Decarbonization challenges and opportunities for the light manufacturing industry in Mexico Avelina Ruiz, Fernando Olea, Gabriela García, Valeria López Portillo, Aline Nolasco Aboute a th uthors Avelina Ruiz i s Climate Change Manager at the Valeria López Portillo is Climate and World Resources Institute Mexico. Ecosystems Coordinator at the World Resources Contact: [email protected] Institute Mexico. Contact: [email protected] Fernando Olea is an energy and climate change senior consultant with an established trajectory Aline Nolasco is Climate Change Coordinator at in mitigation analysis in Mexico. the World Resources Institute Mexico. Contact: [email protected] Contact: [email protected] Gabriela García i s a graduate student in economics at Instituto Tecnológico Autónomo de México (ITAM) Contact: [email protected] Acknowledgements The authors are very grateful to: We appreciate very much the support Abhishek JOSEPH from companies, industrial chambers and Alberto QUINTANA organizations to conduct the interviews to Alfonso ROIBAS supplement this report. We especially thank Lagtzu LOPEZMIRO the National Commission for the Efficient Lorena BRIZ Use of Energy (CONUEE), the German Luis GUIMARAES Agency for International Cooperation (GIZ), Peter KANNING the Private Sector Studies Commission for Zoë KNIGHT Sustainable Development (CESPEDES) and the Mexican Carbon Platform MexiCO2 Special thanks go to the reviewers, for their very valuable insights: Andrés Flores, Carlos Muñoz, Ana María Martinez, Inder Rivera, Samantha López, and Yunuen Velázquez. 02 Contents Executive summary 4 1. Introduction 9 2. Context 12 3. GHG emission projections 24 4. Towards decarbonization 37 5. Enabling conditions and barriers for the decarbonization of LMI 46 6. Conclusions 62 References 66 Annex I. EPS web tool and online 71 Annex II. Companies and organizations interviewed 72 03 Executive summary The Light Manufacturing Industry (LMI) is a branch of the manufacturing sector that produces relatively high-value items per unit weight, such as clothes and consumer electronics, through processes that use moderate amounts of energy and partially processed materials. The LMI has the potential to initiate rapid, substantial, and potentially self-propelling waves of rising output, employment, productivity, and exports that can push countries on a path of structural change. In the case of the Mexican economy, LMI plays a strategic role. It accounts for 13.9% of GDP, 80% of manufacturing production, and 65% of exports. Either directly or indirectly, it employs over 3.8 million people, representing 91% of total jobs in manufacturing industries. In 2019 alone, LMI attracted 13.7 billion USD of foreign direct investment. The sector is highly concentrated. Nearly 60% of LMI’s GDP contribution comes from three manufacturing sub-sectors: transport equipment (23%), food industry (25%), and computer equipment (11%). Other LMI subsectors include textiles, wood, pulp and paper, printing, leather, furniture, and other unclassified subsectors. 04 05 Highlights ¡¡The purpose of this report is to understand the opportunities and challenges faced by the light manufacturing industry in Mexico when attempting to advance its decarbonization strategies. This report aims to represent a useful diagnosis for stakeholders and policymakers to identify and implement cost-effective greenhouse gas (GHG) mitigation solutions in the light manufacturing sector to achieve Mexico’s climate targets. ¡¡In Mexico, by 2018, the LMI contributed roughly with 13.9% of the national Gross Domestic Product LMI’s energy requirements are relatively high, with it demanding (GDP), 80% of total manufacturing production and almost 20% of the national energy generated in Mexico, ether 65% of total exports. The sector employs more than in the form of electricity, natural gas, and liquid hydrocarbons. 3.8 million people and attracts USD 13.7 billion of Energy demand in the sector is still growing, at an annual rate of 2.3%,mainly due to the expansion of activities, even foreign direct investment annually (FDI) (INEGI, 2019). though it has reduced its energy intensity by over 20% since ¡¡Energy use in the light manufacturing sector 2000, through fuel shifting, energy efficiency improvements, and a growing share of less energy-intensive activities. grew at the same rate as the economy, 3.7% between 2010 and 2015, a slowdown compared Electricity represents 65% of the sector’s energy use. If full to growth rates before 2005. In general, light electrification was achieved, the sector would be in a position manufacturing operations consume less energy to significantly abate its greenhouse gas (GHG) emissions, as per value generated, having reduced their energy electric power generation can potentially decarbonize fully. intensity by 21.6% between 1995 and 2015, In Mexico, GHG emissions from light manufacturing ¡¡The mix of energy sources used by the LMI has operations contribute 7% of national total emissions. LMI GHG emissions are projected to grow 3% annually from shifted over time, with electricity growing from a now up until 2050, if no additional mitigation actions are 30% share in 1990 to 65% in 2018. The electrification taken. It is expected that the industry sector as a whole will trend of the sector may come as good news become the second-largest contributor to Mexico’s GHG in terms of GHG emissions, as electric power emissions by mid-century, with 20% of total emissions. generation can potentially decarbonize in full. Mexico has committed to reduce significantly its GHG ¡¡LMI has seen a 3% annual growth in GHG emissions emissions by 2030, by 22% below business as usual (BAU) for the 2010-2015 period, reaching a share of unilaterally, and as much as 36% if a set of conditions are 7% of total emissions. The industry will be the met. The light manufacturing industry is compelled to follow suit, putting in place a pathway to reduce emissions through sector with the second-largest contribution to a comprehensive approach, which can be summarized as Mexico’s GHG emissions by 2050 (20% of total an Avoid-Shift-Improve framework, as illustrated below: emissions) if no mitigation actions are taken. ¡¡Avoid material and energy waste in all processes, through a ¡¡The proposed decarbonization pathway includes strict application of energy efficiency, continuous improvement, energy efficiency, full electrification, and process and operational excellence principles. By eliminating optimization for all LMI operations, followed by a waste, there should be an increase in profit margins; some strict decarbonization effort of the whole value chain savings should be reinvested in the following steps. and the promotion of circular economy principles. ¡¡Shift the use of fossil fuels by electrifying sector Policies that have a strong abatement potential operations in full. Additional electric power demand and represent a net revenue to implementing should be met with renewable sources either by self- companies include industry efficiency standards, generation, purchasing contracts, or the grid. By moving emission sources out of site, on-site operations are safer, renewable energy generation, and a carbon tax. healthier, and can potentially be improved further. 06 ¡¡Improve processes through machinery/technozogy ¡¡Mexico has a broad range of policies and laws upgrades, monitoring and control, energy in place which can act as enablers of LMI management systems, and heat recovery. decarbonization. These include its Nationally ¡¡Subsequently, follow a strict decarbonization effort Determined Contribution (NDC), the General Law on of the value chain in full while promoting and Climate Change (LGCC), and the Energy Transition building capacities for a circular economy. Law (LTE), with its respective GHG mitigation and clean energy penetration targets. Relevant The single policies with the greatest emissions abatement potential, and which entail net profits for instruments are also derived from them, such as the implementing companies are industry efficiency the National Emissions Registry (RENE), the Carbon standards, renewable energy generation, and a carbon tax. Tax, and the Emissions Trading Scheme (ETS). Besides, corporate strategies and management practices can contribute significantly to achieve decarbonization. ¡¡Mexico´s regulatory and standardization frameworks have been the most cost-effective policy. International Savings in energy consumption are a key driver to invest standards, such as ISO 50001, and national programs, in renewable sources and develop energy management such as the National Program for Energy Management systems. Nowadays, the cost of electricity can reach 35% of the total production costs of LMI. Standards and Systems (PRONASGEn), have been essential tools to regulations that limit energy consumption in equipment, manage energy efficiency and generate capacity. devices, and commercial systems have been the most cost-effective policy to reduce energy use in the LMI. ¡¡Corporate sustainability programs, rankings, coalitions, voluntary and compulsory reporting, and Economic instruments implemented so far in Mexico are certifications were identified as fundamental drivers insufficient to achieve significant GHG emissions reductions. for capacity-building and reducing GHG emissions, The emissions trading system has just started as a pilot program along with savings derived from energy efficiency in 2020, and the carbon tax applied to fossil fuels is currently (EE) and better-priced renewable