The climate crisis is no longer a distant threat. Recent heat waves, droughts and forest fires show that the consequences of global warming are a reality and directly affect living conditions. However, despite the growing scientific evidence and the visible costs of inaction, political and economic responses are insufficient.
Climate change is not just a secondary consequence of development, but a direct result of the way in which the production system has been designed. Despite advances in renewable energies and efficiency, an effective decoupling of growth and emissions has not yet been achieved: global energy consumption continues to rise and demand for natural resources remains at critical levels. This poses an unavoidable challenge: how can we ensure that economic growth, which is essential for the well-being of societies, does not end up compromising the environmental and social conditions that make it possible?
Ignoring this problem and assuming that the market will be able to correct it on its own constitutes a significant risk. If the current model is maintained without substantial modifications, the very economic growth that has generated stability and development could become a crisis factor. Environmental degradation, water and food insecurity, and the increased frequency of natural disasters can destabilize institutions and markets and affect the foundations of economic progress.
There are positions, such as that of degrowth, that question whether it is possible to maintain sustained growth without irreversibly affecting the planet. However, beyond this debate, what is undeniable is that the economic model needs to evolve to ensure its own continuity. The real question is not whether growth should be maintained, but how to ensure that it does not compromise the social and ecological foundations that make it viable in the long term. Meeting this challenge requires technological innovation and new regulatory and international coordination strategies that align economic incentives with sustainability.
Economics has generally approached climate change as an external problem, that is, as a market distortion in which environmental costs are not correctly reflected in the prices of goods and services. From this perspective, ecological damage is seen as a negative externality that could be corrected with carbon taxes, subsidies for clean energy or emission rights markets. This logic, developed by economists such as William Nordhaus, has influenced the formulation of climate policies, especially in the design of market instruments to reduce emissions.
However, while these mechanisms are valuable tools, they are based on the assumption that the problem can be solved with gradual adjustments within the same market framework. Climate change, as economist Nicholas Stern argues in his influential 2006 report “The Stern Review on the Economics of Climate Change,” is not a conventional externality, but “the largest and broadest market failure the world has ever seen,” affecting every dimension of the economy and society. Stern argues that failure to act early will have significantly higher economic costs in the future, making investment in mitigation not only an environmentally responsible measure, but a rational economic strategy.1
This systemic nature is what makes climate change a wicked problem. These are complex challenges for which there is no single, definitive solution, where each intervention attempt can generate unexpected effects and where the interdependencies between variables make it impossible to solve them from a single discipline.2 In this context, economics is a key tool, but it is not enough. Models such as those of Nordhaus, which seek to calculate the optimal cost of climate change based on discount rates and cost-benefit analysis, can contribute to the design of specific policies, but they often underestimate the long-term impacts and nonlinear dynamics of environmental systems. As Stern points out, the climate change problem cannot be confined to traditional economic calculations, as it involves systemic risks, deep uncertainty and ethical dimensions. While market incentives can play an important role in reducing emissions, tackling climate change requires overcoming a fragmented vision and moving towards integrated approaches that combine policy, science, economics and innovation, recognizing that there are no simple solutions to challenges of this magnitude.
Addressing climate change requires a coordinated approach that considers its nature as a global public good.3 Ecosystems, climate stability and biodiversity are essential resources whose protection cannot depend on a single country or actor. In theory, the solution requires the creation of global governance frameworks to manage these assets collectively and ensure effective commitments and compliance mechanisms. In practice, however, these efforts have been insufficient. The Paris Agreement, signed in 2015, represented a breakthrough by establishing a framework for international cooperation to reduce carbon emissions and limit the global temperature increase to 1.5 °C above pre-industrial levels. However, reality shows that the current commitments are not generating the expected results. According to the most recent projections, the world is heading towards an increase of between 2.4 and 2.9 °C by the end of the century, compromising global climate and economic stability.
The difficulty of moving towards effective climate governance is not only due to a lack of political will, but also to an increasingly fragmented international context. Global cooperation faces serious challenges in an environment of growing geopolitical rivalry, where major economies compete for economic and technological leadership, and also prioritize their national interests over climate commitments.4 The war in Ukraine, tensions between the United States and China, and the resurgence of protectionist policies have eroded confidence in multilateral institutions and diminished the chances of making progress on more ambitious agreements. In addition, institutional fragility in many countries hinders the implementation of effective climate policies. In this context, although the need for global climate governance is evident, its viability in the medium term remains uncertain. The absence of binding compliance mechanisms and the lack of clear incentives to encourage cooperation have turned international agreements into voluntary commitments instead of driving real structural transformations. As long as this situation persists, the world will continue to move towards an increasingly unstable climate scenario, without a global structure capable of coordinating an effective response to the crisis.
Even though multilateral cooperation faces significant obstacles, it is important that progress be made at the national level to reduce the effects of climate change and adapt economies to a more sustainable future. Countries cannot wait for a global consensus to act; they must strengthen their domestic policies and redesign their decision-making frameworks. A key aspect of this transformation lies in moving beyond traditional assessment models that focus only on monetary metrics and cost-benefit analysis. While these tools have been useful in drafting economic policies, their narrow focus excludes crucial impacts on long-term sustainability. Evaluating projects and regulations on the basis of immediate cost-effectiveness alone prevents environmental and social costs from being effectively incorporated into decision making. Climate change can be effectively addressed with assessment methodologies that include indicators of ecological resilience, equity and social welfare.
An example of this paradigm shift can be seen in the private sector with ESG (environmental, social and governance) criteria, which integrate environmental, social and governance variables into corporate strategy and investment decisions. Although their use has been criticized, these criteria have led an increasing number of companies and investment funds to consider sustainability as a strategic element. However, the use of such approaches in the public sphere is still limited. Governments should broaden the application of similar principles when establishing policies. This would ensure that economic decisions respond not only to efficiency objectives, but also to long-term sustainability and stability criteria. Incorporating these approaches into public policy would advance the transition to a less emissions-dependent economy, strengthen mechanisms for managing climate risks, and promote a more integrated vision of development. Without a transformation in decision-making, any effort to address the climate crisis will remain insufficient, regardless of international agreements.
While state involvement is critical to address climate change, the private sector also has a key role to play towards a sustainable economy. In many cases, business innovation, driven by competition and efficiency, has led to the development of clean technologies without the need for direct government intervention. The falling costs of solar and wind energy and advances in battery storage are examples of how market dynamics have favored more sustainable solutions.
Mexico faces a high level of climate vulnerability that compromises its economic and social stability. Prolonged droughts, more intense hurricanes and increasingly frequent heat waves affect key sectors such as agriculture, infrastructure and public health. Water scarcity impacts essential crops such as corn and wheat, which not only raises food prices, but also exacerbates food insecurity and inequality. At the same time, the cost of natural disasters is on the rise: in the last decade, economic losses have been in the millions and demonstrate the country’s fragility in the face of extreme weather events. The water crisis, which has affected cities such as Mexico City and Monterrey, could become a structural problem if more efficient water management policies are not implemented. If we do not act quickly, the impact of climate change will put increasing pressure on the economic system, infrastructure and the well-being of the population.
Today in Mexico, decision-making on public investment projects requires at least three types of studies: technical feasibility studies, which evaluate feasibility from an engineering perspective; economic studies, which analyze whether the economic benefits outweigh the costs and whether they generate economic value; and environmental impact studies, whose objective is to prevent, mitigate and restore damage to the environment, regulating works or activities that avoid or reduce their negative effects on the environment. Thus, the country’s regulatory framework explicitly recognizes the importance of the environment in project planning.
However, in practice, such regulations often become a bureaucratic hurdle rather than a safeguard for environmental interests. The absence of clear guidelines, standardized criteria and adequate environmental indicators in environmental impact assessments means that many of these studies do not reflect reality.5 A worrying aspect is that, in certain cases, projects are approved based on technically deficient studies or, in the worst cases, they are completely disregarded. An example of this is the Mayan Train and the Dos Bocas Refinery, where deficiencies in the environmental impact assessment have been repeatedly pointed out. It is important to note that this problem is not exclusive to a particular administration but is structural in nature.
This situation is aggravated at the subnational level, where few states have specialized units in charge of investments and some local governments face difficulties even in the most basic phase of project approval, especially at the technical stage. In some cases, projects have been initiated and implemented without adequate executive projects. For example, Line 12 of the Mexico City subway, whose design lacked a complete executive project at the start of construction. If this happens in one of the entities with greater resources and institutional development, the situation in municipalities with lesser capacities is even more worrisome.
Although these are the problems identified in public investment projects, the government also implements various programs and activities that do not necessarily involve direct public investment and whose environmental impact has not been fully analyzed. This is the case with subsidies granted to different sectors, which in some cases may indirectly contribute to environmental degradation. For many years, for example, subsidies were allocated to fossil fuels, a policy that was maintained during the administration of Felipe Calderón and only ended with the fiscal reform promoted by the government of Enrique Peña Nieto. However, there was never an analysis of the environmental impact of this measure. Currently, there is no comprehensive mapping of how much government programs affect the environment; at the subnational level, the lack of evaluation in this area is even more pronounced.
Despite the urgency of the problem, the government’s response has been fragmented and has moved slowly on some fronts. However, in recent years, Mexico has taken important steps, such as the implementation of the Sustainable Taxonomy, an initiative that seeks to establish clear standards to reorient financial decisions toward projects aligned with sustainability.6 Developed by the Ministry of Finance and Public Credit, Mexico’s Sustainable Taxonomy establishes a framework for identifying which investments can be considered sustainable, based on scientific, social and economic criteria. Although its initial application is voluntary and is designed as a classification standard, in the medium term its influence could go beyond that: it could help in the regulation of both public and private investments. At the governmental level, the taxonomy offers the possibility of improving the evaluation of investment projects, allowing environmental criteria to be incorporated in a more rigorous and homogeneous manner. This would contribute to overcoming the current deficiencies in environmental impact assessment and resource allocation. At the private level, if applied, it could facilitate the channeling of financing towards sustainable projects, reduce the uncertainty associated with green investment and promote a more structured economic transition.
As climate urgency intensifies, it cannot be ruled out that the Sustainable Taxonomy will evolve from a voluntary reference mechanism to an instrument with broader regulatory implications. In other regions, such as the European Union, similar initiatives have influenced the creation of regulations that oblige the financial and corporate sectors to integrate sustainability criteria into their decisions. In Mexico, although the taxonomy is not yet mandatory, its progressive application could serve as a basis for future regulations that condition access to public financing or tax incentives based on the environmental impact of projects. In this way, the taxonomy not only seeks to classify investments, but also has the potential to transform the way economic decisions are made in the country. So forth, public policy and the private sector could be progressively aligned with international climate commitments. Climate change is not only an environmental crisis, but also a direct threat to Mexico’s economic and social development. Prolonged droughts, intensifying hurricanes and increasing water scarcity are already impacting agricultural production, infrastructure and the quality of life of millions of people. Ignoring this reality is not an option, as the cost of doing nothing will continue to rise. Inequality will deepen; there will be greater fiscal pressure and vulnerability to disasters will increase. There is still time to transform the economy to make it more resilient and sustainable, but this requires firm and coordinated decisions. The State must strengthen environmental planning and regulation, ensuring that public and private investments are aligned with sustainability criteria. This is not only an ethical issue, but also a major economic necessity. The Sustainable Taxonomy represents a first step, but its impact will depend on how it is implemented and whether it evolves into a regulatory framework that drives a real transition.
Mexico has room to act, but the window of opportunity is closing fast. We cannot wait for a global consensus or rely on external solutions. It is essential that the country adopts ambitious policies, harnesses its renewable energy potential and transforms its decision-making model, ensuring that economic growth does not compromise its own future. Climate change is already a reality and is redefining the rules of development. Ignoring it would be, in economic terms, the worst possible decision.
Roberto Durán Fernández
Professor and academic researcher at Tecnológico de Monterrey and the Baker Institute for Public Policy.
1 Stern, N. The Economics of Climate Change: The Stern Review, Cambridge University Press, 2007.
2 Peters, B. G. “What is so wicked about wicked problems? A conceptual analysis and a research program”, Policy and Society, 36(3), 2017, pp. 385-396.
3 Chin, M. “What are global public goods?”, F&D Finance & Development Magazine IMF, 2021, https://www.imf.org/en/Publications/fandd/issues/2021/12/Global-Public-Goods-Chin-basics
4 Durán Fernández, R. “North America’s Geopolitical and Economic Playbook Under Trump’s Second Term”, 2025, https://www.bakerinstitute.org/sites/default/files/2025-01/20250116-Trump%2047-WP.pdf
5 Perevochtchikova, M. “Environmental impact assessment and the importance of environmental indicators”, Management and Public Policy, 22(2), 2013, pp. 283-312.
6 SHCP. Sustainable Taxonomy of Mexico, 2024, https://www.finanzassostenibles.hacienda.gob.mx/es/finanzassostenibles/taxonomia.
