The global temperature has increased faster in the last 2000 years, leading to significant negative impacts on economic growth and livelihoods of the countries, particularly for developing countries and vulnerable communities who have contributed the least to climate change (IPCC 2019).

According to the World Energy Outlook, taking climate actions to achieve net zero carbon emissions by 2050, will require a green investment ranging from 0.6% to 1% of annual global GDP over the next 20 years, which means an increase of USD 2 trillion to USD 5 trillion by 2030 and to USD 4.5 trillion by 2050 (IEA 2022).

In that sense, despite the rapid growth of the green and sustainable finance markets in the past years, there is still a need of green investments. That is why, it is necessary to have an integrated climate action to mobilize the capital needed, which includes the government at sub-national and national level, as well as the international financial institutions, private sector, and civil society to help accelerate the global climate transition towards lower and net-zero carbon emissions and climate resilience development (CPI 2019).

In the context of national development objectives and priorities, when we study the case of Mexico, it becomes evident that despite the political commitments and efforts to tackle climate change, such as the implementation of the General Law on Climate Change and the submission of the Nationally Determined Contributions (NDCs) in line with the Paris Agreements, the country’s greenhouse gas emissions continue to increase. This affect not only the economic growth of the country, but also imposes complications for the environment in the medium and long term that could be irreversible. For that, if Mexico aims to fight climate change, it is important to develop approaches based on the country’s needs and priorities that align investments with sustainability goals.

Is there a need for a national financial climate change strategy in Mexico?

Due to the lack of a comprehensive and diversified national financial climate change strategy in Mexico, there is still an inadequate basis for planning climate change spending, which has prevented the transition towards sustainability and climate resilient development (INECC 2018). The lack of a specific climate financing strategy consistent with the environmental goals has led the country to allocate the available resources to carbon-intensive public investment activities. This has been reflected in Mexico’s 2020 Sustainable Finance Index (GFLAC) ranking. Here, Mexico was the biggest greenhouse gas emitter in Latin America and the Caribbean and ranked in the 13th position among the world’s highest emitting countries (GFLAC 2020).

Although Mexico has been allocating resources to combat climate change, these resources have been currently set back and most of this funding has been directed to carbon intensive activities, due to the country’s heavy reliance on fossil fuels. To illustrate this, in 2021, the Mexican Federal Expenditure Budget allocated resources for activities and programs associated with climate change mitigation and adaptation. However, those resources represented around US$3 billion, meaning only 1.1% of the total federal budget (IKI 2021). Of this amount, around 75.3% was allocated to the Federal Electricity Commission to strengthen the Natural Gas Transportation Service, a program based on hydrocarbons, which is not necessarily aligned with the actions to mitigate climate change (Latinoamérica Sostenible 2020).

Furthermore, in the same year, the Mexican Congress approved the termination of the Climate Change Fund, which previously captured and channeled financial resources to support the implementation of climate actions. This decision shows the contradictory actions of the country to counteract climate change and represents additional challenges for the country to fulfill its commitments. 

Is there an alternative to align Mexico's climate change efforts?

The cost of climate change is difficult to predict, but a first estimation to carrying out the necessary actions to comply with the ambitious environmental and social commitments that the country has assumed, and to promote activities and projects linked to achieving sustainable development will require an investment of public and private resources of around US$20 million per year from 2014 to 2030, which represents a total amount of US$17 billion (INECC 2018).

According to the GFLAC, Mexico requires at least 2% of its GDP to address climate change problems. It will require an estimated budget of around 8.1% of the total budget (GFLAC 2020). This reflects the need for an accelerate reduction of public investments focused on fossil fuels and attention on the matter to increase actions focused on sustainability to allocate adequate resources in the shortest possible time.

For this reason, addressing the gap in sustainable finances and improving budgeting process for climate change projects, requires a comprehensive financial strategy. This can help in the identification of investment priorities, development of project portfolios and the promotion of multiple financial sources that are aligned with the country´s sustainable goals.

The main objective of a climate financial strategy is to implement short-, medium- and long-term actions to improve the management of available resources, as well as to increase financing for climate change through the development and use of innovative financial mechanisms. The identification, quantification, and evaluation of the transversal spending on climate change can contribute to the increase of transparency and improve the capacity to assess the quality of spending that is aligned to the climate change objectives (Delgado et al. 2021). If the country aims to fight climate change, it is important to know how and what resources are being utilized to mitigate climate change. It is then possible to know where the spending gaps are and what is needed to implement an adequate public spending budget on the climate agenda.

Conclusion

As we anticipate increasing climate impacts in the coming years, the consequences for developing countries such as Mexico will become even more significant due to their dependency on fossil fuels. It has been seen that Mexico has progressed in areas related to the development and adoption of standards, taxonomies, net-zero commitments, and other initiatives to align the financial structure with the Paris Agreement. However, to meet climate objectives, it is needed that in addition to scaling up climate finances, the government can seek to redirect carbon investments to a more climate resilient development.

To enact this, it requires a deep understanding of the structure of the Mexican economy to map a roadmap to be followed to align investment with sustainability goals. The development of a comprehensive climate financial strategy must be created according to the country´s climate change commitments and to support the diversification of the federal government´s sources of financing (Monsalvez 2023).

References

CPI (2019): Global Landscape of Climate Finance 2019. Climate Policy Initiative. Available online at www.climatepolicyinitiative.org/wp-content/uploads/2019/11/2019-Global-Landscape-of-Climate-Finance.pdf.

Delgado, Raul; Eguino, Huáscar; Lopes, Aloisio (2021): Fiscal Policy and Climate Change: Recent Experiences of Finance Ministers in Latin America and the Caribbean: Inter-American Development Bank. Available online at publications.iadb.org/publications/english/viewer/Fiscal-Policy-and-Climate-Change-Recent-Experiences-of-Finance-Ministries-in-Latin-America-and-the-Caribbean.pdf.

GFLAC (2020): Índice de Finanzas Sostenibles 2020: México. Climate Finance Group for Latin America and the Caribbean. Available online at www.sustainablefinance4future.org/_files/ugd/32948d_71f6f09bf084494a8dbdac6a8377a4d3.pdf.

IEA (2022): World Energy Outlook 2022. International Energy Agency. Available online at www.iea.org/reports/world-energy-outlook-2022.

IKI Alliance México (2021): Análisis del presupuesto destinado a medio ambiente y cambio climático en el PEF 2021. International Climate Initiative. Available online at iki-alliance.mx/analisis-del-presupuesto-destinado-a-medio-ambiente-y-cambio-climatico-en-el-pef-2021/.

INECC (2018): México comprometido con sus CND hacia una economía verde y baja en carbono. Instituto Nacional de Ecología y Cambio Climático. Available online at www.gob.mx/inecc/prensa/mexico-comprometido-con-sus-cnd-hacia-una-economia-verde-y-baja-en-carbono.

IPCC (2019): Special Report: Global Warming of 1.5 ºC. Intergovermental Panel on Climate Change. Available online at www.ipcc.ch/site/assets/uploads/sites/2/2022/06/SR15_Full_Report_HR.pdf.

Latinoamérica Sostenible (2020): Latinoamérica Sostenible: ¿Cómo impulsar una recuperación justa y resiliente a partir del financiamiento climático en México? Available online at www.latinoamericasostenible.org/wp-content/uploads/2023/04/MEX_Como-impulsar-una-recuperacion-justa-y-resiliente-a-partir-del-financiamiento-climatico-en-Mexico_2020.pdf.

Monsalvez, M. (2023): La mexicana que saca las cuentas del cambio climático: “América Latina no sabe cuánto le va a costar”. In El País, 2023.

~ The views represented in this blog post do not necessarily represent those of the Brandt School. ~