Justin Trudeau; Doug Ford

Canada slammed Doug Ford for axing cap-and-trade. Now, as it battles Koch Industries, it’s defending him

Koch is demanding a US$30M refund in international court, leaving Canada to prop up Ontario’s decision to backtrack on climate — after fighting it at home

In 2021, Justin Trudeau and Doug Ford took their two-year clash over climate policy — specifically, Ford’s rejection of, in his words, “the Trudeau Liberal carbon tax” — to the Supreme Court of Canada. 

The battle was heated, with sniping on both sides. “Cap-and-trade and carbon tax schemes are no more than government cash grabs that do nothing for the environment, while hitting people in the wallet …,” Ford said in a 2018 statement, as he cancelled the program immediately upon taking office. 

“The premier is making it clear that he is not interested in taking climate action and is effectively withdrawing from Canada’s national climate change plan,” a spokesperson for then-Environment Minister Catherine McKenna told The Guardian a month later, just as the legal fight was beginning.

Eventually, the federal government won, confirming its constitutional right to impose a carbon price on provinces without stringent emissions-reduction policies in place: Ontario, Saskatchewan and Alberta.  

But now, in a different court at the World Bank, Canada is defending the Ford government’s cancellation of Ontario’s cap-and-trade program in an international battle with megacorporation Koch Industries. 

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The program Ford cancelled placed a cap on emissions from industry, in an attempt to incentivize companies to reduce their output. Those that overshot the limit had to buy emissions permits, or allowances, from businesses whose emissions came in under the cap to offset excess pollution. Participants in Ontario were able to buy, sell and trade credits with participants in Quebec and California; the trading system was set up to be the second largest carbon market in the world.

Despite Ford’s repeated assurances that axing cap-and-trade would save taxpayers money, the decision has been a costly one. It has led to multiple lawsuits, the most high-profile of which involves Koch Industries.

The company is unhappy that Ford’s election led California to delink its cap-and-trade system from Ontario, preventing it from transferring emissions credits it had bought in the province to the U.S. So, via the North American Free Trade Agreement (which was in place when the cancellation happened) the global giant has launched an investor-state dispute settlement case. Because the free trade agreement was between countries, not states or provinces, it’s Canada, not Ontario, that has to fight back.

Koch argues the Ford government’s cancellation was “ill-considered, precipitous and illegal” — and denied the conglomerate any compensation. It’s seeking US$30 million to recoup its lost investment into the Ontario program, which it was going to use to help offset emissions from its California factories.

In August, Canada’s defence was released to the public. In it, the federal government repeats many of Ford’s talking points about the cancellation, including that it was a burden on taxpayers — the same points it disputed at home. Canada’s arguments use Ford’s words from 2018 almost verbatim, telling the arbitration court that “the government received a strong mandate from the people of Ontario to cancel the cap-and-trade program.”

As proof of this point, Canada cites Ontario’s review of almost 12,000 public comments on the cap-and-trade cancellation. It does not mention that the provincial government broke the law when it failed to request and review these comments until after its decision was made. In 2019, a provincial court found the Progressive Conservatives guilty of violating Ontario’s environmental bill of rights, which guarantees public involvement in any climate or energy policy. 

The federal defence also does not mention that the majority of comments were opposed to the cancellation. 

Instead, the defence states that “Ontario’s actions with respect to the winding down of the cap-and-trade program were made in good faith and for legitimate policy reasons, including that the existing program imposed economically inefficient burdens on Ontarians.”

The federal argument notes that in 2016, Ontario’s Auditor General found the program would only reduce “a small portion” of Ontario’s emissions “at a significant cost to Ontario businesses and households.” 

“The [Ontario] government followed a principled and rational approach to winding down the cap-and-trade program,” Canada’s defence continues. This counters a point made in Koch’s memorial (what a statement of claim is called in an international arbitration case) that argues Ford created an expectation of compensation when he promised an “orderly wind down” of the program upon getting elected — an expectation that was not met. 

American billionaire Charles Koch is the CEO of Koch Industries. Despite the company’s investment in cap-and-trade systems, it has a long history of waging political and legal fights against climate legislation. Photo: David Zalubowski / Associated Press

Ontario business owners have also told The Narwhal they were caught unawares by the sudden shutdown: separate from the Koch case is a class-action suit brought by local entrepreneurs trying to recoup lost investments, in which the quick cancellation is labelled “high-handed, reckless, and deliberate.”

But Canada disagrees, stating in its Koch defence that “the phrase ‘orderly wind down’ is not a promise or assurance that every participant will be compensated; it does not even address the question of compensation.”

Keith Stewart, senior energy strategist with Greenpeace Canada, calls the case a “weird” one — while Canada criticized Ontario for backtracking on climate at home, on an international level it does need to defend the right of provincial governments to set policy at will. A win for Koch could spur powerful corporations to challenge climate-positive legislation. 

“Given the speed with which we need to transform our energy systems to avoid the worst impacts of climate change, it is vital that the fossil fuel corporations that dominate the current system not be able to sue governments over changes in environmental policy,” Stewart said. 

The Canadian government argues for the provincial government’s right to change climate policy by touting that Ford “was also instrumental in the development of a new solution to the challenges posed by climate change.” This new solution was a proposed emissions performance standard, which applies emissions levels for all industrial facilities tied to their level of production. It took almost three years after the cap-and-trade cancellation for this program to take effect. 

“This is quite a full-throated defense from the federal government of Ontario’s decision to scrap its key environmental, greenhouse gas emissions reduction strategy …”

Stuart Trew, director of the trade and investment research project at the Canadian Centre for Policy Alternatives

In addition to attempting to prove the Ford government decision was “rational, non-discriminatory, legitimate,” Canada also argues that Koch was not truly invested in Ontario, and should have known which way the province’s political winds were blowing. 

In its arguments, Koch said that it was entering the cap-and-trade program as a first-step in making investments in Ontario “in the short and long-term.” But, Canada points out, the company has no operations or personnel in the province.

And, from January to April 2018, the conglomerate’s subsidiary, Koch Supply & Trading (KS&T) transferred all of its Ontario emissions allowances to its California account. The subsidiary bought more allowances in May 2018 — by which time Ford was the front-runner for premier, running on a campaign centred on axing cap-and-trade.

Because of this, the federal government argues “there were clear indications that the future of the Ontario cap-and-trade program was uncertain” and Koch was aware of the risks. As an example of the fragility of such initiatives, it points to New Jersey’s 2011 decision to withdraw from a 10-state cap-and-trade program. 

Koch Supply & Trading bore a commercial risk: it bought emission allowances at auction, betting that it could resell them at a higher price in another jurisdiction … Koch Supply & Trading cannot now complain that its inability to complete a cross-border sale, and its ineligibility for compensation, contained any “investment” risk related to the objective of developing an economic venture in Ontario.”

Canada’s defence in Koch Industries, Inc. and Koch Supply & Trading, LP v. Canada

Stuart Trew of the Canadian Centre for Policy Alternatives calls the lawsuit “a big waste of time for everyone.” The director of the centre’s trade and investment research project, he said that he agrees “on principle” with Canada defending the provinces’ “right to change direction.”

“But this is quite a full-throated defense from the federal government of Ontario’s decision to scrap its key environmental, greenhouse gas emissions reduction strategy and then also defend the measures that were put in place after that,” he said. And even as Canada mounts this defence, Trudeau continues to take swipes at premiers pushing back against his carbon pricing policy.

“In general, Canada does a very good job in defending the government’s right to set policy … you need to be able to do that as a government without the fear of constantly having these lawsuits coming at you,” Trew said. “We are still nonetheless faced with this [lawsuit], which to me after reading the defence, seems even more preposterous.” 

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Investigating stories others aren’t. Diving deep to find solutions to the climate crisis. Sending journalists to report from remote locations for days and sometimes weeks on end. These are the core tenets of what we do here at The Narwhal. It’s also the kind of work that takes time and resources to pull off.

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We hear it time and time again:
“These are the stories that need to be told and you are some of the only ones telling them,” John, a new member of The Narwhal, wrote in to say.

Investigating stories others aren’t. Diving deep to find solutions to the climate crisis. Sending journalists to report from remote locations for days and sometimes weeks on end. These are the core tenets of what we do here at The Narwhal. It’s also the kind of work that takes time and resources to pull off.

That might sound obvious, but it’s far from reality in many shrinking and cash-strapped Canadian newsrooms. So what’s The Narwhal’s secret sauce? Thousands of members like John who support our non-profit, ad-free journalism by giving whatever they can afford each month (or year).

But here’s the thing: just two per cent of The Narwhal’s readers step up to keep our stories free for all to read. Will you join the two per cent and become a member of The Narwhal today?

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The Narwhal’s Ontario bureau is telling environment stories you won’t find anywhere else. Keep up with the latest scoops by signing up for a weekly dose of our independent journalism.