ENERGY AND THE ENVIRONMENT

Multinational CEC Board Presents Environmental Profile of North American Electricity Market

An expert advisory board drawn from Canada, Mexico, and the United States guided the report: Environmental Challenges and Opportunities of the Evolving North American Electricity Market. The board was asked how North Americans could have an affordable and abundant supply of electricity without compromising environmental and health objectives. And, in a series of recommendations that accompany the report, the board suggests how the NAFTA partners can cooperate to ensure the North American public receives the full economic and environmental benefits of an integrated continental electricity market. The CEC was established by Canada, Mexico and the United States to build cooperation among the North American Free Trade (NAFTA) partners in implementing NAAEC, the environmental side accord to NAFTA. The CEC addresses environmental issues of continental concern, with particular attention to the environmental challenges and opportunities presented by continent-wide free trade.

Overview
The opportunities for North American cooperation on environment and energy were presented in a joint statement issued April 22, 2001 by Canadian Prime Minister Jean Chretien, Mexican President Vicente Fox and President of the United States George W. Bush, after meeting as the North American leaders group during the Summit of the Americas in Quebec City:

As a result, Canada, Mexico and the United States are exploring North American appro-aches to help expand the production, distribution and trade in energy, including electricity. At the same time, the electricity sector in the region is in the midst of unprecedented change. Competitive electricity markets have been introduced, or remain under consideration, in Canada, Mexico and the United States. The three countries are considering important policy decisions that will affect the role competitive forces will play in the design and operation of North American electricity markets. They are also exploring ways in which electricity markets can be designed to deliver affordable and reliable electricity in the region, as well as protect the health and environment of citizens and their neighbors.

The extent to which a more integrated North American electricity market captures the possible environmental benefits of more efficient resource allocation, technology diffusion and consumer choice will depend on the complex interplay between many variables. Many of these variables, such as fuel choice, technology, pollution control strategies and subsidies, are directly influenced by rules and policy measures. Where and when these policy interventions occur, and the degree to which they are coordinated across borders, is likely to be a critical factor in achieving the twin goals of clean and abundant electricity. It is a matter of choice.

One of the most striking features of the evolving North American electricity market is the rapid pace of change occurring in a sector once characterized by its almost unchanging nature. While the rate of change varies from country to country, and in some cases, jurisdiction to jurisdiction, the ripple effects of major structural changes increasingly affect electricity generation and transmission throughout those portions of the region currently engaged in electricity trade. Key elements of this dynamic sector include the environmental profile of the electricity sector, how market integration links to health and the environment, and the extensive opportunities for environmental cooperation in this field.

Some central issues include:

• While important differences remain in each country, there is a clear trend towards convergence in competitiveness and trade policy underway in North America. Numerous participants in the initiative emphasized the economic and environmental benefits that could be achieved through greater efforts to coordinate or make compatible relevant federal, state or provincial environmental laws, standards and policies in the electricity sector. Generally, more compatible environmental approaches help to make domestic environmental policies, such as air pollutant reduction strategies, more effective, decrease the likelihood of environment-related trade disputes, (especially those concerning restrictions on market access based on product or production standards) and address concerns about so-called 'pollution havens'.
• Current and future uncertainties about many fundamental characteristics of the electricity sector - such as planned and future generation capacity and location, demand, fuel type and technology - call for secure health and environment safety nets. Ambient air standards, guidelines, and objectives, already adopted in North America, represent a good common platform to build on. Participants identified additional environmental policies and management tools that appear to work well in restructured markets and advanced ideas on how these policies could be adapted to ensure that they enhance competitiveness and benefit the entire region.
• A number of environmental and free market advocates voiced concern over the effect of half-way measures which purport to open up electricity markets but lock-in competitive advantages gained through historic subsidies to conventional generation sources, or disadvantage access to the grid for distributed energy.
• In some instances, market-based mechanisms to avoid or reduce adverse environmental effects may prove efficient and effective at a regional scale, even generating resources for environmental protection and conservation. Participants explored the potential to regionalize these mechanisms and identified steps to enhance cooperation in this area.
• Building a more supportive North American policy framework for energy efficiency and renewables represents a significant opportunity for achieving 'win-win' outcomes.

A North American Partnership for Energy Cooperation
In recent years, the economy of the North American region has become increasingly interconnected in the manufacturing, transportation, service and other sectors. Similar market integration is beginning in the electricity sector, as illustrated in Table 2. Cross-border trade in electricity is growing, bolstered in part by the long-term stability conferred by the trade and investment rules adopted in NAFTA.

The existence of affordable and reliable electricity supplies is a prerequisite for economic stability and long-term prosperity. However, concerns have been raised over the prospect of electricity shortages and their effect on economic development where these take place. There is also significant public concern about the impacts on human health and the environment from electricity generation, distribution and usage. The CEC's background and working papers series examine the regional environmental dimensions of the transformation of the North American electricity market, including the key features, trends and variables shaping events in this dynamic sector.

North America has asymmetrical levels of total production, numbers of electricity producers, consumption of electricity, intensity of emissions, and the investment required to add electricity generating capacity in the three countries.

Over the next decade, total investment required for the expansion of North American electric generating capacity will be very high, particularly in Mexico, which is contemplating a radical transformation of its current generating fuel mix. In fact, according to the Secretar’a de Energ’a, the addition of 29 GW through to the year 2010 in Mexico represents an amount equivalent to almost 3 percent of its year 2000 GDP. For Canada, whose expansion is estimated at an additional 19 GW, the investment amount is equivalent to 1.4 percent of GDP. For the United States, which is contemplating an additional 150 GW, the figure represents 1 percent of GDP. Financing of these capacity additions as well as general upgrading of existing capacity to reduce the environmental impact of the electricity sector, especially for Mexico, is likely to prove very challenging.

The interest from Mexico, Canada and the United States in building a more seamless North American energy market provides new opportunities to identify ways in which affordable and reliable electricity can be provided, while at the same time protecting human health and the environment in the region.

Emissions of Air Pollutants by Electricity Generators
When examining the environmental profiles of the electricity sectors in Canada, Mexico and the United States, it is important to bear in mind that there are significant differences in electricity generation, ownership and competition policy, in per capita energy consumption, aggregate emissions and in other relevant indices. Regional comparisons should also consider built-out infrastructure, available financing and levels of development. For an illustration of the main sources of electricity generation in North America, please refer to Figure 1 (circles depicting national generation are drawn to scale).

Notwithstanding the obvious benefits electricity provides, its generation, transmission and use has a considerable impact on both human and ecosystem health. For example, in the United States, the electricity sector emits approximately 25 per cent of all NOX emissions, roughly 35 per cent of CO2 emissions, one-quarter of total mercury emissions, and almost 70 per cent of SO2 emissions. The electricity sector is the single-largest source of nationally reported toxic emissions in the United States and Canada, and may represent a large source of toxic emissions in Mexico (publicly available data are lacking in Mexico at this time).

A fuller perspective of regional comparisons can be gained by examining a variety of measures. Some examples are provided in Table 3. This table shows aggregated amounts by country of the pollutants CO2, SO2, NOX and mercury emitted by the electricity generation sector during a recent year (generally 1998) and emissions per capita, per square kilometer and per GWh of electricity generated. All forms of large-scale electricity generation affect one environmental medium or another. Coal- and oil-fired plants contribute most of the sectoral emissions of air pollutants, although natural gas-fired plants emit a considerable amount of CO2, a greenhouse gas. Large-scale hydroelectric facilities can displace communities, destroy or degrade critical habitat such as streams and rivers and harm wildlife and native fish populations. Nuclear power plants pose health, safety and security risks related to their operations, and transport and storage of spent fuel. Even wind farms, depending on their location and technology used, can have impacts on visual aesthetics and avian wildlife.

Determining the relative environmental impact of different forms of electricity generation has proven to be a challenging task because of the difficulty of quantifying environmental impacts from different fuel sources and technologies throughout their lifecycle.

Long-range and Cross-border Environmental Impacts
The environmental impacts associated with most conventional forms of electricity generation are often not limited to the immediate vicinity in which they operate (see Maps 1, 2, and 3 for Electricity Generated in Canada, Mexico and the United States, by region and fuel type [and/or] see Figure 1 for Net Generation by country). The medium- and long-range transport of pollutants from electricity generation plants - ground-level ozone and its precursors (especially NOX), acid pollution, particulates and mercury, to name a few - has been well documented. Persistent organic pollutants can also be transported on wind currents and deposited long distances from their point of generation, and can enter the food chain of distant communities. Other emissions, such as CO2 and stratospheric ozone-depleting gases, are of global concern wherever they are emitted. Electricity plants can even cause impacts on wildlife long distances away, especially for migratory species dependent on corridors and specialized ecosystems in multiple regions.

New Generation Capacity
A thorough examination of the environmental implications of the evolving North America market for electricity must consider future generation needs and projected plans to meet those needs. Utilities, private developers and energy planners currently have announced plans (as of August 2001) to build nearly 2,000 new power generating units in North America by the year 2007. This represents roughly a 50 per cent increase over current installed capacity (see Maps 6, 7 and 8 for proposed new generation in North America by fuel type and location by region).

While only a fraction of these projects will likely go forward, it is impossible at this time to determine which ones will move ahead or where they will be located. In Table 4, the CEC has estimated high boundary and low boundary values for selected air emissions based on planned new generation capacity in North America.

Estimating emissions from announced generation capacity changes places some perspective on the potential emissions arising from announced capacity changes in relation to the electricity sectoral emissions from a recent year in North America (the reference case inventory). This also provides initial indications of what regions in North America may appear to be the most attractive to new energy developers, as reflected in the amount of new power plant capacity or emissions. This can lead to future lines of inquiry as to why developers deem these regions attractive, either because of greater local demand growth, access to transmission lines, differing regulatory requirements, availability of tax or other financial incentives, or other reasons.

Furthermore, by developing a reference case emissions inventory for the North America electricity sector (the first of its kind), this analysis identifies key areas where access to improved information will help policymakers better evaluate the potential environmental consequences of an increasingly integrated electricity market. This analysis also underscores the value of having information on proposed new generation capacity available for North America for environmental policy makers to better assess the potential cumulative impacts on air quality.

It is important to point out what this analysis does not estimate. It does not estimate total emissions from the entire North American electricity generation sector in 2007. The analysis only attempts to account for emissions associated with proposed changes (additions and closures) in electricity generation capacity in North America projected to 2007. It does not estimate emissions from existing sources that may still operate in 2007.

For example, it does not account for potential pollution reductions at existing sources due to pending regulations, such as regional controls on emissions of nitrogen oxides in the eastern United States. It also does not estimate potential pollution reductions associated with reductions in electricity generation from existing sources where that generation may be displaced by newer, cleaner sources. This would require forecasting of demand growth and dispatch modeling that is beyond the scope of the analysis.

The boundary scenarios reflect differing assumptions of the probability of new generation projects going forward between 1999 and 2007. The difference in emissions between the high and low boundary estimates provides an indication of the dramatically different outcomes that are possible only in the present-day partially integrated market. Such variation underscores the importance of carefully considering which environmental policy tools are best suited to operating effectively in a climate of uncertainty. Across North America there is extensive experience with some policy tools, such as national ambient air quality standards, guidelines, and objectives, and less experience with other measures such as domestic or regional cap and trade programs.

How Electricity Market Integration Can Affect the North American Environment
The 'integration' of electricity markets in North America refers to the operation of a more seamless market and is characterized by cooperative regulatory approaches supportive of regional trade, investment and infrastructure development. While far from completely integrated, North American markets have evolved to the point where retail prices in regions of the United States are affected by the level of snowfall in eastern Canada, natural gas pipelines cross thousands of miles from western Canada to Chicago and a growing number of electricity generation projects are designed for export.

The integration of electricity markets can potentially affect environmental quality in a number of ways. Removing trade and investment barriers, for example, may accelerate capital turnover, allowing for more rapid diffusion of state-of-the-art technologies and pollution control equipment. A competitive, price-based and transparent sector may also help to 'get the price right', by helping to internalize external environmental costs - costs that are not often reflected in electricity prices.

The effect that market integration will have on the environment will be influenced by a number of key factors. These include the choice of fuel (fossil, hydro, wind, solar, biomass, geothermal, hydrogen or other) which in turn is driven by price and policy considerations. Regional and cross-border dynamics are also relevant and may be influenced by infrastructure, fuel and market access as well as environmental standards and regulations.

Greater integration of North American electricity markets remains hindered by what are often severe limitations and constraints in the functioning of the 'grid' - the linked supply and transmission infrastructure in the three countries. As an example, the ability to access the grid can be a key determinant for siting new facilities.

Pollution Havens, Halos and Generation Clusters
Currently, the key considerations for siting new electricity generators include the availability and cost of fuel sources, access to profitable markets, and deficiencies in the operation of the grid. As North American markets become more closely integrated, they will tend to favor the 'least cost producer'. This may lead to some locational shifts in production and in environmental impacts. Put simply, in areas where electricity is imported, domestic air emissions will be displaced to the area where the electricity is generated (assuming fossil fuels are used). Similarly, in areas where electricity is exported, air emissions will increase (again assuming fossil fuels are used). The relative economic and environmental costs and benefits of these shifts will depend on how a particular region is affected by these changes. This is illustrated in Table 5, which shows, for the high boundary case, what emissions of CO2, SO2, NOX and mercury could be expected from new generation for the top three states/provinces in Canada, Mexico and the United States.

It must be noted that these data provide insight into what key stakeholders in the electricity sector are thinking now; repeated experience has shown us that unpredicted events can dramatically alter current paradigms. Nonetheless, the table does highlight potential regions where additional analysis may be warranted on fuel types, pollution control technologies and other factors affecting potential impacts. One factor affecting production costs and hence, location, is the relative and absolute cost of environmental regulations. Concerns have been raised that in tight, highly competitive markets, widely divergent regulatory requirements could accelerate locational shifts in electricity generation to so-called 'pollution havens', to the detriment of those living in adversely affected airsheds or watersheds. Citizens have raised concerns about pollution havens in all three countries. Conversely, jurisdictions with strong standards or which attract 'clean' electricity may see associated health and environment benefits ('pollution halos'). Even with high environmental standards, the magnitude of the impacts in regions preferred for new electricity generation - which are often near lucrative export markets - pose significant challenges for environmental managers charged with meeting air quality standards and other environmental goals. Without nearterm technological breakthroughs, those regions that are likely to attract concentrated 'clusters' of electricity generation facilities will require robust environmental policies to deliver the twin benefits of affordable energy and environmental protection. Jurisdictions downwind of new generation facilities will be interested in assuring that adequate measures are in place to protect their environmental and health interests as well.

A key consideration for environmental policymakers will be how market integration affects the competitiveness of particular fuels such as coal, natural gas or renewables, in larger areas or regions. The type of fuel used, along with pollution control technologies, performance standards, and related regulations, will largely determine the environmental impacts from a specific facility. In 1996, this potential was examined by the US Federal Energy Regulatory Commission (FERC) in an environmental impact assessment that was carried out before the introduction of competition in US wholesale electricity markets by promoting open access to transmission lines.

The experience gathered in the United States, since the introduction of competition, suggests that competition favored coal over other fuels - as FERC's 'competition-favors-coal' scenario seems to have come the closest of the various scenarios evaluated in describing what has taken place. (It should be noted that even the 'competition-favors-coal' scenario underestimated actual CO2 emissions by a considerable margin.) The historic difficulty of accurately forecasting electricity demand continues to plague planners of all types, especially those attempting to assess the potential environmental impacts of different scenarios.

Current information, including the fuel choice for proposed new generation facilities across North America, suggests that, for the moment, prevailing conditions favor natural gas, currently the cleanest of the fossil fuels.

Relative fuel prices can shift rapidly, however, and a number of experts are already projecting an increase in natural gas prices as low-cost, accessible reserves are aggressively exploited. In the near term, the health and environmental impacts of electricity generation in North America will largely be determined by whether and where 'cleaner' electricity generation fuels can compete favorably with 'dirtier' ones. Over the longer term, impacts will also be affected by the still more uncertain pace of technological change and the advent of 'breakthrough' technologies, such as hydrogen fuel cells.

Standards and Regulations
At a 'macro' level, the NAFTA partners address air, water and land impacts in similar ways, employing a blend of command-and-control and market-based instruments to achieve environmental and health goals. All three countries set ambient air quality standards or objectives nationally or locally, for example. Nonetheless, there are major differences between the three countries with respect to jurisdictional issues, i.e., who sets and enforces standards or objectives, the level of allowable emissions, and monitoring and enforcement requirements.

In tight regional markets, differing approaches to regulating pollution can affect price, stability and certainty, including project development approval timelines. They can also influence siting, fuel or other choices that have an impact on environmental quality. Deeper market integration may lead to a more fluid and dynamic policy climate. The role environmental regulators play in this arena should be considered thoroughly as trade and competition policies are discussed in the region.

Differing environmental standards across regions can create differing comparative costs for environmental compliance. If power developers locate in regions of lower compliance costs (i.e., lower environmental standards), the question often arises, are these regions 'pollution havens' ?

Identifying such regions, however, is complex, based simply on differing environmental standards. Specifically, a simple comparison of environmental 'standards' across borders in an attempt to identify a 'pollution haven' needs to take into account differing circumstances, such as the degree of the pollution problem in a specific region or local public demand for higher standards, which could rationalize differing levels.

The emergence of market-based regulatory programs, such as emissions trading, also complicates inferences made from direct comparisons of emission standards. Setting an emissions cap for a pollutant relies more on achieving a total emissions reduction across a region or country, rather than imposing a power plant-by-power plant emissions standard. Therefore, assuming all else is equal, even identical power plants can have different emission rates if their summed emissions comply with an overall cap. If the goal of environmental and public health protection is the reduction of overall pollution, these programs can meet that goal without imposing identical standards on all affected facilities. The existence of a pollution cap, however, can still allow for the setting of more stringent standards at specific power plants to account for local 'hot spots.' The severity of local impacts may not exist at other power plants in other locations, thus not requiring the same level of stringency, and this would not necessarily mean that the other power plants with less stringent standards constitute a 'pollution haven.'

Examples abound illustrating the complexity of comparing differing emission standards, not just between countries, but within countries as well. For example, in the United States, many eastern states are subject to a NOx reduction program called the 'NOx SIP Call' that will affect many power plants in the region. Because the reduction requirements do not apply to states outside the NOx SIP Call region, there will be domestic differences in emission standards between affected power plants in the NOx SIP Call region and power plants outside the region. Furthermore, even within the NOX SIP Call region, there may be state-by-state differences. Some states could impose power plant-specific emission standards while other states could allow emissions trading to meet the reduction requirements. Therefore, while the overall reductions may be met across the region, there could be state-by-state differences in terms of allowed emission standards.

Under the current trend towards 'market-based' regulatory programs such as emissions trading, cross-border differences may not necessarily arise because of perceived differences in power plant emission standards, but rather over the design of emission trading programs. For example, Ontario is implementing a NOx emissions trading program to help meet Canada's emission reduction commitments under the Ozone Annex to the 1991 United States-Canada Air Quality Agreement. Environment Canada, several NGOs, and the US EPA (at Ontario's request), have critiqued Ontario's trading plan and have reservations about its environmental efficacy.

Despite the emergence of market-based regulatory programs, disputes can and still do arise over perceived differences in traditional emission standards. There is a heated debate currently under way in the United States over differences in emission standards applied to new power plants and existing 'grandfathered' power plants. New coal-fired power plants in the US, for example, are subject to pollution control requirements for NOx and SO2 under the Clean Air Act New Source Review (NSR) provisions that are more stringent than those required for existing coal plants that have never been subject to NSR (i.e., commonly refered to as 'grandfathered' coal plants).

Furthermore, one group in Canada is raising the issue of differing cross border emission standards in arguing that proposed new coal plants in Alberta, while meeting relatively more stringent requirements than existing plants, would not meet the more stringent emission limits achievable by a new coal power plant in Wyoming.

Additionally, concerns have been raised about power plants being built in northern Mexico to serve the US market.

Technological Innovation
In trying to predict what the shared North American energy future will look like, it is difficult to quantify the potential beneficial impacts of technological innovation and the emergence of breakthrough technologies. New energy technologies hold the promise of profoundly changing the face of energy markets and can address both the supply and demand side of the electricity sector. Examples of new energy technologies include fuel cells, conductive plastics, supercritical steam generators and integrated combined- cycle gasification technologies, along with progress in renewable energy sources, including solar, wind, geothermal and tidal generating technologies. Emerging technologies also include new ways of meeting familiar challenges, including the promise of 'smart grid technologies,' cleaner coal plants, as well as longer term prospects of the shift from a carbon to a hydrogen economy.

The Need for Greater Environmental Cooperation and Compatibility
The trend towards convergence of trade, investment and competition policies in the electricity sector in North America has been reinforced and reinvigorated by current trilateral discussions on advancing North American energy markets. A parallel effort towards more compatible environmental policies is essential to ensure that expanded and more integrated North American energy markets help the three countries to achieve their health and environmental objectives.

There are several compelling reasons for North American cooperation in developing compatible policies and progress related to the electricity sector. First, failure to at least ensure compatible (not identical) environmental laws, policies and programs in this sector could undermine carefully considered domestic strategies for striking the right balance between health, environment and abundant electricity. For example, in an increasingly integrated grid, generators could locate power facilities in neighboring jurisdictions without caps, offset requirements or mitigation rules, even though emissions from those facilities will enter the airshed of the neighboring jurisdiction maintaining such policies.

Moreover, failure to coordinate regional environmental responses to electricity markets may invite unwelcome environment-related trade disputes as local jurisdictions scramble to enact policies to promote clean energy and/or protect their environment. An examination of early policy initiatives from a growing number of US states and Canadian provinces provides a glimpse of how some environmental policy options may be shaped, or constrained, by trade and commerce rules. Trade experts point out that a number of the environmental policy responses either in place or currently under consideration may be problematic under rules established by the WTO and in NAFTA's Chapter Six and elsewhere. While such disputes are not inevitable, environmental laws or policies are not insulated from trade challenges, and lawmakers need to be cognizant of how trade rules can shape, or in some cases constrain, environmental policy responses.

Compatible, mutually reinforcing regional electricity and environmental policies could provide the long-term regulatory stability and predictability conducive to private sector ventures. More compatible regulatory approaches may also establish a foundation for employing innovative market mechanisms on a regional scale. These mechanisms - such as cap and trade schemes - may achieve environmental goals while generating substantial resources that could be made available to help finance technology upgrades in poorer regions.

Opportunities for Environmental Cooperation
There are a number of areas where opportunities exist for greater cooperation and compatibility. Trinational focus in these areas could help realize important environmental gains and economic efficiencies in the electricity sector.

Transboundary Airshed Management
A clear opportunity exists to initiate a dialogue on overall environmental, health and economic goals in specific regions defined by common airsheds where deteriorating air quality is of concern. Several examples demonstrate the feasibility of innovative cooperation to achieve environmental goals that affect a broad region defined by the regional airshed of a specific pollutant. In the US, the Clean Air Act provided for the formation of the Ozone Transport Commission (OTC), composed of 12 northeast states and the District of Columbia. The purpose of this commission is to identify regional solutions to the regional ozone challenges facing the member jurisdictions, bound together from an air quality perspective by a common ozone airshed. From 1994 to 1997, the US EPA oversaw the efforts of the Ozone Transport Assessment Group (OTAG), formed as a result of the growing amount of data indicating that ozone transport affected an even broader region of the eastern US. Science had demonstrated that the northeast ozone airshed is actually larger than originally anticipated by the formation of the OTC.

On the international level, the governors of the six northeastern states in the US have met regularly for two decades with the prime ministers of the five eastern Canadian provinces to address issues of mutual interest, including the transport of air emissions throughout an airshed that encompasses their combined region. Similarly, international coordination also exists between El Paso in the state of Texas in the US and Ciudad Jurez in the state of Chihuahua in Mexico to address air issues within their cross-border airshed.

These airshed management efforts may hold promise for developing equitablesolutions to regional air quality challenges. As national barriers are reduced to allow for the expansion of trinational electricity markets, the emissions associated with the production of electricity will be directly affected. The resulting impacts on cross-border airsheds will require increased international cooperation and present an opportunity to utilize an airshed management approach as an effective framework for addressing cross-border air quality challenges.

Innovative Economic Instruments
The use of economic instruments, in particular, emissions trading and trading in renewable energy certificates, has increased dramatically during the 1990s. The marketplace has proven effective as a means to deliver lower compliance costs for environmental objectives along with an associated price signal. In North America's electricity generation sector, domestic emissions trading for NOx and SO2 has succeeded in reducing emissions efficiently. There is interest in, and good potential for, transboundary emissions trading within North America. Some jurisdictions, (e.g., Ontario) have opened the door for international trades to be recognized within their system. Developing common approaches to transboundary emissions trading programs may enhance their environmental and economic effectiveness. An international market is emerging for greenhouse gases (GHGs) as well, though in North America the emergence of a carbon market faces a number of challenging hurdles.

Despite some broad-scale policy differences related to approaches to climate change, the emergence of multi-pollutant emissions trading regimes affords opportunities to examine what elements should be common to each system in order to maximize economic and environmental benefits, in addition to identifying barriers that hinder a broader, more liquid market in the long term.

Energy Efficiency and Renewable Energy
A more balanced and sustainable long-term policy framework for energy can be achieved through closer collaboration on national, state and provincial policies to promote energy efficiency and renewable energy. In addition to promoting energy security through a more distributed and diverse energy portfolio, greater attention to these areas could help cushion the region from the impacts of more conventional electricity sources.

The CEC workshop on 'Emerging Renewable Energy in North America' presented information on a number of important renewable energy initiatives under way in the region. Surprising to some, renewable energy entrepreneurs are not sitting back awaiting the development of revolutionary ('disruptive') renewable technologies. Rather, they are looking for a fair chance to compete (and raise financing) with their existing technology against historically subsidized conventional energy sources. Innovative programs such as California's reverse auctions for renewables, and the wind farms in Quebec, Alberta and Oaxaca are examples of concrete renewable energy measures emerging in the market.

There are differing views regarding the size of the marketshare renewable energy sources can capture. Nonetheless, in some regions renewable sources of energy have made impressive gains. Also, an increasingly broad spectrum of industry and governmental entities has advanced bold and aggressive forecasts for increased renewables. Government action to stimulate favorable market conditions is needed to foster the kind of innovation needed to accelerate the use of renewable electricity sources. The recent proposal by Conae in Mexico to help encourage the development of renewable energy production in Mexico provides a good example.

There are also differing views regarding the definition of renewable energy. Development of national, regional and international guidelines, definitions and criteria for areas such as 'renewables' could reduce the possibility of environmental policies clashing with trade rules.

Impressive gains continue to be made in energy efficiency in North America. To illustrate, although total energy consumption in North America rose throughout the 1990s, it did not rise at as steep a rate as the growth in national economies. Through improvements in electricity generating technologies, coupled with a continued emphasis on demand-side energy efficiency, it is clear that total energy demand can be lowered while simultaneously delivering comparable or even higher levels of energy services. Reflecting the important role energy efficiency represents both for energy and environmental policies, a working group on energy efficiency has been convened under the North American Energy Working Group.

Improvements in energy efficiency vary by technology and by region. During the 1970s, following the oil-price shocks, energy efficiency in the United States increased by almost 40 per cent. More recent estimates suggest that energy efficiency gains based on existing technologies are in the range of 25 to 30 per cent, with an upper boundary of 40 per cent. The greatest potential for energy efficiency improvements in Canada and the United States lies in changing residential and commercial building codes. Mandatory energy performance standards covering a broad range of consumer products are also a highly effective environmental policy. The announcement in 2001 by Canada and the United States to market EPA's Energy Star product labeling in Canada underlines the potential for international cooperation in product labeling and certification efforts. Improvements in energy efficiency are further complicated in Mexico by the flow of tens of thousands of used, less efficient pieces of equipment and appliances, principally from the United States.

An important challenge for North America is to find ways of increasing private sector financing in renewable energy and energy efficiency. Two vehicles used to promote renewable energy are the creation of dedicated funds, including joint public-private sector 'green' investment funds to help defray capital acquisition and start-up costs, and 'green' pricing initiatives, which pass along the premium of green electricity to end-users.

Experience in California shows that the financing of renewable energy can succeed, provided certain conditions are met. Among the most important are long-term purchasing contracts. These send signals to private investors about the longerterm commitment of public policy to renewable energy and energy efficiency goals.

Access to Information
Information plays a crucial role in integrated resource planning, assessment, including the consideration of cumulative impacts and transborder effects, and effective public participation. Paradoxically, while the electricity sector often appears awash in information on almost every aspect of generation, transmission, and consumption, the lack of timely, comprehensive, affordable and accessible data on many of the variables that affect the environment hampers significantly the ability to plan, forecast and mitigate regional and long-range effects.

Information on certain regulated emissions is reported by operating generators or is estimated by authorities, but only a handful of jurisdictions employ or maintain a database or clearinghouse of proposed projects that could enable authorities and the public to evaluate cumulative, regional or transboundary issues efficiently. Even where considerable data exist, their usefulness is often diminished because they are often dispersed among multiple agencies and departments, are displayed in formats that are hard to access or are available only at excessive cost.

Information, Planning and Transboundary and Cumulative Impact Assessment
An unprecedented degree of regional cooperation will be needed to maximize the potential environmental benefits of cross-border electricity trade, while avoiding or at least mitigating negative impacts to human and ecosystem health. Improved information, mechanisms for coordinated and transparent planning, and transboundary impact assessments will help fill these needs. Public processes to address these planning issues at the utility or state/provincial level through integrated resource planning were abandoned in many places as part of the shift to competitive electricity markets.

However, the extreme volatility that has been seen in electricity markets over the last two years has led some to seek reinvigorated state and utility planning processes. The tools developed for integrated resource planning remain relevant, though much work remains to be done to apply them in the context of restructured markets.

Gathering data and developing information on the cumulative impact of additional generation capacity is especially important in light of the large number of new electricity generation facilities proposed for the near future, and the likely concentration of these in specific regions.

In recent years, advances in pollutant transport modeling, remote sensing, and other monitoring techniques have increased our appreciation of long-range source/receptor relationships. For example, it is now feasible to track any number of emissions from area sources and to estimate their deposition rate and impact on distant communities. However these tools are not yet employed systematically throughout North America in assessment processes, often because affected parties may not even be aware of proposed projects or because reliable emissions databases (upon which such analysis depends) are unavailable. Projects that are not subject to environmental assessments are especially unlikely to employ such tools to consider the potential effects on a regional or transboundary scale.

Fundamental concerns persist about access to information and about effective participation in decision-making processes involving projects with the potential, either individually or cumulatively, to cause long-range and/or cross border impacts.

The environmental impacts of major projects, including those associated with the generation and transmission of electricity, are usually assessed pursuant to state, provincial or federal law. Often this is accomplished through environmental assessments, which consider the scope of the project in question, estimate likely environmental impacts, and evaluate mitigation measures where appropriate. Electricity generation projects not subject to a formal environmental assessment usually undergo some scrutiny in state, provincial, or local permitting processes, but these may take a less disciplined approach to assessing long-range and cumulative impacts and may not examine impacts across all media. Opportunities for the public to be informed about, and to participate in, such decisions vary widely across jurisdictions. In practice, local siting determinations that are not subject to environmental assessments tend to leave communities beyond the immediate locality unaware of the impacts such facilities might have on them.

Transboundary environmental impact assessment (TEIA) continues to gain acceptance worldwide. TEIA employs a cooperative mechanism to extend environmental impact assessment across borders. It allows members of the public and government in areas that could be affected adversely to participate in the environmental impact assessment, according to procedures established in the country where the project originates.

While no formal continent-wide agreement has been reached in North America, certain bilateral institutions have participated in TEIA-type assessment; and a growing number of states and provinces are adopting TEIA procedures. For example, the environmental impacts of BECC/NADBank projects are subject to assessment, as are specific activities within the purview of the International Joint Commission. The province of British Columbia and the neighboring state of Washington appear to be the first state and province to conclude a formal TEIA arrangement. In an important step towards TEIA, the ten Mexican/US border states have declared their intention to notify each other of projects with the potential to affect neighboring jurisdictions adversely, and the state of California recently invited neighboring Baja California residents to participate in its environmental impact assessment for a new generation facility in the border region.

From 'Environmental Challenges and Opportunities of the Evolving North American Electricity Market: Secretariat Report to Council Under Article 13 of the North American Agreement on Environmental Cooperation' June 2002. To view these comments in full, and to access the report and associated working papers, see http://www.cec.org. ET