Reforming USMC is key for combating climate change by investments, new policies, and implementing a carbon border adjustment

Addressing climate change is a priority for the U.S. and Canadian governments. At President Biden’s Leaders Summit on Climate in April 2021, the U.S. increased its target for reducing greenhouse gas emissions from 50 to 52 percent by 2030 compared to 2005 levels. Canada similarly raised its level of ambition to reduce emissions from 40 to 45 percent by 2030 compared to 2005 levels, up from its previous pledge under the Paris Agreement of a 30 percent reduction. Under the same agreement, Mexico has committed to a 22 percent reduction of greenhouse gas (GHG) emissions and 51 percent of black carbon, as well as to generate 35 percent of power through clean energy sources by 2024 and 43 percent by 2030. President Biden and President Obrador have also agreed to explore bilateral cooperation on climate. Addressing climate change presents a range of opportunities for North American cooperation that can also strengthen competitiveness and build resilient supply chains. One way is to use USMCA to drive innovation and investment in clean energy needed to meet climate change targets. There is a range of climate action coming out of the Leaders Summit that will spur clean technology investments including carbon capture and energy storage.50 In all these areas, there should be a regional approach—that builds on USMCA—to spur investments and develop new supply chains. Reforms on enhancing competitiveness and strengthening the investment environment will be important. Actions to increase North American competitiveness will also support supply chains in areas important to climate change issues such as EV battery productions and Photovoltaic or PV solar systems.51 Another area to address is policies that undercut clean energy, particularly ones that lead to carbon intensive energy sources. For example, the Mexican government’s Electricity Industry Law eliminates the energy regulator Comision Federal de Electricidad’s (CFE) preferences for clean energy or other incentives that would grow Mexico’s clean energy sector. Instead, the existing law prioritizes fossil fuels. Not only is this inconsistent with Mexico’s USMCA commitments, but it is at odds with Mexico’s Paris Agreement pledge to build a low carbon economy. Such actions disincentivize investments in Mexico’s clean energy sector and jeopardize Mexico’s role as a supplier of clean technologies. There is, therefore, an opportunity for the U.S. and Canada to challenge the consistency of Mexico’s Energy Reforms with its USMCA commitments. Another role for USMCA is developing a coordinated approach to dealing with carbon border adjustment mechanisms (CBAM). The EU CBAM extends its domestic carbon price to imports at the border. The effects of the EU CBAM will need to be assessed through a North American lens such as when the mechanisms apply to carbon intensive products—particularly iron, steel, and aluminum—produced through North American value chains. At the same time, Canada is considering whether it should develop a CBAM to support its more ambitious climate targets.52 Trade Representative Tai has signaled that USTR is also looking at this issue53 and proposed a bill for climate border adjustment, signaling a growing interest in Congress to act on this important issue.54 North America needs to develop a unified approach to CBAM to prevent it from becoming a trade barrier. This requires a coordinated approach to developing a regional mechanism as well as reducing the carbon intensity of exports. While USMCA has been criticized for failing to explicitly include climate change commitments, there are a number of provisions that support climate action.55 For instance, the USMCA’s chapter on the environment includes expanding access to climate finance and clean technology innovation and commitments to sustainable forestry management, which reduces deforestation and builds forests as carbon sinks.56 The USMCA strengthens restrictions on ozone-depleting substances under the Montreal Protocol that are also potent greenhouse gases. 57 USMCA also includes commitments to facilitate trade and investment in environmental goods and services by working through the USMCA Environment Committee as well as through international fora such as the WTO. The U.S., Mexico, and Canada should use USMCA to develop an ambitious agenda around trade in clean technology goods and services. Progress here can stimulate production of clean technologies in North America. This will be particularly the case if there is agreement to ratchet up and harmonize energy efficiency standards in North America where the USMCA Annex 12-D on energy performance standards requires cooperation.58 A successful USMCA outcome on reducing barriers to environmental goods and services could become a basis for renewing WTO negotiations on environmental goods.59