On June 29, 2016, President Barack Obama, President Enrique Peña Nieto and Prime Minister Justin Trudeau met for the North American Leaders’ Summit (NALS) in Ottawa, Canada, and committed to improving the continent’s competitiveness and cooperation in several fields, including climate and energy policy. The announced North American Climate, Energy, and Environment Partnership Action Plan aims, among other objectives, to increase zero-carbon power generation to 50 percent by 2025 (including renewables, large hydro, nuclear, and CCS), align energy efficiency standards, reduce methane emissions from the oil and gas sector to between 40 and 45 percent below 2012 levels by 2025, drive down black carbon emissions, and adopt better practices to monitor emissions.
We focus here on three aspects of the Action Plan (for a more comprehensive description, see the Leaders’ Statement here and the main takeaways from the summit here) that are particularly relevant from a climate diplomacy perspective -- aspects where international cooperation between countries increases the scope for realising synergies and benefits beyond what would be possible with only parallel unilateral action. These are (1) the signaling of strengthened North American cooperation and climate leadership, (2) the realization of synergies in the development and deployment of low-carbon technologies, particularly in electricity, and (3) the missed opportunity of moving towards an integrated regional carbon pricing scheme.
1. Signaling strengthened North American cooperation and climate leadership
In the wake of the Paris Agreement, this Partnership provides a signal that the North American region is moving to reclaim leadership on climate change. In addition to recalling the countries’ commitments under the Paris Agreement, the Action Plan signals the political will to tackle climate change and builds on trilateral cooperation to strengthen North American global leadership. Given that until recently the U.S.-Canadian plans to build the Keystone XL pipeline were the most salient aspect of North American energy relations, it provides an important symbolic shift. At a time where European Climate Action is affected by the difficulties of committing to ambitious climate action in a very heterogenous union -- a situation that could be worsened by the exit of the UK, a strong supporter of ambitious climate action at EU level -- the prospect of stronger regional cooperation in climate mitigation in North America also serves as a hopeful counterpoint. Nonetheless, the Action Plan should not be limited to highlighting North America’s step forward in low-carbon energy transition, but rather bring further commitments with clear added value to what the countries already pledged in international initiatives. The “Three Amigos” Summit has therefore put emphasis on how to take advantage of common opportunities to reinforce the outcomes of their actions.
2. Realizing synergies in the development and deployment of low-carbon technologies
After the summit, it was the regional target to increase the share of clean power generation in North America to 50% by 2025 that received the most attention. However, there is potential for confusion here, as it represents a combined target for the three countries. Canada already gets 80% of its electricity from clean sources (hydro included) while the U.S. and Mexico rely on clean energy for a third and a quarter of their total electricity production respectively. As such, regional clean power production is currently estimated to stand at around 37%, and considering the size of the energy market of each country, the required effort is substantial, in particular for the U.S. New electricity infrastructure implies building plants but also integrating them into the grid, which is likely to require a longer period of time. Successfully meeting this target therefore strongly depends on achieving sufficient deployment of clean energy technology and developing effective cooperation mechanisms within the next ten years.
The key to efficiently achieving this goal is the integration of the North American transmission grid. Except for hydro electricity, most of the renewables currently available -- particularly, solar PV and wind -- are characterized by intermittent generation capacity, which presents a major challenge for their increased deployment. Some solutions to this problem can be pursued by local and national policies, such as the plans to build a giant battery in Los Angeles or the reliance on less intermittent renewables such as concentrated solar power. A complementary solution would be to extend power grids to better balance loads and match renewable supply and demand, or to use pumped hydro storage as a grid-scale storage technology. Specifically, through the Action Plan the leaders committed “to support the development of cross-border transmission projects... and to develop the North American Renewable Integration Study”.
Cross-border transmission lines already exist between Canada and the U.S., but the planned expansion of the transmission network, through projects such as the Great Northern Transmission Line between the U.S. and Canada and the Nogales Interconnection between Mexico and the U.S., is expected to increase the reliability and flexibility of the grid. Intensified hydropower imports in the U.S. would boost its clean electricity production as it would facilitate the integration of intermittent renewable sources to the grid. Similarly, Mexico and the U.S. plan to deepen their cross-border electricity cooperation, following the U.S.-Canadian model, to establish a more integrated and resilient North American grid. Increasing the capacity of energy exchanges between low-cost renewable power generation in Texas and northern Mexico could decrease the variability of renewable supply and thereby increase its value and reduce the need for non-renewable backup capacity. The U.S. Department of Energy had already highlighted in its 2015 Quadrennial Energy Review the benefits of such regional energy integration, also mentioning economies of scale and lower energy costs for consumers. Through these regional synergies and a trilateral vision, North American countries have the potential to cost-efficiently make their energy markets cleaner, while improving their energy security and competitiveness.
Beyond deployment of existing technology, there are also significant benefits to cooperation for the development of next-generation technologies. By promoting cross-border research projects, collaborations between clean energy technology companies and the sharing of best practices, the three countries are seeking to reduce the costs of their energy policies while improving their efficiency and environmental standards. As part of the ambitiousMission Innovationinitiative for instance, they plan to take advantage of their participation to develop joint energy R&D programmes in emerging innovative technologies, something that should become more concrete in the fall when Mission Innovation’s countries will explore joint R&D opportunities.
3. A common carbon price in the region?
Although the Action Plan has been warmly welcomed by numerous organizations, it also fell short of other expectations. Specifically, the Plan did not include the long-awaited declaration on the introduction of a North American carbon pricing scheme (either through a tax, a market or a hybrid approach). Such alignment of carbon prices could decrease the average cost of reducing emissions as it grants access to a broader and potentially cheaper range of emissions reductions in the region, thus leaving scope for increased ambition in the future. A study by the Pembina Institute and IISD finds that the allowance costs of a combined U.S.-Canada carbon market would halve the allowance prices compared to the expected U.S. price without integrated or linked markets (find the complete study here). Adding Mexico into that equation could reduce costs even further.
A regional carbon pricing schemealso makes sense in the context of the North American Free Trade Agreement (NAFTA), where goods and services are traded freely and where a common carbon price would ease the competitiveness concerns that arise from different policies leading to different prices. This measure was backed by a coalition of six think tanks across the continent (including the World Resources Institute, the Center for American Progress, CEMDA and Canada 2020), which identified in their Proposal for a North American Climate Strategy a set of initiatives that could be effective in addressing climate change.
The idea of a common carbon price was seen as one way to align policy instruments in the region (Center for American Progress, 2016), and the NALS was seen as the window of opportunity for that political commitment. For the first time the three North American countries have some approach to carbon pricing. The United States now uses the social cost of carbon (SC-CO2) of around $36 (average for the year 2015 with a discount rate of 3%) as a tool for the Environmental Protection Agency (EPA) and other U.S. federal agencies to estimate the climate benefits of their rulemakings (EPA, 2015). In addition, a number of U.S. states, including California and a group of northeast and mid-Atlantic states, have implemented cap and trade programs. Canadian provinces have implemented both carbon taxes (British Columbia) and cap and trade programs (Quebec, which is linked to the California cap and trade system). Finally, Mexico has introduced a nationwide carbon tax and is considering the introduction of a cap and trade scheme.
Nevertheless, some of the pledges may still provide political momentum for such a development. For example, the commitment to “explore options to ensure environmental integrity and transparency, apply robust accounting”, can strengthen cooperation in the different emissions monitoring, reporting and verification (MRV) systems in the region. This is key for the future linking of carbon markets, since the MRV system is the backbone of a carbon market. Early cooperation in this area under the Action Plan can build around the idea of linking (carbon markets) by degrees (Burtraw et al, 2013), starting with the basic elements and gradually progressing to a fully integrated market.
Building on the political momentum for climate action provided by the Paris Agreement, this Action Plan sets an ambitious course for cooperation in North American energy, climate and environment policy. The concrete forms implementation takes will determine the success of this initiative and will also influence how areas such as carbon pricing are to be addressed. In the meantime the three North American countries have clearly demonstrated their ambition to address climate change and sent a positive message to the world on the role of international cooperation in addressing climate change.