US$20 billion: That’s how much American investors think Canadian taxpayers should fork over to compensate them for their failed bid to develop a liquefied natural gas facility in Quebec.

That’s almost a fifth of the province’s total budget for this year.

Ruby River Capital LLC, the U.S.-based owner of GNL Québec Inc., filed a claim against Canada under the North American Free Trade Agreement (NAFTA) after its Énergie Saguenay project failed to pass a federal environmental impact assessment.

The proposed terminal had already been rejected by the Quebec government over concerns that it would increase greenhouse gas emissions and negatively impact First Nations and marine mammals.

Canada faces a no-win situation — a catch-22. If the government does not rapidly phase out fossil fuels, it will fail to meet its commitments under the Paris Agreement to address the climate crisis. But when it takes steps to do so, foreign investors invoke international trade and investment agreements like NAFTA and threaten to drain public coffers.

‘Lost future profits’: NAFTA ability to sue governments ends in June 2023

Unlike environmental treaties, trade and investment agreements have teeth. They are enforceable through a system known as Investor-State Dispute Settlement that allows foreign investors to bypass local courts and bring claims for monetary compensation to a panel of three arbitrators. More than 1,200 Investor-State Dispute Settlement cases have been launched against governments around the world in the last 25 years.

Between 1996 and 2018, Canada was sued more than 40 times by American investors through the investment chapter in NAFTA. To date, Canada has lost or settled (with compensation) 10 claims. Canadian governments have paid out more than $263 million in damages and settlements. Another case currently playing out is with Koch Industries, which is suing Canada for the money it says it lost in 2018, when Ontario cancelled a cap-and-trade carbon pricing program the global conglomerate had bought into.

When NAFTA was replaced in 2018 with the U.S.-Mexico-Canada Agreement (USMCA), it did not include a similar mechanism between Canada and the U.S. Chrystia Freeland, the then-deputy prime minister of Canada, noted at the time that the removal of Investor-State Dispute Settlement “strengthened our government’s right to regulate in the public interest, to protect public health and the environment.”

Ruby River was only able to launch its case because USMCA allowed firms that had made investments before NAFTA’s termination — on July 1, 2020 — to continue to bring these types of claims for three years — until June 30, 2023.

Importantly, Ruby River spent only about CDN$165 million on the Énergie Saguenay project proposal. However, the firm is permitted within the Investor-State Dispute Settlement system to seek “lost future profits” based on speculation about the performance of notoriously volatile oil and gas markets.

Several fossil fuel firms suing Quebec for ban on oil and gas

Quebec is a member of the global Beyond Oil and Gas Alliance and is the first jurisdiction in the world to ban all oil and gas production. The province is being sued over this ban by several fossil fuel firms — seeking more compensation than was offered — in Quebec’s Superior Court.

Had these companies been foreign, and thereby qualified for the protection of an investment treaty, they likely would have chosen Investor-State Dispute Settlement instead. This is because Investor-State Dispute Settlement generally provides broader scope for claims — and larger awards — than domestic courts.

Other jurisdictions need to follow Quebec’s lead. The global carbon budget has no room for new coal, oil or gas developments. Construction of new fossil fuel infrastructure also needs to be limited, as it would lock in continued extraction long into the future.

Despite clear messages to this effect from the Intergovernmental Panel on Climate Change and the International Energy Agency, investors continue to propose new fossil fuel projects. They do so in full knowledge that governments need to act to curb emissions in line with their international commitments and that future climate policies may negatively impact their investments.

Allowing these companies to demand billions in compensation creates moral hazard and could dampen necessary policy action.

Governments are increasingly aware of this risk and many are taking action. The European Union is seeking to withdraw from the Energy Charter Treaty, the largest investment treaty in the world, because it “is not aligned with the Paris Agreement, the EU Climate Law or the objectives of the European Green Deal.”

The Biden administration is committed to not signing up to new agreements with Investor-State Dispute Settlement and a number of Democrats are calling for the removal of the mechanism from existing deals. Other countries such as Australia and New Zealand have worked to exclude Investor-State Dispute Settlement from some of their trade agreements.

Other trade agreements pose similar threats to global climate policy

Canada will soon escape from the legacy of NAFTA. However, the government remains exposed to the threat of Investor-State Dispute Settlement through other trade agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), as well as dozens of bilateral investment treaties.

When the U.K. officially joins the CPTPP, the risk of Investor-State Dispute Settlement claims from fossil fuel firms will increase dramatically.

The idea that public finance, desperately needed for the energy transition and climate adaptation, will be redirected to compensate fossil fuel firms currently making record profits is offensive.

In light of the increasing body of evidence that documents how the industry has actively obstructed climate action and helped to spread disinformation about climate science, it is communities impacted by climate change that should be compensated by fossil fuel firms, not the other way around.

The Canadian government should adopt a consistent approach to Investor-State Dispute Settlement. The exclusion of Investor-State Dispute Settlement from USMCA should be emulated in any future agreements, and Canada should work with treaty partners to remove access to the system in all current ones.

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The world is on the brink of an unprecedented economic collapse, as extreme yet necessary measures to deal with the coronavirus pandemic shutter businesses and put people out of work.

Governments in many countries, including Australia, Canada, Germany, the U.K. and the U.S., are responding with fiscal stimulus.

Much of the focus has rightly been placed on boosting the health sector’s capacity to respond to the crisis and providing immediate relief for the unemployed.

This first wave of stimulus will likely be followed by further government spending, and it is not too soon to think about how that money should be allocated. As in 2008, the last time the world faced a major economic crisis, there are numerous calls for governments to take measures that will simultaneously create jobs and decarbonize the economy.

A smart response to this emergency could go a long way to addressing the larger ecological crisis looming on the horizon.

There are important lessons to learn from the “green” stimulus measures adopted in the wake of the global financial crisis. While many of the 2008-09 investments did stimulate the economy, most did little to address climate change. Greenhouse gas emissions initially dropped, due to reduced economic activity, but quickly rebounded in 2010.

Politics can partially explain this failure of green stimulus efforts: power plays a big role in how public money is spent.

For example, the fossil fuel lobby ensured that carbon capture and storage projects sucked up a significant amount of green stimulus funds, but not a lot of carbon dioxide.

It’s also not always easy to identify what investments should be prioritized. Attempts to provide general categories of “green” and “brown” investments are doomed to fail, because context is everything. For example, a high-speed train is only a good environmental investment if it replaces enough air travel to offset the emissions produced during construction.

Instead of a list, I propose a modified version of the “three Ts” of effective stimulus — timely, targeted and temporary — as recommended by a number of economists in 2008.

Timely, but not hasty

Individuals in dire need should receive stimulus funds as quickly as possible. This downturn, however, is predicted to last a number of years and long-term plans will be necessary.

Unfortunately, the focus on timeliness in 2008-09 meant that shovel-ready brown projects, like investments in roads, got priority over shovel-worthy green ones, like investments in renewables and battery technologies.

The haste with which governments tried to get money out the door also contributed to poor policy design. And the need for speed was used to support efforts to pare back or eliminate important regulatory processes, like environmental impact assessments.

In light of this, the timely criterion should be qualified. Measures should still be timely.

There is, after all, as much urgency associated with addressing climate change as with any economic downturn.

But timeliness should not take priority over appropriate design or compliance with regulatory frameworks that have been put in place to protect the public and the environment.

Targeted

Funds should be directed primarily to lower-income earners because they are more likely to immediately spend, creating a “multiplier effect” as businesses are, in turn, able to spend more. Economic impacts aside, there is a broader moral case to be made for addressing inequality through government investment.

Targeting low-income households also has environmental benefits. For example, low-income families often occupy homes that are the least energy efficient, but they are unable to make improvements without assistance. In other words, targeting low-income households means more environmental “bang” for each stimulus “buck.”

While we should keep this criterion, its meaning should also be expanded to take two additional issues into consideration.

First, public money should primarily be targeted to public projects, for example, public transit, community renewables projects. There may be a reasonable case for governments providing concessional loans and other assistance to private companies that are developing or commercializing clean technologies.

But, as economist Mariana Mazzucato has argued, in these cases, the government should receive a return on successful investments.

Second, regions that are hardest hit by climate change, such as those prone to drought, fire or flooding, and/or the shift away from fossil fuels, such as Alberta or the Midwest, should receive more support. Here the concept of a “just transition” is helpful.

In achieving this aspect of the targeted criterion, governments should ensure that unions, employees and local communities participate in the development and implementation of stimulus programs.

A bailout for the oil and gas industry? Here’s why experts say it’s not a long-term solution

Transitional

In wake of the global financial crisis, most governments interpreted the “temporary” criterion to mean that all funding should be spent by a deadline, usually within a few years.

The deadlines set by governments were arbitrary and too short for some new technologies and industries to mature. Short time frames also created boom and bust scenarios for some sectors. Rather than this “crude Keynesianism,” as economist Jeffrey Sachs terms it, what we need a “consistent, planned, decade-long boost in public investments in people, technology and infrastructure.”

Instead of temporary, investments should be transitional, in place long enough to provide the certainty and stability required for new sectors to become established. Involving members of the research community in stimulus planning is one way to ensure that sensible timelines are established for new technologies.

Transitional also indicates that the aim is to steer the economy in a new direction rather than to return to a pre-crisis status quo.

Stimulus measures should either provide substantial environmental benefits such as greenhouse gas emissions reductions or re-orientate the economy to low-carbon activities, such as care work and the arts.

From green stimulus to the Green New Deal

Good green stimulus should be considered the default for governments rather than a small subset of a more general category of “regular” stimulus. And bailouts to the fossil fuel industry and airlines would be monumentally counterproductive.

Investment is also only one piece of the puzzle.

Much bigger structural changes to our economies are also required to tackle climate change. Luckily, we have a plan for that too. It’s called the Green New Deal.

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“Coal is dead.”

These are not the words of a Greenpeace activist or left-wing politician, but of Jim Barry, the global head of the infrastructure investment group at Blackrock — the world’s largest asset manager. Barry made this statement in 2017, but the writing has been on the wall for longer than that.

Banks know it, which is why they are increasingly unwilling to underwrite new coal mines and power plants. Unions and coal workers know it, which is why they are demanding a just transition and new employment opportunities in the clean economy. Even large diversified mining companies are getting out of the business of coal.

The only ones who seem to have remained in denial are President Donald Trump and non-diversified mining companies like Westmoreland Coal. The Denver-based firm made a bad bet in 2013 when it purchased five coal mines in Alberta. Now it wants Canadian taxpayers to pay for its mistake.

Alberta’s coal phaseout

Three years ago, Alberta’s New Democratic Party (NDP) committed to what some have described as “the most ambitious climate plan in North America to date.” In addition to the development of an economy-wide carbon price, the province is phasing out coal-fired power by 2030. Without the infrastructure to export coal, the climate plan has also resulted in a de facto phaseout of local thermal coal mining.

To ensure support for the plan, major utility companies in the province were provided with “transition payments” to facilitate the switch to gas and renewable energy. Westmoreland did not receive a government handout, because coal mining companies have no role to play in the energy transition. The company, which filed for bankruptcy protection for its investments in the United States in October, doesn’t think this is fair.

NAFTA’s investment chapter

Because Westmoreland is an American company, it can rely on the North American Free Trade Agreement (NAFTA) for protection from “unfair” treatment. NAFTA allows a foreign investor to use a process known as “Investor-State Dispute Settlement” (ISDS) when government action harms its business in some way.

ISDS allows foreign investors to bypass local courts and bring claims for monetary compensation to an international tribunal. The system is not unique to NAFTA; it is found in other trade agreements like the Comprehensive and Progressive Agreement for Trans Pacific Partnership (CPTPP) and thousands of bilateral investment treaties (known as Foreign Investment Promotion and Protection Agreements in Canada).

ISDS is hugely controversial. Concerns have been raised by a wide range of actors about both the process of ISDS, and the way the system can infringe on the sovereign right of states to regulate to protect public health, human rights and the environment.

More than 900 ISDS cases have been launched by investors since the early 1990s, including 27 against Canada that have so far cost Canadian taxpayers at least $315 million. There is one ongoing dispute that concerns a ban on gas fracking in Québec, but the Westmoreland claim is the first brought in relation to a policy explicitly designed to combat climate change.

Westmoreland argues that part of the reason it invested in Canada in 2013 was to diversify its holdings in response to regulatory risk. At the time, the Obama Administration was taking action under the Clean Power Plan to reduce the reliance of American utilities on coal.

The company’s failure to anticipate similar regulatory action by its northern neighbour is remarkable.

Life after coal

A key battleground

If governments respond appropriately to the urgent warning issued by the Intergovernmental Panel on Climate Change (IPCC) in October, efforts to phase out fossil fuels will have to ramp up considerably — and quickly. We should expect the industry to fight these efforts through a variety of means. ISDS may become a key battleground.

The U.S.-Mexico-Canada Agreement (USMCA or CUSMA, depending on who is talking about it), which may replace NAFTA (it has been signed, but has not been ratified), does not retain the process of ISDS between Canada and the U.S.

While this is good news in the long run, some have suggested that there will be a “rush of filings” before access to ISDS for already established investors expires (three years after USMCA comes into force). Canada will also be exposed to claims from investors under other agreements such as the CPTPP and Canada-European Union Comprehensive Economic and Trade Agreement (CETA).

Other countries, particularly poorer nations, face an even higher risk of ISDS claims and have far less resources available to fight them. It is notable that big oil companies have retained some access to ISDS against Mexico in USMCA, after lobbying hard for it.

A climate of fear?

If Westmoreland’s case proceeds to arbitration, it will not have direct implications for Alberta’s climate policy. An investment tribunal cannot require the provincial government to reverse the coal phaseout; it can only award the company damages. Westmoreland is asking for US$470 million. It is the federal government, rather than Alberta, that would have to pay compensation to Westmoreland if the company’s claim was successful. However, Ontario did agree to pay the award in a recent NAFTA case.

What is more concerning than any potential payout is that Westmoreland’s suit could hinder efforts to implement similar plans to combat climate change in other jurisdictions.

“Regulatory chill” is a phenomenon that has been observed in several jurisdictions around the world. A notable example is the decision of the New Zealand government to delay the introduction of legislation to require plain packaging of tobacco products until Australia won its ISDS case against the tobacco company Philip Morris International. This delay of regulatory action — out of fear of expensive litigation — may have cost lives.

As recent forest fires and floods have demonstrated, delays in action to combat climate change can also be deadly.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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