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The Council of Canadians is Canada's largest citizens' organization, with members and chapters across the country. We work to protect Canadian independence by promoting progressive policies on fair trade, clean water, energy security, public health care, and other issues of social and economic concern to Canadians.

Trans-Pacific investor rights are incompatible with sustainable development

| January 31, 2013

The Council of Canadians submitted the following comments to the Government of Canada's request for information on the likely environmental impacts of the 11-country Trans-Pacific Partnership trade agreement. Canada officially joined the TPP negotiations late last year after a lengthy lobbying campaign by the Harper government. In February 2012, we submitted comments to a previous government consultation on Canada's entry to the TPP, which you can read here. For more information on the TPP and our campaign against the agreement, click here.

Submission on the Environmental Impacts of the Prospective Trans-Pacific Partnership Trade Agreement (TPP)

January 30, 2013

The Council of Canadians welcomes the opportunity to comment on the potential environmental impacts of the proposed Trans-Pacific Partnership trade agreement (TPP) between Australia, Brunei Darussalam, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam. Our comments are divided into two sections. First we explain what we see as the failings of Canada's environmental assessment process for trade and investment agreements. Then we explore the substantive ways the TPP could affect the environment and environmental policy in Canada and across the TPP region, specifically the incompatibility of investor-state dispute settlement with the goal of sustainable development.

Founded in 1985, the Council of Canadians is Canada's largest citizens' advocacy organization with tens of thousands of members across the country. We work nationally through our network of volunteer chapters to promote progressive policies on fair trade, access to clean water and sanitation, climate justice and energy security, public health care, and other issues of social and economic concern to Canadians. We are a member-funded organization and do not accept corporate or government funding. The Council has a long history of commenting on the ways Canada's trade and investment agreements empower corporate interests at the expense of the public interest.

The Environmental Assessment Process

In the Notice of Intent to Conduct an Environmental Assessment of the Trans-Pacific Partnership Free Trade Agreement, which was posted in the Canadian Gazette on December 1, 2012, the Government of Canada states that it is committed to sustainable development. It also mentions the importance the Minister of International Trade places on seeking information from many sources, through an "open and inclusive process," on the relationship between trade and environmental issues. However, past environmental assessments of free trade and investment agreements, as well as the process to date for the TPP, have not lived up to these commitments.

First, there is only a passive effort to solicit public input at each stage of the assessment - initial, draft and final reports. Notices are posted quietly in the Canada Gazette so that only those people or groups paying the closest attention to the government's trade and investment policy agenda would be aware that a consultation has been opened. These consultations are web-based only and it is not always clear whether the Department of Foreign Affairs and International Trade has taken the submissions into account in the development of its final recommendations.

In the case of the Canada-China Foreign Investment Promotion and Protection Agreement (FIPA), the government received no public comments at all until the treaty was made public and it was time to review the final environmental assessment. This highlights a deeper problem with the EA process in general, which is that the consultations begin before a final or even draft text of the trade or investment agreement being studied is available. We therefore agree with the Canadian Environmental Law Association in its submission to the Government of Canada on the final environmental assessment of the Canada-China FIPA that

full environmental assessments of trade and investment agreements should be conducted before final terms of the agreement are concluded, based on a publicly available draft agreement. This would ensure that the EA process might in effect influence Canada's decision to enter into the agreement or influence its terms, as required by the first guiding principle of the Canadian Environmental Assessment Agency's 'Cabinet Directive on the Environmental Assessment of Policy, Plan and Program Proposals', namely 'early integration.'

Without any public input in the EA process for the Canada-China FIPA, the government decided to skip directly from a cursory initial assessment to a final assessment, without testing its assumptions about trade and investment agreements with the public or outside experts. In that case, these assumptions included that the FIPA "is not expected to generate significant economic or environmental effects in Canada," and that the treaty "ensures that the Parties retain the ability to regulate in the public interest, including with respect to environmental issues." In other words, there is nothing to worry about since the investment treaty will have neither economic nor environmental impacts.

Leaving aside the question of why the government would enter into an investment treaty that has no noticeable impact on investment into Canada, legal experts and environmental groups demonstrated in commentaries following publication of the FIPA text that the treaty could very likely have a chilling effect on environmental policy, and make existing environmental measures vulnerable to investor-state challenges. Yet these concerns came too late to have any effect on the treaty, which was passed quickly through Parliament and now awaits ratification. This reinforces the need to more actively engage the public and non-governmental experts while the text of a trade or investment agreement is public and not yet signed or ratified. In other words, the input the government receives through its EA process must have the potential to change the trade or investment agreement under negotiation or else the process is largely meaningless.

Investor-state dispute settlement and the TPP

The lack of a final negotiating text does not entirely preclude an examination of the potential substantive impacts of the TPP on the environment, environmental policy and sustainable development. This is especially true with respect to the proposed investment protections and investor-state dispute settlement process, and not just because an early copy of the investment chapter in the TPP has leaked publicly. To the extent that the TPP investor rights and dispute settlement procedures look anything like the NAFTA model or those in the Canada-China FIPA, they will present a direct challenge to the ability of governments to set and enforce environmental and other regulations.

Canada has a long and disappointing history with investor-state dispute settlement under NAFTA. The process allows firms or investors from any one North American country to challenge the measures, laws, decisions or regulations in any other country if they feel those measures have unfairly harmed their right to profit from their investments. Many of these disputes have involved non-discriminatory measures, for example environmental or conservation rules or regulations that treat all investors equally.

The Canadian government has already paid about $170 million in fines or settlements under NAFTA investment disputes. In one controversial case filed shortly after NAFTA came into force, a U.S. toxic waste disposal firm was awarded about $6 million when a ban on PCB exports to the United States was found to have violated the firm's minimum standards of treatment, and to indirectly expropriate their profits. This ruling directly contradicted another international treaty obligation requiring Canada to discourage trade in toxic substances so their disposal can be handled domestically.

Canada has attempted to limit the opportunities for foreign investors to challenge legitimate public policy and decisions in its post-NAFTA investment treaties. For example, Canada now typically limits the definition of minimum standards of treatment to that prescribed by customary international law for the treatment of aliens. Canada also favours language like that proposed by the United States in the leaked investment chapter, stating that "Except in rare circumstances, non-discriminatory regulatory actions by a Party that are designed and applied to protect the legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations." The language cannot be working as expected since investors increasingly turn to investment arbitration to challenge government measures that should be safe under this definition, in disputes that national courts could easily decide.

Recent investor-state disputes against Canada under NAFTA show a clear trend of companies challenging non-discriminatory public policies in ways that undermine our basic notions of democracy and what governments should be able to do to regulate in the public interest.

For example, recently settled cases include:

- AbitibiBowater vs. Canada (settled 2010): After learning the pulp and paper company was closing its last remaining factory in the province, the government of Newfoundland and Labrador passed legislation that took back the firm's water and timber rights and, in the process, expropriated the company's factory as leverage in bargaining over who would pay for severance packages for the workers as well as environmental cleanup costs. The firm very quickly filed notice of arbitration under NAFTA, claiming $300 million in damages, which included the value of the water and timber rights that under Canada's constitution are the sole property of the Crown, or the province. Canada settled with AbitibiBowater for $130 million, putting the status of these Crown rights as public goods versus private property in question.

- Dow Agrosciences vs. Canada (settled 2011): Dow had challenged Quebec's cosmetic pesticide bylaw, which the company claimed violated NAFTA's guarantee to fair and equitable treatment, as well as the expropriation clause of the investment chapter, and sought $2 million in damages. The company settled in advance of arbitration in exchange for a statement from the Quebec government, "that products containing 2,4-D do not pose an unacceptable risk to human health or the environment, provided that the instructions on their label are followed." The ban remains in place.

New cases (filed in past two years):

- Lone Pine Resources vs. Canada: A U.S.-backed energy firm with headquarters in Calgary is challenging Quebec's ban on oil and gas exploration in the St. Lawrence Valley, claiming $250 million in damages in breach of NAFTA's fair and equitable treatment and expropriation clauses. The recently elected Parti Québécois government had campaigned on a promise to put a stop to hydraulic fracturing in the region - a promise that had broad public support. But the company claims the decision was arbitrary, and the law firm representing them says the fracking ban is "exactly what the NAFTA rights are supposed to be protecting investors against."

- Windstream Energy vs. Canada: A U.S.-registered firm owned by a New York investment group with an Ontario address is asking for $475 million compensation for the effect that a temporary moratorium on offshore wind farms in the province will have on its investments. The moratorium was implemented so that a provincial-federal study could be carried out on the health and environmental effects of offshore wind projects. The firm claims breaches of the articles on expropriation, fair and equitable treatment, national treatment and most favoured nation treatment.

- Eli Lilly vs. Canada: The fifth largest U.S. drug company is asking for $100 million in compensation under NAFTA for a decision of the Canadian courts to invalidate a patent for the ADHD drug Strattera. The patent denial was based on a court finding the drug did not live up to the company's promises. Eli Lilly disputes Canada's system for deciding patent validity. The notice of arbitration criticizes the Canadian system for the ways that it is different, and in some ways more stringent or cautious, than European or U.S. pharmaceutical approvals processes. The firm claims that the patent invalidation decision unfairly expropriated its investment in Canada, and that it denies the firm minimum standards of treatment and national treatment.

- St. Mary's Cement vs. Canada: A Brazilian-owned (formerly Canadian) cement company with U.S. registration is asking for $275 million in compensation for a rezoning decision near Hamilton, Ontario that stopped a planned quarry from moving ahead. The company is blaming political collusion for the "arbitrary" decision - a claim that ignores the large citizens-based resistance to the quarry in the region based on the impacts on the water and ecology of the area.

One recent case is highly problematic from a sustainable development perspective. Last spring, ExxonMobil and Murphy Oil won their NAFTA investor dispute against a legal profit-sharing measure on offshore oil production in Newfoundland and Labrador. The panel of arbitrators in that case overturned a decision of the Canadian courts that research and development requirements for the Terra Nova and Hibernia projects were legal and appropriate. The panel made this decision despite Canada having excluded the federal-provincial legislation and associated measures in question from NAFTA's ban on performance requirements.

This case shows just how much space unelected and largely unaccountable arbitrators have to interpret the limits of trade and investment agreements like NAFTA and the TPP, and to decide their own jurisdiction over matters that would be more appropriately, and in a more balanced way, handled by the courts. The U.S. energy firms had asked for $65 million in compensation for the R&D measures, which are an appropriate trade-off for the right to extract provincial resources. It is our understanding that negotiations continue on how Canada and the provincial government are to bring themselves in line with the arbitral panel's decision.

The threat to sustainable development internationally

Where the TPP should be scaled back or preferably changed would be to remove these excessive investor rights altogether. However, the U.S. government is trying to expand them geographically to countries such as Vietnam or New Zealand, where it does not have bilateral investment treaties or NAFTA-like free trade agreements. Given the U.S. position as an investment-exporting country, and the growing list of cases by U.S. investors against Canada, it's clear the impact on sustainable development and other measures by TPP countries will be profound. Investor-state cases brought by U.S. firms under free trade agreements in Latin America offer us even more reason to predict a high environmental and social impact from the treaty.

For example, Renco Group of the United States is using the investor rights in the U.S.-Peru Free Trade Agreement to try to avoid compensating children suffering high levels of pollution caused by a metal smelter in La Oroya. The Peruvian affiliate of Renco promised in 2007 to install a sulfur plant at the site as part of an environmental agreement with the government. But the company has failed to live up to its promises and sought two extensions on a deadline to clean up the project. When the Peruvian government said no to a third extension, the company filed an investor-state lawsuit. According the U.S. group Public Citizen, the Renco case

illustrates two deeply worrying implications of investor-state arbitration. First, it shows that corporations will use investor-state cases to put pressure on governments to weaken environment and health policies. Second, corporations are increasingly attempting to evade justice in domestic courts through the investor-state mechanism.

In another recent international case, a U.S. energy firm sued Ecuador under the U.S.-Ecuador Investment Treaty, claiming $1.8 billion plus legal fees in compensation for a decision the government made in response to a breach of contract by the firm. Occidental signed a contract in 1999 with Ecuador that granted the firm rights to explore and extract oil from a section of the Amazon but with some conditions, among them a requirement that the firm not portion off any of its claim to other companies. But in 2000, Occidental ignored the contract (and the law) by auctioning off part of its Amazonian claim to an Alberta firm, AEC. A government audit in 2004 found that Occidental had not received proper government authorization for the transfer and the project was seized. The U.S. firm went quickly to arbitration under the bilateral treaty.

The panel award, released on October 5, 2012, said that Ecuador had breached the treaty's rules on minimum standards of treatment. It decided that "fair and equitable treatment" should go beyond international law as practiced by states - the definition Canada and the U.S. insist is strong enough in their bilateral investment treaties - and that "any penalty the State chooses to impose must bear a proportionate relationship to the violation which is being addressed and its consequences." Arbitration panels in other cases have claimed that "idiosyncratic" decisions by governments, or decisions that went against the firm's reasonable expectations based on public or private discussions, can upset an investor's minimum standards of treatment.

It is not difficult to imagine a situation in which a foreign energy firm operating in Canada finds a similar breach of its rights based on delays, cancellations or alterations to pipeline, tar sands or mining projects, considering the many public assurances from the Harper government about these projects moving ahead smoothly. In fact, the Lone Pine dispute against Quebec's ban on fracking is proof that resource companies and the law firms they hire are learning to profit from these expansive definitions of investor rights under agreements like the TPP and NAFTA.

"Idiosyncratic" actions by provincial governments - to seize a greater share of the profits from these projects, or to better regulate for environmental protection, or perhaps to phase out nuclear power - could also violate TPP investment guarantees, as they would under NAFTA, despite Canadian assurances that these legitimate measures should be safe from harm. In fact, a recent multi-billion dollar investor-case against Germany by the Swedish energy firm Vattenfall resulted in the City of Hamburg diluting its environmental rules on a coal-fired power plant, putting the health of the adjacent Elbe River at greater risk. That firm was emboldened by the decision to launch a second case under the Energy Charter Treaty demanding nearly $4.75 billion CDN from the German government for its decision to let existing nuclear power stations go offline at the end of their life spans. In the end, it will be up to an arbitration panel to decide what is and what is not legitimate public policy, with expensive consequences.

The risks of investor-state dispute settlement to environmental protection are significant enough that a Sustainability Impact Assessment of the proposed Canada-European Union free trade agreement recommended against including the process in that agreement. The SIA concluded that

the conflicting costs and benefits of such a mechanism make it doubtful that its inclusion in CETA would create a net/overall (economic, social and environmental) sustainability benefit for the EU and/or Canada. There is no solid evidence to suggest that ISDS will maximise economic benefits in CETA beyond simply serving as one form of an enforcement mechanism, just as state-state dispute settlement is also an enforcement mechanism. And the policy space reductions caused by ISDS allowances in CETA, while less significant than foreseen by some parties, would be enough to cast doubt on its contribution to net sustainability benefits. As such, the study's assessment suggests that a well-crafted state-state dispute settlement mechanism might be a more appropriate enforcement mechanism in CETA than ISDS.

If Canada is truly committed to sustainable development, the only proper course of action in regard to the TPP, and the CETA for that matter, is for the government to insist that investor-state dispute settlement not be part of the deal, and that Canada, Mexico and the United States enter into negotiations to remove it from the scope of NAFTA. The Australia government is refusing U.S. demands for an investor-state dispute process in the TPP. According to Australia's new trade policy report, there is no good reason to grant foreign firms greater rights than national firms in international law, and Australian investors have other means with which to secure their overseas investment that do not require the public or taxpayers to subsidize the risk associated with corporate investment decisions. Canada should adopt the Australian position on investor-state dispute settlement at the TPP negotiations.

A commitment to Multilateral Environmental Agreements

Canada could play a positive role at the negotiating table by supporting a strong, enforceable environment chapter that recognizes the commitments TPP countries have made in multilateral environmental agreements. These commitments should be as enforceable as the trade and investment rules in international treaties. In the event of a conflict between an environmental and a trade obligation, the former should prevail with very few exceptions. Taking this position would send the right message to the world that environmental protection and sustainable development are top-level global priorities that must not be compromised by global trade and investment rules.

The United States has proposed that TPP members should be bound by seven multilateral environmental agreements, including the Convention on International Trade in Endangered Species (CITES), Montreal Protocol on Ozone Depleting Substances, Convention on Marine Pollution, InterAmerican Tropical Tuna Convention (IATTC), Ramsar Convention on Wetlands, International Whaling Convention (IWC), and Convention on Conservation of Antarctic Marine Living Resources (CCAMLR). We propose that this list is too short, and should include at least the United Nations Framework Convention on Climate Change. But we agree with the U.S. position that simply fining countries for violating these treaties is an insufficient enforcement mechanism, and that trade sanctions should be available in cases of serious violations.

Conclusion

In short, we submit that there is insufficient information on which to base a satisfactory environmental assessment of the Trans-Pacific Partnership trade agreement. We feel that the consultation process should begin only after a complete, or nearly complete negotiating text is available; that this process should be more actively promoted for public participation, and that public input should have a real chance to affect the final trade or investment agreement. However, we feel there is enough evidence of the negative effect of investor-state dispute settlement on environmental policy and sustainable development to insist on removing it entirely from the scope of the TPP, as proposed by the Australian government.

Sincerely,

Stuart Trew, Trade Campaigner
The Council of Canadians

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