Electricity generation is the largest source of greenhouse gas emissions in many countries. Most emissions trading systems (ETS) therefore address emissions from electricity generation. The de-sign of an ETS and the structure and regulation of the electricity sector have a large impact on the environmental effectiveness and the quality of the carbon price signal. This report analyses the potential interaction of carbon and electricity markets in Mexico. The Mexican ETS started as pilot scheme in 2020 with the aim to gather experience in the implementation of an ETS without having impacts on the economy. Due to this, no carbon price has been established yet and the political uncertainty about future climate and energy policy is high. While it is unlikely that the trading sys-tem will have a noticeable impact in the short term on demand, supply, or investments, a carbon price has the potential to spur renewable energy growth under an appropriate electricity market regulation. The potential for short-term fuel switching is low, as natural gas is already the cheapest fossil fuel in the merit order.

This case study is part of the project “Influence of market structures and market regulation on the carbon market” that aims to identify the impact of market structures and regulations on carbon markets and to investigate the interdependencies between carbon and energy markets in Europe, California, China, South Korea, and Mexico.