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U.K. membership in Pacific trade deal threatens Canadian climate action

Canada should join Australia and New Zealand in neutralizing lopsided corporate protections in CPTPP

April 6, 2023

3-minute read

Just when we thought we were out, they pull us back in.

In three months, Canada was going to be free from the threat of unnecessary corporate lawsuits under the investor-state dispute settlement (ISDS) mechanism in the North American Free Trade Agreement (NAFTA). That’s when NAFTA’s controversial investment protection chapter was set to expire for good.

Keeping ISDS out of the Canada-U.S.-Mexico Agreement (CUSMA)—the NAFTA replacement deal that came into force in 2020—was supposed to safeguard Canadian democracy, in particular our right to set responsible environmental policy, according to the government.

But as the fictional mobster Don Corleone learned when he tried to go clean, it seems our government wasn’t being honest with us. By agreeing to let the United Kingdom join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), Canada’s environmental and other public protections are once again targets of unreasonable corporate attacks.

Canada announced last week that negotiations on the UK’s bid to join the Pacific trade agreement were successful. The economic impact will be insignificant for the UK or other CPTPP countries, but the treaty’s investment chapter creates large risks for governments across the region, especially as they begin to transition away from fossil fuels.

Wisely, both Australia and New Zealand signed side-letters with the UK which “disapply the ISDS provisions in CPTPP” for investors. Canada signed no such side letter.

Canadians care about this, because ISDS cases are expensive and undemocratic and can chill policy action on issues that are important to all of us. Under NAFTA, Canada has been sued 46 times by US-based investors, complaining largely about the impacts of environmental and natural resource measures on their bottom line. Up to April 2021, these claims cost Canadian taxpayers more than $376 million.

The costs continue to rise. Just a few weeks ago, the American company Ruby River Capital filed a request for arbitration against Canada claiming a mind-boggling $20 billion USD in compensation for Québec’s decision to reject a highly controversial gas pipeline and LNG terminal. The province, which has taken a lead role in phasing out fossil fuels, rejected the project on the basis that it would increase greenhouse gas emissions and negatively impact First Nations and marine mammals.

It’s important to note that Ruby River Capital did not invest anything close to the amount of its ISDS claim in developing its project proposal—because under ISDS, firms can make claims based on speculative “lost future profits.”

It is not difficult to imagine a similar case emerging under this new agreement. UK-based firms have lodged 90 claims against foreign governments using ISDS mechanisms in investment treaties, making them the third most litigious group after US and Dutch investors. British fossil fuel company Rockhopper Exploration just won about $350 million CAD in compensation for lost future profits over Italy’s 2015 ban on offshore drilling—a key environmental policy.

The global oil and gas giant Shell is headquartered in London. Shell is the largest investor in LNG Canada, which is currently building an LNG liquefaction and export terminal in Kitimat, BC When phase one of the project is complete and the facility comes online, it will be the single largest source of greenhouse gas emissions in the province.

If phase two of the project is approved, annual emissions will soar to 13 megatonnes (20 per cent of BC’s total emissions in 2020), making it impossible for the government to meet its climate goals. If the province doesn’t approve the project, it could result in an ISDS case. Shell is no stranger to the ISDS system, having been involved in at least four previous cases.

BP, one of the world’s largest oil companies, is also based in the UK and currently exploring for offshore oil in Newfoundland and Labrador. If Canada were to decide—in line with analysis from the International Energy Agency and others—that no new oil developments should be approved in order to keep global warming below 1.5C, then BP could demand compensation via ISDS, just as Rockhopper successfully did in Italy.

These kinds of cases are so common under international trade and investment treaties that many countries are choosing to walk away from the ISDS regime. Poland, Germany and France, among several other European countries, have begun to formally withdraw from the Energy Charter Treaty, the world’s most common venue for ISDS lawsuits.

For the same reasons, Australia decided last year to stop signing new treaties that include ISDS and is considering how it might remove extreme investor protections from its existing deals. That’s why it signed a side letter with the UK to make ISDS off limits for Australian and U.K. firms in each other’s countries.

Given Canada’s principled removal of ISDS from the new NAFTA, we should expect nothing less from our government as the U.K. joins the 12-country CPTPP. Canada should immediately secure a side-letter with the U.K. that neutralizes the CPTPP’s investment protections for U.K. investors here as for Canadian investors in the UK We should offer to sign similar side-letters with any CPTPP parties that might be interested.

Canada should also follow Australia’s lead and explore options to fully exit the ISDS regime. The government should abandon its ongoing efforts to include ISDS in new trade deals with Indonesia, ASEAN and India. Failure to do so will put a huge burden on this and future generations.

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