A powerful legal tool designed to protect foreign investors could undermine commitments made in Paris last month to reign in climate warming emissions.
The
tool is tucked into two pending trade deals President Obama wants to finalize
this year. The language is de rigueur for trade agreements and is designed to
protect against what's known as "loss of expected profits."
TransCanada,
citing this clause in the North American Free Trade Agreement, on Wednesday
filed a $15 billion lawsuit against the United States for blocking its Keystone
XL pipeline.
The
language gives companies an avenue to challenge regulations that undermine
investment plans, and it could chill or even curtail global efforts to trim
carbon emissions.
Almost
200 countries pledged last month to cut global warming gases in an attempt to
keep temperatures “well below” 2 C above pre-industrial times.
But under either trade pact, if a new air rule, for instance, creates disincentive for an international energy company to build a coal plant, it can sue the government for investment losses if the company can prove the policy was adopted after initial plans for the plant were made.
Both
trade agreements limit "the ability of governments to put in place climate
and other public interest policies" and give "huge power"
to big polluters," said Ilana Solomon, director of the Sierra Club’s
Responsible Trade Program.
The
two trade deals in question capture most of the world's economic might.
In
his final year in office, President Obama hopes to finalize both the
Trans-Pacific Partnership and the Trans-Atlantic Trade and Investment
Partnership.
The
Pacific partnership involves 11 countries on the Pacific Rim and is awaiting
Congressional approval. The Atlantic version, still on the negotiating table,
incorporates the 28 member states of the European Union.
Designed
to ease trade obstacles between countries, both agreements include something
called an "investor-state dispute settlement," which allows
corporations to file lawsuits based on “loss of expected profits.”
Under
such agreements, if a foreign corporation is doing business in a country and it
feels that basic investment rules have been breached, it can bring the country
before an international tribunal in an effort to recoup lost or potentially
lost profits.
The
settlements—even if won by the corporation—don’t overturn the laws or
regulations that were challenged.
TransCanada
this week opened the largest such case ever brought against the U.S.—seeking
$15 billion due to President Obama’s rejection of the Keystone pipeline last
year.
Brought
under NAFTA, the 1994 treaty that contains similar investor-state dispute
settlement language, the case immediately became Example No. 1 in critics'
argument against the two pending agreements—corporations suing big when
they don’t like environmental laws.
Democratic
presidential candidate Martin O'Malley called the lawsuit "outrageous"
in a tweet. "Trade deals shouldn't value corporate profits over
national interests."
Solomon
and others add that granting companies such power elevates foreign corporations
to near equal standing with governments in environmental rulemaking. In the
United States, they say, that would chill state and federal attempts to reign
in global warming gases.
Trade
advocates say this fear is overblown and maintain the tool keeps a level
playing field for corporations operating abroad.
Chilling effect
Investor-state
dispute settlements rose 50 years ago, as investors sought a way to bring
claims against states, said Kara Sutton, policy director with the
Trans-Atlantic Business Council.
Some
form of investor-state dispute settlements exists in about 50 current U.S.
trade agreements.
Sutton
and others in support of the trade agreements say the investment language is
necessary to protect companies doing business abroad from countries that may
not have highly developed legal systems or may have bias against foreign
investors.
Bill
Reinsch, president of the National Foreign Trade Council, said objections to
investor-state dispute settlements are borne out of “misplaced understanding”
of how they work.
Arbitrators
don’t have authority to order a country to change its laws, he said. “What they
can do is require compensation.”
Reinsch
sees no evidence that investor-state dispute settlements have had any
“chilling” effects on regulators.
But
environmentalists and social justice activists, among others, often fault
international trade deals for giving unfettered economic activity precedent
over social, environmental and democratic goals.
The
U.S. has never lost such a case.
In
the first investor-state dispute settlement case that targeted environmental
law in the U.S., a decade ago a Canadian company sued the federal government
over California’s prohibiting the compound methyl tertiary butyl ether, MTBE,
as a gasoline additive because of health concerns.
Methanex
Corp. brought case and sought more than $900 million in damages. The U.S. won
the case but spent millions in defense.
This
week’s announcement that TransCanada is suing the U.S. is a stark reminder of
this legal weapon—and how the two pending trade agreements open up the U.S. to
far more attacks, said Carroll Muffett, president and CEO of the Center for
Environmental Law.
He
added this threat of such litigation definitely impacts regulators. “Even
sophisticated regulators operating at the national level in large countries are
easily dissuaded" if they see a risk of trade complaints, he said.
The
Obama Administration did not return requests for comment.
How do
investor-state dispute settlements work?
In
2009, Swedish energy giant Vattenfall ran into a problem with a massive coal
plant it planned for the banks of the Elbe River in Hamburg.
At
issue were new Germany’s environmental restrictions— specifically water
discharge regulations — that Vattenfall argued would render the 1,600 megawatt
plant uneconomical. The policies were drafted years after Hamburg officials had
accepted initial plans for the plant.
Germany's
federal regulators and the energy company at first tried to play nice but
couldn’t hash it out. They stepped inside the ring at the Washington,
D.C.-based International Center for Settlement of Investment Disputes, with
Vattenfall using the dispute settlement clause in the international Energy
Charter Treaty as its go-to punch.
Germany
didn’t quite hit the canvas. But it suffered a behind-the-scenes TKO of a
sort—settling with Vattenfall in 2010. As part of the
agreement, Germany agreed to roll back some of the new environmental
protections designed to protect water quality. The coal plant starting churning
at full power this year.
Regulators
tend to notice that kind of pushback.
A
study last year from researchers at York University’s Osgoode Hall Law School
interviewed 51 current or former Canadian officials involved in environment or
trade in Ontario about investor-state dispute settlements and “regulatory
chill.”
Researchers
found that trade deals altered decision-making and created some obstacles for
environmental rulemaking.
“About
half of the interviews from Canada recalled one or a few situations in which
[investor-state dispute settlements] or other trade concerns were raised in
internal decision-making,” the authors wrote.
At
the 2014 United
Nations’ World Investment Forum, Malan Lindeque of Namibia's
Ministry of Trade and Industry said the arbitration for the settlements can be
costly and pose major risks for developing nations. Such language in
international trade agreements “limit their right to regulate and for
developing countries hampers their ability to act in their own interest,” he
said.
At
the same forum, Champika Malagoda of Sri Lanka’s Research and Policy Advocacy
Department said for international trade agreements her country “would not want
the provision for state-investor dispute settlement, which gives investors the
power to drag governments to dispute over policy changes.”
In
addition, Muffett pointed out that the National Conference of State
Legislators, a nonpartisan non-profit that supports U.S. state legislatures, has come out
against investor-state dispute settlements.
The
investor-state dispute settlement has prolonged negotiations between U.S. and
Europe on the Trans-Atlantic deal as both France and Germany have expressed
concern over its inclusion.
Plenty of precedent
Muffett
and others skeptical of the agreements say cases like Vatenfall’s are just the
tip of the iceberg.
The
nonprofit organization Public Citizen estimates that governments have paid out
more than $3 billion to investors in investor-state disputes under U.S. free
trade agreements and other investment treaties, with more than 85 percent of
this related to "oil, mining, gas, and other environmental and natural
resource disputes.”
Some
high profile examples: a Chevron
Corporation case against Ecuador for its push for the company
to clean up Amazon rainforest contamination; the Clayton Family, owners of U.S.
concrete company Bilicon, against Canada for
the country’s attempt to protect habitats and key species from Bilicon’s
proposed basalt extraction in Nova Scotia; and U.S.-based waste management firm
Metalclad Corp. against Mexico over
a municipality’s decision to not grant permits to expand a toxic waste
facility.
“This
system has existed for decades, and these very vague concepts of fair
treatment—or if they feel something reduces their profits—has given broad, expansive
powers to foreign investors and corporations,” Solomon said.
Muffett
said a “cottage industry” is growing around this practice as law firms
increasingly seek ways to guide corporations to use the powerful investor-state
tool in trade agreements.
“This
is one of the most troubling things about investor-state protection: … Many
companies operate on a multinational basis. It’s easy to move money across
borders and give foreign investors access to alternate legal systems,” he
said.
"Many companies operate on a multinational basis. It's easy to move money across border and give foreign investors access to alternate legal systems."- Carroll Muffett, Center for Environmental Law
Another
concern is the international tribunals’ arbitration process, which critics say
primarily takes place behind closed doors and lacks a proper appeals system.
At odds with Paris
agreement?
Sutton,
with the Trans-Atlantic Business Council, said an uptick in “frivolous cases”
might be possible if the two trade deals are ratified. But “no company wants to
use [investor-state dispute settlements] at the end of the day. It’s a last
resort to get back investments.”
The
Obama Administration has touted that the U.S. has never lost an investor-state
dispute cases in spite of having 50 such agreements in place, and publicized
the trade deals as way to expand “economic opportunity for American workers,
farmers, ranchers, and businesses.” It is not worried about environmental loses
or handicapping the climate deal.
In
an October statement on the Trans-Pacific Partnership President Obama said it
“includes the strongest commitments on labor and the environment of any trade
agreement in history.”
Muffett
said the advisory boards for the agreements are overwhelmingly dominated by
trader interest and the environment will come out on the losing end if the
investor-state dispute settlement tools remain.
These
“agreements’ express purpose is to reduce regulatory barriers and increase
coherence between countries,” he said. “The problem is each country is farther
along in certain environmental regulations.”
Adding
to the skepticism around the trade agreements is a recent bill by the
Republican-controlled House that would block trade deals from being used to cut
greenhouse gas emissions.
“The
Paris agreement set out a framework, now it’s up to all national governments to
meet emissions targets,” Solomon said.
“We
need to be clearing a path ... (for) strong policies that keep fossil fuels in
ground, and these free-trade agreements create new roadblocks and empower the
very industries we’re trying to regulate.”