The National Energy Board is fundamentally broken.

That was a point repeatedly highlighted by Prime Minister Justin Trudeau during the 2015 federal election — and one confirmed for many with recent revelations that former Quebec premier Jean Charest had privately met with senior NEB officials while on the payroll of TransCanada.

Trudeau and his federal cabinet have the chance to change that: in June, the government announced dual review panels to assess the mandates and operations of the NEB and the country’s oft-criticized post-2012 environmental assessment processes (it also announced five interim principles until those reviews are completed, including a requirement to assess upstream greenhouse gas emissions although it’s unclear how that information is being used).

But for those to serve as anything more than symbolic gestures of goodwill, the pause button must be hit on the reviews of Kinder Morgan’s Trans Mountain and TransCanada’s Energy East pipeline proposals.

Those review processes need to be completely redone once recommendations from the two review panels have been implemented.

If it sounds demanding, that’s probably because it is. But that’s the price of real change.

‘To Govern is to Choose’

If built, the Trans Mountain pipeline and Energy East pipeline would add a combined 1.79 million barrels per day of export capacity from the Alberta oilsands (690,000 and 1.1 million barrels/day, respectively).

Let’s put that in context.

The Canadian Association of Petroleum Producers has projected that heavy oil production will increase 1.45 million barrels per day by 2030, to a total of 3.99 million barrels per day. In other words, the two massive projects currently under review would lock in more than enough export capacity for the oilsands to maximize its growth to 2030.

If paired with the construction of a single LNG export facility in British Columbia, this situation would require the rest of the Canadian economy to contract by 47 per cent from 2014 levels by 2030 in order to meet the country’s Paris Agreement targets (an impossibility “barring an economic collapse” according to David Hughes, who calculated those numbers in a Canadian Centre for Policy Alternatives report).

In other words, approving the two projects would completely botch the country’s chances of meeting international climate commitments.

“When you’re in opposition, you can be strongly committed to contradictory things,” says Keith Stewart, climate and energy campaigner for Greenpeace Canada.

“But to govern is to choose. And the Liberals have been very clear they want to meet our international climate commitments, implement the United Nations Declaration on the Rights of Indigenous Peoples (UNDRIP) and get a pipeline built. The problem is you can have, at most, two of those.”

Why @JustinTrudeau Should Call Off the Reviews of Trans Mountain and Energy East https://t.co/TslT4Z5IbV #bcpoli #cdnpoli

— DeSmog Canada (@DeSmogCanada) August 24, 2016

Opportunity for Canada to Enact ‘Visionary Environmental Laws’

The review of the process has great potential, especially given the impacts of the gutting of environmental assessments in 2012 under former prime minister Stephen Harper.

Anna Johnston, staff counsel at West Coast Environmental Law Centre, describes the review as a “once-in-a-generation opportunity for Canada to enact really visionary new environmental laws and processes.”

Johnston says a key component is to hold projects to a higher standard — requiring companies to prove net benefits as opposed to not simply posing a “significant adverse impact” — as well as measuring total cumulative impacts. Such an approach would result in a threshold of potential greenhouse emissions, meaning some projects simply wouldn’t be considered due to impacts on meeting climate targets.

“Those are just going to a red light and won’t even need to go through an environmental assessment process as we know this huge project is going to take up way more of its fair share of greenhouse gas emission allocations,” she says.

The panel members for reviewing environmental assessment processes were announced on August 15: it will be chaired by Johanne Gélinas of consulting firm Raymond Chabot Grant Thornton, Renee Pelletier of the Aboriginal law firm Olthuis, Kleer, Townshend LLP, Rod Northey of law firm Gowling WLG and Doug Horswill, senior vice president of Teck Resources and “honorary life director” of the Mining Association of Canada. (Interestingly, Bob Rae is a senior partner at Olthuis, Kleer, Townshend and Rod Notley has donated $17,000 to the Liberals since 2004).

Erin Flanagan, director of federal policy at the Pembina Institute, says the panel has “a solid balance of perspectives and experience on the file.”

The panel members for the NEB review haven’t been announced yet. The executive summaries of the final reports will be published on January 31, 2017; Flanagan emphasizes “the clock is ticking – it’s a huge mandate to execute on by early 2017.”

There’s plenty of ground to cover.

Trans Mountain, Energy East Remain Exempt

But even if the review panels produce progressive recommendations — for instance, calling for the revamping the Canadian Environmental Assessment Act, returning the responsibility for federal environmental assessments of interprovincial and international pipelines to the Canadian Environmental Assessment Agency and treating Indigenous nations as much more than an afterthought — they wouldn’t apply to the two biggest pipeline projects in recent Canadian history.

The federal cabinet will be making a decision on the Trans Mountain pipeline before Christmas, a full month before the review panels deliver their recommendations (the NEB approved the project in May with 157 conditions). This occurs in contradiction to a promise Trudeau made during the election that the NEB review would apply to the project.

The government’s ad-hoc supplementary review panel, intended to improve public consultations, has come under serious fire for conflict-of-interest allegations and failures to offer translation services or livestreaming, in many ways pointing out the massive flaws of the existing process.

Those meetings have, by and large, been an opportunity for communities to voice their majority opposition to Trans Mountain and the review process. In the case of Vancouver and Victoria, the overwhelming number of public participants voiced opposition to the pipeline project.

The NEB’s review process for Energy East is already underway via panel sessions in communities. The bulk of the work won’t start until 2017.

But if the federal government is serious about addressing concerns about the NEB, why not hold off on the panel sessions until community members are fully aware of the stakes? Currently, intervenors are operating under the expectation that the NEB will be responsible for conducting the environmental assessment of Energy East, a reality that could very well change if the dual review panels recommend serious alterations to processes.

Canadians Still Without Restored Environmental Laws

In February, Ecojustice argued in regards to the TransCanada project that “the government missed a golden opportunity to put the entire process on hold until legislative amendments could effectively repair the damage done by the Harper government’s rollbacks.”

Green Party leader Elizabeth May has also voiced concern, stating in June 20 press release that “I vigorously opposed the idea of a drawn-out consultation without first repealing the devastating changes made to environmental assessment in omnibus budget bills of 2012” and “the government is choosing to continue with a broken system while it consults stakeholders.”

The future changes may be hugely beneficial, barring carbon-intensive LNG facilities, oilsands upgraders and other industrial emitters from ever entering the review process. But the Trans Mountain pipeline and Energy East could very well be on the path to construction and export, further jeopardizing Canada’s environmental reputation.

Government Hanging onto ‘Deeply Flawed’ Process

The Liberals have already established an unfortunate track record of blaming the previous government for politically unsavoury decisions they could have very well stopped: think the controversial sale of light-armoured vehicles to Saudi Arabia, the government’s decision to withdraw an appeal to force the Catholic Church to pay reparations for its significant role in running residential schools or the approval of permits for construction on the controversial Site C dam in B.C.

It’s a bit of a sunk costs fallacy, but one shaded by an obvious desire to keep the real political mechanisms and motives under wraps.

The same appears to be occurring with the two major pipeline approvals. The government made the powerful and convincing argument during the election that the review process was broken. Yet it has allowed the NEB to continue reviewing Trans Mountain and Energy East.

“You had Trudeau say that this process isn’t credible,” Stewart says.

“So what are you actually going to do about that? How can you approve a major controversial project based on a process that you’ve already said is deeply flawed and is proved once again that it’s deeply flawed? I just don’t understand how they think they can move that forward.”

Image: Prime Minister Justin Trudeau and B.C. Premier Christy Clark meet in Burnaby, B.C., site of the Kinder Morgan Trans Mountain export terminal. Photo: Prime Minister's Photo Gallery

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In an open letter to Catherine McKenna, Canada’s Minister of Environment and Climate Change, a group of scientists publicly challenged the integrity of an environmental assessment reviewing the impacts of a major liquefied natural gas export terminal on the west coast of British Columbia.   The Pacific Northwest LNG plant, a controversial $11.4-billion export terminal, is proposed for Lelu Island near Prince Rupert. The terminal is slated to be built next to Flora Bank, a unique eelgrass rich intertidal zone scientists have termed a salmon superhighway.   According to salmon ecologist Michael Price with SkeenaWild Conservation Trust, and signatory of the open letter, the environmental assessment of the project represents a “failure of process.”   “There’s certainly a frustration with [the Canadian Environmental Assessment Agency]. We feel CEAA has not incorporated the best available science.”

Price said CEAA asked both Fisheries and Oceans Canada as well as Natural Resources Canada to provide comment on the Pacific Northwest project.   “But what they were asked by CEAA to comment on was a very narrow aspect of the project and had nothing to do with other available science.”   Price pointed out the work of Dr. Patrick McLaren which found the construction of the LNG terminal on Lelu Island would likely cause a mass erosion event at Flora Bank, dismantling the eelgrass beds critical for salmon.   “McLaren has good evidence that by building this structure you’re going to destabilize Flora Bank,” Price said, “but the proponent brings in their own 3-D model saying, ‘well, actually, there will be no negative effects.’”   “Fisheries and Oceans Canada as well as Natural Resources Canada were asked to review only the proponent’s evidence and was not tasked with reviewing any other lines of evidence, even those that are peer reviewed.”   “It’s a failure of the precautionary principle,” Price said, adding it’s also a “failure of process.”   Price said that in a review of CEAA’s mandate it was unclear if a broad spectrum of science had to be considered when performing an environmental assessment.

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“I don’t see any concrete language that CEAA — in the process of assessing risk — that they need to incorporate best available science,” Price said.   “So we could be talking about a process limitation where CEAA 2012 falls short. There could be a loophole where CEAA 2012 isn’t mandated to consider science beyond that provided by the proponent.”   “Is CEAA being negligent? Maybe they’re just following their mandate,” he said.   He added that under current Fisheries Act rules, the proponent is also legally allowed to destroy salmon habitat as long as a mitigation plan is put in place that results in “no net loss of habitat.”   “If you’re going to destroy 27 square metres of salmon habitat you can simply promise to recreate 27 square metres of that lost habitat somewhere else,” he said.   “Very few of these mitigation projects actually equate to the same productivity of natural habitat. Actually creating eelgrass habitat is extremely difficult. We have a hard time as humans to recreate what Mother Nature has created.”   Price added that from a scientific perspective the ecosystem under threat is not easily replaceable.   “What is at stake is at the moment a fairly pristine, highly productive nursery ground for salmon and other fishes.”   “More migrating juvenile salmon have been found here than in any other habitat surveyed throughout the Skeena estuary,” Price said. “It’s a pristine and highly productive natural environment that will be altered significantly. The proponent is quite clear they’re project will have this effect but, they say, they will mitigate.”   And technically, Price said, “they’re following the rules because there will be no ‘net loss’ of habitat.”   He added that the specific mitigation plan to replace the lost habitat hasn’t been made available for the project.   “They can’t tell us what their mitigation plan is because they haven’t developed it yet, but they tell CEAA they are going to recreate the habitat and CEAA says, ‘okay.’”   The public comment period on the draft environmental review ends tonight at midnight.   “Theoretically not only can CEAA consider new lines of evidence put forward but that is what they are supposed to do, incorporate comments or information put forward that is relevant.”

Image: Tavish Campbell

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Major natural gas projects and ski resort developments now have the option of being built in B.C. without environmental assessment after the Liberal government quietly deposited two orders in council Monday. (Update April 17, 2014: The B.C. government has rescinded this decision. Read our new post here)

The orders — passed without public consultation — include changes to the Reviewable Projects Regulation under the provincial Environmental Assessment Act, which eliminate mandatory environmental review of new and/or modified natural gas and ski facilities. As a result, proposed projects like the Jumbo Glacier Resort or new natural gas processing facilities may skirt the approval process without standard environment review, which involves public consultation.

“These regulatory changes only heighten the crisis of public confidence in B.C.’s environmental assessment process,” said Jessica Clogg, executive director and senior counsel with West Coast Environmental Law Association (WCEL) in a press release.

“Environmental assessments are supposed to allow the public and regulators to better understand and avoid potential risks. Removing the requirement for an environmental review is not in the public interest.”

Changes to affect currently proposed projects

The Jumbo Glacier Resort, a $900-million mega resort proposed for 6,000 hectares of B.C.’s Purcell Mountains, has been stuck in planning-stage limbo for two solid decades. Despite significant provincial support, the development still faces a number of hurdles, the most notable of which is an unresolved legal challenge brought against the resort by the Ktunaxa Nation. If construction doesn’t begin by October 2014, the development faces losing its environmental approval certificate.

Changes made to the Reviewable Projects Regulation may ease the recertifying process without requiring public consultation or environmental oversight.

“It appears to be a stunning attempt to keep the ill-fated Jumbo Resort proposal afloat, funded by the misappropriation of British Columbian's taxpayer dollars,” said Wildsight’s Robyn Duncan.

During a recent public consultation more than 1,300 letters of opposition were submitted from across B.C.

“Assessing the environmental and social impacts of any such project should be a basic requirement,” Duncan said. “Exempting projects like Jumbo from the environmental assessment process closes the door on informed decisions in regard to environmental and social impacts.”

Potential loss of oversight for B.C. natural gas projects

The lack of oversight will also influence B.C.’s rapidly expanding natural gas sector. New natural gas processing plants may now be approved without a provincial environmental assessment.

Anna Johnston, staff counsel at WCEL, says that the changes could have severe consequences for local communities. “Now for natural gas production facilities there is no public review. Once there is no longer an environmental assessment, there is no mandatory public consultation.”

“It’s really concerning with these natural gas facilities, because there are so many of them. The province wants to grow this industry and there is a lot of related infrastructure, roads, and pipelines,” she told DeSmog Canada.

“They have a huge impact on habitat and water.”

Under existing law companies will still have to notify affected landowners and First Nations but not the general public.

Proposed liquefied natural gas (LNG) facilities for the central coast will still be subject to environmental assessment, says Johnston, because they store fuel and so fall under a different review category.

According to WCEL, the B.C. Environmental Assessment Office claims the changes “are designed to reduce duplication with regulation by the Oil and Gas Commission and the Ministry of Forests, Lands and Natural Resources Operations.”

However, “these changes go far beyond avoiding any possible duplication,” Johnston wrote in the WCEL press release.

“Environmental assessments are an essential and distinct part of any development process. With these changes, the province has eliminated the kind of fact-finding process and analysis that is required for responsible decision-making.”

“Public participation is necessary for social buy-in,” she said. “Governments can only keep restricting citizens’ rights to have their say in the projects that affect them for so long.”

The changes are especially significant after the weakening of the federal Canadian Environmental Assessment Act, which places the responsibility and burden of environmental assessments upon the provinces.

Image Credit: CCPA Fracking Up our Water, Hydro Power and Climate: BC's Reckless Pursuit of Shale Gas 

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This post is second in a series on the Canada-China Investment "Straitjacket:" Exclusive Interview with Gus Van Harten. You can read Part 1 here and Part 3 here.

Right now Canadians stare down the barrel of a 31-year long legal trade agreement with the Chinese government that did not become public knowledge until September 26, 2012.

The trade treaty, known as the Foreign Investment Protection Agreement or FIPA, has garnered notable opposition in the past three weeks, with NDP trade critic Don Davies calling for public hearings, Green Party MP Elizabeth May calling for an emergency Parliamentary debate, and campaign organizations Leadnow.ca and SumofUs.org gathering over 39,300 opposition signatures (and counting) to deliver in person to Ottawa.

Yesterday, the Canadian Press reported the Harper government's refusal to host public hearings. Elizabeth May's October 1 request was also denied on the grounds that FIPA does not meet the test of emergency.

The trade agreement, or treaty, as it is called, is slated for ratification at the end of this month. The Commons trade committee will be briefed on the document in a one hour hearing.

With a trade deal that threatens Canadian sovereignty looming on the horizon and a government committed to expediting its approval, DeSmog caught up with trade investment lawyer and Osgoode professor Gus Van Harten to talk through some of the details.

In this segment Van Harten discusses why the Canadian government would pursue a deal of this sort, outlining the implications of the agreement for environmental legislation in Canada and development in the tar sands, especially in light of the spring's Omnibus budget bill C-38.

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Van Harten also considers the implications of the trade agreement for undecided energy projects like the Northern Gateway Pipeline and, significantly, if first nations and environmental groups were to blockade projects of this sort – who's rights the government would be obliged to protect. 

Below is Part 2 of our interview:

Carol Linnitt: As you have described it, it doesn't seem to make much sense for Canada to sign this agreement.

Gus Van Harten: I can tell you – trying to think about why the government would sign the China-Canada deal – it’s very unfavourable to Canada because of the way in which, as I was saying earlier, we have an open economy and China’s is closed, so the deal really, in fact appears likely to benefit Chinese investors far more than Canadian investors in China, because there will just be more Chinese investment here, because we’ve allowed more in. But I was trying to think why the government might do it, well I thought of different reasons, one might be that they sort of want to score the political bragging rights, of, ‘we signed the deal’, which is, you know, very short sighted, but sometimes governments are kind of shallow like that.

Another explanation would be that they want to open up the economy to this investment, and so that shareholders in Canadian companies in the oil patch can sell their shares at a premium to the Chinese, and get that benefit.

But another more troubling explanation which would require greater sophistication by the government but is not – certainly shouldn’t be ruled out – is that they foresee changes in attitudes about the oil patch, in the United States, in Canada, and that this may lead to new regulations on the oil patch, in that, climate can’t just be wished away forever, and that governments might take steps to regulate the oil patch in ways that investors wouldn’t like.

If you bring in a lot of Chinese investments, and you sign the Canada investment deal, you kind of get the Chinese investors to do your dirty work for you, for years after the current government is gone, because the Chinese investors can beat up on new governments that actually do take steps to change the balance between the investor rights in the oil patch and the general interest in addressing climate change or other issues like pollution and so on.

CL: Wow.

GVH: So that’s probably the most troubling aspect, is that this is designed to be a straitjacket, and it will have effect on Chinese investments that have been let in for the next 31 years after the deal’s been signed. Because the deal has a 15 year term, you have to give another year’s notice to terminate the deal and then after it’s terminated it still applies for another 15 years for investments that are in the country at the time of termination.

CL: So you’re saying that this deal has an active shelf life of 15 years, but stays in effect for 31 years?

GVH: Yes, the treaty does, meaning the treaty will be available to protect Chinese investors, including not just the Nexen investors, if they’re allowed to buy Nexen, but any other Chinese investors who come into the oil patch. I don’t think the government wants to see the whole oil patch Chinese owned, but I think it’s quite likely we’ll see significant portions of it Chinese owned, and once significant portions are Chinese owned, the you’ve also given lawyers who work for the Chinese investors this powerful tool to beat up on governments anywhere in Canada, you really frustrate the ability of Canadians to elect governments that are going to get more serious about the environmental consequences of the oil patch. That will be for 31 years from the date of this deal coming into effect, which is right now forecast to be about a two weeks away.

CL: And what’s the significance of that for, say, something like the northern gateway pipeline project that’s still in decision process?

GVH: Well, I mean, first of all, if that pipeline is owned, if foreign investors are spending money in relation to the proposed pipeline, then they right there could conceivably use the China-Canada deal to object to decisions taken by Canada, for example the British Columbian government, in objection to the pipeline. So the BC government may say ‘we don’t like the deal for the pipeline, we won’t supply electricity to it,’ well if they did that and the pipeline had Chinese money in it, the Chinese investors could say ‘you are discriminating against us, you don’t treat other investors in pipelines the same way in BC, so why are you discriminating with this pipeline, you’re not allowed to do it, and any money we lose as a result, you have to compensate us. You, Canada.’

And that’s not just the money that they put into the pipelines, they that’s their lost profits, that’s the money that otherwise reasonably would have earned, had this pipeline gone forward.

CL: I’m thinking about how tenuous the situation has already become in terms of environmental regulations after the Omnibus budget bill was passed and we saw a severe weakening of our environmental reviews and assessments and regulations. In effect the Harper government has instituted this new legal framework in which our pre-existing environmental laws have been weakened, gutted and now we are introducing this new 'straitjacket' to maintain those laws because of the possible difficulty of ever reinstituting them in stronger ways.

GVH: Yes, exactly, and let me spell it out very precisely. In many cases the arbitrators have allowed the investors to argue under the treaties that their treatment by the government was unfair and inequitable, if the government did not provide a stable regulatory framework. So if the regulatory framework is in a particular state, let’s say its currently denuded state because of the changes in the spring budget to environmental legislation, investors from China now say ‘well, we’re going to invest now because we don’t think any of our projects will be subject to environmental assessments and fisheries act regulations’, and so on. A new government comes in when the projects are underway, and says, ‘well actually we’re putting the laws back in place’. The Chinese investor can then say 'ah, but you can’t because we made our investments based on an expectation that there was a stable regulatory framework and that the previous government promised us that that regulatory framework would be stable’.

And so you can’t change the laws so easily. I’m not saying that the arbitrators necessarily would, but many have, interpreted the treaties broadly enough to allow the Chinese investors to receiver full market compensation in those circumstances from the new government due to a change in the regulatory framework. And, in a way, some of the things that the Harper government has done, I understand second hand – but have not confirmed this myself – that one of the ministers, I think Joe Oliver, had said at press conferences that they were changing the environmental laws because that’s what the investors wanted. If he did in fact say something along these lines, the he could have done nothing more to feed the arguments to the  investors’ lawyers down the road, if a new government decided to put the laws back in place. Because Chinese investors would be able to point specifically to his statements, which would be statements on behalf of Canada, that Canada was prepared to remove its environmental laws in order to bring in Chinese investment because that’s what investors wanted. It almost becomes part of the deal. A new government can reverse that decision, but they will have to pay for it.

CL: Well, that is astounding to hear.

GVH: Yeah, it’s kind of disheartening to those who care about, let’s say, protecting the environment for future generations. But on the other hand, the system has invoked very strong reactions by some countries, and increasingly governments that don’t put investor rights ahead of the rights and interests of everyone else are taking steps to unplug the system as best they can. But the decision to allow the China-Canada investment deal to come into effect will have the greatest impact on Canada’s ability to take sovereign decision with respect to its resource sector since any treaty we have signed since NAFTA. And it is comparable to NAFTA in terms of the effect that it will have. Yet it does not allow any access by Canadian exporters to the Chinese market, unlike NAFTA for the U.S. market. For this reason, it seems to be just a very lopsided deal for Canada.

CL: And this is why the conversation that you see coming, even from conservatives, expressing concerns about the fact that China is not a benevolent nation, that this is why that statement is so significant. They’re not talking about whether these are nice guys or not. This is a much more meaningful and significant thing to say about a county like China when you’re preparing to engage in this kind of deal.

GVH: Well let me give you another example. Under the treaties investors are entitled to something called ‘full protection and security’. Now what that has been interpreted by arbitrators in some cases to mean, among other things, that the government has to protect the investors’ property, assets, from public opposition and public protest. So let’s imagine that there are blockades of the pipeline as it’s being built through British Columbia, let’s say by native groups and by environmentalists. The Chinese will have an expectation, backed by the treaty, that the Canadian government through its police, through the courts, will take strong steps to protect the Chinese investors’ business plans from public opposition.

Now, sometimes public protests in opposition to foreign investments in other countries, I’m thinking in particular of a couple of cases in Latin America, one involving oil drilling in the Amazon by Texaco and then Chevron, and the other involving the disputes over a privatised water system in a city in Bolivia, some of those protests have actually led to violence, people have died, and that becomes part of the context for the arbitrators deciding whether the governments’ protection of the investor were sufficient. So it’s a concern, and I think it’s fair to say the Chinese investors may have a different view of how to handle that kind of situation from what we’re used to in Canada.

CL: And suddenly the onus is placed on the federal government to uphold this agreement, and their loyalty will in some sense be split between preserving this agreement that they have with the company and also protecting the rights of the citizens.

GVH: Yes, exact. So the question that the government will now have to face is, how is it going to balance its obligations to respect Canadian democratic protests, including when it’s actually effective in frustrating a pipeline, to balance that against its new obligations to provide full protection and security, backed by a very powerful international arbitration process, which tends often to favour the investors in its legal approach, and to provide that full protection and security under the treaty to Chinese investors. That’s the question the government will now have presented for itself.

[END OF INTERVIEW PART 2]

Gus Van Harten has written extensively on foreign investment deals. His research is freely available on the Social Science Research Network and International Investment Arbitration and Public Policy website.

Stay tuned for Part 3 of my interviews with Gus Van Harten.

The Narwhal’s reporters are telling environment stories you won’t read about anywhere else. Stay in the loop by signing up for our free weekly dose of independent journalism.

This post is the first of a series on the Canada-China Investment "Straitjacket:" Exclusive Interview with Gus Van Harten. You can access Part 2 here and Part 3 here.

I recently picked up a copy of Francis Fukuyama's 2011 book, The Origins of Political Order. Sitting on the bedside table at the house I was staying at, the book made for some 'light' bedtime reading. I heaved the enormous tome onto my lap and, opening it to a random page, read this alarming passage: 

There is no rule of law in China today: the Chinese Communist Party does not accept the authority of any other institution in China as superior to it or able to overturn its decisions. Although the People's Republic of China has a constitution, the party makes the constitution rather than the reverse. If the current Chinese government wanted to nationalize all existing foreign investments, or renationalize the holdings of private individuals and return the country to Maoism, there is no legal framework preventing it from doing so.  (Pg 248)

My concerns with China's treatment of foreign investments arose in light of China's recent bid for Nexen, a Canadian company with large holdings in the Alberta tar sands. Since Canada is having trouble with the management of the tar sands now, what would it look like if we had Chinese state-owned enterprises like the Chinese National Offshore Oil Company (CNOOC) in the mix?

It turns out the problem is of magnitudes greater than I had originally conceived, and concerns not only Canada's management of its resources, but its sovereignty, its democracy, and the protection of the rights and values of its citizens.

Perhaps most strikingly, Canada is embracing this threat, showing telltale signs the real culprit in this dangerous deal isn't China at all.

In order to untangle the web of an international trade deal as complex as the China-Canada Investment Treaty, which establishes the terms of the Nexen deal – the biggest overseas takeover by a Chinese company –  I spoke with Professor Gus Van Harten of Osgoode Law School, an expert on foreign investment deals of this sort.

Below is Part 1 of our interview:

Carol Linnitt: Thanks for taking my call, and for making time for me to ask you some questions. I really appreciate that.

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Gus Van Harten: No problem at all.

CL: I guess I’ll just jump right in. The first question I have regards Canada’s sovereignty over its resources when it engages in these kinds of transactions with state-owned enterprises. Could you talk about Canada’s ability to maintain its sovereignty over the tar sands with this potential Chinese acquisition of Nexen under the Canada-China investment deal?

GVH: Okay, so when we talk about sovereignty, the way a country exercises sovereignty over its territory is by being able to pass laws and enact regulations that apply to companies and anyone else operating in its territory. And if there are any disputes about the laws or the regulations, then those get decided in the courts of the country.

What’s really different about the China-Canada investment deal – although it tracks especially NAFTA in Canada's case, although NAFTA obviously relates to American investors – is that it allows disputes about how laws and regulations or even court decisions have been made, to be decided outside of the Canadian courts. So they’re decided by international arbitrators at the option of the investor…and the China-Canada investment deal and many of these other investment treaties … give the power, and quite immense power, to the investor to challenge any decision that Canada would make, whether by the Canadian Parliament, or a provincial legislature, by the Supreme Court of Canada or a lower court, or by Cabinet or some low-level government official. Anything can be challenged by skipping Canadian courts and going straight to these international arbitrators.

And the international arbitration process, for a number of reasons, is really, I would say, without wishing to make personal allegations about any of the arbitrators, objectively slanted in favour of the investors. That’s not unique to the China-Canada deal. But what is unique is that this is the first time since NAFTA that Canada is entering into a deal that allows for these kinds of lawsuits with a country that is likely to have investors that own a lot of assets in Canada. Okay? You get my drift?

CL: Yes.

GVH: So Canada has other investment deals with countries like Romania, but there are not a lot of Romanian investors in Canada. There are more Canadian investors in Romania. But in this case it seems very likely that there will be a lot more Chinese investment in Canada than Canadian investment in China, and that’s because the China-Canada investment deal has another element, which is that it does not require each country to open up its economy to investment from the other country. Now, Canada is already very open to foreign investment, including Chinese investment, whereas China is relatively closed.

So for that reason, going forward, we are likely to see major purchases of assets in the resource sector, especially the oil sands obviously, by Chinese companies, but I don’t think we’re likely to see anything like the same amount of investment by Canadian companies in China, because the Chinese government won’t allow it, it puts more restrictions on foreign investments. You have to do a joint venture, for example.

They just won’t allow their major companies to be bought up by foreigners in the way that Canada has in the last 10, 15 years. And Canada is increasingly open to having that done, because the Harper government has raised the threshold for the review of foreign takeovers of Canadian companies under the investment Canada Act from about 330 million now, it’s going to go up in about 5 years to 1 billion dollars, meaning the Chinese can buy any Canadian company worth less than a billion dollars without any government review, under the usual process, under the Investment Canada Act. So the Nexen takeover is subject to review because it’s worth more than a billion but there could be a lot of purchases by Chinese investors we won’t even hear about.

The point is, we’re open to foreign investment, and it’s only once the investment is allowed in that the rights of the foreign investors kick in under the deal. So it’s much more likely that Chinese investors will benefit from being able to sue any Canadian exercise of sovereignty than vice-versa.

CL: What kind of potential litigation do you see happening? What are the types of regulatory frameworks or legal frameworks that you could foresee being a problem, say in the development of the tar sands?

GVH: I’ve tracked all the known investment treaty lawsuits brought by companies, and most of these lawsuits are brought by American and Western European companies against developing countries. But there’s been a lot of lawsuits against Canada under NAFTA, and Canada’s been sued more than any other developed country. A Chinese company just launched its first lawsuit against Belgium for two or three billion dollars, which is a very large amount, involving the kind of winding-down or takeover of a Belgian bank, in which the Chinese invested before the last financial crisis. So it’s quite reasonable to expect Chinese investors will be in a position to sue Canada in the way that other companies have sued other countries under these treaties.

Now in tracking those cases to date, there are about 300 that have led to a known decision, not all of which you can really evaluate, so it’s maybe between 150 and 200 that can be evaluated on this point; that is, what kind of disputes do they relate to? There are four main areas:

1) One of the major areas is resource disputes. Resource disputes lead to a lot of investor lawsuits in cases to date.

2) Another area is environmental and health regulations, and I would say most of the lawsuits against Canada under NAFTA, there have been about 30, relate to one of those two areas, a significant majority. So we have a reasonable basis to expect that Chinese investors, where we make decisions in the resource sector and/or related to health and environmental regulations, that they will generate lawsuits under investment treaties.

3) The other two areas incidentally are privatisation, disputes arising from privatisation of major infrastructures, such as water systems or gas transmission lines, led to a lot of disputes. So if we’re talking about a privately owned pipeline, subject to regulation in Canada, then that is also an area that’s ripe for investor-state disputes that could be resolved by these arbitrators.

4) The fourth area is tax disputes and financial sector disputes, and those often link in to the resource sector too, because a government will, for example raise royalty rates on the basis that there has been a windfall profit. This has happened in the oil and gas sectors. Many countries have put new taxes on what they consider to be windfall profits by companies in the relevant sector, and those have generated disputes.

So I really can’t imagine any area of government decision making in Canada other than the resource sector specifically, with the huge money that’s going to be wrapped up in the oil sands, and on piping the oil out of the oil sands, that would be more likely to lead to disputes involving Canada.

When we open up other areas of the resource sector, like in the north, in northern Ontario, the Ring of Fire, those will also be ripe for disputes if there’s a significant foreign investment, which there almost certainly will be.

The biggest loss for Canada under NAFTA was a lawsuit brought by companies owned partly by Exxon against Canada, because of Canada and Newfoundland & Labrador’s process for putting research and development spending requirements on companies operating in the Hibernia, Terra Nova oil projects were objected to by the foreign Exxon-owned companies. The tribunal based that decision on a reading of Canada’s exceptions, Canada actually had exempted Hibernia and Terra nova from the NAFTA provisions, but the tribunal apparently adopted a, very unfriendly for us, interpretation of those exceptions, making them very narrow, and we lost on that basis. This is significant because we’re relying on the same types of exceptions in the Canada-China deal.

CL: So that means that not only can China, say for example, challenge the current regulatory framework, but they can also retroactively challenge pre-existing Canadian decisions about Canadian resources?

GVH: Yes, they can challenge existing decisions, and they can challenge existing legal frameworks, although there are grandfathering provisions with respect for some of the standards in the treaty. But it gets quite complicated as to which existing laws are exempted and which are not, and this goes back to the point about the case I just mentioned. It’s that the arbitrators may not consider Canada’s exceptions for its existing laws, including provincial laws, they may not consider them sufficient to avoid liability in the way that the Canadian government is telling us that they are. And incidentally I should add also, the case in which this was decided is called Mobil Oil and Murphy Oil versus Canada. The award in that case was issued in May of this year, and, despite Canada’s government stated policy to make all documents public, it is still sitting on that award and has not made it public. So we cannot see the basis on which the arbitrators in effect defeated our exceptions under NAFTA, reportedly, and we cannot evaluate the risks associated with using potentially the same exceptions under the Canada-China deal as well as other trade deals the government is negotiating.

CL: So there’s no way at this current stage that we could make an informed decision about whether the China Nexen deal would potentially be a good thing for Canada?

GVH: Well I’m not sure about that, but anyone outside the government is unable to evaluate whether or not the exceptions that the government is relying on to exempt certain existing laws are really reliable, or whether this decision actually frustrates our legal approach, or both.

[The exceptions Van Harten is referring to are stated clearly in this explanatory memorandum.]

This isn’t a central point, I should add, this is something of a more peripheral point to what we were speaking about earlier. The bigger point is that we’re essentially delegating a judicial component of Canadian sovereignty to international arbitrators. And the arbitrators, I should stress, are not subject to review in any court, whether a Canadian court, or an international court. And the arbitrators themselves aren’t judges. In this case the arbitrators are often corporate lawyers whose main career is to work for large companies and other foreign investors, or they’re moonlighting academics, or sometimes they’re members of corporate boards.

Put it this way, the process is not independent in the way that most Canadians would think of a judicial process. 

The other point that’s quite important is that it is very reasonable to expect that in relation to Canada’s resource sector, because of the amount of money at stake and the possibility that governments will try to take steps to ensure that Canadians and the Canadian economy benefit from the exploitation of our finite resource. This is something that all governments have an obligation to do, some do better than others. 

If a new government came in or if the circumstances change, say the price of oil in the international market goes up to $200 a barrel, we could quite likely see a government say, “Well, we’re going to raise the royalty rates”, or they’re going to say, “We’ve got enough, we don‘t need to attract as much foreign investment anymore, so we’re going to start demanding a bit more of a share from these projects.”

That is just a minefield under the Canada-China investment deal for lawsuits by China against Canada, and these would potentially be multi-billion dollar lawsuits. The largest lawsuit I’ve heard of is a lawsuit against Pakistan that involves claims in excess of 100 billion dollars, which is sort of hard to get your head around.

CL: Yes.

GVH: It's a massively important decision-making power that the arbitrators have.

CL: And when this sort of international arbitration occurs, is it usually for the purpose of an award, or can it also be for the purpose of re-establishing a legal framework in favour of the investors? Say the investor has a problem with the way that the local government wants to build a pipeline, or manage a certain resource, or deal with privatisation of resources. Can the decision of this international arbitrator actually end up instituting certain laws or changes in the legal framework?

GVH: Generally the arbitrators do not do that; they just award money. They require compensation of the foreign investor out of the public purse of the government. Now that in itself reflects a change in the government's decision, because the government will have taken a decision to pass a law, it will have said ‘we’re not going to compensate everyone in the world who is disadvantaged by this law.’ That’s not how parliaments work.

When Parliaments pass a general law, they don’t compensate all the businesses that now have lost profits they would otherwise have earned over the next ten or twenty years had the law not been passed. But the arbitrators do award that kind of compensation in some cases. They order, in effect, the state to pay compensation for legislation when parliament otherwise would not have, or when the Canadian courts would have ordered parliament not to have done it. So in that way they change decisions but the change is related to the monetary implications for taxpayers.

CL: Right.

GVH: Now the monetary implications in themselves can be huge and can actually exceed in their impact a non-monetary order. It’s actually easier sometimes for a government just to change a decision or tweak it than to have to pay a massive award for all the lost profits of the investors. The threat of a lawsuit, especially if it involves a lot of money, can be used in the early stages of a dispute to get a government to change decisions, or to deter it from making certain decisions. It’s not clear the extent to which this happens because it’s extremely difficult to research, because we never really hear about these cases, because they never lead to an award, they get settled even sometimes before the investor has brought a claim. You see what I mean?

CL: Yes, absolutely.

GVH: Threaten Canada with a lawsuit, and parliament changes its decision while it’s still in the committee stage. We could find out about that. Or for, for example, the federal government may lean on a provincial government to change its decision. We might never know. 

CL: So in effect, when these massive state-owned enterprises are purchasing large stakes in a resource, they’ve got big muscles to flex, basically, they have a lot of power to exercise in the way laws are managed and shaped.

GVH: These treaties are like a dream for the lawyers who work for big companies. It’s just a wonderful additional tool to use to threaten and intimidate and beat up on governments.

And I believe that lawyers in Canada, Canadian lawyers in law firms, may be quite keen on the China-Canada investment deal as they see work for themselves, representing Chinese investors and helping them understand how they can sue, or threaten to sue, governments in Canada. And in fact, it’s regularly the case that you have this section of the Canadian legal community that promotes actively the ability of foreign investors to sue or threaten to sue the Canadian government.

CL: My goodness, the more you talk about this, the more it sounds like absolute madness.

GVH: Yeah, I’ve hardly even gotten started.

[END OF INTERVIEW PART 1]

Gus Van Harten has written extensively on foreign investment deals. His research is freely available on the Social Science Research Network and the International Investment Arbitration and Public Policy website.

The Harper government has recently decided to extend the review period for the CNOOC purchase of Nexen for an additional 30 days until mid-November. The China-Canada Agreement, however, is slated to pass into legislation on October 31, 2012 without open parliamentary debate. 

Campaing organizations Leadnow.ca and SumofUs.org have launched an effort to stop this deal before it's even begun.

Stay tuned for Part 2 of this series based on my interviews with Gus Van Harten.

Images from "PM Visits China" Photo Gallery.

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