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.