Estimating the costs of atmospheric carbon reductions in Mexico

Abstract

Trading in carbon emissions is a means of ensuring that supplies with the lowest marginal costs of emissions reduction are commissioned first. To analyse the potential for Mexican suppliers to participate in an emissions trading market, the relative cost-effectiveness of a carbon sequestration project and carbon abatement project is assessed. The marginal costs of emission reductions for each project are estimated and compared using standardised data. The results show that the carbon sequestration project has lower marginal costs for carbon emissions reductions than the technology-based abatement. Factors such as timescale, discounting implementation costs, transaction costs, and technical assumptions are considered in this comparison. The high transaction costs to set up carbon sequestration projects and weak institutional capacity to monitor and enforce agreements are relevant factors. Even though the carbon sequestration project is more cost-effective than the renewable energy power plant, both projects may allow Mexican suppliers to enter a potential international carbon emissions trading market depending on demand and supply conditions and the rules of the market.