Panama, Central America’s logistics and finance hub, is considering carbon pricing options for its fast-growing economy, a move that could pave the way for a regional emissions market.

With a population under 4 million, a small industrial sector, and powered mainly by hydro, Panama is not the most intuitive candidate for implementation of a domestic emissions trading scheme.

But regulators see opportunities for market-based GHG mitigation policies because the country’s disproportionately large financial services sector, its crucial role in global shipping, and its potential for CO2 sequestration via reforestation.

“A market approach is very interesting to us,” Panama’s Deputy Environment Minister Emilio Sempris told officials from his and related ministries at a high-level training session on carbon markets held this week, which was sponsored by his ministry and UNEP.

With neighbors Mexico, Costa Rica, and Colombia enacting domestic climate change policies that to some extent involve markets, Panama sees opportunities to get involved in carbon trading, officials told Carbon Pulse on the sidelines of the event.

Although emissions from the power and industrial sectors – those traditionally covered by an ETS – are low in Panama, ambitious rural electrification programmes and strong electricity demand amid 6% annual GDP growth have seen the addition of several fossil-fuelled power plants since 2012, including a handful of inefficient coal-fired units.

This makes the country an increasingly realistic candidate for a cap-and-trade programme covering electricity, a sector that has been liberalised and partly privatized in Panama since the mid 1990’s.

The sector is also connected to those in Costa Rica, Honduras, El Salvador, Guatemala, and Nicaragua through a major shared transmission line completed in 2014 and managed by an independent system operator, making a regional market-based emission reduction policy a viable option for regulators.

SHIPS AND FORESTS

“Given our country’s involvement in shipping and ongoing efforts to address global maritime emissions, we are looking closely at carbon accounting and systems for trading allowances and offsets,” said Panamanian environment ministry official Edgar Salinas.

Jose Bosquez from Panama’s Maritime Authority told Carbon Pulse that as the registered home country for nearly 20% of the world’s freight ships, Panama closely follows discussions on climate change mitigation from the shipping sector, especially those at the IMO.

Though so far these have focused little on holding vessels’ home countries responsible for their emissions, administrators are keeping tabs on their options for offsetting or CO2 allowance purchases.

One major domestic source of such credits could be the forest sector, as Panama is ramping up local reforestation efforts as well as the conservation of existing tropical forest areas.

As current head of REDD discussions within Latin America, the Panamanian government is eager to find ways to incorporate credits from avoided deforestation and conservation into a trading system, either at the domestic, regional, or international level.

“We are exploring the ways potential reduction units from our forestry sector could constitute domestic offsets or perhaps be traded internationally” Salinas said, citing ongoing negotiations over results-based finance.

While no emissions trading schemes worldwide currently allow REDD credits, California regulators last week recommended the state allow for their limited use in its carbon market from 2018.

Panama may also cite international market mechanisms as a potential source of climate finance when it submits its national emissions reduction pledge (INDC) to the UN.

By Lisa Zelljadt – news@carbon-pulse.com