Environmental regulations in Mexico could dramatically increase demand for natural gas in the following years. This increase could lead to gas price shocks and a counter-intuitive increase in carbon emissions. The effect would be accentuated if Mexico lacks the funds required to carry on with investments in gas development and processing capacity. With the use of a dynamic computer model, this study addresses responses of the Mexican oil and gas industries to perturbations such as: changes in regulatory and environmental policies; changes in institutional arrangements such as those arising from market liberalization; and lack of availability of investment funds. The study also assesses how regulatory policies can be designed to minimize the economic inefficiencies arising from the business cycle disruptions that some perturbations may cause. In addition, this study investigates how investment responses will shape the Mexican energy sector in the future, particularly with respect to both the relative importance of different fuels for power generation and heating purposes and the nature of competition in the Mexican natural gas market. Furthermore, this study explores the direct consequences of these responses on the level of carbon emissions.