Trade Deals Like the TPP Put Corporate Polluters Above the Law

The Obama administration’s historic rejection of TransCanada’s Keystone XL pipeline marked the first time a major fossil fuel project was denied over climate change concerns. The decision capped a contentious years-long fight, and helped spark a broader grassroots movement aimed at keeping fossil fuels in the ground, which scientists have increasingly warned is necessary if we hope to limit global temperatures to manageable levels.

But TransCanada would not take no for an answer. Soon after the rejection, the company announced it would sue the United States government for $15 billion in lost profits under a tribunal system in the North American Free Trade Agreement (NAFTA) called Investor State Dispute Settlement (ISDS). This system, which the proposed Trans-Pacific Partnership would dramatically expand, allows foreign investors to bypass U.S. courts and challenge American laws in a corporate-friendly arbitration system. The Keystone XL case shows how the ISDS system puts corporate polluters above the law and threatens global action on climate change.   

TransCanada has no case for compensation under U.S. law   

The ISDS system is a gift to foreign investors like TransCanada, because it is difficult to challenge government actions under U.S. law. The Fifth Amendment of the Constitution allows the government to take private property for public uses such as sidewalks or roads, as long as the government provides just compensation. However, courts also recognize that in limited cases, government regulations or actions can go too far in depriving private actors the right to make economic use of their property. 

The doctrine of “regulatory takings,” while far from perfect, is an attempt to strike a balance between the government’s interest in promoting the public good and the burdens imposed on private property owners. While it has occasionally been applied to intangible property like copyrights and patents, the primary focus of this doctrine is on real property. Courts have developed a stringent set of factors to weigh in deciding whether a government act amounts to a taking. For example, courts will consider the degree to which the action interfered with a distinct, investment-backed expectation. It is not enough that the government somehow limits a property’s value—there must be a concrete investment based on a reasonable expectation of entitlement. Thus, if a landowner receives a building permit and makes a substantial investment and consequentially relies on that permit, a subsequent regulation preventing construction might amount to a taking.

TransCanada would have no regulatory taking claim in American courts. First, it does not own the property that Keystone XL would have crossed; in fact it planned to take the land from farmers and ranchers using eminent domain. Moreover, the very fact that TransCanada was applying for a permit means that it was seeking government permission to do something it was not otherwise entitled to do. It simply cannot claim a reasonable expectation that Keystone XL was sure to go forward.

The ISDS system leaves taxpayers on the hook

Luckily for TransCanada, the Investor State Dispute Settlement system offers an easier alternative that avoids U.S. courts. ISDS lets investors challenge government actions directly before an arbitration panel composed of corporate lawyers who often rotate between sitting as judges one day and representing corporations before ISDS tribunals the next. While U.S. courts are bound to follow the precedent of prior cases, ISDS tribunals are given broad discretion to decide vague legal questions, like whether a government violated a “minimum standard of treatment” guaranteed to investors under the trade pacts. Corporations have frequently won ISDS cases on this basis through arguments that would not otherwise stand up in the American court system.

TransCanada now claims that the United States violated this “minimum standard of treatment” in denying a permit to build a dangerous pipeline that would have piped a torrent of toxic, high-carbon tar sands crude oil though America’s heartland. TransCanada essentially argues it had a “reasonable expectation” that the permit would be rubber-stamped, and now wants $15 billion in taxpayer compensation for profits it might have earned had Keystone XL been approved.

The corporate use of ISDS has been on the rise in recent years. In each of the last five years, investor corporations have brought more ISDS cases than in the first 30 years of the ISDS system combined. Many of these cases have targeted government efforts to protect the environment and curb climate pollution. Foreign investors have used ISDS to attack a fracking moratorium in Quebec, a court order holding oil companies accountable for pollution in the Ecuadorian Amazon, and new restrictions on coal-fired power in Germany. In a case resembling Keystone XL, a Canadian environmental panel denied an American corporation a permit to mine in Nova Scotia’s Bay of Fundy because the project would harm endangered whales and threaten indigenous and local fishing communities. The company brought an ISDS challenge, and the panel held that the government had violated the investor’s “minimum standard of treatment” because the company had an expectation that the mining permit would be approved.  

The expansion of ISDS would threaten global climate action 

The proposed Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investor Partnership (TTIP) would expand corporate polluters’ powers under the Investor State Dispute Settlement system. They would more than double the number of fossil fuel companies that could challenge U.S. climate policies in ISDS tribunals, including all of the eight largest climate-polluting companies in the world.  

The massive expansion of the ISDS system would create enough risk and unpredictability to dissuade governments from acting in the public interest. It would threaten efforts to limit offshore drilling and leasing on public lands, lead to the approval of more pipelines and fossil fuel infrastructure, and hinder government efforts to meet their carbon reduction targets adopted in the 2015 Paris Agreement.

At a time when the climate crisis is growing more pressing by the day, the United States must continue to show leadership in taking critical steps to reduce our reliance on fossil fuels and shift toward a clean energy future. The TTP and TTIP would instead expand the powers of corporate polluters, and hold signatory states hostage over meaningful actions to address climate change.

For more information, see:

Climate Roadblocks: Looming Trade Deals Threaten Efforts to Keep Fossil Fuels in the Ground

A Dirty Deal: How the Trans-Pacific Partnership Threatens our Climate