The Effect of NAFTA on Energy and Environmental Efficiency in Mexico
Prior to Mexico's entry to NAFTA predictions of the consequent impact on the environment in that country ranged from the dire to the very optimistic. This paper investigates NAFTA's outcomes in terms of energy use and the emission of atmospheric pollutants. Specifically, has entry into NAFTA led to a convergence or divergence in indicators of emissions, environmental efficiency, and emissions specific technology in Mexico, the United States, and Canada? Four emissions variables are considered: energy, carbon, sulfur, and NOx. Three different indicators of emissions and environmental efficiency are computed and tested for both convergence and the presence of a structural break associated with the introduction of NAFTA: energy or emissions per capita; energy or emissions intensity of GDP; and the state of technology in sulfur abatement and energy efficiency derived from a production frontier model estimated using the Kalman filter. Three convergence tests test for beta-convergence, sigma-convergence, and cointegration of the trends and the effect of NAFTA on these measures. I also test whether NAFTA induced a structural break in the trend of the various indicators. The results show that the extreme predictions of the outcomes of NAFTA have not materialized. Rather, trends that were already present before the introduction of NAFTA continue and in some cases improve post-NAFTA, but not yet in a dramatic way. There is strong evidence of convergence for all four intensity indicators across the three countries towards a lower intensity level. Though intensity is rising initially in some cases in Mexico, it eventually begins to fall post-NAFTA. Per capita measures for the two criteria pollutants also show convergence, but this is not the case for energy and carbon and the latter variables also drift moderately upwards. The state of technology in energy efficiency and sulfur abatement is improving in all countries, though there is little if any sign of convergence and NAFTA has no effect on the rate of technology diffusion. However, total energy use and carbon emissions increase both pre- and post- NAFTA and total NOx emissions increase in Mexico. Only total sulfur emissions are stable and falling in all three NAFTA partners.
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