ESG in the Mexican Mining Industry. Fourth Part

As we mentioned in the third part of the document “ESG in the Mexican Mining Industry”, the axis related to climate change and energy efficiency is, today more than ever, an axis that plays a highly relevant role in the industry. This is because, in the mining sector, the vast majority of greenhouse gas (“GHG”) emissions are directly related to energy consumption. GHG emissions are produced mainly by the burning of fossil fuels to supply electricity to mines, as well as to power equipment and vehicles for the extraction and processing of minerals and metals. This intensive energy consumption is expected to increase exponentially in the coming years. In this fourth part of the document, emphasis is placed on one of the most important areas of opportunity that this industry may have in relation to the “E” of the ESG criteria, specifically, in relation to the sustainability of GHG emissions and the different ways in which a mining project may accredit such sustainability. The reduction of GHG emissions forms part of a set of actions required for a positive assessment regarding the mitigation of the effects of Climate Change in accordance with the Responsible Mining Index (“RMI”), prepared by the Responsible Mining Foundation (“RMF”), and, in general, to meet the needs and demands of its stakeholders. The RMI reports that there are increasingly more companies that monitor and publish their energy consumption and their GHG emissions (Responsible Mining Index Framework, 2022). In this regard, this document contemplates the different legal mechanisms that allow accrediting before the different stakeholders (authorities, civil society and the investing public) that GHG emissions are at sustainable levels. The alternatives that will be presented are the following: (i) accreditation, through mandatory and voluntary mechanisms of compensation and carbon credits; and (ii) the acquisition or trading of Clean Energy Certificates (“CELs”) or of I-RECs (International Renewable Energy Certificate) within the Mexican or international system with respect to electric energy consumption. • Carbon Offset Mechanisms Through the ratification of the Paris Agreement, Mexico committed to reducing its GHG emissions by 25% by the year 2030. Currently in Mexico, the emissions trading system is divided into two, the mandatory one (Emissions Trading System) and the voluntary systems. I. Emissions Trading System The General Law on Climate Change (“LGCC”) established the foundations of the Emissions Trading System (Cap and Trade) consisting of the setting of a limit (Cap) on the total GHG emissions of one or more sectors of the economy that must be reduced each year, including the mining sector or industry. Likewise, the economic agents of these sectors must present an emission allowance for each ton of CO2 that they emit. Such agents may receive or purchase these allowances, and this permits these sectors to buy and sell emission allowances among themselves (Trade). As of the date hereof, the Federal Government has not yet issued the complementary provisions that will regulate the operation of said system, whose transition stage for its operational part was foreseen for December 31, 2022. II. Voluntary Markets Voluntary emissions trading systems consist of mechanisms that allow companies and individuals to offset their CO2 emissions on a voluntary basis. Some examples of voluntary emissions trading mechanisms are the following: i. Gold Standard and Verified Carbon Standard (“VCS”) Within the voluntary emissions market, two global carbon standards stand out mainly: the Gold Standard and the Verified Carbon Standard. On the one hand, the Gold Standard is a voluntary carbon offset program focused on driving the United Nations Sustainable Development Goals and ensuring that projects benefit neighboring communities. This mechanism may be applied to voluntary offset projects and to Clean Development Mechanism (CDM) projects. On the other hand, the VCS is also a mechanism that is part of the voluntary emissions market whose main function is to accredit projects that reduce GHG emissions. Certified projects may be entitled to Verified Carbon Units (“VCU”), each unit representing a metric ton of CO2 reduced or removed from the atmosphere. Projects may trade these VCUs on the market to obtain a profit and expand their climate change mitigation activities. ii. Clean Development Mechanism (“CDM”) The CDM is a procedure contemplated in the Kyoto Protocol in which developed countries may finance GHG emission mitigation projects within developing countries, and receive in exchange Certified Emission Reductions applicable to comply with their own emission reduction commitment. The foregoing, through the promotion of projects with low environmental impact and low GHG emissions. The countries that carry out the projects benefit by reducing their emissions and thus generate carbon credits that they may use to cover their commitments under the Kyoto Protocol, or, alternatively, trade them on the open market. • Electric Energy Certificates I. CELs In accordance with the Electric Industry Law (“LIE”), those mining projects whose load centers are registered as a Qualified User are required to accredit that a percentage of the electric energy they consume comes from clean sources. To prove the foregoing, Qualified Users must acquire the quantity of CELs determined by the Ministry of Energy. In this regard, the obligations to acquire CELs are established in terms of a specific percentage determined by the Ministry of Energy with respect to the total energy consumption of a Qualified User. By way of example, for the year 2022, this mandatory percentage was 13.9% of total energy consumption. In this way, economic agents must accredit that they hold CELs in the quantity corresponding to their consumption, which obliges them to acquire CELs or seek clean electricity supply alternatives (e.g. distributed generation schemes or isolated supply through the installation of solar power plants). II. I-RECs The I-REC Standard (International Renewable Energy Certificate) is an electric energy certificate from a renewable source that forms part of the voluntary market recommended by the Greenhouse Gas Protocol, of which Mexico is a party. The main objective of said certificate is to guarantee a system in which electric energy consumers can trace the energy they receive associated with the certificate, from its generation, source, location and date of production. This is done through digital certificates or declarations that are used in the electricity sector to transmit information regarding the generation of renewable energy. As part of the global transition that exists on the part of energy generators and consumers toward energy generated by clean technologies, and with the intention of reducing GHG emissions in the world, it is extremely important that mining projects recognize the impact that their productive activities and GHG emissions may have on the world. Therefore, mining projects have the options set forth in this document to reduce the carbon footprint associated with such consumption. In conclusion, it is indispensable to adopt sustainable legal practices and strategies relating to the accreditation and reduction of GHG emissions, as well as the accreditation of energy generation from clean sources, whether through CELs or through voluntary accreditations, always in compliance with the applicable regulations and avoiding the duplication in the issuance, counting and claiming of these certificates. In any case, the participation of the mining industry to reduce its emissions and represent sustainable mining practices not only benefits the environment, but also creates an area of opportunity around the profitability of the industry, since costs and resources are made more efficient and there will be a better public perception of said industry. Therefore, it is essential that investors who form part of this industry establish viable comprehensive strategies to reduce their GHG emissions and invest in the mechanisms described throughout this article so that the mining industry manages to consolidate viable solutions to confront climate change. For additional information on the subject of this note, please contact our experts: Edmond Grieger Partner: +52 (55) 5258-1048 | egrieger@vwys.com.mx Ariel Garfio Partner: +52 (55) 5258-1048 | agarfio@vwys.com.mx

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