Building the New U.S.-Canada Environment-Energy Partnership: Challenges and Opportunities

Professor John Kirton
Department of Political Science
Principal Investigator, EnviReform Project
Centre for International Studies
University of Toronto

Introduction: From Pessimism to Possibility

Most analyses of the U.S.-Canada environment-energy relationship at the outset of the Bush-Chretien years are engulfed in an atmosphere of pessimism. They are driven by a conviction that the longstanding happy harmony of the Clinton-Chretien period is about to be abruptly replaced by a new era of conflict, Canadian defeat, and perhaps ultimately American loss as well. The standard liturgy of woe highlights such disturbing new developments as President Bush's promise to open up the environment sanctuary of the Alaska Wildlife reserve for hydrocarbon exploration and production, in order to get enough American oil and gas to energy starved Americans in the lower 48. It continues with President Bush's abrupt repudiation of the carefully crafted recent Kyoto protocol on climate change, in an apparently brutal move reminiscent of a new President Reagan's walking away from the long and painstakingly negotiated United National Convention on the Law of the Sea two decades ago. It culminates with President Bush's apparent inability or unwillingness to stop the American trade law system from imposing new barriers to the duty and quota free import of Canadian softwood lumber, amidst claims that the Canadians are subsidizing their producers in ways that damage the Canadian environment and, claims former President Jimmy Carter, the American environment as well.

The resulting judgment is that while President Bush's America offers Canada some severe ecological challenges, and that any energy opportunities its offers may too come at the expense of the environmental values Canadians cherish. While some have suggested that Canada meet its environmental values by linking them to the energy opportunities that America offers, most conclude that such a strategy of direct linkage will not work. Thus a sense of pessimism rather than partnership prevails.

Is this unhappy conclusion, and the prognosis and diagnosis on which it rests, correct? An answer requires a close look at both the environmental challenges and opportunities, and the energy opportunities and challenges that the US and Canada face, the prospects for linkage, and the co-operative mutual gain as well as the conflictual zero sum losses that can come. Such an examination suggests that in a relationship where issues, countries, and civil societies are ever more closely interrelated, and thus ever more deeply vulnerable to each other, that there are some real prospects of a new partnership for sustainable development, and even more possibilities to craft one through creative policy change.

A. Environmental Challenges

In addition to such understandable measures as reversing some of Clinton's last minute lame duck degrees protecting America's forests, the Bush administration has thus far undertaken only three important actions that present a direct challenge for Canada's environment and U.S.- Canada environmental co-operation - on the Alaska Wildlife Reserve, the Kyoto Protocol and Softwood Lumber. These are serious setbacks for Canadians who have for over a decade placed global environmental protection as their first priority and ultimate unifying national conviction in the foreign policy domain. But for those with long memories of the Canada-US relationship, they appear more modest when set against the new Reagan administration's attitude toward acid rain, the newly negotiated United Nations Law of the Sea treaty with the embedded Canadian Article 234, and the egregious act of protectionism in the shakes and shingles case. And it is worth recalling that it took the Canadian Prime Minister a few years and some skillful educational persuasion before President George Bush senior cast off the advice of John Sununu and agreed, beginning at his hometown Houston G7 Summit in 1990, to conclude a Canada-US acid rain accord, agree with the G7 to create a United Nations Convention on Forests by the year 1992, and to go to Rio in 1992 and there to sign the United Nations Convention on Climate Change. A brief look at the current trilogy of environmental challenges suggests that this time too it is too soon to despair.

1. Opening the Alaska National Wildlife Reserve

The first challenge is one that Canada long knew was coming - opening the Alaska Wildlife Reserve to hydrocarbon drilling and production. This was a clear part of the President's campaign, and one heavily endorsed by Alaska's voters, whose Electoral College contribution was critical to putting Bush in the White House. Deeply regrettable though this move might be to ecologists it bears directly on only one particular Canadian environmental interest - the migration route of the Canadian Porcupine Caribou herd. Especially given the narrow majorities in both houses of Congress, it may be possible to open the reserve to drilling with strict environmental regulations - as the President has promised - and thus in ways that offer some real protections to the herd. Moreover there may still be a chance to offer Canadian oil and gas as a substitute for that in Alaska, and at the same time give the Alaskans the revenue and even the jobs they want and would otherwise get. Stated differently, those Porcupine Caribou may have a price that Canada is willing to pay.

Most immediately, however, the President had begun backing off, if not explicitly repudiating, his ANWR solution, primarily because it offers no short-term solution at all. With no proven reserves there, no in place capacity for extraction or transportation, probably rather less supply there or offshore than Bush first assumed, and with a number of environmental problems surrounding its exploration and exploitation, it is a distant advantage at best. And short of a short-term emergency that would justify an Executive Order, it would require a reluctant Congress to amend legislation protecting the National Wildlife Reserves from drilling.

2. Kyoto

The second challenge comes from the President's decision to abandon the Kyoto Protocol path to meet the Climate Change Convention objectives accepted in 1992. That move is deeply disappointing to many Canadians, including Environment Minister David Anderson, especially in his role as the new President of the UNEP Council; whose property the Kyoto Protocol in large part is. But given the intransigence of some ministers from the small European countries at the Hague conference, the Kyoto pathway was already dead in the water. There is still some chance that the G8 leaders at the Genoa Summit on July 20-22 can find away to restart the process, and do so in a way that renders forest sinks and non-OECD countries a relevant part of the regime. With national leaders rather than single-issue environmental ministers making the decisions, with the world's great forest powers of Russia, Canada and the US at the table, and with the Italian invitees from developing countries offering a chance to bring more forest powers and environmentally willing outsiders to the discussions, there is a chance that a new balance can be struck.

3. Softwood Lumber

The looming threat of softwood lumber protectionism is one that Canadians are properly concerned about, both for the harsh economic costs duties of up to 107% would bring to Canadian producers, workers and communities, and to American consumers and their still inflationary-contained economy as a whole. It is also a threat to the American environment, for despite Jimmy Carter's strategy of reward the rich and trickle down tree replanting will follow, it really represents a policy of "Chainsaw America First." It simultaneously denies to an already integrated North American economy a source of lumber from forests that are growing and where strong government regulation ensures that for every tree cut down one is planted and will grow. Yet here apart from Robert Zoellick's predictable statement that he will fully enforce U.S. trade law, this conflict is still at the very beginning, President Bush has yet to focus on the issue, and special envoys, a la the acid rain days may yet emerge. In addition, the American producers who own Canada's forest companies and the American consumers who use them may yet out lobby southern woodlot owner Jimmy Carter and a few hundred of his protectionist friends.

B. Environmental Opportunities: the Good News

If the environmental challenges are less severe than the headlines would have it, there are also opportunities that have largely been overlooked.

1. A Highly Limited, Short Term Environmental Assault

First the environmental setbacks all have a common element. They are tightly linked to the limited purpose of ensuring America's short-term energy security - a major preoccupation of the early Bush Presidency. If it is carbon emission caps on stationary source power plants, the policy is changed. If it is more distantly related issues - automotive emissions standards - the former regime remains intact.

2. Bush's Environmental Advances

Second, President Bush can already claim some environmental advances. One is the US agreement to rewrite the terms of NAFTA's Chapter 11 investment provisions, in response to criticism that they were impeding the freedom of government to introduce new environmental regulations. Another is the creation of a cabinet level position for the EPA administrator, and the appointment to it of someone with some greater weight in the U.S. political system than her predecessor possessed. She has certainly sent authentic environmentalist signals at the G8 Environment Ministers Meeting at Trieste and at the NAFTA Environmental Commission meeting in Montreal. In both cases this is a notable contrast with the message of EPA administrators in the initial Reagan years.

3. The Regional NAFTA Environmental Institution - the CEC - Remains Intact

Third, the regional environmental institution created by NAFTA - that Commission for Environmental Co-operation in Montreal - remains intact, with a work program that is proceeding well. As those close to Bush from his time in Texas have been integrally involved in the work of the CEC, there are good grounds to believe that it will have the confidence of the president himself, as it does his good friend Mexican President Vincente Fox.

4. The Promising Record of that NAFTA Trade-Environment Regime

Fourth, the evidence suggests that the NAFTA trade-environment regime of which that CEC is an integral part has worked very well in its first five years in operation. The record shows that NAFTA works, for traders and for environmentalists, and for the US, Canada, Mexico and the common North American community as well.

5. The Repertoire of Environmentally Enhancing Ways to Advance America's Energy Security

Fifth, there exists an extensive repertoire of long accepted measures to enhance America's energy security. A survey of old G7 communiques, matched with recent innovations in windpower, dual cycle combustion engines, and fuel cells suggests that such sustainable development solutions are close at hands, and ready with the right incentives to be rapidly introduced.

C. Energy Opportunities

Turning to the field of energy, it is indeed appropriate to begin with the opportunities rather than the challenges. For George Bush badly wants deeper energy co-operation with Canada, genuinely needs it to ensure American energy security, has few inviting alternatives elsewhere in the hemisphere world, and is organized to get it. And Canada itself can co-operate, is willing to co-operate, has good reasons to co-operate, is organized to co-operate, and is ready to discuss a deal at a rare NAFTA summit taking place at the end of the Quebec City Summit of the Americas on April 20-22.

First, President Bush wants Canada. A commitment to deeper and broader forms of international energy co-operation to enhance Americans energy security was a core part of the President's overall foreign policy and even domestic policy program, both during and after the election campaign. Here he envisaged an expansive, multi-layered set of initiatives, most narrowly within NAFTA, more broadly within the western hemisphere, and most broadly within the G8, where he called for the birth of a new G8 institution where the energy ministers of the members could meet. Canada is the one common element each of these three forums. Thus it was hardly surprising to hear the president himself state, at a White House news conference on March 29, "it is important for us to explore and encourage exploration and work with the Canadians to get pipelines coming out of the Northwest Territories to the United States."

Second, President Bush genuinely needs Canada to ensure American energy security. The expansive extent and centrality of this call was driven not primarily by the hope of reaping the Electoral College votes or electricity starved Los Angelenos or a post-campaign partisan desire to prove president Clinton's profligacy in energy, nor the special pleas of campaign contributors from the US energy industry. It was and is driven above all by the objective energy security problems faced, and still faced, by Americans, in politically and economically consequential California, but elsewhere in the United States as well. Indeed it reflects a prudent and prescient calculation that unless America acts now, through precautionary and preventative co-operative action with its closest democratic partners, it could confront the prospect of a third, or by a more focused national security calculus, a seventh oil shock.

For close to a year now, Americans of both political parties have known that they face a global energy challenge that requires careful management. Former Treasury Secretary Larry Summers, on behalf of President Clinton, certainly conducted his G7, G20, and IMF diplomacy in ways that managed the challenge and staved off the threat. Moreover, the days the lights went off in California is not just a dim and distant memory but a continuing fact of life, both in California and in ever more of the U.S.

Most recently Pacific Gas and Electric, one of California's two largest utilities recently filed for bankruptcy protection. Aluminum smelter in the Pacific Northwest will not be firing up in October as initially scheduled but two years latest at the earliest, due to electricity shortages in the US. The region accounts for about 5% of global aluminum supply. While aluminum demand in 2001 in expected to be down 5% in North American but flat in the integrated global market for this commodity, with already tight inventories, prices for aluminum will rise. As of March 31, U.S gas supplies were 5% below year ago levels, awakening memories of last years record pump prices to as high as US$2,75 a gallon in cities such as Chicago. With US Gulf Coast and Northeast refineries and one in the Caribbean experiencing production problems as the Memorial Day start of the peak driving season looms, concern is compounding. If OPEC should; chose to produce above its agreed upon quota ceiling during the summer by about a million barrels a day, shortages could well arise. With Saddam Hussein still in a state of confrontation with the U.S., and Israeli-Palestinian violence still raging, there may be room for a politically inspired effort a new oil shock to arise.

Third, President Bush has nowhere else to go. He has few inviting alternatives for proceeding without Canada as a core part of the regime. When he followed Prime Minister's Chretien's example and paid his first dedicated discretionary bilateral visit as leader to Mexico, he learned that, while President Vincente Fox was indeed willing to proceed with deeper North American integration, in energy as elsewhere, there remained great reluctance and resistance within Mexico to changing the constitution in order to permit a program of the required proportions in the energy field to unfold. Moreover tankering more petroleum from Venezuela or other oil laden parts of the hemisphere is expensive, environmentally threatening, raises questions about political stability, and would require those relatively impoverished countries to depart from their adherence to an OPEC-guided regime in favour of a preferential all Americas one. More broadly, there exist abundant exportable oil and gas reserves in America's G8 partner Russia. But the overall U.S.-Russian relationship has cooled of late and President Putin, attending the last European Council Summit, signaled a desire to do his own regional North American-like deal with neighbouring continental Europe alone. In short, George Bush, as he now recognizes, must come to Canada first.

Fourth. President Bush is well organized to get it. Despite a slow start putting in place a new administration an energy task force headed by Vice-President Dick Cheney is now hard at work on a tight deadline. Cheney has already provided a proven point of entry for Chretien and Canada This Vice Presidential point of entry is reminiscent of the effective system operated with Vice President Mondale, during a presidency in which the President himself did not once visit Canada during his four years un office.

Fifthly, turning northward, Canada can help. Canada has already become the number one outside supplier of energy to the US. Indeed it is America's biggest most reliable, most secure supplier by far. It sells the US more than $30 billion a year worth of oil, gas and electricity. As Prime Minister Chretien, in his recent visit to Washington, informed an otherwise unaware President Bush, Canada is, in effect, the Saudi Arabia next door. Alberta's Tar Sands contain 300 billion barrels of oil, compared with 263 billion barrels in distant, insecure, if inexpensive Saudi Arabia. Canada exports 1.7 million barrels of oil a day to the U.S., compared with 1.6 million from Saudi Arabia. The U.S. consumes about 7 billion barrels of oil a year, with other imports coming from Venezuela, Mexico, Nigeria, Britain and Algeria.

Six, Canada is willing to co-operate. Prime Minister Chretien clearly signaled Canada's desire to do so last week in his address to the petroleum industry in Calgary last week.

Sixth, Canada has many good reasons to co-operate. These begin with the national unity imperative, both in an otherwise alienated west where the governing Liberals have few parliamentary seat and a Quebec now led by an avowedly separatist premier and whose economy is sustained by electricity exports to the USA. They continue with the stake Canadian banks have in loans to California's utilities and its investors in many U.DS. companies, the need to maintain a current account surplus and the exchange value of the Canadian dollars, and the need to avert an American economic slowdown and inflationary spike whose effects would be immediately transmitted up north.

Seventh, Canada is now well organized to co-operate. A new cabinet committee tasked to explore energy co-operation with the US has been formed and has already begun to meet.

Seventh the NAFTA Summit at the end of the Quebec City Summit of the Americas offers a convenient and properly configured venue where a deal can quickly be done. Although not yet officially announced, that encounter represents a rare, perhaps even the first real, NAFTA Summit, taking place among three leaders whose orientations to and experience in the private sectors and energy field are highly compatible indeed.

D. Canada's Energy Challenge

Canada's first energy challenge is to understand what precisely the President is after when he arrives in Quebec City, and thus what the most efficient way is to arrive at a mutually beneficial deal.

As it has evolved, the President wants first, an inventory of what Canada's has in the way of energy supplies, and second, a move to putting in place the physical, policy and regulatory systems so that America can tap in quickly to these supplies in the event of need. It wants to know the extent of Canada's supplies in the tar sands and Arctic, and to connect Arctic oil and gas by pipeline to the U.S. grid. Driven concern about the future security of supply from unstable Venezuela and insecure Saudi Arabia, and having discovered that there are far fewer all-American supplies available in Alaska and its Arctic than first thought, its has taken a second look at Canada, and discovered a solution in Canada's tar sands, Arctic supplies and Hibernia. In the electricity field, where the U.S. interstate transmission generation infrastructure is not strong, in the wake of a FERC deregulations that provided few incentives to build such capacity, there is a strong need to invest. The envisaged common North American Energy Strategy would thus see Canada commit to create the new physical infrastructure of pipeline to get Arctic oil and gas down south, while the U.S., essentially in parallel, simultaneously committed to undertaken investments of similar visual magnitude in its electricity grid.

In U. S. calculation, this bilateral 'let's build together" program has a clear trilateral dimension and indeed, overarching objective. For its is ultimately Mexico's energy supplies and thus continuing growth, rather than the United States, that President Bush is concerned about. With Mexican demand rapidly growing, and little investment eager to rush in to build an infrastructure that would remain firmly in the hands of the constitutionally protected state-owned monopolies of Pemex and CFE, it is clear that the electricity starved California of today will become the Mexico of tomorrow and the NAFTA growth miracle there would be destroyed. By constructing a new U.S. Canada grid now, and bringing Mexico into it as soon as possible, NAFTA's two northern neighbours will keep Mexico's growth on track. In understandable deference to Mexican sensitivities, this trilateral strategy will not be cast as a gringo bailout of poor Mexico but as a program to build a new all North American market and infrastructure that matches the emerging real economy that it will fuel.

Having defined the vision and the target, a President who manages by objectives is quite prepared to leave the task of defining the details of delivery to Jean Chretien and his fellow Canadians. Having set aside any tanker from Alaska options due to the expense and many Exxon Valdez-like environmental downsides, it is largely up to the Canadians alone to decide what route a pipeline across Canada would take. The US has no strong position on how it should be done.

E. Linkage, Leverage and Partnership: Searching for an expansive Sustainable Development Solution

In the face of this familiar if updated vision of a trilateral North American Accord, what should Canada's response be. Clearly the wrong response would be to leap to the conclusion that a desperate America needs Canada's energy so badly that it offers Canada a chance to ponder or play the game of linkage and leverage that inspired imaginations in the era of energy crises past. In the first place, Canada would now be co-operating with and for Mexico as well as the big rich USA alone. Second, ordinary Canadians has far more of a stake in the non-inflationary flourishing of the US and Mexican economies than they did in the 1970's or 1982. Third, there are severe limits to any linkage strategy premised on a "I'll do this only if you do that" approach, especially as neither the Canadian or U.S. governments own very much of the energy supplies, transmission networks or softwood lumber the pundits would wants them to be linking and trading in creative ways. Indeed the tone of Prime Minister Chretien's remarks in Calgary, which seemed to reflect an NEP-like premise that Ottawa actually owned the assets and would thus deliver the new system sounded odd in Washington, which assumes that the private sector will do the envisaged work in Canada as well as the US. Fourth, there are good grounds for giving this brand new President, who has yet to pronounce on softwood lumber and other such issues - a unilateral expression of assistance with one of his central priorities, rather than to doubt the benefits such a gesture could bring. Finally, an environmentally conscious, Kyoto concerned Canada is unlikely to rush to exploit and use these new expenses hydrocarbon sources all be itself at home, should it be tempted to pursue a policy of "just say no.".

There are, however, two inevitable linkages, that exist and that Ottawa might put to some good use in Presidentially-directed talking points. The first is the overall mood of the Canadian public in regard to the United States and the Canada-US relationship. It is more difficult for democratically elected politicians in Canada as elsewhere to move ahead with bold new co-operative projects if their electors doubt the good will or good faith of their partners, based on simultaneous experience in other cognate domains. And here softwood lumber, as another natural resource exported commodity with important environmental dimensions, produced for a market to which Canadians were given guaranteed assured access over a decade ago, is close enough to raise such questions in the public mind.

But the more important linkage may lie not with the average Canadian, now well schooled in the rituals of the Canada-US free trade game, but with other prospective partners in the hemisphere for whom entering into a full free trade agreement with the much larger and much different USA is still a bold, difficult, historic, and anxiety creating threat. The Free Trade Agreement of the Americas, and the full free trade it will bring to all 34 democratic countries in the hemisphere by the year 2005, is scheduled to consume only 15 to 30 minutes of the leaders time in their Summit of the Americas discussion at Quebec City. But President Bush is quite committed to securing this FTAA and will want credibly to personally encourage his colleagues to proceed promptly down this path. Can he credibly say "join me in this new project for full free trade in the Americas, and reap the reward of guaranteed assured access to the US market", at the same time as that all know Americas' largest trading partners, joined with the United States the world's largest two way trading relationship, and one governed for over a decade by a full free trade agreement, even as one of Canada's largest exports and a natural resource commodity they can readily relate to, faces the prospect of being hit buy duties of up to 107%. Furthermore, can he credibly say, "I George, unlike my Seattle inspired predecessor Bill will never use trade sanctions to enforce environmental standards", when all observe that one politically consequential motive for this latest prospective outburst of US protectionism is the Carter-like claim that closing Canada's free access to the US market will protect the North American ecology from the predatory practices of a sovereign country with a different regulatory tradition.

Having deal deftly if defensively with the potentially damaging distraction of softwood lumber, can one more creatively construct an expansive program of cooperation grounded in the premises of sustainable development? Three modest concrete innovations could constitute a good start.

1. Create an Ongoing NAFTA Summit

The first is to create an ongoing NAFTA summit. While neither Prime Minister nor President lack opportunities to practice such plurilateral institutuionalized summitry, there is a strong functional claim that the depth and breadth of North American co-operation and consequent friction is now ripe for regular leader-level comprehensive oversight. For Canada, such summitry is a good way of getting a busy President Bush to Canada and to encounters with Prime Minister Chretien, as the Summit of the Americas in April, the G8 in July and APEC in the autumn indicate. If Ronald Reagan could be lured into Shamrock summitry, there is some prospect that President Bush could be enticed into regular encounters with his friend Vincente Fox with Prime Minister Chretein in attendance as well. Overseeing the successful realization of the new North American Energy Strategy would be a core agenda item and rationale.

2. Create a NAFTA Energy Institution linked to the CEC

A second sound move would be to create a trilateral ministerial level energy institution, to assist the leaders in this task. While few bilateral Canada-US ministerial level institutions have had a long or productive live, the trilateral NAFTA generations ones - for labour and the environment and trade - have proven their worth. With the emerging North American Energy Strategy, the intervulnerabilities in this sector will become as intense and as politically consequential as those in the environmental field. Moreover, given the dense functional interconnection between environment and energy matters, the work of these two NAFTA institutions should be closely linked. There is even merit, now that the three countries have agree to clarify the NAFTA text in regard to Chapter Eleven, to add a clarifications which provides the CEC with a responsible role in regard to the central environmental dimensions the new North American Energy Strategy will have.

3. Create a NAFTA Climate Change Bubble, with a Development Fund Attached

Third, such an institutional and legal linkage could inspire more creative common solutions to the larger environment-energy challenges the three North American countries face. A leading candidate here would be for the three North American amigos to devise and offer internationally a "North American bubble within which their climate change commitments would be delivered. Those in the European Union, who have long enjoyed the benefits of their all-European bubble should immediately understand the efficiency and equity in such a move. And to deal with Jimmy Carter's deep environmental commitment, it would give full value within it to forests as sinks, in ways that the best scientific minds in the three countries would define.

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