97-291 -- NAFTA: Related Environmental Issues and Initiatives Updated September 28, 2004 Environmental issues emerged early in NAFTA negotiations, and linkages between trade and environmental issues were reflected inthe outcome of these negotiations more so than in any previous trade talks. While not a new issue, the question ofwhether acountry's stricter environmental measures could be found to pose non-tariff trade barriers received an unprecedentedlevel of attentionduring the NAFTA debate. Additionally, the question was raised whether a country's weaker environmentalprotection measures ortheir ineffective enforcement would create a competitive advantage and provide an added incentive for businessesto relocateproduction to the least regulated country. A related concern was that expected NAFTA-driven industrialization andpopulation growthin the U.S.-Mexico border region would worsen the severe pollution problems already present. Although tradeofficials argued thatenvironment was not a customary trade matter and that NAFTA talks were not the best forum for resolving theseissues, the level ofconcern over environmental issues in Congress prompted NAFTA negotiators to respond to them. Ultimately, the NAFTA parties included language to conditionally protect a party's stricter environmental,health, and safetystandards for products and produce (provided that, among other things, such measures are scientifically based). NAFTA also includeshortatory language to discourage parties from lowering standards to encourage investment. Other NAFTA provisionsencourageupward harmonization of standards and encourage parties to integrate environmental protection and sustainabledevelopment intoeconomic decision-making. NAFTA's standards provisions do not affect a country's ability to determine its levelsof environmentalprotection for manufacturing and other process standards (such as water pollution controls and resource harvestingpractices). NAFTA set a precedent in addressing its relationship to multilateral environmental agreements (MEAs). It identifies threetrade-related MEAs that may take precedence over NAFTA if implementation conflicts arise, provided that the MEAis implementedin the least NAFTA-inconsistent manner. The listed agreements include the Montreal Protocol on Substances thatDeplete the OzoneLayer; the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their Disposal;and theConvention on International Trade in Endangered Species. U.S.-Mexico and U.S.-Canada bilateral waste-tradeagreements also areincluded, and the parties may agree to add others. Despite the inclusion of the above provisions, some in Congress remained concerned that NAFTA's effect on environmental lawscould be unpredictable. For example, an issue during the debate on renewing trade promotion authority concernedthe effect thatNAFTA may have on state and federal environmental laws, because some investors have challenged environmentalmeasures asconstituting a form of expropriation for purposes of the NAFTA investment chapter. These provisions allowcompanies to challenge,and potentially be compensated for, governmental measures that are viewed as harming their investments. At least20 cases have beenfiled, including 6 against the United States, one of which involves California's ban on methyl tertiary butyl ether(MTBE) in gasoline. Environmental concerns persisted after completion of the NAFTA text. To facilitate NAFTA passage, two related agreements werenegotiated, which are discussed below. A matter not addressed in the NAFTA text was whether lax enforcement of environmental laws in Mexico would provide an addedincentive for U.S. industries to relocate, and thus increase U.S. job losses, and increase border-area pollution. Manyin Congresscalled for side agreements that included an enforcement mechanism to address failures to enforce environmental(and labor) laws.Opponents of a side agreement argued that NAFTA-related economic growth would increase Mexico's resourcesavailable forenvironmental protection, and that NAFTA would increase environmental cooperation in North America.Nonetheless, congressionalsupport for NAFTA remained uncertain. In 1993, the three NAFTA governments adopted the North American Agreement on Environmental Cooperation(NAAEC), whichincludes dispute settlement provisions to address a party's failure to enforce environmental laws. The side accord'sobjectives cover arange of goals, including avoiding the creation of trade distortions or new trade barriers; enhancing compliance with,and enforcementof, environmental laws and regulations; and fostering environmental protection and pollution prevention. The side agreement created the North American Commission for Environmental Cooperation (NACEC) which includes a Council, aJoint Advisory Committee, and an independent Secretariat. The Council consists of cabinet-level representativesof the parties and haskey responsibilities regarding the side agreement's dispute settlement provisions. The Joint Advisory Committeeadvises the Counciland is comprised of nongovernmental groups. The Secretariat's duties include preparing reports and serving as apoint of inquiry forpublic concerns about NAFTA's possible environmental effects. The NACEC's major goal is to broadenenvironmental cooperationamong the parties. It provides a forum for the parties to consider ways to address environmental issues, and providesan avenue fordispute settlement panels to obtain environmental expertise. Perhaps most notable is the side agreement's dispute settlement process that, as a last resort, may impose monetary assessments andsanctions to address a party's failure to enforce its environmental laws. To invoke the dispute settlement process,a complaint mustconcern a party's persistent, systematic failure to enforce its laws, and the alleged failure must be trade-related orinvolve competinggoods or services. Only the NAFTA parties can initiate a NAAEC dispute settlement proceeding, and none havedone so. However,the Secretariat may consider a submission from any person or nongovernmental organization asserting that a partyis failing to enforceits environmental law, and may request that party to respond. The Secretariat may prepare a factual record andsubmit it to the Councilfor its consideration. Since 1995, 47 citizen submissions have been filed, and 9 factual records have been finalizedand made publiclyavailable. Throughout the NAFTA debate, many proponents and opponents noted the need to identify funding sources for financingenvironmental improvements in the border area. Much of the pollution there had been attributed to the effects ofunregulatedindustrial development and related population growth associated with Mexico's maquiladora program, and bothgovernmentsanticipated that NAFTA could further concentrate economic activity in the border region, and that existingenvironmental conditionswould worsen without a binational effort to address infrastructure needs. The Administration estimated that $8billion would berequired to address needs for sewage treatment, drinking water, and municipal solid waste infrastructure projectsalong the borderover the next decade and that NAFTA-related industrialization would create additional needs. (1) For many in Congress, support forNAFTA was partially contingent on the identification of a mechanism for financing border environmental projects. In October 1993, the United States and Mexico agreed to a new institutional structure to promote borderenvironmental cleanup. TheBorder Environmental Cooperation Agreement authorized the establishment of the North American Development Bank (NADB) andthe Border Environment Cooperation Commission (BECC) to assist bordercommunities in financing environmental infrastructureprojects. The agreement noted the need for environmental infrastructure, especially in the areas of water pollution,wastewatertreatment, and municipal solid waste. The BECC is directed to help border states and communities coordinate, design, and mobilize financing for environmentalinfrastructure projects, and to certify projects for financing. The NADB evaluates the financial feasibility ofBECC-certified projectsand provides financing as appropriate. Public involvement is fostered through representation on the BECC Boardof Directors andAdvisory Council, and through a public comment process on proposed projects. The NADB was designed to generate between $2 billion and $3 billion in loans or guarantees for financing environmental projects oneither side of the border. (Ten percent of the NADB's resources may be used for NAFTA-related communityadjustment andinvestment projects.) To leverage financing, the United States and Mexico each contributed $225 million over fouryears, for a total of$450 million in paid-in capital. The NADB is authorized to make only market-rate loans, however, and this hasbeen a major obstacleto the Bank's ability to finance projects in low-income border communities. Despite the creation of the NADB to provide financing for border environmental infrastructure projects, grants from theEnvironmental Protection Agency (EPA) have accounted for the vast majority of funding provided through theBank. In 1997, theNADB entered into an agreement with EPA, under which EPA contributes much of its annual border infrastructureappropriation tothe Border Environment Infrastructure Fund (BEIF). (Over the past decade, Congress regularly has provided EPAwith $75 million or$50 million each year for border water and wastewater projects.) The NADB established the BEIF to use EPA grantresources fordrinking water and wastewater projects to make the projects affordable for border communities. The NADBdevelops financingpackages using its loan and guaranty programs, EPA grants, and other sources. EPA grant funds may be used forBECC-approvedprojects on either side of the border. As of June 30, 2004, the NADB had approved 22 loans worth a total of $97.1 million, and had fully disbursed 9 loans. Overall, theNADB had authorized $662.4 million in grants and/or loans to partially finance 80 infrastructure projects estimatedto cost a total of$2.26 billion. In addition to the 22 loans, this assistance included $490 million in EPA grants that had beencommitted for 52 waterand wastewater projects. (2) Because of the low activity level of the NADB, and because most infrastructure funding for NADB projects has been providedthrough EPA grants rather than NADB financing, considerable interest emerged in recent years for reforming theNADB. Bothfederal governments, the border states, and other interested parties discussed possible reforms for these institutions,including changesin institutional structure, types of financial assistance provided, and types of projects eligible for assistance. In 2000, the NADB established a Low Interest Rate Lending Facility using part of its paid-in capital to provide lower-than-market rateloans to communities. In 2001, President Bush and President Fox directed a binational working group to developrecommendations tostrengthen the performance of the NADB and the BECC. In 2002, both Presidents accepted the working group'srecommendationsand directed their respective administrations to work with their legislatures to effectuate them. Therecommendations includemaintaining the focus on environmental infrastructure projects; giving the NADB more flexibility to make grantsandbelow-market-rate loans to finance projects; and expanding the geographic scope of BECC/NADB operations toinclude the area inMexico within 300 kilometers of the border. In August 2002, the NADB Board of Directors approved creation ofa WaterConservation Investment Fund to finance water conservation projects. As discussed below, H.R. 254 ( P.L.108-215 ),enacted in April 2004, authorizes several operational reforms to the NADB. Corresponding legislation was approved by the Mexicanlegislature in 2003. The NAFTA Implementation Act directed the President to report to Congress in 1997 on the effects of NAFTA and implementationof the side agreements. The resulting study concluded that it was premature to assess any environmental effects ofNAFTA anddifficult to determine whether further environmental degradation at the U.S.-Mexico border was due to NAFTA orother economicdevelopment and events. More recent studies have attributed increased border pollution and other environmentalimpacts to NAFTA,although the studies generally identify a number of other contributing factors. A March 2001 NAAEC study, North American Tradeand Transportation Corridors: Environmental Impacts and Mitigation, concluded that air pollution fromincreased freight traffic inNAFTA transportation corridors is significant and could double or quadruple by 2020. (3) Relatedly, the number of assembly factoriesin Mexico near the border grew from 2,114 in 1993 to 3,182 in 2003, while employment at these plants more thandoubled to 1.07million. (4) A report by EPA in 2000, Protectingthe Environment of the U.S.-Mexico Border Area, noted that the concentration ofindustry and people at the border was exacerbating pollution and health problems, and that many border citiesexpected to experienceserious water constraints by 2005. A NAAEC committee recently completed a ten-year review of the environmentalside agreement,and concluded that the NAAEC has facilitated trinational environmental cooperation and capacity building overall,and specificallyhas fostered environmental progress in Mexico. In the 107th Congress, the environment-related provisions of NAFTA and its side accord received attention during consideration oftrade promotion authority legislation and the U.S.-Jordan Free Trade Agreement (FTA); both adapted environmentalprovisions fromthe NAAEC and NAFTA. (5) Some in Congressexpressed particular concern regarding the effect that NAFTA-like investmentprovisions may have on domestic environmental protection efforts, because various investors have challengedenvironmentalmeasures as constituting a form of expropriation under the NAFTA investment chapter. (6) Also in the 107th Congress, the Housepassed H.R. 5400 to authorize changes in NADB and BECC operations, with a goal of increasing theseinstitutions'effectiveness. In the 108th Congress, efforts to reform the BECC and NADB continued, and in April 2004, the President signed into law P.L.108-215 ( H.R. 254 , H.Rept. 108-17 ). This law authorizes the President to agree to a change in the NADB'scharter topermit the Bank to make below-market-rate loans and a limited amount of grants in order to increase the numberof projects theseinstitutions support. It directs the U.S. members of the NADB board of directors generally to oppose projectproposals if grantsaccount for more than 50% of the project financing or if a project is not financed in part by loans. The law alsoauthorizes extendingthe operational area of the BECC/NADB on the Mexican side of the border from 100 kilometers to 300 kilometers.It requires anannual report to Congress, and includes a sense of the Congress relating to U.S. support for water conservationprojects. In otherlegislation, the conference report to H.R. 6 , the Energy Bill (Section 146) would amend NAFTAimplementinglegislation to direct U.S. NADB board members to encourage the Bank to finance infrastructure projects related toclean energy andenergy conservation. Interest in the 108th Congress also has continued regarding the implications of NAFTA and the NAAEC for new trade agreements.The U.S.-Chile and U.S.-Singapore FTAs both include an obligation for parties to enforce their environmental laws,and make thisobligation subject to dispute settlement procedures. Moreover, both agreements include environmental cooperationandcapacity-building provisions. The U.S.-Chile FTA further calls for parties to negotiate a U.S.-Chile EnvironmentalCooperationAgreement. The U.S.-Central America FTA (CAFTA), which the President has signed but which requiresimplementing legislation,includes similar provisions and also adapts the NAAEC provisions that allow citizens to file submissions concerninga party's failureto effectively enforce its environmental laws. While welcoming the heightened consideration of environmental matters since the NAFTA debate, some Members of Congress andenvironmental groups remain concerned that the provisions in the current TPA law and in recently negotiated tradeagreements maynot be sufficient to safeguard legitimate environmental measures from challenges, particularly those involvinginvestor-state disputes.Consequently, while the debate over whether environmental matters should be a part of trade negotiations generallyhas been settled,the debate over how to address such issues is likely to continue. The effect of the environment-related provisionsin recent U.S.bilateral trade agreements, and thus the shape of the debate, may become clearer with the ongoing implementationof NAFTA andsubsequent agreements that have incorporated NAFTA and NAAEC-like provisions.

Summary:
The North American Free Trade Agreement (NAFTA) includes severalenvironment-related provisions, that while limited, were unprecedented for their inclusion in a trade agreement. However, furtherenvironmental (and labor) assurances were needed to secure passage of NAFTA, and ultimately, the negotiatingparties agreed to aside accord that promotes cooperation on environmental matters and includes provisions to address a party's failureto enforceenvironmental laws. Additionally, the United States and Mexico entered into the Border EnvironmentalCooperation Agreement(BECA), which authorized the establishment of the Border Environment Cooperation Commission (BECC) and theNorth AmericanDevelopment Bank (NADB) to help border communities finance environmental infrastructure projects. In the 108th Congress, NAFTA's environmental provisions and related institutions have continuedto receive attention. A key issuehas concerned the effectiveness of the NADB and the BECC, and especially the Bank's ability to finance projects.Enacted on April5, 2004, P.L. 108-215 (H.R. 254) authorizes several operational reforms to the NADB. Other issues involvetheenvironmental impact of NAFTA, and the effect that NAFTA and its environmental side agreement have had onthe negotiation ofother U.S. trade agreements, including the U.S.-Central America Free Trade Agreement (CAFTA) and U.S.-ChileFTA. This reportbriefly reviews NAFTA's environmental provisions, associated agreements, and related issues and congressionalactions. It will beupdated.