Initial Environmental Assessment of the Canada-Mercosur Free Trade Agreement Negotiations

Executive Summary

The numerous linkages between trade and environment are complex, and a key objective of the Government of Canada is to ensure that trade and environmental protection and conservation are mutually supportive.

Since 2001, the Government of Canada has conducted an environmental assessment of its international trade negotiations, in line with the Cabinet Directive on the Environmental Assessment of Policy, Plan and Program Proposals. This approach has allowed for the identification of potential environmental impacts of a trade agreement and the identification of ways to mitigate possible negative impacts, either through the course of negotiations or through domestic measures. The purpose of these assessments is to fully integrate environmental considerations into the negotiating process, contribute to informed decision-making, and improve overall policy coherence.

On March 9, 2018, Canada launched negotiations toward a possible free trade agreement (FTA) with the four full members of the Mercosur trade bloc—Argentina, Brazil, Paraguay and Uruguay. In line with the Government’s commitment to advance an inclusive  approach to trade- which recognizes that trade policies need to respond and contribute more meaningfully to overall domestic economic, social and environmental policy priorities - the Government of Canada committed to conduct an expanded impact assessment on the negotiations to include environmental, labour and gender impacts. The summary of the initial  Gender-Based Analysis Plus (GBA+)^{Footnote 1} on the agreement was  published in August 2019 and presented the potential differentiated effects and opportunities of a Canada-Mercosur FTA on diverse groups of women and  men in Canada, with SMEs and Indigenous peoples as priority considerations.

This report presents the Initial Environmental Assessment (IEA) of a Canada-Mercosur FTA. Its purpose is to identify potential impacts on the environment that may result from an FTA, assess the significance of these impacts, and identify possible enhancement or mitigation measures that may be addressed in the negotiations. The IEA uses Computable General Equilibrium (CGE) economic modelling and environmental data to estimate the potential effects of a Canada-Mercosur FTA on the Canadian environment. These effects are assessed in two steps: first in terms of projected changes in output by economic sectors; and, second in terms of expected impacts on climate change (through GHG emissions), energy and water usage as a result of estimated changes in Canadian output. This modelling of impacts on Canada’s environment identifies that increased trade with Mercosur countries would lead to minor increases in GHG emissions, energy and water usage. Most of these increases are projected to come from the manufacturing sector, with the largest share concentrated in a limited number of sub-sectors, notably motor vehicles and parts, paper products, chemical products and machinery and equipment.

Recognizing that the modelling approach to environmental impacts is limited in scope and does not capture effects that may not be directly related to changes in Canadian output levels, the study also includes consideration of other environmental impacts that may result from increased commercial and investment flows between Canada and Mercosur countries. These can include environmental risks related to maritime transportation, invasive alien species, investments – notably in the mining sector. The analysis also briefly examines potential environmental impacts in Mercosur countries, although this is not the primary focus on the IEA.

Based on the results of the model analysis of impacts and the broader review of environmental linkages, the IEA concludes that a Canada-Mercosur FTA is not likely to produce any significant positive or negative effects on the environment. Rather, the potential impacts are expected to be limited in extent and scope, with limited risks related to the manufacturing, transportation, agriculture and agri-food and mining sectors. Further, the overview of the Government of Canada’s existing environmental legislative framework, including statutes, regulations, policies and actions for the prevention and management of environmental risks, suggests that Canada is well positioned to mitigate the potential environmental impacts of an agreement, including through future improvements in the environmental performance of Canadian economic sectors. The FTA itself also offers opportunity to enhance positive impacts or mitigate negative effects from trade liberalization. In particular, the chapter-by-chapter review points to several areas for environmental collaboration and risk mitigation in the context of the FTA, including through provisions in the environment chapter, expanded market access for environmentally-friendly products, services and technologies, mechanisms to increase sectoral, technological and institutional cooperation between Canada and Mercosur countries in key areas, and various Investment and Government Procurement-related provisions.

1. Background and Study Objectives

On March 9, 2018, Canada launched negotiations toward a possible free trade agreement (FTA) with Mercosur, with a view to improving market access for Canadian goods and services, and creating more opportunities for established and first-time exporters to access a rapidly growing regional market. The Government of Canada also committed to advancing an inclusive approach to trade through a potential agreement, in recognition that trade policies need to respond and contribute more meaningfully to overall domestic economic, social and environmental policy priorities.

Since 2001, the Government of Canada has conducted an environmental assessment of all of its international trade negotiations, in line with the Cabinet Directive on the Environmental Assessment of Policy, Plan and Program Proposals (the “Directive”). In accordance with the Directive, this Initial Environmental Assessment (IEA) of a possible Canada-Mercosur FTA aims to identify potential impacts on the Canadian environment that may result from an FTA, assess the significance of these impacts, and identify possible enhancement or mitigation measures that may be addressed in the negotiations^{Footnote 2}. This report should be read in conjunction with the summary of the initial Gender-Based Analysis Plus (GBA+)^{Footnote 3} which was published in August 2019 and presented the potential differentiated effects and opportunities of an agreement on diverse groups of women and men in Canada, with SMEs and Indigenous peoples as priority considerations.

1.1 Economic Relationship Between Canada and Mercosur

Comprising Argentina, Brazil, Paraguay and Uruguay, Mercosur is one of the largest economic blocs in the world. It has a significant economic presence in South America, representing nearly 70% of the region’s Gross Domestic Product (GDP). The Mercosur market has a combined GDP of $3.2 trillion and 261 million consumers in 2019, and is considered the world’s seventh largest economy when measured as a bloc.

In 2019, Canada’s total merchandise trade with Mercosur reached more than $9.0 billion. Canadian merchandise exports to Mercosur totaled $2.6 billion, with chemical products and machinery leading the way. Merchandise imports into Canada from Mercosur represented nearly $6.4 billion, with the largest imports in chemical products, precious metals, machinery and food products. In total, Canada’s bilateral merchandise trade with Mercosur represented nearly 55% of Canada’s merchandise trade with South America. The Brazilian market is a major destination for Canadian merchandise exports among Mercosur countries, reaching nearly $2.2 billion in goods in 2018. Bilateral trade in services reached nearly $1.1 billion in 2018. Within Mercosur, Brazil is the leading destination for Canadian services exports at about $730 million and the leading services exporter to Canada at $324 million.

In regards to investment, Canada’s stock of direct investment abroad (CDIA) in 2018 was valued at $16.1 billion within the bloc, including in the mining sector, as well as agriculture and agri-food. Mercosur’s stock of foreign direct investment (FDI) in Canada was valued at $15.9 billion, led by mining, beverages and steel.

1.2 Objectives of the Proposed Free Trade Agreement

FTAs are binding treaties between countries that open markets for businesses by eliminating or reducing a variety of tariff and non-tariff barriers; establish the terms of market access in areas such as services, investment and government procurement; and set out rules for fair and transparent treatment. A Canada-Mercosur FTA will aim to:

• Provide Canadians with preferential access to a wider range of export and international investment opportunities;
• Create more predictable and transparent conditions for businesses operating in Canada and Mercosur countries.

The proposed FTA aims to address areas beyond the traditional focus of, for example, liberalization of trade in goods and services, investment and government procurement, to also include provisions such as those related to sustainable development, trade and gender, and trade and Indigenous peoples. For a detailed description of the objectives of each proposed FTA chapter, please refer to Annex A.

1.3 Framework for Environmental Assessment of Trade Negotiations

Pursuant to the Directive, all Government of Canada departments and agencies are obligated to consider, when appropriate, potential environmental effects when developing policy, plans and programs. This includes a requirement to conduct a strategic environmental assessment of a policy, plan or program proposal when the proposal is submitted to an individual minister or Cabinet for approval, and the implementation of the proposal may result in important environmental effects, either positive or negative.

The 2001 Framework for the Environmental Assessment of Trade Negotiations (the “Framework”) was developed by Global Affairs Canada in response to the Directive, in order to guide its application to trade agreement negotiations. Further guidance for applying the Framework is contained in the 2008 Handbook for the Environmental Assessment of Trade Negotiations (the “Handbook”).

Canada’s assessment of the potential environmental impacts of a proposed FTA explores the linkages between the environment and liberalization of trade. In so doing, it considers the effects of new trade and investment that may result directly from an FTA, as well as potential related impacts on the environment. More specifically, the objectives of conducting an environmental assessment for a given trade negotiation are to:

• Assist Canadian negotiators in taking into account environmental considerations in the negotiating process, with a view to mitigate risks and enhance benefits;
• Support the identification of possible needs for additional domestic measures to further mitigate risk and enhance benefits; and
• Report on how environmental factors are being considered over the course of trade negotiations.

Furthermore, an environmental assessment examines the relationship between domestic policies and measures and the potential increased economic activity generated by trade liberalization through a proposed FTA, which can exacerbate environmental problems if there is an absence of effective environmental policies and regulations. This includes consideration of current domestic policies and measures as a way to mitigate any negative effects of economic growth.

The Framework provides for three phases of assessment^{Footnote 4}:

1. Initial Environmental Assessment (IEA): a preliminary examination to identify potential key issues.
2. Draft Environmental Assessment (if required^{Footnote 5}): builds on the findings of the IEA and provides detailed analysis of those issues.
3. Final Environmental Assessment: takes place after the conclusion of the negotiations, taking into account final negotiated outcomes.

The present document reports on the first phase, or Initial Environmental Assessment (IEA), related to the negotiation of a Canada-Mercosur FTA.

1.4 Initial Environmental Assessment (IEA)

The analytical stages of an IEA, as laid out in the Handbook and summarized in Annex B, are: (1) Identification of the economic effects of the negotiation, (2) Identification of the likely environmental impacts of economic effects, (3) Assessment of the significance of the identified likely environmental impacts, and (4) Identification of enhancement/mitigation options to inform the negotiations.

This IEA is presented in four sections. The first part, Stakeholder Consultations, presents a summary of the comments received from public consultations, the interdepartmental committee, Provinces and Territories, as well as the Environmental Assessment Advisory Group (EAAG). All of these comments were considered in the elaboration of the present document.

The second part, the Environmental Impact Assessment, presents the first three analytical stages of the impact assessment (identification of the economic effects, environmental impacts and assessment of the significance of these impacts).

The third part, Existing Environmental Legislation, Policies and Actions, provides an overview of the Government of Canada’s framework governing environmental impacts, both at the broad and sector-specific levels.

The fourth part, the Chapter-by-Chapter Review, constitutes the final analytical stage of the impact assessment. The aim of this section is to highlight the relevant chapters in the proposed Canada-Mercosur agreement that provide an opportunity for Parties to enhance environmental cooperation and/or mitigate potential environmental risks, as identified in the Environmental Impact Assessment.

2. Stakeholder Consultations

In conducting environmental assessments for trade agreements, the Government has established an interdepartmental committee to contribute to and review the EA for each trade negotiation. Departments and agencies represented in this committee include Global Affairs Canada (GAC), Environment and Climate Change Canada (ECCC), the Impact Assessment Agency (IAA) and a number of federal government departments and agencies involved in the negotiation under review. This approach facilitates informed policy development and decision-making throughout the negotiations.

The IEA also includes consultations with the public, provincial and territorial governments, and with the non-governmental Environmental Assessment Advisory Group (EAAG).  The EAAG is made up of persons drawn from the business sector, academia and non-governmental organizations, and provides advice in its own capacity on the EA undertaken by GAC. At the conclusion of each assessment phase (i.e. Initial, Draft and Final), EAs are shared with provincial and territorial representatives and the EAAG for feedback before being released for public comment.

This section presents the comments and input that were received from the public, provincial and territorial governments and the EAAG as part of the preliminary assessment of a Canada-Mercosur FTA.

2.1 Public Consultations

A Notice of Intent to conduct a Strategic EA of a prospective Canada-Mercosur FTA was published on September 11, 2018.^{Footnote 6} This Notice invited interested individuals to submit their input for consideration in the drafting of the IEA. Comments were received from two Canadian organizations. One organization raised concerns related to an expected increase in global shipping, which may increase greenhouse gas emissions and other pollutants such as sulfur dioxide. The other focused on the Canadian fish and seafood sector, highlighting its leadership in implementing sustainable practices and compliance with international sustainability standards.

2.2 Other Consultations

2.2.1 Interdepartmental Committee

An interdepartmental committee composed of representatives from GAC, ECCC, the IAA, Employment and Social Development Canada, Natural Resources Canada, Canadian Heritage, Finance Canada, Agriculture and Agri-Food Canada, Canada Border Services Agency, Transport Canada, Fisheries and Oceans Canada and Immigration, Refugees and Citizenship Canada was closely involved in the drafting and review of this IEA of a potential Canada-Mercosur FTA.

2.2.2 Provinces and Territories

Consultations with provinces and territories form an integral part of the environmental assessments of trade negotiations. As such, the draft of this IEA was shared with provincial and territorial governments, four of which provided comments covering a number of topics, including invasive species, carbon leakage, forest management, as well as coverage of provincial and territorial actions and regulatory frameworks. These comments were documented and considered in the final version of the report.

2.2.3 Environmental Assessment Advisory Group

Members of the EAAG were also engaged in the drafting of the IEA. Given the variety of expertise and approaches represented on the EAAG, the comments received from the group were instrumental in shaping the final version of this document. In particular, EAAG members’ feedback on the IEA pointed to the need to refine the analysis of sectoral impacts, to elaborate on the environmental and clean technology sector, and more generally to broaden the scope of the analysis given the global nature of international trade.

3. Preliminary Environmental Impact Assessment

The purpose of the IEA is to identify potential impacts on the Canadian environment that may result from an FTA between Canada and Mercosur, and to assess the significance of these impacts. The IEA first uses economic modelling and environmental data to estimate the potential effects of a Canada-Mercosur FTA on the Canadian environment. These effects are assessed in two steps: (1) the projected changes in output by economic sectors (the Economic Assessment); and (2) the expected impacts on climate change (through GHG emissions), energy and water usage as a result of estimated changes in Canadian output (the Environmental Assessment).

Recognizing that this modelling approach does not capture other effects that may not be related to changes in Canadian output levels, the analysis also includes the review of other environmental impacts that may result from increased commercial and investment flows between Canada and Mercosur countries (Other Environmental Linkages). While our approach to the assessment of environmental impacts mainly focuses on the Canadian environment, it is well understood that increased commercial flows do not happen in a vacuum and can have implications that transcend national borders. Such implications are important to consider in order to provide the level of information and analysis required to contribute to informed decision-making throughout trade negotiations. As such, broader global impacts are also addressed, as relevant.

3.1 Preliminary Economic Assessment

The estimation of changes in GDP, exports and imports as a result of a Canada-Mercosur FTA is based on a Computable General Equilibrium Model (CGEM) of global trade.^{Footnote 7} The simulation compares a baseline scenario (prior to implementation of the agreement) to a post-liberalization scenario (following the full implementation of the agreement, by year 2040). The net effect of the agreement is quantified as the difference between the baseline and post-liberalization scenario expressed in terms of changes in GDP, exports and imports.

3.1.1 Limitations of the Economic Modelling

While the economic modelling analysis is a useful estimation tool, all economic models, by definition, represent a simplification of reality and rely on numerous assumptions. One of these is that the agreement would achieve complete elimination of all agricultural and non-agricultural protections between Canada and the four Mercosur countries, with no exception made for “sensitive products”. Further, the modelling isolates the trade policy impact by netting out all other macroeconomic influences such as economic growth and exchange rate fluctuations. The model also only captures the expansion of trade in products already traded in the bilateral relationship, and cannot predict the creation of trade in new product areas.

3.1.2 Impacts on GDP and Trade

The modelling analysis estimates that trade liberalization through a Canada-Mercosur FTA would generate overall GDP gains for the Parties of $3.8 billion (US$2.9 billion). Canada’s GDP would increase by $1.7 billion (US$1.3 billion) or 0.051% by 2040. The Mercosur countries, as a group, would see a combined GDP growth of $2.1 billion (US$1.6 billion) or 0.027%. Canada’s GDP gains would result from two primary sources: expanded trade due to the elimination of domestic and foreign protections, and productivity enhancement arising from increased certainty and reduction in costs of goods and services. The preliminary analysis shows the proposed FTA would boost Canadian production by $1.5 billion by the year 2040 based on an assumption of full liberalization that eliminates all tariffs in all sectors for both parties. The key contributor to the expansion of Canadian production capacity is the removal of relatively high tariffs in the industrial and manufacturing sectors in Mercosur. In terms of trade, it is estimated that Canada’s bilateral trade in goods and services with Mercosur countries would increase by $5.2 billion (US$4.0 billion), or 30.0% compared to the baseline.

3.2 Preliminary Environmental Assessment

Based on estimated changes in GDP and trade presented in section 3.1.2, the preliminary environmental assessment projects environmental impacts in terms of impacts on climate change (Greenhouse Gas (GHG) emissions), as well as changes in energy and water usage across sectors of the Canadian economy. The analysis also includes a qualitative review of other environmental linkages that may affect the Canadian and global environments as a result of a Canada-Mercosur FTA.

3.2.1 Limitations of the Environmental Modelling

Calculations of changes in GHG emissions, energy and water usage are based on projected GDP and trade impacts, as measured by the economic simulation. Consequently, they inherit the same limitations as the economic modelling.

In addition, there are cautionary notes specific to the interpretation of environmental modelling results. Notably, projected changes in GHG emissions, energy and water usage reflect the impacts based on these indicators only, and do not capture the breadth of environmental issues that could occur as a result of this FTA. Also, the methodology does not take into account the effect of environmental actions that may be or have been taken at global, national, provincial or local levels independently from the FTA under study. Indeed, the analysis calculates the additional emissions that may be generated by an increase in Canadian output further to the agreement, but not the positive effect of Canadian forests as carbon sinks. While our forests do play a key role in helping Canada meet its greenhouse gas emissions reduction targets by offsetting emissions from other sectors, this positive effect is expected to remain largely unaffected by a Canada-Mercosur FTA. Likewise, this analysis does not take into account any independent events or actions, such as natural disasters, that may adversely affect the Canadian and global environments, unless those would be the direct result of increased activity and trade under a Canada-Mercosur FTA.

3.2.2 Impacts on GHG Emissions, Energy and Water usage

As presented in section 3.1.2, the economic modelling projects an increase of $1.7 billion in Canada’s GDP, with increases in production levels expected in the manufacturing sector. These estimated output changes are combined with environmental indicators of climate change (GHG emissions), energy and water usage per sector^{Footnote 8}, in order to assess environmental impacts as a result of increased levels of economic activity post-FTA. Each indicator is decomposed into scale, composition and technical effects. The scale effect measures the impact of an expansion of economic activity as a result of the agreement on total emissions as well as water and energy usage, assuming that the nature of that activity remains unchanged; the composition effect captures the changes in emissions and depletion of resources resulting from shifts in the structure of the economy due to trade policy changes; and the technical effect captures the current and future evolution of the Canadian environmental performance by sector, further to the adoption of new technologies and enforcement of regulations.

A summary of expected changes in these environmental indicators as a result of a Canada-Mercosur FTA is presented in Table 1 and detailed below.

a. Changes in GHG emissions

As summarized in Table 1, the simulation projects an increase of 71.0 kilotonnes (kt) in Canada’s GHG emissions via the scale and composition effects, as a result of increased output of Canadian goods and services. This projected increase in GHG emissions is counterbalanced by expected progress in environmental technologies and enforcement of environmental regulations (captured by the technical effect), which should reduce emission levels by 4.8 kt. The net increase in GHG emissions as a result of an FTA with Mercosur is thus estimated at 66.2 kt and represents a minimal share of current GHG emissions in Canada in 2015 (0.0092%).^{Footnote 9}

The most significant increases in GHG emissions as a result of an FTA are expected to originate from the manufacturing sector, with a total effect of 116,2 kt, compared to a reduction of 50 kt in the non-manufacturing sector (Table 2).

Within the manufacturing sector, the highest increase post-FTA in GHG emissions is expected to originate from sectors with high direct GHG intensity, notably motor vehicles and parts, paper products and chemical products. Together, these sub-sectors account for 96% of the increase in GHG emissions projected in the Canadian manufacturing sector as a result of an FTA with Mercosur. Although not factored into the model, the manufacturing process in the motor vehicles and parts, paper products and chemical products sub-sectors may emit other substances than GHG, including toxins and chemicals that may negatively impact the health of humans and other animals– notably avian wildlife.

That said, indicators show that overall emissions from the Canadian manufacturing sectors have been declining since 2005.^{Footnote 10} In the Canada-Mercosur FTA context, the projected increase in emissions is thus likely to be counterbalanced to some extent by technological advancements and environmental regulations in Canada (the technical effect), which are expected to help reduce emissions intensity of the manufacturing sector as a whole going forward.

b. Changes in energy usage

The total energy usage in Canada as a result of the implementation of this FTA would increase by 7,286.8 terajoules (TJ) via the scale effect. As trade between Canada and Mercosur is liberalized under an FTA, the Canadian production pattern would shift, which, in turn, would have an effect on the energy usage in Canada (the composition effect), resulting in a reduction in energy usage by 6,185.2 TJ. Taken together, total energy consumption is expected to increase by 1,101.6 TJ via the scale and composition effects. Estimates show that technological improvements in energy conservation (the technical effect) would give rise to a decrease in energy usage of 128.8 TJ. Thus, the net increase in energy usage under an FTA with Mercosur would be 972.9 TJ, or 0.0084% of total energy usage.

Simulations show that the manufacturing sector under a Canada-Mercosur FTA would see an increase in energy usage of 773,5 TJ by 2040, compared to a 199,4 TJ increase for the non-manufacturing sector (Table 3).

The highest increase in energy usage following the entry into force of a potential Canada-Mercosur FTA is expected to originate from sectors with high direct energy intensity, notably Machinery and equipment, Motor vehicles and parts and Chemical products.

This uptake is expected to pose a minimal effect on the Canadian environment as over 67 percent of Canada’s electricity comes from renewable sources (e.g. hydro, solar, wind) and 82 percent from non-GHG emitting sources (e.g. nuclear)^{Footnote 11}. By 2040, it is projected that Canada’s non-GHG emitting electricity productions will increase to over 90 percent, in part due to technological advances in wind and solar; wind capacity is also expected to double and solar nearly triple within that timeframe^{Footnote 12}.

c. Changes in water usage

Finally, the total water usage for the Canadian economy would increase by 27.9 million m³ via the scale effect as a result of the FTA. The shift in the economic structure in Canada further to the FTA would lead to lower levels of water usage as the economy’s sectoral composition adjusts. This composition effect results in a decrease in water usage of 25.1 million m³. The technical effect for water usage could not be calculated due to a lack of projected data for future years. The water usage for the whole economy is thus characterized by a total overall net increase of 2.8 million m³, representing a 0.0079% share of total water usage in Canada in 2015.

The total increase in water usage from the manufacturing sector as a result of an FTA is estimated at 3.4 million m³, compared to a reduction of 0.6 million m³ in the non-manufacturing sector, as presented in Table 4 below. Most of this increase is projected to originate from the paper products sub-sector (74%), followed to a lesser extent by the chemical products sub-sector (18%).

Besides water usage the pulp and paper industry also ranks second to municipalities in wastewater output to the Canadian environment. Effluents from pulp and paper mills that use bleaching techniques may release toxins into water systems, which can accumulate and have a negative impact on aquatic ecosystems – including harming fish and invertebrate species.

d. Conclusion

Based on the above projections of aggregated changes in environmental indicators, it appears that a Canada-Mercosur FTA is unlikely to have significant impacts on the Canadian environment as a whole, as measured by expected changes in GHG emissions, energy and water usage. Although overall impacts are expected to be modest, most of the environmental impacts are projected to come from the manufacturing sector, with the largest share concentrated in a limited number of sub-sectors, notably motor vehicles and parts, paper products, chemical products and machinery and equipment. While significant in relative terms, projected increases in GHG emissions, energy usage and water usage in these sub-sectors are limited in absolute terms and expected to be spread over a long period of time (by year 2040).

3.2.3 Other Environmental Linkages

It is understood that the potential environmental impacts of a FTA between Canada and Mercosur extend beyond those that may result from an increase in Canadian output, as covered in the previous section. As such, it is appropriate to expand the analysis beyond the economic and environmental modelling, to scan other potential environmental impacts that may result from increased commercial and investment flows between Canada and Mercosur countries.

This section highlights a few additional risk areas not captured in the economic and environmental modelling presented in the previous section. This additional analysis explores broader environmental risks related to maritime transportation, invasive alien species, large-scale investment projects – notably in the mining sector. It also presents a succinct overview of potential environmental impacts on Mercosur countries.

a. Maritime transportation

International trade requires that goods be transported from the country of production to the country of consumption. Any expansion of trade as a result of a potential FTA with Mercosur, in particular trade in goods, is therefore likely to lead to increased use of transportation and logistics services. While the environmental modelling presented in the previous section captures emissions originating from Canadian-owned transportation service providers, it does not include emissions originating from foreign service providers and as such is not comprehensive.

According to the United Nations Conference on Trade and Development (UNCTAD), 90% of the world’s merchandise trade travels by sea, which represented 10.7 billion tonnes of goods moved in 2018.^{Footnote 13} Taking into account the geographical location of Canada and Mercosur countries, the additional trade flows generated by a Canada-Mercosur FTA are likely to translate into more intensive use of maritime transportation.

The International Energy Agency estimates that transportation is responsible for 24% of direct global CO² emissions from fuel combustion.^{Footnote 14} The shipping industry reportedly generates less than 10% of the sector’s total emissions, and the international aviation less than 7%.^{Footnote 15} That said, the transportation sector is also responsible for the emission of air pollutants such as carbon monoxide, nitrogen oxide, sulphur oxides, volatile organic compounds and particulate matter^{Footnote 16}.

Beyond air pollution, the increase in the volume of goods transported by sea between Mercosur countries and Canada also has implications for ecosystems and marine species in Canadian and international waters, notably from the effects of underwater vessel noise and vessel strikes.

While simulations project an increase in bilateral merchandise trade of 30% by 2040 as a result of an FTA with Mercosur, the value of this increase is relatively small compared to Canada’s trade with other partners.^{Footnote 17} As such, the transportation-related global effects of the agreement on the environment are expected to be limited.

b. Invasive Alien Species

Between 2016 and 2018, 6% of Canada’s exports to Mercosur were agricultural products, with annual exports averaging $152 million. Over the same period, 20.7% of Canada’s imports from Mercosur were agricultural products, with annual imports averaging $1.3 billion.

A Canada-Mercosur FTA is projected to bring a small increase in two-way trade of agriculture and agri-food products. Should this increase lead to significant growth in agricultural imports from Mercosur, it could translate into a higher risk of invasive alien species (IAS) and diseases in Canada. Many significant pests affecting agriculture are not native to Canada - for example, 80% of agricultural weeds are invasive aliens - and many crops in Canada cannot be grown without protection from IAS. It has been estimated that invasive species from all regions of the world cause $2.2 billion in annual losses to Canada's agriculture industry as a result of lower yields, increased pest control expenses, and loss of markets due to trade and transport restrictions.^{Footnote 18} In addition, IAS protection activities generate indirect environmental costs as a result of increased chemical use.

While present, the risk of increased exposure of the Canadian agricultural sector to IAS and diseases remains limited given the small projected rise in agricultural and agri-food bilateral trade between Canada and Mercosur further to an FTA. As a result, the significance of these potential environmental impacts is also expected to be small.

c. Large-scale investment projects

As noted previously, the projected increases in output as a result of a Canada-Mercosur FTA are expected to be limited in scope and value. As a result, the likelihood that these changes would lead to the building or expansion of production facilities, transportation infrastructure or other large-scale physical projects in Canada is also expected to be limited.

That said, evidence suggests that investment treaties or investment provisions under free trade agreements are likely to lead to a modest increase in some types of foreign direct investments.^{Footnote 19}That is, while the existence of investment provisions as part of the FTA should be a positive and important factor in an investor’s decision on whether to invest in the territory of the other party, it will be but one of many factors considered in any investment decision. In addition, Canada already has a relatively open investment regime and two investment agreements with Mercosur countries (Argentina and Uruguay). As such, the economic effects in the form of increased incoming investment from Mercosur in Canada as a result of the FTA are expected to be minimal and to originate principally from Brazil. Current investment from Brazil in Canada is concentrated in the mining sector, and it is possible that new investments could lead to other large-scale projects in the mining sector.

Each stage of the mineral/non-mineral production process (exploration, extraction, processing, closure and post-closure) carries a risk of negative environmental impacts, including increased GHG emissions, land and water usage, water contamination and sedimentation, soil contamination, and habitat destruction. Waste rock, process effluent and mine waste tailings can result in releases of contaminants to water and soil, causing pollution to the neighbouring environment. Acidic drainage and the leaching of metals from the mine workings and mine wastes may occur at certain types of mines.

On the other hand, it should be noted that Canada’s mining sector is a key global producer of copper, nickel and cobalt, and hosts a number of advanced mineral projects for rare earth elements, lithium and graphite. These commodities are crucial in the production of renewable energy technologies such as solar cells, high-density batteries and wind turbines. These technologies are crucial to positioning Canada’s industries at the forefront of a global opportunity to deploy technological solutions, which can address the world’s most pressing environmental challenges. Therefore, although increasing foreign access to these mineral inputs for renewable energy technologies could result in some negative environmental impacts as highlighted previously, this would be counterbalanced by the creation of opportunities for other countries to adapt these sustainable energy sources, thereby reducing global GHG emissions.

d. Impacts in Mercosur countries

While the present analysis focuses on impacts likely to be felt in the Canadian environment, it is important to recognize that environmental risks as a result of a Canada-Mercosur FTA are not limited to Canada’s borders. Indeed, as the economies of Mercosur countries adjust to new opportunities created by the agreement, relative production intensities and efficiencies across sectors are expected to shift. This may result from the expansion or contraction of production in certain sectors, changes in the use of raw material, technological advances, new investments and expansion of physical infrastructure, which could have positive or negative impacts on the local environment. The nature and significance of such impacts on the environment of Mercosur countries will depend in large part on the effects of an agreement on the economic structure of each country, as well as on the regulations, policies and actions these countries have or will put in place to prevent and manage environmental risks created by the FTA.

Notably, a possible risk associated with higher levels of agricultural and agri-food production in Mercosur countries for the Canadian market could lead to some levels of deforestation, soil erosion and loss of biodiversity, if such expanded production is made at the expense of natural ecosystems. Conversely, a Canada-Mercosur FTA could lead to a reduction of the environmental footprint of certain sectors in Mercosur countries as a result of improved production efficiencies or better access to environmental technologies.

Notably, expected environmental impacts in Mercosur countries will create opportunities for Canadian business in certain sectors. In terms of nuclear energy, Argentina operates CANDU technology, and both Canada and Argentina have continued engaging in nuclear energy policy collaboration for future projects. Under the 2018 Nuclear Cooperation Agreement, Canada and Argentina have signed a Memorandum of Understanding (MOU), which is a bilateral framework for cooperation aimed at the sustainable development of nuclear energy and its applications.  In the event that future nuclear energy projects are facilitated by this FTA, the MOU includes policy areas of mutual interest for cooperation, notably environmental protection and radioactive waste management for both future and existing operations.

It is also worth highlighting that there are opportunities for Canadian cleantech investors in Mercosur countries. Recent examples of projects and acquisitions in the region include wastewater management, hydro, transmission, wind, and solar assets. Most of the large portfolio Canadian investors in Brazil have already acquired assets or concessions in the cleantech sector, mainly in wind and solar assets in the North-East of Brazil, and are keen in broadening their investments in cleantech through new acquisitions. In Argentina, cleantech investment are related mostly to developments in the mining and oil & gas sectors, directed towards selling energy to industrial and multinational end-users. In Uruguay, cleantech opportunities are mainly related to water treatments, waste management and clean energy. Paraguay offers opportunities for Canadian investors in waste management and distributed energy generation. Planned electricity regulation changes in Paraguay could also potentially present opportunities for Canadian renewable energy developers and technology providers in solar and small-hydro.

3.3 Conclusion of the Preliminary Environmental Assessment

As a scoping exercise, this IEA focused on identifying the likelihood of significant positive or negative effects of a Canada-Mercosur FTA on the Canadian environment. Based on estimates of increases in GDP and trade, as well as projections of resulting changes in environmental indicators in Canada, it appears that the net impact of increased production and trade under an FTA with Mercosur would be characterized by minor increases in aggregate GHG emissions, energy and water usage, notably in the manufacturing sector.

Complementary to this analysis, the qualitative review of other environmental linkages aims to broaden the analysis of potential risks related to an FTA with Mercosur. While this review does not identify any significant positive or negative impacts on the Canadian environment from such an agreement, it did highlight limited risks related to maritime transportation, invasive alien species and investments in the mining sector. Although beyond the scope of this report, the analysis also noted the possibility of positive and negative environmental impacts in Mercosur countries.

Considering these limited risks, the next sections review the existing environmental legislative framework at the federal level in Canada (Chapter 4), as well as the enhancement and mitigation options that could be considered more specifically in the context of a Canada-Mercosur FTA (Chapter 5).

4. Chapter-by-Chapter Review of Enhancement and Mitigation Options

A Canada-Mercosur FTA could also help to enhance positive impacts and/or mitigate environmental risks, as described in the following section. As the final analytical stage of the environmental impact assessment, this section identifies areas for environmental enhancement and risk mitigation that may be addressed in a potential Canada-Mercosur FTA. This preliminary analysis aims to respond to the risks identified in section 3, as well as broader environmental considerations, in trade policy terms, with a view to inform ongoing negotiations. For more information on the purpose of each of the chapters mentioned below, please see Annex A.

For the purposes of this report, the assessment has been broken down into five groups of related chapters/provisions:

• Environment
• Goods and Services
• Investment and Dispute Resolution
• Government Procurement
• Trade and Indigenous Peoples

Chapters not included in the above groupings are those that are not expected to significantly enhance or mitigate environmental impacts of the agreement.

4.1 Environment

Canada seeks to advance an ambitious and comprehensive Environment chapter in all of its FTA negotiations. This includes obligations to ensure that high levels of environmental protection are maintained as trade and investment are liberalized, as well as commitments to address a range of global environmental issues. In addition, Canada includes environment-related provisions in other areas of its FTAs as appropriate, including in the preamble, as well as in the broader initial provisions and general exceptions articles.

In the context of the Canada-Mercosur FTA, there are opportunities to use this chapter to improve environmental governance and pursue cooperation among Parties and address environmental challenges, not only in relation to the risk areas identified in section 3 of this report but more broadly.

In particular, Canada may use the opportunity of an FTA with Mercosur to advance four key objectives:

1. Strengthen environmental governance by pursuing core obligations to maintain high levels of environmental protection, including commitments to effectively enforce environmental laws, to not derogate from such laws to encourage trade or investment, and to promote transparency, accountability and public participation. In the context of an FTA with Mercosur, commitments by Parties to maintain high levels of environmental protection and improve their respective laws and policies may help mitigate the minor increases expected in GHG emissions, water and energy usages identified earlier in this report;
2. Support efforts to address a range of global environmental challenges in areas that affect Canada’s environment, economy and health. In addition to potentially helping address specific risk areas identified in section 3 related to GHG emissions, air quality, chemicals management and invasive alien species, environment provisions in an FTA with Mercosur provide an opportunity to enhance efforts related to areas such as illegal wildlife trade, resource efficient and circular economy, marine litter and plastic waste, and conservation of biodiversity. An agreement could also include a binding commitment on climate change, which would support broader climate change objectives and align with the 2019-2022 FSDS goal of promoting substantive climate change provisions in Canada’s FTAs. Further, Parties could use the FTA to reaffirm their respective commitments to the multilateral environment agreements they have signed. Overall, these provisions would support each Party’s respective national, bilateral and international commitments to strengthen environmental protection and help advance solutions to current and future global environmental challenges.
3. Promote mutually supportive trade and environment objectives through, for example, commitments to promote voluntary best practices of corporate social responsibility and responsible business conduct, voluntary measures to enhance environmental performance, and trade and investment in environmental goods and services. In particular, and subject to a willing partner, such provisions could encourage the promotion of trade in environmental goods and services, including those of particular relevance to the risk areas identified earlier in this report, and to broader climate change mitigation and adaptation goals. Overall, this could also contribute to sustainable growth and the creation of jobs, and would align with the 2019-2022 FSDS goal to grow Canada’s clean technology industry and exports.
4. Support sustainable management of natural resources by pursuing provisions related to a resource-efficient and circular economy and, sustainable fisheries, agriculture and forestry management. Given the importance of natural resources and their significant role in the national economy of Parties, these provisions would reinforce the importance of sustainable resource management. These provisions may also help mitigate negative impacts, notably in relation to the agricultural practices highlighted earlier, as well as the generation of waste, illegal logging, overfishing of limited fish stocks, or illegal, unreported and unregulated (IUU) fishing.

In addition to the above objectives, the Environment chapter provides an opportunity to build upon existing cooperation activities between Canada and Mercosur countries on broader environmental issues by establishing a framework for cooperation on matters of mutual interest.

Existing environmental cooperation activities between Canada and Mercosur countries cover a range of areas. For example, Canada has recently cooperated with Argentina and Brazil on the development and design of Pollutant Release and Transfer Registers (PRTR), and with Brazil on biodiversity, to monitor and conserve Canadian artic breeding shorebirds on their non-breeding grounds in northeastern Brazil.

Canada is also cooperating with Argentina and Brazil on the issue of forest fires in the Amazon. Canada announced on August 26, 2019 that it would contribute up to $15 million CAD and the use of Canadian water bombers to help fight the fires in the Amazon Rainforest. In addition, the Meteorological Service of Canada provided smoke dispersion modelling to Argentina. Canada is also a significant donor to the Green Climate Fund (GCF), and pledged to contribute an additional $300 million during the Fund’s first replenishment process. As of January 2020, the GCF funds three projects in Brazil, two of which promote energy efficiency, and one provides payments for results derived from reducing emissions from deforestation in the Amazon region in 2014 and 2015.

As part of Canada’s fast-start climate finance commitment that took place from 2010/11 to 2012/13, Canada also supported climate action in several Mercosur countries, including Argentina, Brazil and Uruguay. These included Canada’s contribution of: $1.5M to support adaptation to water stress in Argentina’s Comahue Region; $300,000 to reducing energy consumption in Brazil’s growing hospitality industry; and several energy projects in Uruguay under the $250M contribution to the Inter-American Development Bank to create the Canada Fund for the Private Sector in the Americas (C2F). Under Canada’s current climate finance commitment of $2.65B (2015/16 to 2020/21), Canada is providing $223.5M to the second phase of the Canada Fund for the Private Sector in the Americas to support countries in the Americas and the Caribbean region adapt to, and mitigate the effects of, climate change. Specific projects in Latin American and Caribbean countries will be gradually approved and communicated, but none have been announced to date.

An FTA with Mercosur provides an opportunity to build upon these environmental cooperation activities and explore new cooperation avenues with Mercosur.

4.2 Goods and Services

Provisions on goods and services include the following chapters: National Treatment and Market Access (NTMA); Rules of Origin and Origin Procedures; Customs and Trade Facilitation; Sanitary and Phyto-sanitary Measures; Cross-Border Trade in Services;  Temporary Entry; Electronic Commerce; Intellectual Property; and the Biotechnology Annex. The purpose of these chapters is to help Canadian traders, services providers and investors gain market access and to ensure that the regulatory systems in Mercosur member states are predictable and transparent. Please refer to Annex A for more details.

An FTA with Mercosur provides an opportunity to enhance positive impacts and/or mitigate impacts of increased trade in goods and services as follows:

• NTMA: In the context of FTA negotiations with Mercosur, there are opportunities to enhance positive impacts and mitigate negative impacts of free trade on the environment by supporting the growth of environmentally-friendly technologies, including goods. For example, the projected elimination of tariffs by Canada and Mercosur on environmental goods would improve market access and provide a competitive advantage for Canada’s environmental goods in Mercosur. This could stimulate growth in Canada’s environmental goods sector by providing new export opportunities while at the same time contributing to address environmental challenges in Canada’s manufacturing sector as a result of an FTA, as noted earlier in this report. This approach supports the 2019-2022 FSDS and its long-term goal of growing Canada’s clean technology industry, which includes a medium-term target of increasing the value of Canada’s clean technology exports to $15.6 billion by 2025.
• Positive environmental effects and mitigation of transportation-related impacts may also be achieved in the Electronic Commerce chapter, by supporting the adoption of more environmentally-sustainable means of trading goods and services. Expansion of online commerce may help reduce environmental impacts, provided that businesses seek new avenues in which they can have a positive and sustainable impact on the environment, such as logistics efficiencies, delivery via electric vehicles and use of recycled packaging materials.
• In the context of a Canada-Mercosur FTA, there may be an opportunity to use the Intellectual Property chapter to facilitate the exchange of information between Parties regarding domestic IP policies aimed at supporting innovation and the commercialization of clean technologies. Moreover, and subject to a willing partner, provisions could indirectly encourage the replication of Canada’s expedited examination process for patent applications in the clean technology sector.
• Cross-border trade in services and Temporary entry for business persons: These  chapters will promote trade flows in higher-knowledge services sectors, including in sectors providing cross-border trade in services through digital means. These chapters could help support the growth of the environmental services sector by including provisions facilitating temporary entry for environmental services professionals in Canada and Mercosur countries, thereby supporting the goal of the 2019-2022 FSDS to grow Canada’s clean technology industry.
• Sanitary and Phyto-sanitary (SPS) Measures: The inclusion of provisions related to SPS in a trade agreement aim to protect human, animal or plant life or health from risks arising from additives, contaminants, toxins, pests or diseases. In the context of a Canada-Mercosur FTA, these provisions could help mitigate the risks posed by imports on Canada’s agricultural and agri-food sector (as highlighted in section 3) and contribute to strengthen environmental stewardship globally.
• Biotechnology Annex: By enhancing transparency and predictability in trade among the Parties, the inclusion of Agricultural Biotechnology provisions could contribute to increasing the adoption and trade of products of biotechnology, as well as reinforcing the role of biotechnology as an agricultural sustainability tool. The adoption of modern biotechnology could help broaden farmers’ access to new tools to improve productivity, plant and animal health, as well as environmental sustainability. Furthermore, the use of modern biotechnology by farmers can enable a reduction in the use of pesticides and fertilizers, as well as greenhouse gas emissions, during the production process. In the context of a Canada-Mercosur FTA, this could help mitigate risks highlighted in section 3 in relation to the agriculture and agri-food sector.

More generally, chapters in this grouping could help improve trade processes and mechanisms through more predictable and transparent procedures as well as specific provisions to facilitate online trade in goods and services. This applies in particular to the Customs and Trade Facilitation and the Rules of Origin and Origin Procedures chapters, which could streamline customs processes and facilitate the movement of goods more efficiently. This would deliver commercial and environmental benefits by reducing costs and delays to traders, while minimizing the environmental impacts relating to the movement of goods through transportation efficiencies, promoting a paperless environment, and other mitigating factors.

4.3 Investment

 The purpose of an investment chapter under an FTA with Mercosur would be to help Canadian investors gain market access, protect them and their investments from discrimination and arbitrary treatment, and ensure that the regulatory systems in Mercosur member states are predictable and transparent. The investment chapter does not impose any changes to the Canadian regulatory framework, which applies to all foreign investors as it applies to Canadian investors, including the Impact Assessment Act and provincial environmental assessment regulatory regimes. As such, although the FTA may result in increased investments, these investments would need to meet the same standards of environmental protections as investments of domestic origin. The investment chapter could also contain a number of additional provisions to further address the risks noted in this study in relation to large-scale projects, and include:

• Affirmation of the State’s right to regulate to achieve legitimate policy objectives including with regards to the environment;
• Clarification of the rules governing expropriation with regard to expropriation for a public purpose;
• A commitment by the Parties not to derogate from their own measures relating to the environment to attract investments;
• Flexibility to reserve existing laws and regulations such that they are not subject to specified obligations of the treaty, and to reserve sensitive sectors for future regulation.

Some stakeholders have expressed concern that the inclusion of provisions for the settlement of disputes between an investor and a Party to the agreement grants rights to investors without binding them to any obligations, including obligations to protect the environment. The investor-state dispute settlement mechanism is designed to preserve the government’s right to regulate in the public interest, including with respect to the environment.

4.4 Government Procurement

Canada’s Government Procurement (GP) objectives in trade negotiations are to ensure that Canadian suppliers are treated in a non-discriminatory manner when they bid on procurement contracts and that procurements are conducted in a fair, open and transparent manner.

While advancing the above objectives, Canada may use the opportunity of negotiations with Mercosur to secure commitments to allow Parties to apply technical specifications to promote the conservation of natural resources or the protection of the environment in its GP activities.^{Footnote 20} The inclusion of such provisions would contribute to enhancing positive impacts of an agreement by supporting the Government’s Greening Government Strategy, particularly its Policy on Green Procurement^{Footnote 21} and advancing the 2019-2022 FSDS’s goal to green government, which includes short-term milestones to:

• Include procurement criteria that address carbon reduction, sustainable plastics and broader environmental benefits into government procurements for goods and services that have a high environmental impact, and
• Promote the procurement of sustainable plastic products and the reduction of associated plastic packaging waste, when procuring products that contain plastics.

Overall, commitments in the GP chapter would likely have an indirect but positive impact on the environment through the reinforcement of green GP practices and the expected associated increase in governmental spending on environmentally-friendly goods and services. GP commitments also reinforce Canada’s efforts to incentivize the adoption of clean technologies, which can create economic opportunities and improve environmental outcomes.

4.5 Trade and Indigenous Peoples

As part of its inclusive approach to trade, Canada is advancing Trade and Indigenous Peoples provisions that seek to acknowledge the importance of enhancing the ability of Indigenous peoples and Indigenous businesses to benefit from the opportunities created by an FTA with Mercosur. This also includes provisions with linkages to the environment:

• reaffirm a number of important existing international instruments, such as the United Nations Declaration on the Rights of Indigenous Peoples (UNDRIP), the 1992 United Nations Framework Convention on Climate Change, the 2015 Paris Agreement, and the 1992 Convention on Biological Diversity;
• recognize the important role of the environment in the economic, social and cultural well-being of Indigenous peoples, including the importance of the United Nations 2030 Agenda for Sustainable Development;
• recognize the importance of respecting, preserving and maintaining the knowledge and practices of Indigenous peoples that contribute to the conservation of the environment, and;
• facilitate cooperation activities between the Parties, including the sharing of information and establishment of a dedicated website containing information on the Agreement that is useful to Indigenous entrepreneurs and businesses.

Overall, Trade and Indigenous Peoples provisions would likely have an indirect, positive impact on the environment through cooperation activities between the Parties. These activities would highlight the importance the environment has on Indigenous peoples’ economic and cultural well-being and the role that Indigenous businesses play internationally in innovative and environmentally sustainable economic development.

5. Existing Environmental Legislation, Policies and Actions

Expected impacts identified by the environmental analysis should be considered in the context of Canada’s existing statutes, regulations, policies and actions that help prevent and manage environmental risks in Canada. The environmental legislative framework focuses on minimizing threats to Canadians and their environment from pollution; equipping Canadians to make informed decisions on weather, water and climate conditions; and conserving and restoring Canada's natural environment. This robust environmental framework positions Canada well to mitigate potential environmental effects from a Canada-Mercosur FTA.

This section provides an overview of the Government of Canada’s environmental legislative framework, both at the broad and sector-specific levels. While this overview focuses on the statutes, regulations, policies and actions implemented by the federal government, it is understood that provincial and territorial governments also have important roles and responsibilities in the prevention and management of environmental risks, including numerous environmental statutes and regulations. As a result of these roles, there is extensive cooperation taking place between federal, provincial and territorial governments in these areas.

5.1 Canada’s Environmental Sustainability Strategy and Framework

Under our constitution, the management of environmental issues is an area of shared jurisdiction among federal and provincial governments. The federal government collaborates with provinces, territories, Indigenous peoples and others to protect species and spaces, to develop and administer environmental standards, guidelines, regulations and risk management instruments to reduce releases and monitor levels of contaminants in air, water and soil, and promote and enforce compliance with environmental laws and regulations.

5.2 Key Pieces of Federal Environmental Legislation in Canada

The main federal statutes dealing with the protection of the environment are as follows:

1. Canadian Environmental Protection Act (CEPA)
   • Aims at preventing pollution and protecting the environment and human health.
   • Prevents and manages risks posed by toxic and other harmful substances. It also manages environmental and human health impacts of products of biotechnology, disposal at sea, vehicle, engine and equipment emissions, fuels, hazardous wastes, environmental emergencies and other sources of pollution.
2. Fisheries Act
   • Addresses the protection of fisheries habitats in both oceans and inland waterways.
   • Prohibits the deposit of harmful substances into water frequented by fish, unless authorized through regulation.
3. Transportation of Dangerous Goods Act
   • Promotes public safety in the transportation of dangerous goods.
4. Migratory Birds Convention Act
   • Protects migratory birds from over-hunting and from other human actions. It prohibits the purchase, sale, or possession of any migratory bird, including parts, nests or eggs, unless authorized by regulation.
5. Nuclear Safety and Control Act
   • Regulates the development, production and use of nuclear energy and the production, possession and use of nuclear substances, prescribed equipment and prescribed information in Canada.
6. Canada Shipping Act
   • Deals principally with controlling the discharge of pollutants from shipping vessels.
7. Species at Risk Act (SARA)
   • Designed to meet one of Canada's key commitments under the International Convention on Biological Diversity, aimed at preventing wildlife species in Canada at risk from becoming extinct, providing for the recovery of wildlife species, and managing species of special concern to prevent them from becoming endangered or threatened.
   • Encourages the various governments in Canada to cooperate to protect wildlife species.
   • Consultation and cooperation with Indigenous peoples are essential to the successful implementation of SARA.
8. Impact Assessment Act (IAA)
   • The Act and its regulations establish the legislative basis for federal impact assessment.
   • The impact assessment is a planning and decision-making tool used to assess positive and negative environmental, economic, health and social effects of proposed projects as well as impacts to Indigenous groups and rights of Indigenous peoples.
9. Greenhouse Gas Pollution Pricing Act (GGPPA)
   • Helps reduce Canada’s GHG emissions by ensuring that a carbon price applies broadly throughout Canada and increases over time.
10. Wild Animal and Plant Protection and Regulation of International and Interprovincial Trade Act (WAPPRIITA)
    • Implements the Convention on International Trade in Endangered Species (CITES) by regulating trade in wild animals and plants.
    • Forbids the import, export and interprovincial transportation of designated species unless the specimens are accompanied by the appropriate documents (licences and permits).

5.3 Canada’s Federal Sustainable Development Strategy and The Pan-Canadian Framework on Clean Growth and Climate Change

The 2019–2022 Federal Sustainable Development Strategy (FSDS)^{Footnote 22} sets out the Government of Canada’s environmental sustainability priorities, establishes goals supported by medium-term targets, and identifies short-term milestones and actions to achieve them. It is Canada’s fourth whole of government strategy that brings the Government of Canada’s sustainability activities together in one place.  It outlines what the Government will do across 42 federal departments and agencies to promote clean growth, ensure healthy ecosystems, and build safe, secure and sustainable communities over the next three years. The FSDS also remains closely linked with government priorities, reflecting key initiatives such as efforts to implement the UN 2030 Agenda; the Pan-Canadian Framework on Clean Growth and Climate Change; the Oceans Protection Plan; and work undertaken to address plastic waste and promote zero-emission vehicles. Indicators to track progress against the goals and targets in the FSDS are drawn largely from the Canadian Environmental Sustainability Indicators program, including progress on GHG emissions for Canada. The FSDS also tracks progress on the federal government’s Mission Innovation pledge to double investments in clean energy, research, development and demonstration from 2015 levels of $387 million to $775 million by 2020, as well as reducing GHG emissions from government operations by 40% over 2005 levels by 2030 with an aspiration to be carbon neutral by 2050.

Among the 13 goals set out by the 2019-2022 FSDS, the following are of particular interest in the context of environmental impacts projected as a result of a Canada-Mercosur FTA:

• Taking effective action on climate change, including by taking a leading role in international agreements and initiatives on climate change and promoting substantive climate change provisions in Canada’s free trade agreements;
• Greening government, including through the strengthening of green procurement initiatives;
• Supporting Canada’s growing clean technology industry;
• Ensuring healthy coasts and oceans, including through legislation and regulations to protect coasts, notably to enhance enforcement of pollution prevention provisions;
• Promoting innovation and ingenuity in sustainable food, notably by encouraging the adoption of sustainable agricultural practices and working with provinces and territories through the Canadian Agricultural Partnership.

The Pan-Canadian Framework on Clean Growth and Climate Change^{Footnote 23} is the Government’s plan to take ambitious action to fight climate change, build resilience to a changing climate, and drive clean economic growth. It is the first climate change plan in Canada’s history to include joint and individual commitments by federal, provincial and territorial levels of government, and to have been developed with input from Indigenous peoples, businesses, non-governmental organizations, and Canadians from across the country. The Pan-Canadian Framework has four pillars: pricing carbon pollution; complementary actions to reduce emissions across the economy; adaptation and climate resilience; and clean technology, innovation and jobs.

Among the key areas defined in the Pan-Canadian Framework, those of specific relevance in the context of expected impacts from a Canada-Mercosur FTA include plans to:

• Reduce emissions through complementary actions in:
  • Transportation, including fuel-switching and efficiency improvements in rail, aviation, marine, off-road sectors, light- and heavy-duty vehicles;
  • Industry, including accelerated adoption of energy management systems such as ENERGY STAR for Industry;
  • Forestry, agriculture and waste; and,
  • Government operations and procurement.
• Work with international partners to ensure that trade rules support climate policy;
• Invest in more efficient trade and transportation corridors, including hubs and ports; and
• Support innovation, commercialization and adoption of Canadian clean technologies.

5.4 Sector-specific Laws, Policies and Action

Canada also leverages bilateral and multilateral engagement in key international fora to support wider global efforts to address climate change and manage environmental risks. For example, under the Paris Agreement, Canada committed to reducing GHG emissions by 30% below 2005 levels by 2030. Canada also provides climate finance to support developing countries transition to low-carbon, climate-resilient economies. Canada is delivering $2.65B in climate financing to developing countries, between 2015-16 to 2020-21.

Specific policies and regulations are also of relevance given the environmental risks identified in the preliminary environmental assessment of a Canada-Mercosur FTA. At the sector level, these may help control the limited risks related to the manufacturing, transportation, agriculture and agri-food and mining sectors, as identified in section 3.2.

• Manufacturing: The regulatory framework governing environmental impacts from manufacturing includes the CEPA and its regulations. A key aspect of CEPA is the prevention and management of risks posed by toxic and other harmful substances. For example, CEPA provides broad authorities to regulate activities involving toxic substances, including manufacturing and processing activities. Under CEPA, manufacturing facilities may also be required to disclose their emissions data regarding of selected pollutants through various programs such as the National Pollutant Release Inventory (NPRI) and ECCC’s Greenhouse Gas Emissions Reporting Program. Pollutant emissions to water resulting from industrial manufacturing are also subject to the Fisheries Act, which prohibits the deposit of deleterious substances;
  • Pulp and Paper: Emissions and effluents levels of the Canadian Pulp and Paper sector are subject to a number of regulations and monitoring activities, including the Pulp and Paper Effluent Regulations in the Fisheries Act, as well as ECCC’s code of practice for the management of air emissions from pulp and paper facilities, which promotes best practices in the environmental performance of pulp and paper mills in Canada with respect to atmospheric emissions of sulphur dioxide (SO2) and total particulate matter (TPM);
• Transportation:  ECCC has implemented six vehicle and engine emission regulations to reduce air pollutants and greenhouse gas emissions from on- and off-road vehicles and engines under the CEPA. Transport Canada leads a suite of regulatory and voluntary measures to reduce greenhouse gas emissions from the aviation, marine and rail sectors, and also supports emission reductions from the on-road sector. With respect to the maritime transportation sector in particular, the Canada Shipping Act provides regulations to protect the marine environment coming from navigation and shipping activities;
• Invasive Alien Species (IAS): Implemented by a number of federal departments and agencies, as well as Provinces and Territories, the IAS Strategy directs national efforts to address the issues associated with invasive species entering or already in Canada. At the federal level, the government-wide IAS Strategy involves Agriculture and Agri-Food Canada, Fisheries and Oceans Canada, ECCC, Natural Resources Canada and the Canadian Food Inspection Agency;
• Large-scale projects, including in the mining sector: The Impact Assessment Act (IAA) and its regulations establish the legislative basis for the federal impact assessment process of projects. Whether Canadian or foreign, proponents of designated projects (as defined by the Physical Activities Regulation) may be required to conduct an impact assessment to determine if a project's adverse impacts are in the public interest. For the mining and processing sectors, air emissions and effluents are subject to a number of regulations and monitoring activities, including the Metal and Diamond Mining Effluent Regulations (Fisheries Act), as well as other federal instruments (e.g. Codes of Practice, Environmental Performance Agreements, Pollution Prevention Planning Notices).

5.5 Conclusion

The Government of Canada’s existing environmental legislative framework is well positioned to mitigate any environmental effects from a Canada-Mercosur FTA. As new statutes, regulations, policies and actions are developed and implemented in the future, improvements in the environmental performance of Canadian economic sectors may further help mitigate environmental impacts of an agreement going forward.

6. Conclusion and Next Steps

With a combined population of 261 million and GDP of over $3 trillion, Mercosur offers Canada an opportunity to diversify trade in an important, fast growing market. An FTA with Mercosur represents an avenue to increase our current $9.9 billion in bilateral trade by helping more Canadians compete and succeed in global markets, which in turn will help strengthen the Canadian economy.

The environmental impact analysis uses economic modelling and environmental data to estimate the potential effects of a Canada-Mercosur FTA on the Canadian environment. The economic modelling of environmental impacts identifies that increased trade with Mercosur countries on Canada’s environment would lead to minor increases in GHG emissions, energy and water usage. Most of these increases are projected to come from the manufacturing sector, with the largest share concentrated in a limited number of sub-sectors, notably motor vehicles and parts, paper products, chemical products and machinery and equipment. The analysis also explores broader environmental risks related to maritime transportation, invasive alien species, investments – notably in the mining sector – as well as potential environmental impacts in Mercosur countries. Overall, the analysis identifies that the negative impacts of a Canada-Mercosur FTA on the Canadian environment would be limited in extent and scope.

Further, the overview of the Government of Canada’s existing environmental legislative framework, including statutes, regulations, policies and actions for the prevention and management of environmental risks, suggests that Canada is well positioned to mitigate the potential environmental impacts of an agreement, including through improvements in the environmental performance of Canadian economic sectors going forward.

In addition, the chapter-by-chapter review points to several areas for environmental collaboration and risk mitigation in the context of the FTA, including through provisions in the environment chapter, expanded market access for environmentally-friendly products, services and technologies, mechanisms to increase sectoral, technological and institutional cooperation between Canada and Mercosur countries in key areas, and various Investment and Government Procurement-related provisions.

Given the limited expected environmental impacts of a Canada-Mercosur FTA and pursuant to the Framework, which does not require the publication of a Draft Environmental Assessment (EA) in cases where significant environmental impacts are unlikely to occur, the next phase of the EA process will be to conduct a Final EA. This Final EA will take into account the final negotiated outcomes to assess the scope and nature of environmental effects that could arise from the proposed Canada-Mercosur FTA. The Final EA will be published following the conclusion of negotiations.

Until then, the Government of Canada welcomes input and comments on this IEA. Any comments received will be used to inform subsequent EA analysis of a Canada-Mercosur FTA, as well as EAs of other trade negotiations more broadly. Suggestions for enhancement of mitigation measures regarding potential negative environmental impacts and augmentation of positive effects identified at this stage are also encouraged.

Comments and inputs can be sent until November 10, 2020 to:

E-mail: EAconsultationsEE@international.gc.ca

Mail: Environmental Assessment of the Canada-Mercosur FTA Negotiations
Trade Agreements and North American Free Trade Agreement Secretariat (TCT)
Global Affairs Canada
125 Sussex Drive, Ottawa (Ontario), K1A 0G2

Annexes

Annex A - Overview of the FTA Chapter’s Objectives

• Chapter 1 – Market Access for Goods – The National Treatment and Market Access (NTMA) chapter establishes clear and predictable rules for trade in goods, such as the elimination of tariffs and import and export restrictions, as well as incorporating “General Agreement on Tariffs and Trade obligations on national treatment,” which requires parties to treat imported products no less favourably than like domestic products. Tariff elimination annexes and schedules set out each party’s commitments regarding the elimination of tariffs. Canada’s FTAs typically provide for the elimination of all customs duties, except on a limited number of highly sensitive products.
• Chapter 2 and 3 – Rules of Origin and Procedures related to Origin
  • Rules of Origin – The Rules of Origin provisions set out the general requirements under which a good may be considered originating in the territory of the Parties to the Agreement and therefore eligible for preferential tariff treatment. Rules of origin are intended to be clear, as simple as possible, and leave little room for administrative discretion.
  • Origin Procedures – The Origin Procedures provisions establish the procedures used to administer the rules of origin and set out obligations for importers, exporters and the customs authorities. The procedures clarify the processes and obligations required for importers and exporters to take advantage of the reduced or free rates of duty and provide the customs authorities with an applicable methodology to ensure that only qualifying goods receive preferential tariff treatment under the FTA.
• Chapter 4 – Trade Facilitation – The Customs and Trade Facilitation chapter is administrative in nature, seeking to reduce the transaction costs incurred by traders by simplifying, standardizing and modernizing trade-related customs procedures to facilitate the movement of goods within the territories of the Parties.
• Chapter 5 – Sanitary and Phytosanitary Measures – The Sanitary and Phytosanitary Measures provisions maintain each party’s right to take measures necessary to protect against risks to food safety, animal or plant life or health, while ensuring that such measures are science-based, transparent and do not create unnecessary and unjustifiable sanitary and phytosanitary trade restrictions.
• Chapter 6 – Technical Barriers to Trade – The Technical Barriers to Trade (TBT) chapter builds on the existing World Trade Organization (WTO) Technical Barriers to Trade Agreement’s provisions in the areas of transparency, conformity assessment and joint cooperation. A TBT is a non-tariff barrier to trade - such as a technical regulation, standard or conformity assessment procedure - that sets out specific technical or other requirements for products to be exported or imported to a certain country.
• Chapter 7 – Good Regulatory Practices – The focus of the Good Regulatory Practices chapter is to promote enhanced transparency and good regulatory practices, with a view to improving governance and predictability while taking into account the legitimate policy objectives of each country. The Chapter includes commitments on mechanisms to facilitate coordination between regulatory authorities; obligations involving the implementation of good regulatory practices; and obligations concerning cooperation with other parties and interested persons of other parties.
• Chapter 8 – Intellectual Property – The inclusion of provisions related to intellectual property (IP) in a trade agreement aims to establish standards for the protection and enforcement of IP rights to which each Party’s national laws must conform.
• Chapter 9 – Cross-border Trade in Services – The Cross-Border Trade in Services provisions set out the rules regarding the treatment of service suppliers in partner countries.
• Chapter 10 – Temporary Entry for Business Persons – Describes the labour mobility provisions that support the facilitated movement of highly skilled business persons between partner countries.
• Chapter 11 – Telecommunications – The Telecommunications provisions enhance regulatory certainty for telecommunications service suppliers.
• Chapter 12 – Electronic Commerce – The Electronic Commerce provisions help facilitate the use of e-commerce by consumers and businesses, in recognition of the growing digitalization of trade and its impact on the economy.
• Chapter 13 – Financial Services – The Financial Services (FS) chapter provides protections for investments in financial institutions, establishes a framework for regulatory transparency and includes a dispute settlement framework tailored to the financial sector. The scope of the FS chapter only applies to measures relating to: financial institutions; investors and investments in financial institutions; and cross border trade in financial services.
• Chapter 14 – Investment – The Investment provisions protect investors from discriminatory or arbitrary treatment in their host country.
• Chapter 15 – State-owned Enterprises – The State-Owned Enterprises provisions seek to ensure that private firms can fairly compete with enterprises owned or controlled by a government. Such provisions ensure that state-owned enterprises act in accordance with commercial considerations, except when performing a public mandate.
• Chapter 16 – Competition – The purpose of the Competition Policy chapter is to promote open and competitive markets, and help ensure that the benefits of trade liberalization are not offset by anti-competitive business conduct. The proposed competition policy provisions require that the parties adopt or maintain measures to proscribe anti-competitive business conduct, and include specific commitments for transparency and procedural fairness.
• Chapter 17 – Trade Remedies – The purpose of the Trade Remedies chapter is to reaffirm WTO rights and obligations for anti-dumping, countervailing and global safeguard measures under the relevant WTO Agreements.
• Chapter 18 – Dispute Settlement – The Dispute Resolution provisions describe transparent, effective and efficient dispute settlement mechanisms. State-to-state mechanisms help to resolve disputes between the FTA partners over the interpretation of the agreement or whether a measure of a Party is inconsistent with the agreement. Investor-state mechanisms provide recourse for companies that feel they were not treated as favourably as the host country’s companies.
• Chapter 19 – Government Procurement – The Government Procurement provisions help to ensure that suppliers of goods, services and construction services are treated in an open, transparent and non-discriminatory manner when competing for government procurement opportunities in partner markets.
• Chapter 20 – Environment – The Environment provisions ensure that parties effectively enforce their environmental laws and do not lower environmental standards to encourage trade or investment. It also includes commitments that support efforts to address a range of global environmental challenges, including related to climate change, conservation of biological diversity, illegal wildlife trade, sustainable fisheries and forest management, and invasive alien species.
• Chapter 21 – Labour – The Labour provisions commit parties to adopt and maintain in their domestic labour laws internationally recognized labour rights and principles. These provisions also require that the parties effectively enforce such labour laws.
• Chapter 22 – Trade and Gender – The main objective of the Trade and Gender chapter is to advance women’s economic empowerment and gender equality. It does so by acknowledging the importance of incorporating a gender perspective into economic and trade issues to maximize the benefits of trade. It also facilitates cooperation activities and information sharing.
• Chapter 23 – Trade and Indigenous Peoples – The Trade and Indigenous Peoples provisions seek to enhance the ability of Indigenous peoples and businesses to benefit from the opportunities created by an FTA. They do so by increasing engagement of Indigenous peoples in international trade and facilitating cooperation activities and information sharing.
• Chapter 24 – Micro, Small and Medium-sized Enterprises – The Micro, Small and Medium-sized Enterprises provisions support the growth and development of micro, small and medium-sized enterprises by enhancing their ability to participate in and benefit from the opportunities created by an FTA, through facilitating cooperation activities and information sharing.
• Chapter 25 – Institutional Chapters
  1. Preamble – The preamble is not a chapter, but an introduction on the purpose of the Free Trade Agreement (FTA). The preamble reflects the intentions of the parties and the scope of the FTA.
  2. Initial Provisions and General Definitions – The first part of the Initial Provisions and General Definitions chapter explains how the FTA respects WTO commitments and how it links with existing agreements. The second part includes definitions of terms used in more than one chapter.
  3. Administration – The Administrative Provisions chapter establishes the structure of the bodies that will be charged with the governance and the implementation of the FTA.
  4. Exceptions and General Provisions – The Exceptions and General Provisions chapter includes exceptions, such as for essential security, cultural industries and taxation, that would apply across the entire agreement.
  5. Transparency, Anti-Corruption and CSR and RBC – The purpose of this chapter is to facilitate trade by reducing corruption and enhancing transparency. The chapter is divided into three sections: transparency, anti-corruption, and CSR and RBC.
  6. Final Provisions – This chapter includes provisions related to entry into force or accession to the agreement (i.e. elements linked to the Vienna Convention).
• Biotechnology Annex (The placement of the Annex is to be determined) – The objective of the Agricultural Biotechnology provisions is to encourage innovation and facilitate trade in products of agricultural biotechnology.

Annex B - Environmental Assessments Analytical Methodology

The Framework provides a four-stage analytical methodology for conducting the Initial, Draft and Final EAs. Guidance on how to conduct each stage of the analysis is provided in the Handbook (section 4.6.1).

1. Identification of the economic effect of the agreement to be negotiated. This stage identifies the trade liberalization activity of the agreement under negotiation. It examines the areas the potential agreement may include, the changes or new trade activity that could result, and the overall economic relevance to Canada. This helps to determine the scope of analysis for the EA and to prioritize the issues to be assessed.
2. Identification of likely environmental impact of such changes. Once the economic effects of the proposed trade agreement have been estimated, the likely environmental impacts of such changes are approximated. Consideration is given to potential positive and negative impacts.
3. Assessment of the significance of the identified likely environmental impacts. The identified likely environmental impacts are then assessed as to their significance. The Framework outlines various criteria in determining significance, including frequency, duration, permanency, geographical scope and magnitude, level of risk, irreversibility of the impacts, and possible synergies among the impacts.
4. Identification of enhancement/mitigation options to inform the negotiations. The EA is intended to identify, in a preliminary fashion, the possible policy options or actions that might be required to mitigate potential negative impacts and/or to enhance potential positive impacts that may result from the proposed agreement.

The EA process also includes consultations with the public, provincial and territorial governments and with the non-governmental Environmental Assessment Advisory Group (EAAG). The EAAG is made up of persons drawn from the business sector, academia and non-governmental organizations; the group provides advice in its own capacity on the Global Affairs Canada (GAC) EA process. At the conclusion of each assessment phase (i.e. Initial, Draft and Final), EAs are shared with provincial and territorial representatives and the EAAG for feedback before being released for public comment.

A Final EA will be released after negotiations conclude. As appropriate, the Final EA would include a discussion of any subsequent analysis undertaken and document comments received in response to the IEA concerning the potential environmental impacts of the agreement on Canada. The Final EA should also report on how environmental considerations may have affected the FTA negotiations.

Following the conclusion of the Final EA report, follow-up and monitoring could, if warranted, be undertaken in order to review any mitigation or enhancement measures ultimately recommended by the Final EA report. Monitoring and follow-up activities can be undertaken anytime during the implementation of a concluded trade agreement in order to gauge the performance of its provisions from an environmental perspective.

Annex C - Background on the Environmental Impact Framework

Overall, the net impact of an FTA on the environment is determined by the three competing mechanisms with each having its own unique value: the scale effect (negative impact), the composition effect (ambiguous impact) and the technical effect (positive impact). The scale and technical effects tend to work in opposite directions, while the composition effect depends on whether emission-intensive sectors expand. The overall impact of trade will depend on the magnitude of each of these three effects.

The environmental indicators used for the analysis include GHG emissions, fossil fuel energy and water usage. With respect to GHG emissions, the analysis considers both the 2015 level and direct intensity of 3 main GHGs: carbon dioxide (CO2), methane (CH4) and nitrous oxide (N2O).  The measured level of emissions is in kilotonnes (kt) of carbon dioxide equivalent (kt CO2 eq.) and the intensity is measured in kilo tonnes of carbon dioxide equivalent per million dollars of production output (kt CO2 eq./$1,000,000). The emission sources consist of 16 different fuel types: coal, natural gas, motor gasoline, diesel, aviation fuel, light fuel oil (including kerosene), heavy fuel oil, refinery fuel gas, coke oven gas, liquefied petroleum gases (including natural gas liquids), electricity, coke, steam, wood and spent pulping liquor.

Concerning energy usage, the analysis is based on both the 2015 level and direct intensity of energy usage associated with the use and production of coal, natural gas, motor gasoline, diesel, aviation fuel, light fuel oil (including kerosene), heavy fuel oil, refinery fuel gas, coke oven gas, liquefied petroleum gases (including natural gas liquids), electricity, coke, steam, wood and spent pulping liquor. Energy has been measured in terajoules (TJ), and the intensity is measured in terajoules per million dollars of production output (TJ/$1,000,000).

Water usage refer to the water usage for agricultural, industrial and municipal purposes including irrigation in agriculture, rain in agriculture and forestry and hydroelectric power generation. Water usage intensity is measured in cubic metres per dollar of production output with the latest data available in 2015.

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