TED Case Studies

CARBON2 Case

CASE NUMBER: 213 CASE MNEMONIC: CARBON2 CASE NAME: Carbon II Power Plant I. IDENTIFICATION 1. The Issue In October of 1993 the utility corporation Southern California Edison (SCE) canceled its plans to invest in and operate a $1.8 billion power plant known as Carbon II near the Texas border in Mexico. Through its San Antonio-based subsidiary, the Mission Energy Company, SCE was considering joint ownership of Carbon II with the Mexican mining company Grupo Acero del Norte. The proposal, encouraged by the impending North American Free Trade Agreement (NAFTA), indicated the possibility of bilateral energy usage in trans-boundary areas. However, scrutiny of cross-border pollution in the political debate over the agreement's ratification focused concern on emissions from Carbon II and its precedent for future energy development in Mexico. The facility's coal-fired production technique caused concerns with the U.S. Environmental Protection Agency (EPA) and Interior Department about its impact on the border ecology. In addition, the Texas state legislature and U.S. Park Service had specified the possible ecological damage to the Big Bend National Park. Attention to this facility underscored the overall concern with the process and scope of Mexico's new geo-thermal energy program. These considerations appeared to have influenced the SCE decision to nullify its investment, citing differences with Mexico's energy department over aspects of the final agreement. 2. Description When its funding status changed, Carbon II was nearing completion at its site 18 miles south of the Texas border and within commuting distance to San Antonio. The development of Carbon II marks the inception of a Mexican federal program designed to attract private domestic and foreign investment for increasing its supply of electrical power. The program's planned scope envisions the construction of 40 facilities fueled by coal ash residue from mining operations. Mexico secured World Bank lending to initiate the program, but private investment was necessary to finance this $20 billion project over its twelve year duration. Thus far $3.5 billion, including the investment from SCE, was secured for two additional plants Once in operation, Carbon II and its nearby sister facility Carbon I, would produce 230,000 tons of sulfur dioxide pollutant air particles. This emission would make the site the tenth largest source for such pollution in North America. Carbon II's estimated impact on the U.S. environment alone would be sizable. A National Park Service study concluded that sulfur dioxide from the combined plants would reduce visibility by 30% at the Big Bend National Park in southwestern Texas.(1) In addition, the sulfur dioxide would contribute to acid rain in the region and create a haze that could possibly drift to the Grand Canyon. This ecological degradation, along with the projected magnitude of the program has elevated U.S. environmental concerns. The proximity to the Mexican border, and the prospect of weak environmental regulation monitoring pollution emission prompted EPA criticism. Agency analysis concluded that the Mexican standard for particulate emissions is ten times weaker than the U.S. counterpart.(2) Equipment required to modernize the 1970s-era technology would cost an extra $300 million. Neither SCE nor Mexico's government were willing to pay the expense. SCE's involvement in Carbon II⺳ development illustrates the business aspirations of U.S. and Canadian utility companies in post-NAFTA Mexico. Though the project didn⺶ propose to sell power to the United States, the passage of NAFTA created huge potential transborder utility markets. The case also underscores the pressure to harmonize Mexican environmental standards with the U.S. under NAFTA.(3) U.S. lawmakers consider Carbon II a test case of how the two countries will resolve cross-border problems under the agreements voluntary pollution controls. The Carbon II case illustrates Mexico's quandary in its quest for industrialized status. The parallel, but not integrated, programs of trade liberalization and energy development have combined to place national policies under the examination of the U.S. government. The paradoxical result: Pressure to approve NAFTA, and its subsequent investment, discourage U.S. private financing of its energy policy. Both programs designed to promote economic and societal growth have presented a conflict for each other. In conclusion, the Carbon II outcome is the most beneficial for environmental protection in the border region. Long neglected at the expense of economic development, it appears environmental policy has gained political weight in the decision making of both the United States and Mexico. In that regard the case has served to promote necessary environmental protection. 3. Related Cases (1): Basel and Mexico
(2): Florido< /a>
(3): NAFTA< br> (4): Border
(5): Basel< br> (6): Tijuana< /a>
(7): San Diego
(8): Trail< br> (9): Air Pollution
(10): Colorad o
Keyword Clusters (1): Industry = UTILity (2): Bio-geography = DRY (3): Environmental Problem = Pollution Air [POLA] 4. Author: Douglas R. Freeman B. LEGAL FILTERS 5. Discourse and Status Since Carbon II never became involved in legal proceedings, its general discourse is neither formal agreement nor disagreement. Despite initial ecological concerns raised during the summer of 1993, no law suits were brought against the SCE corp nor Mexico⺳ Department of Energy. In addition, when the SCE corp removed its investment, the venture ceased to be a formal American business interest. 6. Forum and Scope: NAFTA and BILATeral Although this is a bilateral issue between the United States and Mexico it was reviewed under a unilateral context. The potential danger of Carbon II's pollution was examined mainly by the EPA, Interior Department, and Texas State Legislature. A bilateral forum for trans-boundary environmental protection exits under the 1983 Lapaz Agreement. This accord between the EPA and Mexico's Secretariat for Urban Development and Ecology (SERDUE) provides joint authority to regulate air, land, and water pollution in the border region. With NAFTA's ratification, future environmental jurisdiction along the U.S./Mexico Border will enforced by the trilateral North American Commission on the Environment (NACE). Until NACE receives regulatory power, ecological protection is governed by the NAFTA's Article 1114. Concern remains over this article's enforcement ability. It relies on voluntary compliance among investors to health, safety, and environmental regulations. 7. Decision Breadth: 2 (USA and MEXICO) Though never involving a legal proceeding, the SCE decision to cancel its investment involved interests in Mexico and the United States. 8. Legal Standing: TREATY C. GEOGRAPHIC FILTERS 9. Geography a. Geographic Domain: North America b. Geographic Site: Western North America c. Geographic Impact: USA 10. Sub-National Factors The Texas State government brought initial attention to the issue in response to constituent inquiry. Their pressure prompted the review by the EPA and Interior Department, leading to subsequent national attention. 11. Type of Habitat: DRY D. TRADE FILTERS 12. Type of Measure: Regulatory Standard [REGSTD] At this point no regulatory measure was being instituted to prevent the production of electrical power at the Carbon II plant. The EPA recommended the installation of scrubbing equipment at the facility to reduce emissions. The $300 million cost of this regulatory measure would be included the final cost of electrical output. 13. Direct vs. Indirect Impacts: INDirect Though the regulatory standards do not limit production of electricity, the particle filtering equipment would affect the production cost and have an indirect impact on the amount of power produced at plant from the plant. 14. Relation of Trade Measure to Product Impact a. Directly Related: YES POWER b. Indirectly Related: NO c. Not Related: NO d. Related to Process: YES Pollution Air [POLA] 15. Trade Product Identification: POWER 16. Economic Data Based the 1992 UN Energy Statistics Yearbook, Mexico total production of electricity for the fiscal year was approximately 126 million kilowatts of power. Geo-thermal, which includes the coal- ash technique, production accounted for roughly 5 million kilowatts, or 4 percent of this total. No figures are available for employment in Mexico power industry. However, Mexico⺳ country profile compiled by The Economist Intelligence Unit shows the electricity industry accounting for 1.5 percent of 1992 gross domestic product (GDP). 17. Impact of Trade Restriction: HIGH Figures are not available for the hourly cost of Mexico⺳ electrical power. However, without SCE's investment, or a viable alternative, the Carbon II plant will not go into production at a loss of 1.4 million kilowatts of power. In addition, the bleak prospect of investment for Mexico's coal-ash power program may result in insufficient production to meet national demand, and cause increased prices. 18. Industry Sector: UTILity 19. Exporters and Importers E. ENVIRONMENT FILTERS 20. Environmental Problem Type: Pollution Air [POLA] The emissions from Carbon II would increase air pollution in the region and contribute to acid rain. Both types of degradation are examples of resource concentration problems. 21. Name, Type, and Diversity of Species Name: Many Type: Many Diversity: 19,473 higher plants per 10,000 km/sq (USA) Plants, animals, and insects indigenous to the Sonoran Desert of south-western Texas and northern-central Mexico would be affected by the particle emissions. Although the exact number of species is not known, such animals as owls, hawks, deer, javelenas, mountain lions, and assorted reptiles are common to the Big Bend National Park. 22. Resource Impact and Effect: MEDium and Structural [STRCT] 23. Urgency and Lifetime: MEDium and 10-20 years Currently, the urgency of coal-ash pollution is relatively low owing the limited scope of the industry⺳ development. However, the other issues of pollution and waste dumping along the U.S./Mexico border are severe. Publicity of the probable emissions from Carbon II, illustrates a pro-active attitude towards addressing potential new environmental problems in the region. 24. Substitutes Potential substitute sources of power in Mexico could include Solar or Wind energy. Both techniques are well suited for the climatic conditions of the region, and would offer pollution free electricity. F. OTHER FACTORS 25. Culture: NO 26. Human Rights: NO 27. Trans-Boundary Issues: YES This case is a facet of a much larger political, economic, and environmental issue. Environmentalists on both sides of the border feel operation of this plant and the proposed others will exacerbate an already critical situation. Despite Mexico⺳ comprehensive environmental legal framework, the country⺳ ecology has suffered from four decades of almost unregulated industrialization.(4) The border region⺳ ecology has particularly suffered from economic growth resulting from the Maquiladora Program. Over 2,000 U.S. industrial plants have located along the 2,000 mile border in the past two decades.(5) An estimated $5.5 billion would be required to clean up air, land, and water degradation in the area. U.S. concern over this pollution focused attention on Carbon II. Congressional debate over the ratification of the North American Free Trade Agreement (NAFTA), brought the plant⺳ development to media headlines. U.S. lawmakers consider the facility a test case of how the two countries will hammer out cross-border pollution problems.(6) In the words of a Sierra Club official, "Carbon II is a perfect example of how we could make NAFTA work, or how it could actually end up making things worse in the environmental arena."(7) 28. Relevant Literature The Economist Intelligence Unit. Mexico: Country Profile 1993-94 London: Business International Limited, 1993. Golden, Tim. "Fear of Pollution at Mexican Plant." The New York Times, August 12, 1993, A7. Golden, Tim. "A History of Pollution in Mexico Casts Clouds Over Trade Accord." The New York Times, August 16, 1993, A1. Golden, Tim. "Mexican Border Utility Deal Fizzles." The New York Times, October 13, 1993, D1. Old, Joe and Stephen Baker. "How Do You Clean Up A 2,000-Mile Garbage Dump?" Business Week (July 6, 1992): 31. "1,100 Miles of Solitude: The Big Bend National Park," Audubon 94 (March/April, 1992): 36-7. Pasztor, Andy. "Power Plants in Mexico Cast Pall Over NAFTA." The Wall Street Journal, September 8, 1993, B1. The United Nations. 1992 UN Energy Statistics Yearbook. New York: UN Publications, 1993. Ward, Justin and Glenn T. Prickett. "Prospects for a Green Trade Agreement." Environment (May 1992): 2-3 and 44-5. References 1. Andy Pasztor, "Power Plants In Mexico Cast Pall Over NAFTA," The Wall Street Journal, September 8. 1993, B1. 2. Pasztor, B7. 3. Tim Golden, "Fear of Pollution at Mexican Plant," The New York Times, August 12, 1993, A7. 4. Tim Golden, "A History of Pollution in Mexico Cast Clouds Over Trade Accord." The New York Times, August 16, 1993, A1. For aspects of Mexican environmental law see Justin Ward and Glenn T. Prickett, "Prospects for a Green Trade Agreement." Environment, May 1992, 2. 5. Joe Old and Stephen Baker, "How do you Clean Up a 2,000-Mile Garbage Dump?" Business Week, July 6, 1992, 31. 6. Pasztor, B1. 7. Ibid.

Go To Super Page

Go to All Cases

Go to TED Categories