Environment This paper describes the impact NAFTA has had on Mexico's environmental situation, and highlights the institutions, both Mexican, binational and multinational, which are working to improve Mexico's environment. In addition, this paper explains the extraordinary opportunity for U.S. environmental technology firms to export solutions to Mexico. (May 1998)

INTRODUCTION AND OVERVIEW
The North American Free Trade Agreement (NAFTA) came into effect on January 1, 1994. This agreement locks in Mexico's dramatic trade liberalization begun in the mid- 1980s, and establishes a set of rules for trade between the United States, Mexico and Canada. Under these rules, Mexico's integration into the North American market continues. This paper describes the impact NAFTA has had on Mexico's environmental situation, and highlights the institutions, both Mexican, binational and multinational, which are working to improve Mexico's environment. In addition, this paper explains the extraordinary opportunity for U.S. environmental technology firms to export solutions to Mexico.

Mexico faces severe environmental degradation. Years of rapid population growth and industrialization, without adequate environmental investment and enforcement, has left a legacy of polluted waters and large quantities of improperly stored waste. Only in the last decade has Mexico had environmental laws which were adequate and only since 1993 have these laws been supported by appropriate implementing regulations, standards and institutional infrastructure to make them effective.

One concern raised by opponents of NAFTA was that increased trade would lead to further environmental degradation in Mexico, as companies would move their operations to Mexico to avoid strict environmental enforcement in the United States. Since NAFTA has been in place, Mexico has begun a serious effort to enforce its environmental laws for new companies, thereby diminishing any incentive for firms to relocate to Mexico to avoid environmental enforcement. In addition, the Mexican government has begun a process to enforce more effectively its environmental laws by imposing sanctions against the more visible polluters and, more importantly, has developed a program of voluntary environmental audits. These audits permit companies to assess their environmental compliance and develop a program to clean up their operations.

THE ZEDILLO ADMINISTRATION PLAN

At the outset of his administration in 1994, President Zedillo reorganized Mexico's disparate environmental agencies into a single, cabinet-level secretariat and released a six year plan to achieve sustainable use of natural resources to help achieve a rising standard of living for the average citizen. This plan calls for decentralization of environmental authority, increased social participation in decision making and, most importantly, a greater use of economic incentives.

The Secretariat of the Environment, Natural Resources, and Fisheries (SEMARNAP) brings together under one roof the agencies responsible for implementing the county's sustainable development strategy.

The National Ecology Institute (INE) is responsible for developing and reviewing environmental policies and regulations and environmental impact statements, including those involving hazardous waste.

The National Water Commission (CNA) develops water quality standards, regulates and charges for discharges to water bodies under federal jurisdiction (all rivers, coastal waters and most lakes)

The Office of the Attorney General for Environmental Protection (PROFEPA) is Mexico's primary enforcement agency and runs Mexico's environmental audit program.

U.S. - MEXICO BORDER COOPERATIVE ARRANGEMENTS AND MULINATIONAL INSTITUTIONS

The U.S. Environmental Protection Agency (EPA) formally began working with its counterparts in the Mexican government under the La Paz agreement in 1983 to protect, improve and conserve the environment of the border region. In 1992 the environmental authorities of the U.S. and Mexico released the Integrated Environmental Plan for the Mexican-U.S. Border Area (IBEP). The next phase of binational planning was launched with the Border XXI Program that builds on the efforts of the IBEP and increases the scope to include environmental health and natural resources issues. The final version of this five-year plan to clean up the border was published in October 1996. This Border XXI program is an innovative binational effort which brings together the diverse U.S. and Mexican federal entities responsible for the border environment to work cooperatively toward sustainable development through protection of human health and the environment and proper management of natural resources in both countries.

There are nine binational working groups developing cooperative activities. These are: Air, Water, Hazardous Waste, Pollution Prevention, Emergency Response, Environmental Health, Natural Resources, Environmental Information, and Cooperative Enforcement and Compliance Work Groups.

The North American Agreement on Environmental Cooperation (NAAEC) was approved as a side agreement to NAFTA. The Commission for Environmental Cooperation (CEC) was established under this agreement to address regional environmental concerns, help prevent potential trade and environmental conflicts, and to promote the effective enforcement of environmental law. The CEC is made up of a governing body 3/4 the Council 3/4 composed of one cabinet level representative from each of the three countries; a Secretariat, located in Montreal, which implements the annual work program; and a Joint Public Advisory Committee which is composed of fifteen citizens, five from each of the three countries.

Established in 1993 under an agreement between the U.S. and Mexico, were two institutions to help deal with the extensive environmental problems on the U.S.-Mexico border. The Border Environment Cooperation Commission (BECC) is an autonomous, binational organization which supports local communities and other project sponsors in developing and implementing environmental infrastructure projects related to the treatment of water and wastewater, and the management of municipal solid waste. As such, the BECC identifies, assists and certifies projects for financing consideration from the North American Development Bank (NADBank) and other sources. Recognizing the limited ability of many communities to develop quality projects, EPA has granted $10 million to the BECC for technical assistance for water-related projects in the U.S. and Mexico.

The NADBank is a sister institution to the BECC and was established to provide loans and loan guarantees to projects certified by the BECC. The NADBank is capitalized by funds from both the U.S. and Mexican governments and by charter must make its loans at market rates. Developing institutional capacity in the target communities and breaking down the reluctance of communities to transition to user-fee financing of projects, are some of the greatest challenges to the success of these border environmental efforts. To date, the NADBank has been able to fund only six projects on the border although NADBank is delivering institutional assistance to several other projects from the 21 that BECC has certified. In total, NADBank is providing grant-funded technical assistance to almost 30 communities for eventual certification and financing. To improve affordability and financial viability of projects, EPA has established a cooperative agreement with the NADBank for the administration of $170 million in EPA construction grant funds that can be used to structure loans in the U.S. or Mexico to help meet NADBank charter requirements. In January 1998, NADBank made recommendations to EPA under this agreement for $37 million in construction grants to projects in the Mexican cities of Tijuana, Juarez and Naco, and the U.S. city of El Paso. The Juarez project, for example, will consist of two wastewater treatment plants that will increase sewage treatment in the city from 0 percent to over 90 percent. The project will be financed with EPA and Mexican grants, user fees, NADBank loans and an equity stake by the private firm that designed and will operate the plant..

In addition to the BECC and the NADBank, there is another key bilateral environmental management agency, the long-standing International Water Boundary Commission (IBWC). The IBWC focuses on water rights and infrastructure serving the border region. The commission plans, builds and operates several wastewater treatment plants on both sides of the border using grant money from the United States and Mexico. The IBWC has both a U.S. Section and a Mexican Section, each with its own presidentially appointed Commissioner.

ENVIRONMENTAL LAWS AND ENFORCEMENT

Mexico's principal environmental law is the General Law of Ecological Balance and Environmental Protection, which has been in effect since 1988. The law provides a general framework within which all state laws and federal regulations must comply, including regulations governing air pollution, hazardous waste and materials transport, environmental impact assessment and motor vehicle emissions. These regulations are implemented via media-specific, quantitative standards called Mexican Official Standards (NOMs). These standards are largely based on U.S. standards.

There was a major revision to the General Law in December 1996, which provided for decentralization of enforcement, increased sanctions, more citizen participation, and information dissemination on government plans and programs.

The second most important federal environmental law is the Law of National Waters, passed in 1992. This law requires the Federal Government to control water pollution by setting and enforcing water quality standards, authorizing discharges and other measures. It also establishes guidelines to involve the private sector in solving many of these problems by the use of concessions.

In addition to Federal laws, there are many state and local environmental laws. The most important is the Federal District Environmental Law passed in July 1996 which covers about half of the population of Mexico City and about 16,000 industrial establishments.

AVAILABILITY OF MEXICAN ENVIRONMENTAL LAWS TO U.S. BUSINESS

The opportunity exists for U.S. environmental technology firms to provide considerable assistance to Mexico as it works to overcome a legacy of poor enforcement of environmental laws and a poor water treatment infrastructure. However, the lack of an up-to-date source in English of both the federal, state and local laws, and the regulations (NOMs) associated with them, is a significant barrier to fully taking advantage of this opportunity. The information today is available only in different locations, often in Spanish, and usually at a high cost. This is a major constraint on small and medium sized businesses in the United States wishing to do business in Mexico.

This problem is in the process of being remedied by a project called ACCESS-MEXICO, being carried out by the U.S.-Mexico Chamber of Commerce under a grant from the U.S. Department of Commerce. Working with the cooperation of SEMARNAP, which is providing up to date certified environmental laws and regulations, the Chamber is developing an internet based system which will be an affordable source of this important information for firms planning on doing business in Mexico. The technical system design is being developed under a sub-contract with New Mexico State University. A pilot version of this system will be demonstrated by September 1998 with the full system up and running in the year 2000.

ENFORCEMENT OF MEXICAN ENVIRONMENTAL LAWS

Environmental enforcement in Mexico has increased significantly in recent years but was slowed down during the period of the peso crisis in 1995. Enforcement has historically been concentrated on priority zones where most of the Federal Government's limited enforcement budget is spent. These areas include the northern border with the United States, where 24 percent of PROFEPA's inspections occurred in 1995, and metropolitan Mexico City, which had 31 percent. PROFEPA is the agency charged with inspections and enforcement dealing with air and hazardous waste. For enforcement of water regulations, CNA deals with direct discharges into water, while it is up to municipalities to enforce discharges into treatment facilities and the requirements on firms to carry out pretreatment of industrial waste.

Cooperation between the United States and Mexico in enforcement takes place in the Border XXI workgroup on Enforcement and Compliance. The plan of this workgroup involves cooperative efforts to target inspection and investigations against the most likely environmental violators, exchanging information on the results of enforcement activities, training and technical consultations, and cooperation investigating specific enforcement cases. CNA has recently jointed PROFEPA as an active participant in this workgroup.

In 1996, PROFEPA conducted 3,323 inspections and compliance verification visits in the border area, ordering 18 total facility closures, 59 partial closures, and fining 2,622 facilities. From 1992 through 1996 PROFEPA conducted 12,347 inspections and compliance verification visits in the border area, including at least one visit to every facility. PROFEPA reports a 72 percent reduction in serious violation in the maquiladora industry from 1993 to 1996. The percentage of maquiladora facilities in complete compliance, that is, without even minor violations, has climbed 43 percent during this period.

On the U.S. side of the border in 1995 and 1996, EPA, the Department of Justice (DOJ) and state agencies brought over 100 civil, judicial and administrative enforcement actions for border area violations of the U.S. hazardous waste law, the Clean Air Act, the Clean Water Act, Toxic Chemicals law and Pesticides law.

In addition to the legal enforcement of environmental laws, PROFEPA is working with Mexican industry though its voluntary environmental audit program. An environmental audit is a methodological review of a company's production process in order to determine the pollution and risk conditions under which it is operating. The audit covers discharges into all media (including water) and determines the degree of compliance not only of existing law, but also of items not yet regulated but controlled internationally by good engineering practices. Following the audit, the company signs an agreement with PROFEPA on the steps it will take to clean up its operations. By so doing, the company avoids criminal sanctions and can often reduce its insurance premiums. Mexico achieves a clean business in a relatively short period of time. As of August, 1997, PROFEPA had approved 775 audits (211 in border states) and 698 had been completed (198 in border states). Of the 698 completed audits, 117 companies have completed their clean-up process and have been certified as clean companies.

Between 1992 and 1997, PROFEPA has trained about 3,200 individuals to be environmental auditors. About half of these workers came from PROFEPA, 41 percent were from industry, and the remaining 10 percent were from government institutions and universities. This $1.5 million training program received $868,000 from the World Bank with the balance of the resources coming from the Mexican government.

WATER POLLUTION CONTROL

Mexico has serious water pollution problems. Only 10 percent of the country's municipal wastewater is treated. Mexico city alone accounts for 50 percent of all the sewage collected in the country and it has been going largely untreated, putting at risk of infection 400,000 people using it to irrigate farmland outside the Mexico City limits. Mexico City water authorities in 1997 bid the construction of three wastewater treatment plants with a combined capacity of 74 cubic meters per second. The winner has a 15-year "design, build and operate" award. Financing is being provided by the Mexican government backed by an untied $410 million soft loan from Japan's Overseas Economic Cooperation fund, a $365 million loan for the sewerage collection system from the Inter-American Development Bank, and $260 million of its own money to complete the drainage system. The project is designed to reduce the population's exposure to infectious contaminants through an initial advanced primary treatment phase using chemical treatment. The effluent will be suitable for irrigation purposes only.

Although the volume of industrial discharges is 72 percent less than municipal waste, many industrial discharges contain toxic chemicals. When toxic chemicals are mixed together, they can pose a particularly serious health hazard, as Guadalajara discovered in 1993 when the sewage system exploded. In keeping with the policies of the Zedillo administration, Mexican water regulations and standards have recently undergone major changes including using more aggressive economic incentives to induce compliance. Where some companies in the past were paying $60 per month to discharge 10,000 cubic meters of water with a particular level of contaminants, now the charge has been increase by a factor of 27 to $1,650 per month. Some of the larger polluters in this same area have seen their rates increase by a factor of 58. The increases are expected to provide industry with a much greater incentive to treat and reuse industrial wastewater.

Opportunities exist for U.S. firms in wastewater treatment. U.S. engineering firms are competitive on projects utilizing international funding. With the emphasis on primary treatment, U.S. firms with equipment to treat sludge or those dealing with specialized additives should have a high demand for their products.

SOLID AND HAZARDOUS WASTE MANAGEMENT

Mexico generates over 80,000 metric tons of municipal waste every day, up by a factor of eight over just 15 years ago, yet only 70 percent of this waste is collected, and of this, only a small fraction is either adequately transported or deposited in a modern, sanitary landfill. Recycling is limited, performed mostly by scavengers who help Mexico recapture only 6 percent of the total volume of municipal wastes and less than one fifth of the estimated recycling potential. In Mexico City, about 15 percent of municipal waste comes from industry. The Federal Government plays a minimal role in managing municipal and nonhazardous industrial solid waste

and state and local governments have only limited financial resources and experience in this area. Municipalities often lack the political will to institute or raise the required user fees so that these problems can be remedied.

Even with the limitations listed above, there are significant opportunities for U.S. firms in the areas of recycling, incineration and treatment facilities and services.

Mexico generates about 8 million metric tons of hazardous waste each year (excluding the mining sector). The Mexican government estimates that only about 11 percent of these wastes are properly disposed of, with the remaining illegally dumped on land, in bodies of water or in the municipal sewer system, by far the most common option. In 1996, the National Ecology Institute (INE) launched its Integrated Management and Utilization of Industrial Wastes in Central Mexico, 1996-2000. INE identified 87 areas in central Mexico that meet the land-use zoning requirements for siting hazardous waste management facilities and expect states and localities to approve between 12 and 30 of these areas. INE hopes that this process will minimize local opposition blocking the siting of new hazardous waste management facilities. These facilities are being referred to as Integrated Centers for the Management and Utilization of Industrial Wastes (CIMARI). Each of these centers will be run by the private sector.

The maquiladora industry is the chief generator of hazardous waste in the U.S.-Mexico border region. Under Mexican law, maquiladora waste must be returned to the country of origin (usually the United States). With the passage of NAFTA, environmental authorities on both sides of the border increased enforcement efforts in the region. The U.S.-Mexico Hazardous Waste tracking System (Haztraks) accounts for shipments of hazardous waste across the border and alerts local, state, and federal officials on both sides of the border to potential violations. Until the Maquiladora law expires in 2001, there will be little incentive to build state of the art hazardous waste treatment plants on the Mexican side of the border.

AIR POLLUTION CONTROL

Mexico City suffers from some of the world's worst air pollution. The 3 million vehicles and industrial sites give off contaminants, which frequently get trapped by a layer of warm air on top of cool air (thermal inversion). The Mexican government strategy promotes fuel switching, from high to low sulfur fuel oil and to natural gas in fixed sites; and to more highly oxygenated, unleaded gasoline in mobile fleets. There has been success in substantially reducing the levels of lead, sulfur dioxide and total suspended particulates in the air. Ozone and its precursors are now the major problem. Nearly half of the vehicles are over 10 years old and these account for a disproportionate share of emissions.

The Valley of Mexico Air Quality Improvement Program was announced in March 1996 with the goal to cut air emissions by half by the year 2000. This program calls for $2.8 billion of private sector investment and $10.5 billion of public sector investment (including PEMEX and public transportation, such as subway and light rail systems). In addition to stricter standards for control of ozone precursors like nitrogen oxides and volatile organic compounds, there will be financial incentives to buy down the cost of moving to cleaner technologies. These include a new fuel price structure to favor natural gas and other clean burning fuels, and duty-free imports of clean automobile technologies that are not manufactured in Mexico.

Twin cities along the U.S.-Mexico border share common air. The Paso del Norte region, which includes El Paso in the United States and Ciudad Juarez in Mexico, share some very polluted air, principally from vehicle emissions and unpaved roads and to a lesser degree from industrial sources. Cooperation between both sides of the border is beginning to change this. In 1992 concerned U. S. and Mexican citizens formed the Paso del Norte Air Quality Task Force. This voluntary organization of local citizens, representing business, government, public health, academic and environmental interests from both sides of the border, has made a major difference in the prospects for the air in this region. Not only did this work lead to a specific international agreement signed in May 1996 with continuing public input, but this Task Force helped advance several pollution reduction projects. As an example of technology transfer, ovens used to bake bricks in Juarez have caused high levels of pollution; El Paso Natural Gas played a key role in finding and demonstrating a natural gas burner suited to a Mexican brick oven. The Task Force also helped set up three vehicle emission diagnostic centers and train automobile mechanics in Juarez.

U.S. firms specializing in automotive emissions testing equipment and vapor recovery systems should find an increasing demand for their products. With the move to an increased use of natural gas, firms producing natural gas-fired boilers and related conversion technologies will have good opportunities.

CONCLUSION

The Mexican government is serious about solving its severe environmental problems. NAFTA is helping Mexico solve these problems in two ways. First, NAFTA has permitted Mexico to achieve a dramatic recovery from the major recession caused by the peso devaluation about a year after NAFTA was implemented. With the peso now more appropriately valued, Mexico is achieving its highest economic growth rates in generations (7 percent in 1997). With continued growth, Mexico will be able to afford the ambitious environmental programs being implemented by the Zedillo administration. Second, there are a number of bilateral and multilateral institutions, which provide a focus for cross-border environmental issues, particularly along the U.S-Mexican border. While the BECC and the NADBank are beginning to have success in fostering community involvement in environmental planning, the U.S. and Mexican governments have deepened cooperative arrangements under the Border XXI process.

Mexico's environmental problems arose from decades of neglect. It will take time for Mexico to achieve the type of sustainable development envisioned by President Zedillo. The U.S.-Mexico Chamber of Commerce feels Mexico is on the right track to addressing its environmental problems by the use of regulations and economic incentives, which encourage businesses to move toward cleaner technologies. The Chamber believes that its ACCESS-MEXICO program, which will provide a low cost source of Mexico's environmental laws and regulations at the federal, state and local level in English, will reduce an existing barrier to even faster integration of the U.S. and Mexican markets. These environmental pollution problems provide an outstanding business opportunity for U.S. environmental firms.

-- May 1998

The preceding paper is part of the United State-Mexico Chamber of Commerce's NAFTA Forum series, which considers general trade issues and sector-specific concerns between the two nations. The information contained herein is for informational and educational purposes only.

CONTACT INFORMATION:

Albert C. Zapanta, President
John Harrington, Senior Economist and author of NAFTA Forum series
Jeff Sparshott, Director of Communications
United States-Mexico Chamber of Commerce
1300 Pennsylvania Avenue NW, Suite G-3
Washington, DC 20004-3021