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Energy and the environment in North America: Critical linkages

Jeffrey Schott and Meera Fickling

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North America has an interdependent but not fully integrated energy market. The region must increase regional energy supplies while mitigating the environmental impact, and do so in a co-ordinated fashion to enhance energy security. Otherwise it faces a grim future of slow growth choked on high energy prices, greater dependence on foreign suppliers, and more frequent and volatile climatic shocks.

A large share of the energy consumed in North America is produced in the three countries and a lot of it is traded across the two U.S. borders. Canada is the leading source of U.S. oil imports —roughly 70 per cent of the crude oil it produces is shipped to the United States; Mexico ranks second. Combined, Canada and Mexico account for more than 30 per cent of U.S. oil imports. Despite sizeable production, however, the region as a whole is a net oil importer and almost half of its oil imports come from the Organization of the Petroleum Exporting Countries (OPEC) and Russia. Without new domestic production, the region —and the United States in particular— will become more heavily dependent on foreign energy resources and world oil prices will continue to rise, reflecting tighter global supply and demand balances.

Given the massive oil, gas and coal reserves in North America, the policy prescription seems straightforward: produce more! But laws and regulatory measures, including new environmental policies designed to reduce greenhouse gas (GHG) emissions from oil and gas production and electricity generation, constrain the exploitation of untapped reserves. The North American Free Trade Agreement (NAFTA) region needs energy and environmental policies that are mutually reinforcing and that enhance energy security rather than policies that work at cross purposes.

The NAFTA challenge is to ensure adequate investment in energy development and transmission to propel economic growth, in a way that reduces GHG emissions and avoids the adverse effects of climate change. Officials need to ensure that conventional energy is produced and consumed in a less carbon-intensive manner and encourage the development of renewable energy resources. Improved energy efficiency and other conservation measures also merit immediate attention, particularly the implementation of smart-grid technologies.

Gradually reducing GHG emissions over the next decade will not be easy. The United States and Canada each committed to cut GHGs by 17 per cent by 2020 from 2005 levels; under current policies, they will not meet those goals and may even make the situation worse as oil sands production increases to meet rising U.S. demand. Despite notable technological improvements over the past decade, oil sands production is emissions-intensive and likely to be the largest contributor to Canada’s emissions growth in the coming years.

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Concerns about the environmental impact of oil sands production and transmission threaten to put a chill on investment and reduce prospective North American supplies. In Canada, these concerns focus on water use, air pollution, disposal of residual materials and transit rights through protected territories. In addition to those concerns, U.S. oil sands imports could be impeded by state regulations (e.g. low carbon fuel standards) that could affect the mix of fuels in refinery runs and by opposition to the routing of the proposed Keystone XL pipeline that would link Canadian fields to U.S. Gulf Coast refineries.

There is no good substitute for oil sands production, unless North Americans are willing to sharply constrain oil supply and thus pay significantly higher prices for largely comparable “carbon dirty” crudes from OPEC countries. But Ottawa and Washington need to ensure that environmental concerns are fully addressed, even though the requisite actions —investing in new energy efficiency technologies, improving carbon capture and sequestration technologies, and enacting other regulatory policies— would substantially raise the cost of the final product. The resulting gain for both energy security and climate policies would be well worth the cost.

At the same time, Mexico needs support from its NAFTA partners, to the limit allowed by the country’s constitutional constraints on foreign participation in the energy sector, to expand production of both traditional and renewable energy resources. In particular, countries should work together to develop Mexico’s abundant wind and solar potential. The country’s largest challenge in this area is that renewable electricity is difficult to sell to the state-owned electric utility, so private or U.S. customers would need to buy it. However, inadequate transmission capacity sharply constrains cross-border sales and requires upgrading.

The 2009 North American Leaders’ Summit floated a number of clean energy initiatives and committed to developing a Trilateral Working Plan to be presented at the 2011 summit. Proposals included a carbon capture and storage partnership, wherein the three countries would develop a common methodology for determining CO2 storage capacity and use this information to create a North American Carbon Atlas. The leaders promised to co-ordinate on other measures to mitigate climate change, including on approaches to measuring, reporting and verifying emissions reductions; financial support for mitigation and adaptation actions; and a limit to gas flaring.

In addition, the three countries have forged bilateral partnerships on energy and environmental issues. In 2009, U.S. President Barack Obama and Canadian Prime Minister Stephen Harper established a Clean Energy Dialogue to co-ordinate carbon capture and storage research and modernization of the electric grid. Obama and Mexican President Felipe Calderón created the U.S.-Mexico Bilateral Framework on Clean Energy and Climate Change, agreeing to collaborate on low-carbon technology development and capacity building, as well as on adaptation to climate change.

Trilateral summits and bilateral talks have moved the North American energy dialogue in a positive direction. Now, the leaders need to turn talk into action. The primary goal should be to focus on energy efficiency and conservation, starting with harmonization of energy and fuel efficiency standards. The three countries should also co-ordinate mapping of cross-border carbon storage sites and ramp up investment in the technology. Policies to encourage investment in renewable energy and lower-carbon fuels should also be encouraged.

Finally, North American environmental institutions should give high priority to energy and climate change programs. The North American Development Bank currently allocates inadequate sums to clean energy projects along the U.S.-Mexico border. This financial commitment should be substantially expanded so that Mexican firms are better able to take advantage of the ample solar and wind potential in the border region.

In sum, North America needs to develop a comprehensive and integrated energy and climate strategy in order to augment regional energy supplies without accelerating environmental degradation. A sound energy plan will promote growth, reduce dependence on OPEC suppliers, and preserve a livable climate for future generations.

Jeffrey Schott is a Senior Fellow and Meera Fickling is a Research Analyst at the Peterson Institute for International Economics.


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