An energy-specific NAFTA would bring North America closer to energy integration. If done right, it could also lead us toward a more sustainable energy policy.
New drilling technology and supportive market prices have opened vast reserves of oil and natural gas resources to extraction in North America. Canadian oil sands development is now operating at scale, the shale gas and tight oil revolutions are upon us in the United States, and major institutional energy reforms in Mexico are under way that could enable substantial new investment in that country’s oil and gas sector.
The three countries have much to gain from these developments. The exploitation of these resources and the potential for enhanced cross-border energy trade will make the energy-intensive economic sectors more competitive, improve energy security, dampen short-term energy price volatility and stimulate continent-wide economic growth.
How this boom will impact the environment is an unresolved question. On one hand, extraction and use of these reserves could increase North American carbon dioxide (CO2) emissions beyond the limits espoused by each country.
On the other hand, to the extent that natural gas substitutes for coal and oil in electricity generation — while keeping fugitive methane emissions low — and that electric vehicles powered by relatively clean electricity substitute for gasoline and diesel, CO2 emissions over the next two decades could be far less than expected 10 years ago.
An equally unresolved question is how much the three countries will collaborate on energy policy and planning — as well as how significant the benefits of such collaboration might be. The three countries have a long history of economic partnership and have a number of energy and environmental relationships in place. A united North American energy strategy could help to ensure that each nation reaps the economic benefits from development of its resources, while maintaining and enhancing commitments to protect the environment.
The Road to Energy Integration
Politically, the current focus in North America is the development of the oil and gas reserves and the substantial increase in cross-border trade in these commodities. The Keystone XL pipeline and potential changes in the crude export law to permit Canada to re-export U.S. crude are two prominent examples. But Mexican energy reforms permitting direct foreign participation in the oil and gas sector — which has been capital-starved for decades — could be a huge boon to North American energy independence and security, as well as cross-border energy trade.
Moreover, harmonized regulatory policies and reduced barriers to electricity trade could enable expanded U.S. imports of hydroelectric power from Canada. Similarly, low-cost power from Texas could flow across the border to Mexico, while renewable resources along the Baja California border could bring more carbon-free electricity into the U.S. southwest. Clearly, there are trade gains to be had from a more tightly integrated energy strategy.
Bringing Policies Into Harmony
Last year, my colleagues and I at Resources for the Future — along with partners in Mexico and Canada — undertook a review of oil and gas regulations in the three countries, looking at policy differences and opportunities for harmonization. We identified several areas that seem ripe for early, more robust coordination:
- Individual country policies that affect siting and construction of new energy infrastructure represents a prime target, especially related to the process of environmental impact assessments.
- North America has an immediate opportunity to begin the process of developing a continent-wide climate policy via the current international negotiations under the United Nations Framework Convention on Climate Change.
- There is an opportunity to harmonize the electric power sector regulations as the United States moves forward under the Clean Air Act and Mexico begins to restructure its electricity sector.
We also noted that policies regarding light- and heavy-duty new vehicle fuel economy and greenhouse gas emissions have largely been harmonized in the United States and Canada, and for light-duty vehicles in Mexico. Differences exist in the promotion of alternative fuel vehicles.
A Role for Governments
While private energy and capital markets throughout North America will drive the development of expanded continental energy and trade, there is a substantive role to be played by the governments. A formal North American energy strategy would serve to shape a shared vision of the areas where government policy can effectively be deployed to coordinate infrastructure development and project financing; reduce trade, investment and technology barriers; and develop harmonized approaches to reduce continent-wide CO2 emissions.
One approach to the advancement of such a continent-wide energy strategy would be to consider the negotiation of an energy-specific NAFTA, or E-NAFTA. Such an international agreement would facilitate the coordination of cross-border energy trade infrastructure (pipelines, railroads, shipping and electricity transmission) and harmonize energy regulatory structures so energy markets could be effectively integrated continent-wide — a crucial concern. An E-NAFTA could also reduce barriers to energy trade and enhance continent-wide exchange of best practices related to more environmentally responsible energy extraction technologies, renewable energy technologies and regulatory structures.
The negotiation of an E-NAFTA will raise domestic political and economic issues in each of the three countries, as well as significant cross-border concerns. But many of these issues are already in play — look no further than the debates over Keystone XL and the U.S. oil export ban. These developments are being addressed in a one-off, stove-pipe fashion, where policy consistency, effectiveness and economic efficiency are attained only by chance. While challenging, a coordinated consideration of these issues — whether bilateral or trilateral, and whether within a NAFTA framework or not — has much to offer the environment.
(Portions of this article are excerpted from “Toward a North American Energy Strategy,” coauthored with Raymond J. Kopp, in Resources for the Future’s Resources Magazine, issue no. 186.)
(Top image: Courtesy of Thinkstock)
Alan Krupnick is a Senior Fellow at Resources for the Future and Co-Director of the RFF’s Center for Energy and Climate Economics.