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Despite the fact that the United States did not ratify the Kyoto Protocol, Mexican law firm Goodrich, Riquelme y Asociados' Gabriela Merla says U.S. investors stand to gain from the clean development mechanism (CDM). During today's OnPoint, Merla, who heads up Goodrich Riquelme's climate change practice and its Paris office, explains how U.S. investors can link up with emission offset project developers in Mexico to work within the CDM. She addresses the level of risk associated with this type of investment and also discusses long term concerns about the CDM.
Monica Trauzzi: Welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Gabriela Merla, an associate at the Mexican law firm Goodrich, Riquelme y Asociados. Gabriela heads up their Paris office and the Environment and Climate Change division. Gabriela, thanks for coming on the show.
Gabriela Merla: Thank you to you Monica.
Monica Trauzzi: Gabriela, your firm is in the states trying to encourage U.S. companies to invest in Mexican carbon offset projects and these offsets will then be sold over to the European trading system. I want you to describe this proposal a little more and explain for our viewers what you're hoping to achieve here.
Gabriela Merla: OK. Well, we have to go first to know that the Kyoto Protocol establishes three mechanisms in order to help countries to achieve their compromises, which are developed countries. One of these mechanisms is the clean development mechanism by means of which industrialized countries can invest in countries as Mexico, in projects that reduce emissions. The project is certified if it complies with all the requirements that the Kyoto Protocol sets. And then the emissions are certified and you get what is called certificates of emission reductions, CRs. CRs then can be sold and you can obtain from 17 to 20 euros per ton of CO2 equivalent ton and that is another way of financing the project. One is the United States enterprises participation. They can go to Mexico, participate either in funding or in their know-how or technology in developing these kinds of projects. They will not be the project developer, because they cannot be having that title, but they can be indirectly through a Mexican subsidiary, a Mexican company. The Mexican community will be the one receiving the CRs and the underwriter will be receiving CRs that could be sold to those companies that are needing to comply.
Monica Trauzzi: But even though the U.S. isn't signed onto Kyoto? I mean ...
Gabriela Merla: That's why they have to be indirect.
Monica Trauzzi: Oh, OK.
Gabriela Merla: They cannot be a project developer for the Kyoto Protocol. They have to be a true Mexican subsidiary or maybe as a partnership. They can not be the ones directly receiving CRs, because the United States is not a signatory of the Kyoto Protocol.
Monica Trauzzi: And because they're being sold back into the European trading scheme, this is benefiting Europe's overall emissions reductions?
Gabriela Merla: Well, we have to talk then of which is the market of the CRs in this moment for Mexican projects, as the rest of the developing country's projects. You have in this moment two possibilities. One is the Kyoto Protocol itself market, which comprises not only the European Union, but also Japan, Canada, Australia has just ratified the protocol. And then you have the European Union emissions trading scheme, which is also broadening the area of the market and, in fact, is the one that is more demanding than the rest. So you have these two possibilities which have the need to be studied with certain precaution after 2012, because then the rules will be changing. So, an agreement, that's why we are advising our clients you need to have a flexible regime. One regime for what is the Kyoto Protocol phase 1 that comes from 2008 to 2012. And then will be a different regime depending on the circumstance on how it's evolving, the market and the legislation, internationally speaking.
Monica Trauzzi: And Mexico is responsible for a relatively small percentage of CDM emissions credits at this point. It's under 10 percent, and when you compare it to China and India that are getting a lot of focus at this point, so why should there be more of a focus on Mexico?
Gabriela Merla: Well, first of all, we are partners already in trade. So that means that the United States has a lot of presence over an important investment. So they have three options in investment that is currently there. Either they can go in their knowledge, put it in place for example in landfill gases collections. That could be. Second, if they know that there is a project to develop industry in a facility in Mexico where emissions can be reduced, comparing baseline of the emissions as usual in Mexico. That could be another project. And the third project is maybe there are American companies which have already presence in Mexico that they can, within their facilities, reduce emissions or reduce energy consumption. So you have already a presence there. You have already gone through Mexico for different reasons. Then take advantage of that and see if you can reduce consumption of energy and emissions.
Monica Trauzzi: The Clean Development Mechanism is supervised. Who would be supervising these projects?
Gabriela Merla: It is according to the market of course. You have to follow, first, a registration process, which is very well detailed. You're talking about the CR concept to be commodities. Then they have a value, an economic value and you really need to certify that the best process that are generating these reductions is really taking place. So, you have a process where there is effort to see, you have to produce the PDD document, that project development document. You need afterwards where you are justifying why you are complying with the requirements. Then you'll have to obtain a letter of approval from the Senate and National Authority from Mexico. Once you have these two elements, you designate an operational entity which is going to verify your methodology, your baseline, and will be doing the monitoring after the project is registered. This is the DOE, the signature of personal entity, will deliver all these documents and certification to the executive board of the Kyoto Protocol, which is in Bonn. And they will give, after analyzing all this, a document that registers the project.
Monica Trauzzi: Are there any successful projects that can sort of provide a blueprint for U.S. companies that might want to do this?
Gabriela Merla: Yes.
Monica Trauzzi: Has this been done?
Gabriela Merla: There has already been 189 letters of approval given by the Senate and National Authority. The last three years Mexico has been characterized overall because of their participation in landfill projects. I will actually comment to Monica that landfill projects have been so popular in Mexico in the last three years because you are capturing methane.
Monica Trauzzi: Right.
Gabriela Merla: Methane has a bigger global warming potential than carbon dioxide, which is 21 to 1. So when you are capturing methane you are getting more certificates of the emissions reductions because of the equivalence, than you would be with another project, which makes it more financeable. So that's why it has been, this segment, very popular. Now, we're moving towards the renewable energies industrial sector. And I will say that now Europe and I would like that Mexico get interested in that sector as well for building performance.
Monica Trauzzi: The CDM has sparked a lot of controversy because some people say that it sort of allows for business as usual and for business-as-usual projects to take place because the major industrialized nations are not directly reducing emissions themselves, they're doing it in sort of this indirect way. Do you see value in those claims? Do you think that we should proceed with caution when talking about the Clean Development Mechanism?
Gabriela Merla: Well, I do believe in Clean Development Mechanism. I do believe, first, because global warming is a global problem. So, I recognize that there is that responsibility for developed countries, but it is important that developing countries get technology, get a conscience of the need of producing in a different means. And the Clean Development Mechanism is helping in that way. You are transferring technology. You are allowing developing countries to have a cleaner means to produce. And you're at the same time solving a global problem.
Monica Trauzzi: There have been reports that the E.U. is beginning to sort of step away from carbon offsetting in favor of doing it more directly. So, considering that, is this a safe investment for U.S. investors and companies if we are already seeing the E.U. sort of step back down from this idea of the CDM?
Gabriela Merla: Well, maybe you're referring to the fact that this year, the last year, the European Union allowing their own members to establish national assignation plans, where they could be determining if a company could use 20 percent of CRs to comply with their obligations and 80 percent of allowances. And there were cases of countries which were even allowing 40 percent. So there's a proposal that was presented by the European Union, on generating flexibility, which is saying that it is European Union, you know, the one that is going to be establishing if it is going to be 20 or 40. That is one element that you may have said that European Union is trying to limit. And the second one is post-Kyoto European Union has said, well, if United States is not ratifying, the CRs used for complying with their obligations will be limited. We have to see it like a negotiation skill that the European Union is using. We have from now to 2012 the possibility to use certainly the CRs, if United States companies are going to Mexico. But then I do believe it is not possible that the world just gets rid of what has advanced towards combating climate change, which means this mechanism is giving you the standard of how to proceed to make sure reduction of emissions certainty. And I do believe are going to emit to be recognized for the future regime, that I do want to believe and I think the world is urging for it to be followed by another one.
Monica Trauzzi: And you think the CDM will play a role in this post-2012 ...
Gabriela Merla: Completely. I mean I do believe that, it is my personal opinion, that over the future of post-Kyoto we'll have three different regimes, as we have now two for annex 1 countries and non annex 1 countries. We'll have annex 1 countries and another different one for transition economies countries, where they have a more compelling regime than the one that they're having as a annex 1 countries. And then the third one is a no annex 1 countries. But this will necessarily need to recognize what has been done, this is CDM. This investment that has been done, there's a path that has been already walked, and you cannot just get rid of it.
Monica Trauzzi: Final question here. There's a lot of talk in Washington about the U.S. implementing its own cap-and-trade policy, some sort of climate change legislation. What impact would a U.S. cap-and-trade system have on Mexican generated CO2 credits and what impact should it have?
Gabriela Merla: Well, that depends on which is the bill that is finally and how it is finally approved. There is a bill that, the Lieberman one, that it is also accepting the possibility to use the CRs or the certificates that are coming from international mechanisms such as CDM. If that would be the case, that American, United States companies are accepted to comply with a certain percentage with their obligations using CRs, then you are broadening the market of CRs. Then that will give you not only the European and the Kyoto Protocol market, but also the U.S. So, that will give you more demand and more certainties certainly because there is another regime that's accepting this mechanism.
Monica Trauzzi: So, would you then be in favor of something that is structured like the Lieberman-Warner?
Gabriela Merla: Yeah, I think so and I would really like to enhance this because we are connected, in the case of Mexico, we are connected very close in trade and in production. And I think that if we are also going the same way for our resolving the climate change problem it would be a good idea to try, you have a lot of subsidiaries, American subsidiaries in Mexico that could be helping in their complying of their obligations with the subsidiaries in Mexico.
Monica Trauzzi: OK, we'll end it right there on that note. Thank you for coming on the show.
Gabriela Merla: No, thank you to you Monica.
Monica Trauzzi: This is OnPoint. I'm Monica Trauzzi. Thanks for watching.
[End of Audio]
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