CCPA | 18 February 2022
A Koched-up NAFTA lawsuit
February saw a small burst of North American ISDS news. Koch Industries’ 150-page memorial on the merits of its NAFTA legacy claim had been public a week when a notice of intent in Alberta Petroleum Marketing Commission’s legacy case was published (we’ll have more to say about the latter case in a future mailing).
Then we learned another NAFTA tribunal had rejected (with one strong dissenter) CIEL’s amicus curia brief in an underwater mining case of significant environmental importance brought against Mexico by Odyssey Marine Exploration. More on this one later, too. In the meantime, here’s an admittedly incomplete look at the Koch case.
The Narwhal magazine ran a long piece this week on Koch’s claim that Ontario’s abrupt cancellation of its cap-and-trade system in 2018 violated the NAFTA Chapter 11 minimum standard of treatment and expropriation clauses. The headline: officials in Premier Doug Ford’s office repeatedly told Koch people to sue Canada rather than keep coming back to the province for compensation. We don’t owe you anything, but Ontario may have violated Canada’s international legal obligations, they told the firm.
The article goes too easy on Koch Supply & Trading, whose memorial makes up the bulk of the narrative with no response from the Ontario government as counterbalance. This is a company known to distort energy markets for profit and there’s every chance that’s what they would have hoped to achieve in Ontario over time.
The Narwhal story is instead about the price Canada will now pay for Ford’s arbitrary and, to borrow a phrase from Alberta’s Keystone complaint, “performative policy-making.” No doubt that still makes for a juicy story.
In its memorial, Koch admits its plans in Ontario were twofold. First, it would purchase Ontario emissions allowances for resale to other Koch entities such as INVISTA, an Ontario chemicals manufacturer with factories in Maitland and Kingston whose emissions are above Ontario’s cap and who would therefore have to surrender allowances back to the province over time.
Once Ontario’s system was fully integrated with cap-and-trade regimes in California and Quebec (the three systems were officially linked in January 2018), Koch would have been able to purchase Ontario credits for use by its California emitters and vice versa. KS&L would facilitate those trades.
But Koch was also in the game to make a buck on emissions trading to non-emitters, i.e., other “market participants” in the system. Koch would profit by speculating on the value of emissions offsets, which were set to increase over time to make polluting more expensive. Derivatives markets already exist in this sphere, which might allow Koch to do with emissions credits what it does with oil: buy and hold until the price goes up or sell allowance futures immediately to firms looking to hedge against a price increase.
To be clear, this secondary trade between non-emitting participants is a built-in-feature of cap-and-trade and carbon offset markets. According to experts, it’s a way to increase liquidity so that firms needing a quick allowance (for failing to lower emissions) can get it without waiting for new auctions. But given Koch’s history of market destabilization via excess speculation, none of this should make us feel much better about the firm’s intentions.
A November 2021 report of the Potsdam Institute for Climate Impact Research found that the increasing role of financial investors in the EU’s cap-and-trade program created potential for speculation to “run wild,” adding unhelpful volatility in the market for carbon allowances. In fact, financial analysts are betting on huge growth in the role of speculative capital in future carbon markets, suggesting this will provide, in Koch’s own words in its NAFTA submission, “efficient and cost-effective” carbon offset options for firms.
There is a question whether Koch should be considered a foreign investor here for the purposes of bringing a NAFTA claim. Ontario’s cap-and-trade legislation requires market participants to be either an individual resident in Canada or a legal person (company) with an establishment in Canada. Koch chose Paul Brown, then the firm’s government affairs advisor (essentially a lobbyist), to be their person in Ontario doing the buying at cap-and-trade auctions.
So, to participate in these auctions and buy allowances you must be a person of Canada, but to wage a NAFTA lawsuit, Koch must be a U.S. investor. They want it both ways and there’s a pretty good chance they’ll get it.
Then there’s the amount sought: US$30 million, which is the equivalent of 0.00026% of Koch’s annual revenues of $115 billion in 2020. They could easily write off their losses in Ontario, as the many other market and emitting cap-and-trade participants caught up in the cancellation will have to do. Ontario’s cancellation law blocked recourse to the courts for expropriation claims then, as mentioned above, the government told international players like Koch to sue Canada for their losses.
In contrast, what are the rights of retail investors when the value of their stock in equities or bitcoin or whatever is suddenly decimated or eliminated altogether? They can file class action suits against neglectful firms, but there’s no guarantee to recuperate the full value of their investments. Markets are risky. I don’t want to let the Ford government off the hook with that statement, but nor should we shed any tears for Koch, a massive polluter and financier of climate denial.
Koch could have held back from participating in the May 2018 auction, as a hedge against the Ontario government cancelling the cap-and-trade program, which Doug Ford had promised he would do as his first decision in office. Koch probably moved allowances it still held from 2017 auctions to Quebec or Ontario or possibly it had already sold them on (much of the company’s business case is blacked out in the NAFTA claim). Koch’s last purchase of allowances in May could not be traded as it had not been delivered in June when Ontario shut the taps off, refusing compensation for market participants.
A final point, which is just stating the obvious. Canada could have avoided this situation completely by not agreeing to the legacy clause in the NAFTA renegotiation. To recall, ISDS was removed between Canada and the U.S. but investors in either country can launch "legacy" claims under certain conditions up to June 30, 2023.
Without a legacy clause, Koch would have had to take its lumps like the other speculative market participants in the cap-and-trade system and would not have had recourse to ISDS. Likewise, TC Energy and the Alberta government would not have been able to launch multi-billion-dollar NAFTA lawsuits against Biden’s Keystone cancellation.