Getting serious about enforcing CUSMA’s environmental rules

With annual global carbon emissions from fossil fuels in 2023 reaching the highest ever recorded, the need for urgent action on climate change beyond current government activity is clear.¹ Yet, as was pointed out frequently in U.S. debates about the Canada-U.S.-Mexico Agreement (CUSMA), “climate change” is not mentioned once in the NAFTA replacement deal. Nor is the Paris Agreement, the 2015 treaty which sets targets for climate change mitigation, among the multilateral environmental agreements that can be enforced through CUSMA’s new state-to-state environmental dispute settlement process.²

Political formations and election results across North America may make it difficult to improve upon CUSMA’s environmental provisions during the agreement’s scheduled review in 2026. But this is no excuse for Canada not to try. CUSMA parties should think big in this respect—by agreeing on a climate peace clause, or moratorium on using trade and investment rules to challenge climate change policies, and considering a rapid-response environmental enforcement tool similar to the successful rapid-response labour mechanism.

A CUSMA climate peace clause

The idea for a climate peace clause comes out of a growing movement to prevent trade and investment rules, written prior to widespread recognition of the climate crisis, from blocking climate policies. Basically all regulations, bans, subsidies, preferences, and procurement policies aimed at rapidly lowering emissions and transitioning to low-carbon energy, transportation, and industrial practices should be treated as immune to trade disputes.³

Recently, over 190 U.S. state legislators from 52 states and territories called on their government to support a climate peace clause.⁴ As described by the Trade Justice Education Fund and the Sierra Club, such a clause:

would help governments safeguard existing climate policies and create the space for them to adopt the bolder policies that justice and science demand. This could include, for example: (a) policies to reduce use of and reliance on fossil fuels (e.g., rejecting fossil fuel permits, bans on fossil fuel extraction, removal of fossil fuel subsidies) and (b) policies to ramp up the production and distribution of renewable energy and clean energy goods like electric vehicles, heat pumps, and wind turbines (e.g., subsidies, procurement policies, domestic content preferences).⁵

While aimed at state-to-state disputes at the World Trade Organization (WTO) and under free trade agreements like CUSMA, a climate peace clause could also apply to investor-state dispute settlement (ISDS), which unfortunately still exists in a limited form in the renegotiated North American trade deal (see below). Both state-to-state and investor-to-state disputes involving environmental policy pose serious barriers to rapid climate action, threatening governments with potentially billions of dollars in compensation and creating a “chill” effect around new regulations.⁶

Japan and the European Union used the state-to-state dispute mechanisms of the WTO to successfully challenge Ontario’s feed-in tariff for renewable energy, which was phased out in 2017. The U.S. and India have both used the WTO to successfully challenge each others’ renewable energy policies, which were aimed at promoting local industry while increasing the supply of wind, solar and other renewables.⁷

ISDS mechanisms have been favored by the fossil fuel industry, which has initiated more investment treaty and trade agreement arbitrations than any other sector, securing at least $77 billion USD in compensation from governments and, by extension, tax payers.⁸ The ISDS process in NAFTA was frequently invoked against environmental measures.

In 2023, Ruby River Capital launched a huge NAFTA “legacy” claim against Canada for refusing to permit the construction of an environmentally and economically dubious liquified natural gas (LNG) plant in Quebec.⁹ The U.S. investor is seeking no less than $1.04 billion USD in compensation, but this amount could increase significantly as the case proceeds, as it is based on an estimate of the potential value of the investment when the tribunal issues its final award.¹⁰ Given the expansion of climate policies and the potentially lucrative gains to be made from ISDS, Kyla Tienhaara et al. anticipate more climate-related investment claims in the future.¹¹

This will likely also be the case with state-to-state disputes. Several countries have already raised the possibility of challenges at the WTO against the European Union’s new carbon border adjustment mechanism (CBAM), a tariff applied at the border to imports of high-carbon goods that are not subjected to carbon levies equivalent to those in Europe.¹² After decades subsidizing its now-booming electric vehicle industry, China initiated a WTO complaint against U.S. electric vehicle subsidies in March 2024, which is likely to lead to formal dispute proceedings.¹³

A climate peace clause can play an important role in preventing trade and investment challenges from delaying or blocking new policies and regulations aimed at rapidly responding to climate change. The inclusion of such a clause in CUSMA would be a major step toward its expansion to other trade and investment arrangements, including adoption “ultimately … by all WTO countries to offer global protection for climate policies.”¹⁴

Rapid response mechanism for the climate

The dedicated environment chapter (Chapter 24) in CUSMA marked a potential step forward for environmental protection and conservation. The old NAFTA contained a side agreement, the North American Agreement on Environmental Co-operation (NAAEC), which produced reports and recommendations but had little direct impact on environmental enforcement. It was never used to launch a single formal dispute, even if this was technically possible during the NAFTA years.¹⁵

There is growing recognition that such imprecise and effectively unenforceable agreements have been unsuccessful for meeting strong and necessary environmental objectives. Even the World Bank now recognizes that, “Environmental provisions in trade agreements can be effective in improving environmental welfare, but need to be specific and legally binding” (emphasis added).¹⁶

The CUSMA environment chapter has stronger language around conservation and protecting biodiversity, and appears to offer a more direct pathway to enforcement through binding dispute resolution.¹⁷ The NAAEC’s public complaints process is maintained and brought into the body of the agreement, allowing individuals or groups from any CUSMA party to request investigations of non-enforcement of environmental protections in any other country.

While CUSMA is still a young agreement, so far there is little indication that the new environment chapter’s impact differs significantly from the past.¹⁸ Environmental investigations have been slow and there has yet to be a significant co-operative or enforcement outcome. For instance, one of the earliest submissions to the Commission for Environmental Co-operation (CEC) after CUSMA replaced NAFTA in July 2020 involves the near-extinction of the vaquita porpoise in Mexico. An investigation was launched in August 2021, but the CEC secretariat continues to work on a “factual record,” even while there are approximately only 10 vaquita left in the world.¹⁹

Also concerning, in July 2022, environmental groups challenged the significant environmental and cultural impact of the Tren Maya, a 1,500-km rail link through the Yucatan peninsula, in the state of Quintana Roo, Mexico, through a submission to the CEC. The train project, which was rushed through with minimal and inadequate consultation, could be completed by the end of 2024, potentially before a “factual record” on Mexico’s actions will be completed.²⁰

The challenge with these cases is twofold. First, even when the CEC process is complete, it is not clear what impact it will have on enforcement. The CEC produces “recommendations” that governments may or may not act upon (Article 24.28). Second, if CEC investigations cannot be carried out in a reasonable amount of time, their effectiveness as a tool of co-operation or enforcement is questionable regardless of their final recommendations. Justice delayed is justice denied.

Given all this, there is an urgent need to revise the CUSMA environment chapter to provide more rapid responses and enforcement of the obligations therein. The Rapid Response Labour Mechanism (RRM) provides inspiration. Although the RRM cannot be replicated for environmental disputes, given its facility-specific orientation, a revised environment chapter could include the following features.

• Like with RRM labour disputes, there should be a 45-day process after which a public submission on environmental enforcement matters (CUSMA Article 24.27) is open to formal state-to-state dispute settlement. The process currently contains too many hurdles and undetermined timelines.

• Article 24.29 of CUSMA, on environmental consultations, should be altered so that governments have a responsibility to act on the basis of CEC recommendations. As it stands, there is no requirement that recommendations made by the CEC will lead to further action, whether in the form of consultations or dispute settlements between governments.

• The consultation process needs to be reduced to a single consultation before moving to the dispute resolution phase. Currently, before dispute settlement can be triggered, parties are required to conduct an environmental consultation (Article 24.29), a senior government representative consultation (Article 24.30), and a ministerial consultation (Article 24.31). International trade lawyer Jim Holbein observes that these steps “can be seen as either multiple points to reach an agreement or layers of governmental hurdles to be overcome, depending on the viewpoint one brings.”²¹

On this last point, given there is only one case that has reached the consultation stage—requested by the U.S. around the endangered vaquita porpoise in Mexico²²—and that these consultations have dragged on for two years, “layers of government hurdles” would appear to be the most accurate description so far. This does not reflect the urgent need for strong and rapid action around biodiversity loss and climate change.

Responsive environmental co-operation and enforcement through CUSMA also necessitate mechanisms to protect specific and diverse communities from environmental damage and unethical corporate practices. The CUSMA environment chapter provides only brief, unenforceable recognition of voluntary commitments from corporations and “the importance of promoting corporate social responsibility and responsible business conduct” (Article 24.13).

Instead of this soft language, enforceable mechanisms rooted in hard obligations (“shall” versus “shall endeavor to,” for example) are needed. This could be done in the environment chapter and elsewhere in the agreement. For example, CUSMA parties could be required to put in place effective mechanisms to ensure that internationally recognized rights and obligations around free, prior and informed consent, human rights due diligence, and Indigenous rights are respected and enforced.

Meaningful action on the environment also requires addressing the most significant environmental challenge of our time: climate change. The CUSMA environment chapter makes no reference to climate change or to major climate agreements, including the 2015 Paris Agreement and the United Nations Framework Convention on Climate Change (UNFCC). While the chapter does commit all three North American countries to implementing seven multilateral environmental agreements, and contains language that some suggest could be directed toward climate goals,²³ the chapter falls short in three important areas.

First, investigations and consultations under the environment chapter focus on biodiversity protection and conservation. These objectives are significant in their own right but have led to a disproportionate focus on Mexico,²⁴ which confronts challenges around state capacity, resources, and criminal networks. And yet, while Mexico is an important producer of fossil fuels, the U.S. and Canada are the third and fourth largest oil exporters in the world. The impacts of Canadian and U.S. fossil fuel production and exports have a heavy toll on the planet but are not addressed in the environment chapter.²⁵

Second, in not mentioning climate change, the environment chapter also provides no commitments to meet climate action goals. This contrasts sharply with corporate-friendly chapters in the agreement such as Chapter 20, covering intellectual property rights, which contains numerous hard commitments. Under Chapter 20, all parties “shall provide a term of protection for industrial designs of at least 15 years,” and Canada and Mexico pledge to “fully implement [their] obligations under the provisions of this Chapter no later than the expiration of the relevant time period specified,” ranging from 2.5 to five years.²⁶ These are the sort of firm commitments, with precise timelines for implementation, that are required for climate change action and should be included in a revised environment chapter.

Finally, despite the fact that the environment chapter went into effect only a few years ago, it is already dated compared to more explicit commitments to addressing climate change. For instance, both Canada and the United States are members of the Coalition of Trade Ministers on Climate, which emphasizes “the urgent need for climate change mitigation and adaptation in line with the UNFCCC, the Paris Agreement, and the Sustainable Development Goals.”²⁷ One significant way to act on this commitment would be to bring these agreements directly into the CUSMA environment chapter.

Recommendations

1. Revise the CUSMA environment chapter to provide more rapid responses and enforcement of CUSMA environmental obligations, inspired by the RRM in the labour chapter.

2. Negotiate a climate peace clause that shields measures aimed at reducing emissions or responding to the climate emergency from CUSMA state-to-state and investor-state dispute settlement.