Why all of Canada will pay for Doug Ford’s choice to cancel Ontario’s cap-and-trade program

On a muggy day in July 2018, as Doug Ford’s government voted to put the final nail in Ontario’s cap-and-trade program, a tense meeting played out just down the hall from the legislative chambers. 

Around the table sat one executive from Koch Industries and two now-former members of Ford’s team. Two other executives from Koch, a U.S.-based conglomerate whose subsidiaries are largely involved in energy and chemical manufacturing, were on the phone. The global giant was there making a last-ditch attempt to get the government to reconsider its immediate shut-down of the carbon pricing program, which Koch had invested in. But Mitch Davidson, then the executive director of policy for the premier, and Brock Vandrick, then the premier’s director of stakeholder relationships, refused to budge. 

Just weeks before Koch executives met with Ontario government officials, its subsidiary Koch Supply & Trading had purchased over US$30 million worth of carbon allowances from the province. Ontario’s cap-and-trade program had only kicked off in January 2018: introduced by the former Liberal government, it was designed to lower greenhouse gas emissions by imposing mandatory limits, or “caps,” on emissions produced by industry and fining them when the caps were exceeded. The program was linked to equivalent programs in Quebec and California, and allowed companies in all three places to buy carbon allowances in lieu of reducing pollution, or sell unused allowances to other participants. 

These allowances were traded in public auctions. Companies that didn’t emit enough to be subject to mandatory limits were also allowed to purchase allowances, to sell to emitters. Called market participants, they were encouraged to join in when the Liberals kicked off the program, to create a robust carbon market. Koch Supply & Trading was one such market participant, and had been planning to use some of the allowances it had purchased and sell some to industrial emitters through the program. 

But before even taking office, the Ford government cancelled the program and froze that money. And, as newly released legal filings show, Davidson and Vandrick told Koch executives at that July 2018 meeting that Ontario wouldn’t be giving it back. Instead, Davidson said Koch should seek its rights to compensation at the federal level.

“This is likely to turn into a North American Free Trade Agreement claim and will be on the federal government,” he told them, according to a detailed statement of claim filed before an arbitration tribunal at the International Centre for Settlement of Investment Disputes, a World Bank body that handles North American Free Trade Agreement (NAFTA) disputes and other global trade issues. 

Fast forward four years, and that’s exactly what’s happening. The multinational giant’s legal action is one of two lawsuits businesses have launched for losses suffered from the cancellation of cap-and-trade. These businesses had few options to fight the decision, since the legislation that ended it barred any legal action against the Ontario government. 

The documents released in the Koch case illustrate the messy saga of a government that made, as the statement of claim calls it, an “ill-considered, precipitous and illegal” decision to axe an international environmental policy before it even took office, and a company that was denied every route to compensation except one: pursuing an international lawsuit.

“The federal government is now required to defend itself against Ontario’s decision to cancel cap-and-trade,” said Stuart Trew, director of the Canadian Centre for Policy Alternatives’ trade and investment research project. “It’s going to spend a lot of taxpayer money on legal fees doing that.”

“When reading (the newly released documents), you’re kind of reminded of how stupid the Doug Ford government’s decision was,” Trew said. “How it went down, how abrupt it was, how pointless it was … you kind of almost sympathize with market participants who were just cut out of cap-and-trade.” 

According to the statement of claim, Koch executives took Davidson’s pushing them towards NAFTA as a clear sign that “the Ontario Conservative government from the start understood that its measure violated international law, but cynically calculated that responsibility to pay for the resulting damages would in that instance fall to Canada’s federal government.” 

The U.S.-Mexico-Canada Agreement wasn’t in place when the program was cancelled, which is why Koch Industries is claiming damages through the older free trade agreement, NAFTA. The company is relying on the investor-state dispute settlement clause of the agreement, also known as Chapter 11, which was designed to assess whether a company’s right to a stable business environment was violated by government action. It has historically been used by companies challenging government environment policy and was removed for the new U.S.-Mexico-Canada Agreement. 

Koch has two key arguments, the first being the Ford government’s “arbitrary” withholding of the US$30,158,240.95 worth of allowances it had purchased. The second is that the Ontario government “denied access to the courts for any cause of action, and prohibited any other avenue for relief,” while also dismissing the company’s every concern.

An international legal fight wasn’t Koch’s first choice, as the documents make clear. Koch filed its NAFTA legal notice in February 2020, meaning it spent almost two years attempting other negotiations with the Ford government. 

The documents show that after that July 2018 meeting, Koch Supply & Trading met with Jenni Byrne, then Ford’s principal secretary, and Rick Roth, then chief of staff to Environment Minister Rod Phillips. Both suggested the possibility of solutions but did not follow up. 

Koch Supply & Trading also met with Monte McNaughton, then minister of infrastructure, who the company claims supported its case, saying he’d try to push for a cabinet vote, which never happened. 

The company then met with Vic Fedeli, who was finance minister at the time. When he asked why Koch had bought emissions allowances in May 2018, after the incoming government had made it clear it would cancel the program, company representatives responded that they thought there would be time to trade the allowances to their companies in California. Fedeli confirmed Koch Supply & Trading’s investments into the program had been deposited into Ontario’s general revenue account. When the company made a request for him to return those funds, it received no response.

The company states that every plea it made “fell on deaf ears.” None of the above-mentioned ministers or government officials responded to The Narwhal’s requests for comment. 

The allowances Koch bought in May were deposited in the company’s cap-and-trade account on June 11, 2018. Four days later, newly elected Premier Doug Ford, who was still two-and-a-half weeks from being sworn in, announced he would cancel the cap-and trade-program. A media release that day announced the premier-designate had “directed officials to immediately take steps to withdraw Ontario from future auctions for cap-and-trade credits. The government will provide clear rules for the orderly wind down of the cap-and-trade program.”

At a press conference that day, Ford added he had instructed officials to use “all available powers” to end the program. He falsely claimed cap-and-trade “did nothing for the environment” and cancelling it would save Ontarians money. When asked by a reporter if the cancellation opened the province up to lawsuits. “No, I don’t believe so,” Ford said. “We looked into that and we don’t see a problem with that.”

Koch argues that Ford did not yet have the authority to take policy action and his promise to end the program in an “orderly” manner was contradictory to directing officials to “immediately” withdraw from the program. 

According to Koch’s legal filing, “this declaration prompted immediate suspension of emission allowance transfers between Ontario and both Quebec and California, stranding Koch Supply & Trading’s credits in Ontario.” That meant the company could no longer purchase, sell or trade its allowances to finance investments in green, emissions-reduction initiatives. 

The “suddenness” of Ford’s declaration also instantly destroyed the monetary value of Koch’s carbon allowances as Ontario officially withdrew from the cap-and-trade program at 9:25 p.m. EDT on June 15, 2018 — a Friday night.

That night, Quebec and California — also blindsided by the cancellation, according to the documents — instantly delinked their cap-and-trade systems from Ontario’s to prevent any transfers of emissions allowances being purchased or sold in Ontario. The documents show officials in those jurisdictions were worried the cancellation would flood their markets with extra, unused carbon allowances that would make it easy for emitters to meet their obligations without forcing a change in behaviour, as the cap-and-trade program was designed to do.

On Monday morning, Koch Supply & Trading tried to transfer its Ontario carbon allowances to California but was told it had no access to its account. According to the legal filing, “the news was devastating and the loss suffered was clear and immediate.” No other company in Ontario would buy Koch’s allowances. The documents state multiple new business negotiations also had to be cancelled, though the details are proprietary information and blacked out.

When the Ford government tabled the Cap and Trade Cancellation Act officially on July 25, 2018, it compensated emitters, but not market participants. It justified this decision by posting on the Environmental Registry of Ontario — a forum where the government posts changes to environment or energy law when public consultation is legally required — that market participants “chose to take risks as market traders and speculators.” Koch said this characterization was “utterly absurd and unworthy of any society that purports to function on the rule of law.”

Notably, the bill also barred any domestic legal action related to the cancellation, a decision the company argues showed an intent “to act with impunity, in a blatantly unlawful and inequitable manner.” 

Koch wrote to Ford in October 2018 to ask for compensation again, but was ignored. The final notice to the company from the government came five months later: a March 14 letter signed by a bureaucrat, not the environment minister, which Koch objects to in its statement of claim. Noting that the original cap-and-trade legislation and the subsequent cancellation act empowered only the minister to make decisions related to the program and communicate them to all parties, and Koch queries what “internal processes or checks did or did not occur in assessing applications for compensation.”

“The letter felt wholly pre-determined, and that our efforts in making comments … had simply been a box-checking exercise,” a Koch executive said in a witness statement to the NAFTA arbitration tribunal.

Still, Koch Supply & Trading continued to try and engage with Ontario. At the company’s request, then-U.S. ambassador to Canada, Kelly Kraft, met with Ford in April 2019. Koch Supply & Trading’s last meeting was with the premier’s chief of staff and senior policy advisor in January 2020. 

Ten days later, Koch used NAFTA Chapter 11 to have “formal consultations” with Canada about the damages suffered because of Ontario’s policy decision. When those talks “failed to result in a mutually agreeable resolution,” the company filed a formal legal action. 

In its filings, Koch concludes, “Ontario’s desire to avoid paying any just compensation for the direct and indirect effects of its actions was clear, and obviously motivated by the intent to downplay the implications of its irresponsible measures in the eyes of the voting public.” The global giant points to the fact that Ontario residents are still subject to a carbon pricing program. After the cancellation, the province became subject to the federal government’s carbon price. Recently, Ontario put into effect its own emissions performance standards that include some elements of a cap-and-trade system.

And now, Koch Industries is asking Canada to compensate it in full for the money lost and damages suffered from Ontario’s decision to cancel cap-and-trade in the first place — a decision Ford framed during the last election as a way to save Ontarians money. The company argues the Ford government knew it would be impossible to escape carbon pricing, but wanted to become subject to the federal program so that it could claim it hadn’t instituted one itself. “The only difference was that the federal government rather than the Ontario government would ‘wear it’ — indeed, as the federal government would be left ‘wearing’ the international consequences of Ontario’s illegal measures under the NAFTA,” the documents state. 

The Narwhal contacted both Global Affairs and the Ontario Minister of Environment for comment. Both declined as the case was an ongoing legal matter. A decision by the tribunal on this case could take months or years. 

Trew told The Narwhal the most “outrageous” takeaway from this entire saga is the Ford government’s attitude. “How cavalierly they went about cancelling this thing without any phase out and shoving the bill onto the federal government, telling companies to sue them.”

“It just makes them look even worse than they did already from that decision in 2018,” he said.