCS CITD 1997 9 

Hermosillo Sonora CC 1998 225 

Rio Bravo III Tamaulipas CC 1998 450 

Bajio Guanajuato CC 1998 450 

Monterrey Nuevo Leon CC 1998 450 

Altamira II Tamaulipas CC 1998 450 

Naco-Nogales Sonora CC 1998 450 

Rosarito 10 Baja Colifornia CC 1998 225 

and 11

Villahermosa Tabasco CC 1998 450 

Saltillo Coahuila CC 1998 225 

Rosarito 7 Baja California TG 1997 165 

Hermosillo Sonora TG 1997 142 

Rio Bravo Tamaulipas TG 1997 154 

Huinala Nuevo Leon TG 1997 141 

El Sauz Querétaro TG 1997 123 

Tula or El Sauz Querétaro TG/CC 1999 150 

Valle de Mexico Estado TG/CC 1999 280 

de Mexico

Los Azufres III Michoacan Geo 1999 100 

San Rafael Nayarit Hydro 1999 24 

El Sauz Querétaro CC 1998 450 

El Sauz Querétaro CC 1999 150 

Francisco Villa Chihuahua CC 1999 150 

Chicoasen Chiapas Hydro 1999 900 

Tuxpan II, IV & V Veracruz CC 1999 900 450 
Bid Required Capacity (MW)

Project Location Type Date 1998 1999 2000 2001 2002 2003 2004 2005 2006 

Altamira III-VIII Tamaulipas CC 1999 900 900 300 600 

Laguna 1 & 2 Durango CC 1999 225 225 

Baja California BCS CITD 1999 37.5 37.5 

I & II

Rio Bravo II Tamaulipas CC 1999 450 

Noreast I-III Sonora CC/TG 2000 225 225 225 

Guerrero Baja CITD 2001 9 

Negro II California I-III

Baja Baja California CC 2000 225 225 

California I-III

Matamoros Tamaulipas CC 2001 450 450 

Poza Rica Veracruz CC 2001 900 450 

Valladolid Yucatán CC 2001 450 

North I & II Chihuahua CC 2001 225 

Dos Bocas Veracruz CC 2002 450 

Coatzacoalcos Veracruz CC 2002 

El Cajon Nayarit Hydro 2000 636 

Tres Virgenes BCS Geo 1998 10 

Tres Virgenes BCS Geo 2002 5 

La Parota Guerrero Hydro 2001 

Copainala Chiapas Hydro 2001 

Subtotal 786 619 2,374 3,059 1,650 2,513 2,250 2,784 3,079 

Note: Table does not include capacity privately developed for private industrial use. 

Legend: CC, combined cycle; hydro, hydroelectric; geo, geothermal; CITD, internal combustion diesel; TG, gas turbine.
88

Annex B: Flexible Mechanism Opportunities in the Steel Sector

To develop a preliminary determination of the interest and possibilities 

emissions reduction projects in the Mexican iron and steel sector, a short 

concise questionnaire was given to 14 steel company representatives, inclu

those from small, medium and large companies. Exhibit B1 shows the comp

tion of the sample.

Exhibit B1. Composition of the sample of 14 steel companies who answered the

questionnaire.

Classification Size

1. Galvanizer Medium

2. Integrated Medium

3. Integrated Large

4. Integrated Large

5. Integrated Small

6. Integrated Medium

7. Integrated Large

8. Minimill Medium

9. Minimill Medium

10. Minimill Medium

11. Re-roller Medium

12. Smelter Medium

13. Smelter Medium

14. Transformer Medium

The survey results indicated that even though only one out of the fourt

companies is currently developing a climate change-related project (a medium-

transformer industry), 71 percent of them are aware to some extent of the en

and cost savings that could result from the implementation of such projects. 

Although there is a wide-spread lack of information on GHG emis

reduction projects, the survey results indicate that there is interest among s

companies to learn more about such projects and climate change-related iss

All the companies requested more information on the subject, and all but on

those aware of the opportunities stated that they would be interested in carry

out a project. Some general additional information on CDM was subseque

provided by this study team.

Fifty-seven percent of the companies are already running or designing 

energy saving project (Exhibit B2). In contrast, only two integrated compa

are currently running or designing fuel-switching projects: one is a large comp

changing from fuel oil to natural gas and the other is a small one switching f

gas to coke. 
Exhibit B2. Is your company currently running or designing 

an energy saving program?

Companies running or designing energy saving programs

Classification No. Size

Integrated 2 Large

Integrated 2 Medium

Minimill 2 Medium

Re-roller 1 Medium

Transformer 1 Medium

Annex C: Potential Flexible Mechanism Opportunities 

in Industrial Plantations

This annex provides the list of operating industrial plantations summ

the 1998 annual report on forestry in Mexico (Dirección General Forest

They grow trees for different purposes, from Christmas trees to wood 

and paper production, as shown in the Table C-1 of this Annex. These pla

represent good opportunities for CDM projects, as has been mentione

text of Chapter 4, via expansion of plantation areas, establishment of n

tations, and amelioration of their production processes. 
90

These commercial plantations are distributed essentially throughout the coun

as shown in Figure C-1.

Figure C-1. Mexican Plantations by State, 1998

The concentration of commercial plantations is largest in the state

Campeche, Chiapas, Oaxaca, Tabasco and Veracruz, all of which are in the South

and have good growing conditions. The size and number of the plantations 

described in Table C-1.

Table C-1. Mexican Plantations by Size, 1998

While approximately six plantations are categorized as medium or large in term

area, these plantations can still be considered as small or micro enterprises beca

they are divided into subprojects. The plantations involve several species, inclu

pine, oak and eucalyptus. Using the low estimate of sequestered carbon 

Dimension Size No. Average size

>5000ha Large 2 8,195

1000–5000ha Medium 4 2,062

300–1000ha Small 10 578

1–300ha Micro 39 79

Total 55 609

0

2000

4000

6000

8000

10000

Baja California

Campeche

Coahuila

Colima

Chiapas

Chihuahua

D.F.

Durango

Guerrero

Hidalgo

Jalisco

México

Michoacán

Morelos

Nayarit

Nuevo León

Oaxaca

Puebla

Quintana Roo

San Luis Potosí

Sinaloa

Tabasco

Tamaulipas

Tlaxcala

Veracruz

States plantations areas (ha)
10tC/ha/year and the total area of 33,485 ha, the total carbon sequestration 

at these plantations is estimated to be 334,850 tC/year.

Table C-2. Main Ongoing Commercial Plantations Projects in Mexico—1998

State of Name of the project Location or Species used Planted 

the Republic or the property Municipality in the Plantation surface 

(ha) 

Baja California Innominate Mexicali Eucalyptus camaldulensis 

Wood for cellulose 50 

Campeche Smurfitt Cartón Candelaria Wood for cellulose Gmelina arborea 700 

and Papel de México

Clemente Campeche Swietenia macrophylla 100

Rámirez Vargas and Cedrela odorata

Wood for sawmills

Unión de Sivicultores Escarcega and Swietenia macrophylla 331

de la Región Champoton and Cedrela odorata

de Escarcega Wood for sawmills

Productores Swietenia macrophylla 137

Agropecuarios de Haro Escarcega and Cedrela odorata

Wood for sawmills

Various projects Hopelchen Swietenia macrophylla, 149

Small landowners and Campeche Cedrela odorata and 

Cordia dodecandra

Wood for sawmills

Coahuila Various projects Arteaga, Saltillo Pinus spp.

Ejidos and small and Cepeda Christmas and ornament trees 43 

landowners

Colima Various projects Colima, Armería, Various tropical species 98 

Small landowners Manzanillo Wood for sawmills

and Cuauhtemoc

Chiapas Agroforesters of the state Various locations Cedrela odorata, Tabebuia 737 

donnell-smithii, Swietenia

macrophylla and other

Wood for sawmills

SOCAMA Various locations Cedrela odorata, Tectona 2,674

Grandis, Tabebuia donnell-smithii, 

Swietenia macrophylla and other.

Wood for sawmills

Hule de Palenque Palenque Hevea brasiliensis 1,319

Wood for sawmills

Chihuahua Stephanie Memmot Casas Grandes Pinus eldarica 5 

Christmas trees

PIMSA-COPAMEX Ojinaga Eucalyptus camaldulensis 200

Wood for cellulose

D. F Various projects Tlalpan, Milpa Alta Pinus ayacahuite 38 

Small landowners and Alvaro Obregón Christmas trees

Durango Forestal Halcón Durango and Pinus spp.

San Dimas Wood for sawmills and cellulose 450 
92

State of Name of the project Location or Species used Planted Plante

the Republic or the property Municipality in the Plantation surface surfac

(ha) state 

Guerrero Ejido El Balcón Ajuchitlan Pinus pseudostrobus, 10 110

del Progreso P. herrerae, P. teocote, 

P. ayacahuite, P. chiapensis

and P. maximinoi

Wood for sawmills

Commercial plantation El Reparo Pinus spp. 100

Wood for sawmills

Hidalgo Tecocomulco Cuautepec Pinus montezumae, 60 254

Tres Cabezas P. rudis, and P. patula 

Wood for sawmills

Various projects Metzquititlan Pinus spp. 194

Small landowners Wood for sawmills

Jalisco Industrias Emman Ocotlan, Tototlan Eucalyptus spp. 473 473

de Ocotlan and Poncitlan. Production of splinter

for agglomerates

México Bosque de los Amecameca Pinus ayacahuite 150 765

Arboles de Navidad and P. pseudotsuga

menziessi 

Christmas trees

Rancho El Capricho Zumpahuacan Pinus spp. 113

Wood for sawmills and

Christmas trees 

Various projects Various Pinus spp. 502

Ejidos and small municipalities Wood for sawmills and 

landowners Christmas trees

Michoacán CRISOBA Patzcuaro Eucalyptus globulus 50 170

Wood for cellulose

El Cirian and Tuzantla Pinus spp. 120

Cañas Viejas Wood for sawmills and cellulose 

Morelos Tlahichan Tlalnepantla Pinus ayacahuite 4 10

Christmas trees

P. El Vigía Tlalnepantla Pinus ayacahuite 6

Christmas trees

Nayarit Soc. de Producción Bahía de Banderas Tectona grandis 41 372

Rural Ecoteca Wood for sawmills

de la Bahía

Various projects Bahia de Banderas, Cedrela odorata, Swietenia 83

Ejidos and small Compostela, macrophylla, Tectona grandis

landowners San Blas, Tepic and other

and Acaponeta Wood for sawmills

Plantaciones Forestales Acaponeta Eucalyptus spp. and Gmelina arborea 248

Comerciales Norte Wood for cellulose

de Nayarit
State of Name of the project Location or Species used Planted 

the Republic or the property Municipality in the Plantation surface 

(ha) 

Nuevo León Ejido de San Joaquín Arramberri, Pinus cembroides and 60 

de Soto P. pseudostrobus

Christmas trees and

wood for sawmills

Various projects Galeana, Iturbide, Pinus spp. 29

Ejidos and small Santa Catarina Christmas trees

landowners and Santiago

Oaxaca Plantaciones Forestales Pochutla Tabebuia rosae and 20

El Pénjamo Swietenia humilis

Wood for sawmills 

and plywood boards

Plantaciones Tehuantepec 23 properties in Eucalyptus grandis 150

San Juan Cotzocón and E. urophylla

and Santiago Yaveo Wood for sawmills and cellulose

Ejido San Isidro Valle Nacional Pinus caribaea and other 700

Lagunas (FAPATUX) species of tropical pinus 

Wood for cellulose

La Sabana San Juan Cotzocon Pinus caribaea and other 8,000 

species of tropical pinus 

Wood for cellulose

Puebla Various projects Huachinango, Cupressus benthamii, 430 

Ejidos and small Zihuateutla, Tlaola, Chamaecyparis pisifera,

landowners Xicotepec de Juárez Cunninghamia lanceolata

and Chiconcuatla and other

Christmas trees

Quintana Roo El Corozo Felipe Carrillo Puerto Cedrela odorata 25 

Wood for sawmills

El Vergel Othón P. Blanco Cedrela odorata and 100

Swietenia macrophylla

Wood for sawmills

Commercial plantation Felipe Carrillo Puerto Cedrela odorata and 53

with intense technology Swietenia macrophylla

Wood for sawmills

Agroforestry (11 Ejidos) Cedrela odorata and 513

Lázaro Cárdenas Swietenia macrophylla 

Wood for sawmills

San Luis Various projects Tamazunchale Cedrela odorata 10 

Potosí Small landowners and Terrazas Wood for sawmills 

and plywood boards

Sinaloa Various projects Culiacan, Elota, Cedrela odorata, Swietenia 74 

Small landowners Mazatlan and macrophylla and Eucalyptus sp.

Calomato Wood for sawmills and cellulose
94

State of Name of the project Location or Species used Planted Plante

the Republic or the property Municipality in the Plantation surface surfac

(ha) state 

Tabasco Planfosur (13 Projects) Huimanguillo Eucalyptus urophylla and E. grandis 8,390 9,331

Wood for cellulose

Forest development Balancán, Tierra Eucalyptus urophylla 941

(8 projects, 3 of them Nueva and and E. grandis

not planted yet) Huimanguillo Wood for cellulose

Tamaulipas Various projects Victoria, Jaumave, Pinus spp., Cedrela odorata 22 22

Ejidos and Gómez Farías, and Prosopis velutina 

Small Landowners Güemez and Reynosa Wood for sawmills, poles,

fuel and charcoal 

Tlaxcala Various projects Tlaxco and Teacalco Pinus ayacahuite 3 3

Ejidos and Christmas trees

Small Landowners

Veracruz Planfosur (16 Projects) Las Choapas, Eucalyptus urophylla 2,378

Ixhuatlán del, and E. grandis 

Sureste Molocán Wood for cellulose

and Agua Dulce

Particular (13 Projects) Hueyapan de Cedrela odorata, Swietenia 1,876

Ocampo, Catemaco, macrophylla and Tabebuia

Santiago, Isla and donnell-smithii

San Andrés Tuxtla. Wood for sawmills

Reforesta Mexicana Las Choapas Toona ciliata, Tectona grandis 200

and Swietenia macrophylla

Wood for sawmills 

Magueyitos Perote Pinus cembroides, P. Montezumaeà 43

and P. pseudostrobus

Christmas trees and wood for sawmills

El Chaparral Juchique de Ferrer Gmelina arborea and Tectona grandis 190 4,771

Wood for sawmills

Rancho Kirch Poza Rica Cedrela odorata and 48

Swietenia macrophylla

Wood for sawmills

Los Molinos Perote Pinus patula 31

Wood for sawmills

El Colibrí La Antigua Cedrela odorata and 5

Swietenia macrophylla

Wood for sawmills

TOTAL 33,47

Source: Dirección General Forestal.