Canada is “whitewashing” Ontario’s “reckless and illegal” cancellation of cap-and-trade, alleges Koch Industries in an ongoing international lawsuit.
Since February 2020, the multinational giant has been challenging the Doug Ford government’s 2018 cancellation of the $3 billion cap-and-trade carbon pricing program before an arbitration tribunal at the International Centre for Settlement of Investment Disputes, a World Bank body that handles global trade issues.
Koch Industries’ legal action is one of two lawsuits businesses have launched claiming financial losses suffered from the cancellation of cap-and-trade, which legal documents show was finalized before Premier Ford and his Progressive Conservative cabinet officially took office.
Cap-and-trade was a cross-border program, creating a flow of emissions credits between Ontario, Quebec and California. As such, the arbitration started by Koch is under the North American Free Trade Agreement (NAFTA), which was in place when the cancellation happened. Because of this, Canada, not Ontario, is named, leaving the federal government to defend Ford’s actions internationally, despite fighting Ontario and other provinces over carbon pricing all the way to the Supreme Court at home.
Against Koch, Canada is arguing that the Ford government is a democratically elected body with the right to make changes to environmental policy in its jurisdiction. Throughout the case, Canada has cited the same rationale used by Ontario in public and in court: that Ford’s repeatedly stated intention to cancel the program throughout the 2018 election campaign was equivalent to “outlining the incoming government’s priorities and intentions for once it assumes office.”
The tribunal has been making documents publicly available after every hearing, the most recent of which was in December. The latest is Koch’s 242-page response to Canada and Ontario’s arguments: “Canada shamefully apes Ontario’s political spin from the summer of 2018 and adopts the same ill-informed prejudice displayed by Ontario officials at that time,” the company says.
Koch further adds in the new documents that Ford’s Progressive Conservative party “at no point represented that if elected it would recklessly and unilaterally disregard and breach their agreement with California and Québec and rush to exit the program in the way that they did.” It cites a 2019 Ontario court decision that found the cancellation was illegal as it did not properly consult Ontarians as required by law. That court decision concluded that the election platform did not equal proper notice as it did not show “the precise way in which the government intended to repeal cap-and-trade, when it intended to do this, or what, if anything, it intended to enact in its place.”
Based on all this, Koch alleges the cancellation amounted to “guerrilla policy by a populist government, pure and simple, regardless of legalities or solemn commitments.” It “wiped out” Koch’s business in Ontario and “arbitrarily and illegally stripped” the company of “millions of dollars in inventory without any compensation.”
“To draw a simple analogy, if a company owns a ship of oil which is docked off the coast of a country, it is reasonable to expect that the value of the oil will go up or down at any point. These are risks the business undertakes,” Koch continues. “However, it is not reasonable to expect that government to simply and abruptly confiscate the oil in its entirety. The latter scenario is essentially what occurred in Ontario.”
All of the money collected during the program’s duration, some $472 million, “went into Ontario coffers,” and wasn’t used to compensate market participants, the company states repeatedly.
Notably, Koch Industries says the Ford government is withholding documents related to decision-making around the cancellation. The company’s latest submission notes that freedom of information requests remain outstanding nearly two years after they were filed.
It is not clear why Koch should be compensated, Canada argues, noting that Ontario’s cap-and-trade legislation stated from the beginning that there was “no right to compensation” for any losses incurred through the program.
Canada also notes that “a sophisticated entity like [Koch] would have been aware of the risks associated with participating” in the program when it willingly bought emissions credits during the 2018 Ontario election campaign during which Ford was repeatedly signalling his opposition to the program and his intention to remove it.
“[Koch] bore a commercial risk. It also accepted the risks inherent in Ontario’s cap-and-trade program, which contemplated changes to the program without compensation,” Canada continues.
The Narwhal contacted both Global Affairs Canada and Ontario’s environment minister for comment. Both declined as the case is an ongoing legal matter. Koch Industries did not respond to The Narwhal’s request for comment.
A decision by the tribunal on this case could take months or even years, with Canadian taxpayers potentially on the hook for the full costs of the lawsuit, which include the more than US$30 million Koch lost, plus interest and legal costs.
And the stakes could be bigger than that for the environment, as this case could be the final verdict on whether companies have a right to challenge new, cross-border environmental regulations.
“Unfortunately, a NAFTA win for Koch would set a dangerous precedent by putting a chill on governments wanting to adjust, improve or create new environmental policies to address the climate crisis.”
Stuart Trew, Canadian Centre for Policy Alternatives
Stuart Trew, director of the Canadian Centre for Policy Alternatives’ trade and investment research project, is concerned Koch Industries is looking for “a precedent that it will never lose money to environmental policy, no matter how small the sum is.”
While it seems to be arguing in favour of carbon pricing in this case, Koch’s environmental history is complicated. The New Yorker’s Jane Mayer, journalist Christopher Leonard and others have documented the company’s long history of fighting environmental policy and initiatives in court, including other carbon pricing programs.
“Some of the biggest environmental cases in the country are against Koch Industries,” Mayer told a live audience in 2017. “And I mean, not surprisingly, because the [Environmental Protection Agency] classifies them as the largest producers of toxic waste in the country and one of the largest air polluters, climate polluters and water polluters,” Mayer said.
Both Mayer and Leonard reported that Koch-funded groups were instrumental in killing a 2009 U.S. bill that would have created a cap-and-trade system.
“It’s hard to defend the Ford government’s clumsy withdrawal from cap-and-trade. It’s just as hard to swallow Koch’s claim that under international law the company bears no risk for speculating on carbon markets for profit,” Trew said. “Unfortunately, a NAFTA win for Koch would set a dangerous precedent by putting a chill on governments wanting to adjust, improve or create new environmental policies to address the climate crisis.”
Koch Supply & Trading is a subsidiary of Koch Industries, which is owned by the billionaire Koch family. The Delaware-based subsidiary was a market participant in the cap-and-trade program, the term for a business that voluntarily joined the scheme that allowed companies to buy and trade emissions allowances in lieu of reducing greenhouse gas emissions. Market participants made up four per cent of the emissions trading in the program.
The program was put in place by the former Liberal government, with the idea that if emissions allowances grew more expensive, businesses would choose to reduce their pollution instead of buying them. When the Progressive Conservatives abruptly shut it down, it removed Ontario from what had been called the second-largest carbon market in the world. Koch says that the shutdown caused it to suffer losses exceeding US$30 million, or 0.03 per cent of its US$115 billion revenue in 2020.
The issue of compensation is also the crux of the other lawsuit the government is facing, from Ontario businesses. Upon the final closure of the program in March 2019, the Ford government said it delivered more than $5 million in compensation to eligible participants, offering few details on where the rest of the money went. Those compensated, Canada told the tribunal, were participants “whose actual emissions of [greenhouse gases] were lower than their holdings of purchased emission allowances.”
“Ontario’s measures were motivated by the sole purpose of seeking illegally to minimize the financial impact of cancelling the Ontario cap-and-trade program, in service of the incoming Ontario Progressive Conservative Government’s political interests.”
Koch Industries, “Koch Industries, Inc. and Koch Supply & Trading, LP v. Canada”
As evidence for what it characterizes as the government’s bad faith, Koch Industries offers behind-the-scenes details of the day the government gave instructions for the cancellation. On June 15, 2018, two weeks before the Ford government was sworn in, the Liberals’ outgoing deputy minister of environment, Paul Evans, wrote an email to Jeff Hurdman, director of the environment ministry’s cap-and-trade branch, “to confirm the direction from Premier-Designate Ford that Ontario will not be participating” in the program by that August, when the province was scheduled to host a quarterly auction for businesses to buy and sell emissions allowances.
At 4:21 p.m. that day, Hurdman informed colleagues that although the ministry had already prepared for emissions sales and trading in August, “Upon receiving the direction from Premier Designate’s announcement we have completed the necessary actions to reverse the process. Ontario participants will not be able to register to participate … ”
Koch Industries argues that without being sworn in, Ford “had no authority” to give this direction. Ontario’s legislative rules dictate that only routine, necessary or urgent government work is allowed when the legislature is dissolved, such as during an election period. No new policies or positions can be introduced. Senior members of the public service can make time-sensitive decisions that may be required for the incoming government’s policies, but historically, this has been extremely rare.
In light of this, Koch Industries says that Ontario had no right to “veto clear legal frameworks in place before the transition of power.”
“In fact, up until the Premier-elect’s unlawful ‘direction’ to government officials, those officials believed that preparing for the August 2018 auction fell within the scope of the ‘routine and ongoing administrative’ work of government,” the company argues. It says the quick shutdown was done “illegally” and “in service of the incoming Ontario Progressive Conservative Government’s political interests.”
The company adds that the cap-and-trade program was designed to last a long time, with revenues to be invested in Ontario green energy projects. The previous Liberal government began planning it in 2013: Koch quotes Liberal environment minister Glen Murray at length, citing a September 2017 interview with TVO, during which Murray said “it’s very hard to undo cap-and-trade,” that it would be “almost impossible” for someone to eliminate it and that anyone who tried would “pay a very difficult price” to do so.
Koch argues the incoming Ford government knew this in 2018. During the election campaign, Ford repeatedly told Ontarians the cancellation would only cost $5 million but, Koch argues, “at exactly the same time Ontario Progressive Conservative’s high-level political representatives were privately admitting the cancellation would give rise to tens of millions of dollars in claims.” This information comes from tribunal testimony that is not public, but is frequently cited in both Canada and Koch’s documents.
And despite “substantial lobbying efforts” over two years to meet with Ontario government officials — including direct letters to Ontario’s Attorney General and Ford — the company says it was ignored.
Says the company: “were it not for Ontario’s abrupt cancellation and termination of its cap-and-trade Program, [Koch Supply & Trading] would have continued to do business in Ontario, and would have continued to acquire emission allowances … for the full duration of Ontario’s cap-and-trade program which was expected to continue for at least a decade longer, until at least 2030, and possibly even further to 2050.”
Canada disagrees, saying that Koch is “mischaracterizing” and presenting a “gross exaggeration” of its role in the program and Ontario’s shutdown.
“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,” Canada argues. “They knew in early 2018 that Ontario’s cap-and-trade program might be cancelled.”
Koch’s lawsuit is one of the last under the North American Free Trade Agreement, which has since been replaced by the U.S.-Mexico-Canada Agreement. It relies on a clause that was designed to assess whether a company’s right to a stable business environment had been violated by government action. Historically, the clause has been used by companies challenging environment policy and was removed from the new agreement.
Having lost the clause, Koch may be trying to set a legal precedent for future challenges, said Trew, of the Canadian Centre for Policy Alternatives. “They don’t need the money,” he said. “But they’re seeing more jurisdictions getting serious about reducing emissions and they’re looking to protect their money. Because if the Ontario government can do this, cancel the program with no recourse for them, will other jurisdictions follow suit?”
In its latest argument, Koch spends some time dismantling the idea that the Ford government cancelled cap-and-trade to enact different climate policies. The company notes that if the program had to be eliminated “to truly address environmental issues” then “the gap of over three and half years between the [cancellation] and the operation of the new ‘Made-in-Ontario’ environmental plan is absurd and strains credulity.”
In that time period, Ontario has seen two carbon pricing programs. First, the province became subject to the federal government’s price on pollution, which Ontario, Alberta and Saskatchewan unsuccessfully challenged at the Supreme Court in 2021.
Forced to figure out some sort of carbon pricing plan, Ontario then introduced Emissions Performance Standards in July 2021, which came into effect last year and functions similar to a cap-and-trade system: all high-emitting industrial facilities in Ontario are required to reduce emissions through a strict criteria, or purchase compliance units, which are emissions credits, instead.
In light of this, Koch argues Ontario was making a “purely political gesture” with the cancellation and foregoing its business or international commitments.
“I find the whole thing really upsetting because … our country’s trade system is supposed to be our key to reducing emissions, and this case is complicating that,” Trew said. “They are criticizing and taking apart the environmental credentials and the environmental narrative of the Ontario government. Their arguments are political, not financial.”
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