Study on the Operation and Effect
of the North American Free Trade Agreement
From: Reports Issued by the Office of the United States Trade Representative and Related Entities

Chapter 4: the North American Environment:
Cooperation, Institutions, and Enforcement

Activities of NAFTA's Environmental Institutions

NAFTA environmental agreements created three institutions -- the Border Environment Cooperation Commission (BECC), the North American Development Bank (NADBank), and the Commission for Environmental Cooperation (CEC). These three institutions are taking concrete steps to address the region��s environmental problems. The BECC and NADBank are certifying and arranging financing for numerous infrastructure projects designed to reduce pollution and improve the environment in the U.S.-Mexico border region. The CEC, for its part, has begun work on an extensive array of environmental projects in which the three NAFTA governments are cooperating to achieve such diverse objectives as protecting migratory birds, tracking hazardous wastes to ensure they are disposed of properly, and identifying sources of pollution. This work has begun to create an entirely new and more cooperative framework to address transnational environmental questions.

In addition, the CEC, the BECC and the NADBank have all created additional avenues for public input into environmental decision making. This not only ensures that policy makers in all three countries are made aware of environmental concerns at the grassroots level, but has also provided alternative avenues for members of the public to ensure that their environmental concerns are heard in cases in which local or national governments may have been initially unresponsive.

NAFTA and its associated environmental agreements have given the three parties more effective tools to address common environmental concerns, by creating mechanisms to implement their commitment to protect and improve their shared environment for future generations. Some of the activities they have initiated in the past three years are discussed below.

The BECC and the NADBank
Overview

The United States and Mexico have long recognized the urgent need for additional environmental infrastructure in the border region (defined as the area within 100 kilometers of the international boundary). The BECC and the NADBank, which were created under a U.S.-Mexico accord signed in November 1993, are now providing a mechanism to begin to fill that need in a systematic, well-considered manner. These institutions were designed to develop, finance, and construct environmental infrastructure projects, with special priority for wastewater treatment, drinking water, and municipal solid waste projects. In addition, the NADBank is permitted to provide NAFTA-related community adjustment and investment throughout the United States and Mexico.

For decades communities along both sides of the U.S.-Mexico border have been plagued by the problems of raw sewage dumped in boundary waters, unsafe drinking water, and inadequate municipal waste disposal. Rapid population growth and industrialization, which has its roots in the 1965 launch of the maquila program, combined with water scarcity, has and will continue to exacerbate these problems. The border area��s 1995 population was about 10 million and is expected to double in the next 20 years. Of the 5 million residents on the Mexican side of the border, about 88 percent of the population has drinking-water connections and 69 percent is connected to sewage collection infrastructure. (34 percent of this collected sewage receives some treatment.) On the U.S. side, with about 5.2 million residents, all cities are served by drinking-water authorities, and the vast majority have EPA-permitted wastewater treatment works. However, several hundred thousand people live in colonias. With EPA and other agencies�� assistance, Texas and New Mexico have made notable progress in addressing the water infrastructure needs of the colonias, but the wastewater problems are expected to persist in New Mexico until 2000 and in Texas until at least 2010. With estimated costs for border environmental infrastructure over the next decade ranging from $6 to $8 billion, further assistance is needed.

BECC and NADBank were designed to help respond to these problems and to assist in addressing additional obstacles: communities�� inadequate engagement in the infrastructure-development process; localities�� unwillingness or inability to incur debt; users�� unfamiliarity with financing by user-fees, rather than grants; and a lack of comprehensive planning that incorporates long-term operation and maintenance. Against this backdrop, the BECC and the NADBank represent new models for international cooperation at the local level and offer significant, direct benefits for U.S. citizens. The border environmental operations assist Texas, New Mexico, California, and Arizona, while the NADBank domestic window has the potential to help communities throughout the United States adjust to NAFTA. In less than two and one-half years of operation, the BECC and NADBank are:

Border Environmental Infrastructure Projects

Under the Agreement, the NADBank can only finance environmental infrastructure projects that have been certified by the BECC. To date, the BECC has certified 16 projects, with a combined estimated cost of nearly $230 million -- and in many cases BECC and NADBank provided the crucial technical assistance needed to ensure a project��s sustainability. These projects fall into four broad categories: (1) projects financed by the Bank; (2) projects that sought other sources of financing; (3) projects needing further assistance to become technically and financially sustainable; and (4) certified projects for which financing packages are in a preliminary stage.

Financing packages for four BECC-certified projects have been approved by the NADBank Board, two on each side of the border:

Four more projects -- three of them now under construction -- sought sources of financing other than NADBank:

NADBank also is working with the sponsors of the additional BECC-certified projects to finalize technically and financially sound packages.

NADBank is assisting the other BECC-certified projects to upgrade their systems management by providing technical assistance under the Bank's Institutional Development Program (IDP). These projects include:

BECC has recently certified four additional projects:

BECC and NADBank have also developed a joint list of further significant projects for future consideration, and are coordinating the application of their resources for project technical assistance and institutional capacity-building toward the most promising of these projects. Making extensive use of border-area companies and workers as they do so, the institutions build technical skill, institutional expertise, and creditworthiness in a growing number of border communities.

A Coordinated Response to the Border Environmental Problems

The BECC and NADBank help ensure that the United States and Mexico work together to address the environmental problems that have afflicted our border region. These institutions represent new models for international cooperation at the local, state, and federal level. The strong representation from border states and communities in the BECC Board and Advisory Council helps ensure that the region's environmental priorities are considered at the local and state level. The NADBank, which is jointly governed by the United States and Mexico, promotes a continuing federal focus on the environmental needs of the border region. These coordinating roles are exemplified by the BECC certification process, NADBank co-financing arrangements, and the BECC/NADBank outreach efforts.

BECC Certification

The BECC is designed to work with the affected local communities and states, as well as non-governmental organizations, in developing effective solutions to border region environmental problems. The BECC certifies projects to the NADBank and other financial institutions in accordance with its certification criteria, which have been developed with the participation of hundreds of citizens and scores of institutions. To be eligible, all projects are required to satisfy requirements in eight areas, including rigorous environmental and technical standards. Projects with significant transboundary effects require an environmental assessment and a BECC determination, in consultation with affected localities, that the project achieves a high level of environmental protection for the affected area. Perhaps the most innovative features of the criteria are requirements for extensive public participation and transparency, as well as demonstration of the project��s capacity to meet sustainable development standards.

NADBank Co-financing

The NADBank, an international financial institution equally capitalized by the United States and Mexico, is designed to leverage limited resources into substantial financing for border environmental projects and community adjustment. The United States and Mexico have each completed the first three tranches of their capital contributions. Once fully capitalized (as expected in FY 1998), U.S. appropriations of $225 million will be leveraged into $2-3 billion in financing for border environmental infrastructure projects and community adjustment that will provide significant benefits for U.S. citizens and firms. The capital structure of the Bank allows it to borrow in financial markets and lend to projects that otherwise have difficulty accessing financing. Similar to other international financial institutions such as the World Bank, the NADBank is required to preserve its capital, is not permitted to borrow in the tax-exempt bond market, and therefore must charge market-based interest rates. The Bank promotes financially sustainable projects through greater reliance on user fees to cover operating and maintenance costs and to service loans. The Bank can deliver affordable project financing by packaging its loans with concessional funds from other sources.

NADBank lending is further extended through the co-financing relationships it has established in its role as the lead bank for environmental projects. Through cooperative arrangements with federal and state agencies on both sides of the border, the Bank is combining its loans with concessional funds from other sources to provide affordable project finance. Most importantly, the Bank has recently entered into a Cooperative Agreement with EPA that will enable the Bank to combine its financing with up to $170 million in EPA grants. In addition, the Bank is developing co-financing arrangements with export credit agencies in the United States and Mexico. The Bank is also forging financial partnerships with the State Revolving Funds (SRFs) in the U.S. border states, including arrangements which may enable some small U.S. communities to access the tax-exempt bond market for the first time. Finally, the Bank can and has used its lending and guarantees to encourage private sector financing in environmental clean-up.

Tackling Obstacles to Environmental Infrastructure Projects

Expectations

Perhaps the most difficult obstacles confronting the BECC and NADBank have been unrealistic expectations. The environmental problems in the border region were generated over a long period of time and cannot realistically be corrected overnight. Moreover, the development of major infrastructure projects, especially those which rely on project finance and user fees, often requires years of effort. To counter unrealistic expectations, both the BECC and the NADBank have launched aggressive outreach programs.

While the BECC and the NADBank were designed to specifically address some of the most serious environmental problems at the border, in assessing their accomplishments, it is important to remember what they were not intended to do:

Project Quality

The BECC and the NADBank have identified and confronted a number of obstacles which have hindered the pace of BECC certification and Bank lending. Many of the projects, as presented, are technically and financially unsustainable. Many small local water systems in the border region are not equipped to manage their projects effectively. Poor border communities have limited capacity and alternatives for raising funds for environmental infrastructure projects.

In the past year, the BECC and the NADBank have taken concrete action to address these impediments. The BECC has used a $10 million grant from EPA to establish a Project Development Assistance program to assist communities in developing technically and financially sustainable projects. NADBank has set aside $2 million of its earnings to establish an institutional development program (IDP) to help communities on both sides of the border achieve effective and efficient operation of their water, wastewater, and solid-waste management services. The NADBank and EPA have entered into the Border Environment Infrastructure Fund (BEIF) Cooperative Agreement that will enable NADBank to combine its funding with up to $170 million in EPA grants in order to make project financing more affordable to poor border communities. NADBank is also establishing co-financing arrangements with other sources of concessional funding. Finally, the NADBank is working to remove structural impediments to project finance, including restrictions on Mexican municipalities to incur debt and offer collateral.

Building on these structural changes, their recently-unveiled technical assistance programs, and the BEIF Cooperative Agreement with EPA, the BECC and NADBank are now poised to assist the border region in addressing its environmental infrastructure needs. NADBank and BECC, together with EPA and CNA, have identified projects with a total cost of about $500 million that are likely to be the core of their work plan for the next two years. In addition to a number of larger projects in the development stage, this work plan includes an immediate action program for 18 small projects in Mexico and a proposed NADBank program with the State Revolving Funds to assist small U.S. border communities gain access to the tax-exempt bond market to finance environmental projects. The pace of project development and approval is expected to increase significantly over the near term.

The Commission for Environmental Cooperation

The United States, Canada, and Mexico created the CEC to address regional environmental concerns, help prevent potential trade and environment conflicts, and promote the effective enforcement of environmental laws. Prior to the creation of the CEC, many North American cooperative environmental activities were bilateral in nature. Very few involved all three governments. The CEC has shifted the focus of environmental efforts to trilateral activities, often involving the entire North American region. This has greatly improved the three governments�� ability to address regional environmental concerns.

The CEC accomplishes its work through the combined efforts of its three principal components: the Council, the Secretariat and the Joint Public Advisory Committee (JPAC). The Council is the governing body of the CEC and is composed of the cabinet-level environment officials from each of the three NAFTA parties. The Council is required to meet at least annually. This ensures that momentum is maintained behind common environmental initiatives. Moreover, the three member governments�� annual review and approval of the CEC��s work plan ensures that NAFTA parties regularly prioritize regional environmental concerns and agree on steps to address those concerns. The Secretariat implements the CEC��s annual work program, and provides administrative, technical and operational support to the Council. The creation of the Secretariat has ensured that resources are devoted to the CEC��s environmental initiatives on a daily basis. The JPAC is composed of fifteen citizens, five from each of the three countries, and advises the Council on any matter within the scope of the NAAEC. The JPAC ensures that the views of citizens are factored into the Council��s deliberations.

NAFTA parties are seeking solutions to a number of issues of trilateral significance for the first time, focusing initially on five major themes: (1) protecting human health and the environment; (2) enforcement cooperation and law; (3) environmental conservation; (4) environment, trade and economy; and (5) information and public outreach. Each year, the Council approves an Annual Program and Budget for the CEC that includes funding for a number of specific projects in each of these areas; some project highlights to date are described below.

Protecting Human Health and the Environment

Pollution, like other aspects of the North American environment, does not respect international boundaries. Some pollutants can travel great distances through the air, while others may be carried many miles by rivers or ocean currents. It is impossible for any country, acting alone, to prevent pollution from entering its territory. This portion of the CEC��s work program aims to address this problem through cooperative efforts to reduce pollution and minimize its effects.

The sound management of chemicals is one area on which the CEC has focused a great deal of work. In 1995, NAFTA governments agreed to develop continental action plans for the sound management of chemicals that are acutely toxic or can build up to unacceptable levels in the food chain. So far, the CEC has reached agreement on regional action plans for eliminating the use of the industrial chemical PCB, still found in old electrical equipment, by 2008, and for the phase out of the use of two pesticides, DDT and chlordane, over ten years, and their replacement with less environmentally harmful controls for mosquitos and termites. In addition, a task force is working on a reduction strategy for mercury, which has both natural and anthropogenic sources.

Another project involves the development of a North American pollutant release inventory. A common inventory of pollutant releases can encourage industry to generate less waste, supports community right-to-know initiatives, and will also help in the implementation of the toxic substances action plans. As part of this project, Mexico recently established its first pollutant release and transfer register mechanism. The three governments are also working to develop a cooperative long-term air quality monitoring, modeling, and assessment program for North America.

Article 10(7) of the NAAEC calls for the parties to develop recommendations on assessing the environmental impacts of proposed federal projects likely to cause significant adverse environmental effects across national borders. These recommendations are to include provisions for notifying affected parties, as well as ways to mitigate potential adverse effects of such projects. NAFTA parties have agreed to complete negotiations on transboundary environmental impact assessment procedures by April 15, 1998. The agreement will likely include a provision that will allow an affected state within one country to contribute comments and information to the environmental assessment process in another country, which will consider mitigation measures. The agreement will create an early warning mechanism to promote conflict avoidance.

Enforcement Cooperation and Law

Recognizing that strong environmental laws will do little to protect the environment unless they are accompanied by adequate enforcement efforts, each of NAFTA parties committed in the NAAEC to enforce effectively their environmental laws. To help the three countries improve their environmental enforcement efforts, the CEC formed the North American Working Group on Environmental Enforcement and Compliance, composed of senior federal, state, and provincial environmental officials from the three countries. This working group brings together for the first time people from different governments, including from their environmental, customs, and justice departments, to share information on enforcement strategies, as well as expertise and technical knowledge. These exchanges of information have improved each government��s ability to track illegal transborder movements of hazardous substance and wastes, to enforce anti-smuggling laws against trade in endangered wildlife, and to limit the movement of harmful chemicals, such as ozone-destroying chlorofluorocarbons.

In addition to the commitment to effective enforcement, the NAAEC also includes a commitment that NAFTA parties will maintain high levels of environmental protection and continuously strive to improve their environmental laws and regulations. In recognition of this obligation, the Council has agreed to develop principles in 1997 to guide the development of a new generation of environmental regulatory and other management systems. The CEC will use such principles as a yardstick to evaluate the extent to which new laws, rules and regulations fulfill their obligations under Article 3.

Environmental Conservation

There are many species of animals, birds, fish and plants that are unique to North America. The ranges for many of these species cross national boundaries, which means that in order to ensure their survival, NAFTA governments must cooperate to improve management and conservation of these species�� habitats. The CEC is creating tools, such as North American ecosystem maps and a North American biodiversity database network, which will enable governments to make better-informed decisions regarding steps to ensure the continued viability of these species.

Under the auspices of the CEC, the three governments are currently working together to develop strategies for the conservation of migratory species that are threatened by the loss or decline in quality of their habitats throughout their North American migratory routes. The CEC��s North American Monarch Butterfly Conservation program, for instance, will support study of the Monarch butterfly��s population dynamics and may include establishment of additional protected areas, public education efforts, and site management efforts to improve critical migratory habitats. Similarly, the CEC is coordinating a partnership of key public and private organizations to protect vital migratory bird habitat, including resting, feeding, breeding and nesting grounds along principal North American flyways.

The CEC is also promoting cooperation on the protection of marine and coastal ecosystems, which are under threat from increasing pollution and habitat transformation. The CEC is assisting the three governments in implementing their commitments under a recently negotiated international agreement in this area (the Global Programme of Action for the Protection of the Marine Environment from Land-Based Activities, or GPA, concluded in November 1995). Focusing initially on two marine and coastal ecosystems, the Southern California Bight and the Gulf of Maine, the CEC is assisting the governments in identifying land-based threats to those ecosystems and steps to address those threats.

Environment, Trade and Economy

The NAAEC calls for an ongoing consideration of the "environmental effects of NAFTA" in Article 10:(6)(d). Accordingly, the CEC has convened a non-governmental panel of trade and environmental experts to design and implement an analytical framework to identify and assess, to the extent possible, the effects of increased economic development, including the direct and indirect effects of NAFTA, on the environment of North America. The panel is in its third year of work on a general framework for the assessment and believes this framework will provide the basis for further cooperation among the Parties to address ways of countering any negative effects and promoting any positive effects that it identifies. The CEC Council will receive the panel��s results at the end of 1997, at which point it will determine how best to continue to fulfill the Agreement��s obligation for ongoing work in this important area.

Another of the CEC's objectives is to promote pollution prevention policies and practices. In order to do so among small to medium-sized industries in NAFTA countries, in 1996 the Council created a pilot fund for pollution prevention projects in Mexico and is currently exploring options for extending this fund to the United States and Canada. To address the barrier of inadequate information exchange, the CEC has created a Technology Clearinghouse. This project assists potential users of environmental technology in finding the technology necessary to help them comply with relevant environmental laws and regulations or to improve their production efficiency while maintaining or improving their competitiveness.

Information and Public Outreach

As part of the NAAEC, NAFTA parties committed to provide the public with information about environmental developments, and allow public participation in discussions of how the environmental provisions of NAFTA and the NAAEC are being carried out. For example, the CEC Council holds annual public meetings, at which the three environment ministers hold open dialogues with the public.

This openness extends to every level of the CEC. Several CEC projects involve participants drawn from a number of sectors of society. In addition, the JPAC plays an important role in ensuring that citizens from all three NAFTA countries can help the CEC make decisions about its future direction, spending and programs. To date, the JPAC has hosted public meetings annually on specific topics of concern to the Council. Topics for 1997, for example, are the long range transport of air pollutants, voluntary compliance with environmental management systems, and environmental networking between North American communities. JPAC representatives and the CEC Council have frequent and extensive interactions, thereby ensuring that the CEC is well informed of public concerns regarding North American environmental issues.

In addition, each of NAFTA governments maintains its own advisory committees to provide input to its national delegations to CEC meetings. The United States has established both National and Government Advisory Committees. The National Advisory Committee is made up of non-governmental representatives, including business, environmental organizations, and academics. The Government Advisory Committee is made up of state, local, and tribal leaders from around the nation. There are ten to fourteen members on each committee.

For consultations to be meaningful, those involved must have access to accurate and timely information. To broaden its outreach, the CEC established an Internet Homepage which contains a wide array of information, including current CEC publications, summaries of the three countries' environmental laws, and CEC project results. In addition, a CEC resource center has been established in Mexico City, to make information more accessible to those NAFTA citizens living furthest from the CEC headquarters in Montreal.

North American Fund for Environmental Cooperation

In 1995, the CEC created the North American Fund for Environmental Cooperation NAFEC as a means to fund community-based projects in the United States, Mexico, and Canada. The fund has been allocated a total of $1.6 million for the 1996 fiscal year. In order to maximize the impact of the CEC��s limited resources, proposals are encouraged for projects which not only promise concrete results at the local level, but which also have larger-scale impacts. NAFEC seeks projects which respond creatively to new challenges or seek new solutions to old problems, and whose results can be shared throughout North America. To date, 35 projects have been funded under this program.

CEC Activities under NAAEC Articles 13 and 14

Article 13 Reports

Article 13 of the NAAEC authorizes the CEC Secretariat to prepare a report sua sponte on any matter within the scope of the annual program or on any other environmental matter related to the cooperative functions of the NAAEC, unless the Council objects by a two-thirds vote within 30 days. To date, the Secretariat has completed two Article 13 reports, one about the long-range transport of air pollutants and the other evaluating the death of 40,000 migratory birds at the Silva Reservoir in the Mexican state of Guanajuato.

In 1995, 40,000 migratory birds died from an unidentified cause at the Silva Reservoir in the Mexican state of Guanajuato. Facilitated by the Mexican government, the Secretariat sent an international team of scientists to investigate. The team determined that the overwhelming cause of death was avian botulism. The CEC is currently working with the local government to clean up the Reservoir to prevent recurrence of botulism. In addition, an international team of scientists has been formed to exchange information about avian botulism in an effort to cooperatively resolve many of the outstanding questions about the disease.

Article 14 Citizen Submissions

Under NAAEC Article 14, the CEC Secretariat may consider a submission from any non-governmental organization (including businesses) or person asserting that a Party is failing to effectively enforce its environmental law. If the Secretariat determines that a submission meets the criteria set out in Article 14(1), it must decide whether the petition merits requesting a response from the concerned Party, in accordance with Article 14(2). After considering any response provided by that Party, the Secretariat may recommend to the Council that a factual record be developed, in accordance with Article 15 and the Guidelines for Submissions on Enforcement Matters under Articles 14 and 15 of the NAAEC. The Council may then instruct the Secretariat to develop a factual record on the submission.

Ten public submissions have been filed in the three years that the Secretariat has been operational. Of these submissions, three concern the United States, two concern Mexico, and five concern Canada. Following is a summary of the submissions received to date: