Feasibility Analysis of a Cap-and-Trade System in Mexico and Implications to Circular Economy

Market-based instruments, such as the cap-and-trade, have been widely used to address the increase of greenhouse gases (GHG). In line with other geographic regions, Mexico has seen the need to expand the options of market instruments to mitigate the effects of climate change. Simultaneously, there are important reasons to move towards a circular economy model. In this context, this research seeks to answer if it’s feasible to implement a cap-and-trade system in Mexico as part of its climate policy. That said, firstly, it analyses and assesses the cap-and-trade system in Mexico based upon its contextual environment, its potential of implementation and its economic and environmental benefits and costs. Secondly, it highlights the implications of considering circular economy models into a cap-and-trade instrument. Through the use of marginal abatement cost curves (MACC), it was found that the percentage of measures to reduce GHG with negative cost agglomerates 57% of all the measures, which could translate into a benefit for the economy as a whole by almost 1% of GDP by 2020. As part of the conclusions, we argued that MACC results prove partially that the cap-and-trade system is a feasible option to apply in Mexico. In addition, a cap-and-trade mechanism should show a strong carbon price signal felt by end users and therefore motivates the application of circular economy principles, which are related to the introduction of innovations to enable the closing of current materials and energy loops along the supply production chain.