On Wednesday, TransCanada, the Canadian fossil fuel company behind the Keystone XL Pipeline, announced that it is suing the Obama administration under the North American Free Trade Agreement (NAFTA). The case will be decided by an international tribunal. The corporation also filed a separate suit at the US Federal Court in Dallas.
“TransCanada has been unjustly deprived of the value of its multi-billion-dollar investment by the U.S. Administration’s action,” the company said in a press release, declaring that it hopes to recover $15 billion in US taxpayer money as compensation for lost profits. (The federal court suit, the company explained, “does not seek damages, but rather a declaration that the [administration’s] permit denial is without legal merit and that no further Presidential action is required before construction of the pipeline can proceed.”)
The NAFTA suit takes advantage of Investor State Dispute Settlement (ISDS), a way corporations can sue foreign governments for damages that’s a feature of many trade agreements — and which many environmental groups staunchly oppose.
ISDS was an idea conjured up by European investors in the mid-20th century, when companies worried that revolutionary governments would nationalize an investment, like a coal mine. They wanted a way to hold governments accountable for their losses. But in the last two decades, as the number of trade deals containing ISDS has increased, suits have been put to a broader use, with companies alleging lost profits and suing not just when a government seizes a company’s property but also when a government changes regulations in a way that seems to target one company.
In large part because of ISDS, groups like the Sierra Club, Greenpeace and Friends of the Earth have become outspoken opponents of Obama’s current deal with Pacific Rim countries — the Trans-Pacific Partnership (TPP) — and another trade agreement with European countries that is still being negotiated, the TransAtlantic Trade and Investment Partnership (TTIP). The environmentalists argue that while the administration is pursuing agreements with countries like China and India to cut emissions, and backing action through the UN Paris climate pact, it simultaneously is pushing new trade deals that, like NAFTA, would allow foreign fossil-fuel companies to sue to protect their interests and keep pumping greenhouse gases into the atmosphere.
— Ilana Solomon, director of the Sierra Club Responsible Trade Program
These groups argue that the TPP runs completely counter to the goals of the Paris climate pact, which will be signed by nearly 200 countries in April, and which requires every signatory to voluntarily commit to reducing their fossil fuel consumption. “The challenge is that we need to be clearing the path so all countries can put in place the most ambitious climate policies possible in order to meet and exceed those goals. But the Trans-Pacific Partnership and the TransAtlantic Trade and Investment Partnership, if put into law, would essentially put new road blocks in the way that would threaten or slow the ability to make the changes our economy needs,” says Ilana Solomon, who heads the Sierra Club’s Responsible Trade Program.
To illustrate her point, Solomon pointed to a suit against Germany by a Swedish energy giant, Vattenfall. In 2009, after the German government imposed stricter water regulations on a Vattenfall-owned coal plant near Hamburg, the company used ISDS to sue for €1.4 billion, saying the regulations violated Vattenfall’s rights under the multilateral Energy Charter Treaty. The case was ultimately settled after Vattenfall won a victory in a separate suit in German courts. Under the settlement, Germany weakened the regulations in a way that the EU later said was harmful to protected fish species.
“In the halls of power where the [Paris] deal was being crafted there was very little discussion of trade and there’s a real challenge that these two issues — climate and trade — are operating in separate silos. In the trade negotiations, climate change is totally absent from the discussions,” says Solomon, noting that the TPP doesn’t mention the term “climate change” or lay out specific ways to encourage countries to cut emissions.
That, in fact, is the point, argues James Salzman, a professor at UC Santa Barbara and UCLA School of Law, and a member of the Trade and Environment Policy Advisory Committee that counsels the EPA and the US Trade Representative. The TPP is a trade deal, not a climate deal, he says, “driven in part by geopolitical concerns. China has an increasing influence on the Pacific Rim in terms of commerce, and [China is negotiating] investment agreements with these countries with no environmental provisions.
“In order to get these countries to go along, the US has pushed what in trade parlance, and given traditional trade agreements, is actually pretty strong stuff. Not what the Sierra Club wants, for sure, and it’s not the agreement Sierra Club would have negotiated. But of course no country would have signed on to the agreement Sierra Club would have negotiated.”
It’s not a given that suits like TransCanada’s will win the money they’re looking for. In fact, companies only win their ISDS suits outright about a third of the time. But recent research by Rachel Wellhausen, an assistant professor at the University of Texas, finds that companies and individual governments also settle about a third of the time. Because settlements usually involve some compensation for the suing company or a relaxation of regulations related to its business, lawyers often see them as at least a partial victory for the company. That was the case in the Vattenfall ISDS settlement.
And, while ISDS is meant to encourage investment by giving companies an extra sense of safety if they invest in a country, there isn’t solid proof that it does anything to spur investment, writes Wellhausen for The Washington Post’s Monkey Cage blog.
— James Salzman, professor at UC Santa Barbara and UCLA School of Law
On the other hand, the possibility of being sued through ISDS might create a chilling effect, especially among poor countries already at a disadvantage when it comes to cutting back pollution. “Governments might think twice about updating regulations in order to avoid getting sued,” says Wellhausen in an email. In fact, some countries, including, notably, Brazil, have started avoiding agreements that contain ISDS.
“Is it going to chill the US? No. Is it going to chill Germany? I doubt it. Is it going to chill a smaller country? Maybe,” says Salzman, pointing to a case in which cigarette manufacturer Philip Morris is suing Uruguay for $25 million because it mandates graphic health warning labels on cigarette packages. “Philip Morris is asking an enormous compensation, and it isn’t because they’re going to win. I think they’re trying to send a message,” says Salzman.
The TransCanada suit is part of a larger shift among fossil fuel companies. In a speech earlier this week, American Petroleum Institute CEO Jack Gerard made clear that, faced with a growing movement of climate activists, his lobbying organization is ready to push back aggressively in 2016.
“The demonization of the Keystone XL pipeline remains a powerful cautionary tale of the dangers of energy policy driven by ideology rather than economic reality,” Gerard said. “Emboldened by their ability to stop the Keystone XL pipeline, anti-fossil-fuel advocates have set their sights on all energy infrastructure projects.”
If TransCanada is suing the US, a powerful country that has never yet lost an ISDS suit, then there’s no reason to believe that fossil fuel companies won’t be even more aggressive with less-powerful countries under new multilateral trade deals. Mexico, for instance, is also party to NAFTA, and might be paying attention to TransCanada’s actions. “I would indeed suspect that Mexican officials would think twice about instituting a similar policy to the one that got the US in trouble,” says Wellhausen.
After much wrangling between the Obama administration and Congress, the Trans-Pacific Partnership will likely be up for a vote this year. The deal is being “fast tracked,” which means Congress won’t get to tweak the agreement, it will only be able to approve or shut it down.
And so, environmental groups are raising their voices about ISDS: If these sorts of suits become more common, there’s a very real chance that the task of cutting emissions will become even harder for poor countries. “If we’re really serious about taking on the climate crisis,” says Solomon, “we have to stop entering into trade agreements that constrain our ability to do so.”
This post was updated to clarify the World Wildlife Fund and The Nature Conservancy’s stance on TPP.