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Policy Brief 09-18

Setting the NAFTA Agenda on Climate Change

by Jeffrey J. Schott, Peterson Institute for International Economics
and Meera Fickling, Peterson Institute for International Economics

August 2009


After years of inaction, the three partners in the North American Free Trade Agreement (NAFTA)—Canada, Mexico, and the United States—now recognize the imperative to start the long-term process of substantially reducing greenhouse gas (GHG) emissions. The American Climate and Energy Security Act (ACESA) passed by the US House of Representatives in June 2009 cuts emissions, sets new standards for the use of renewable energy sources, and provides support to ease the transition to a low-carbon economy and to mitigate concerns about trade competitiveness of carbon-intensive industries and increased energy costs to consumers. The policy brief assesses the implications of the ACESA for North American trade and investment, particularly the free distribution of emissions permits, the allocation of revenues generated by the limited auctioning of emissions permits, the impact of renewable portfolio standards on US-Canada electricity trade, and the international offset provisions (that could be available to support Mexican policies seeking to cut GHG emissions in half by 2050).

In light of ACESA's trade implications, the authors offer a pragmatic NAFTA agenda for near-term action on climate change issues. First, the Commission for Environmental Cooperation should be used as a clearinghouse for climate change-related data. Second, Canada and the United States should standardize definitions of renewable energy and coordinate their policies. Third, NAFTA members should commit not to impose border measures to address competitiveness concerns arising from new climate change policies (i.e., a temporary "peace clause") until a framework for such measures is developed under the WTO. Fourth, NAFTA members should study options for coordinating or integrating the evolving carbon regimes in each country. Fifth, NAFTA partners should establish a "safe harbor" to shield climate change taxes and regulations from claims under the indirect takings provisions of NAFTA Chapter 11. Finally, capacity building in Mexico will be essential to North American coordination on climate change. The North American Development Bank should be used to provide finance and technical assistance for energy-saving and pollution control projects in Mexico in support of its ambitious climate change policies. North American cooperation could serve as a model for how developed and developing countries can mutually benefit from an international climate change agreement.

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