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Koch v. Canada: Tribunal Dismisses Claims Over Emissions Trading Program
Koch v. Canada: Tribunal Dismisses Claims Over Emissions Trading Program
Background:
The ICSID Tribunal recently dismissed Koch Industries, Inc. and Koch Supply & Trading, LP's (KS&T) USD 31.3 million claims against Canada. The claims arose from Ontario's cap-and-trade emissions program (OCTP), which KS&T argued had harmed their trading business. The Tribunal's key finding was that the emission allowances held by KS&T and its trading activities did not constitute an “investment” under Chapter 11 of the North American Free Trade Agreement (NAFTA).
Ontario’s Cap-and-Trade Program:
Ontario's Cap-and-Trade Program (OCTP) was established in January 2017 under the Climate Change Mitigation and Low-Carbon Economy Act (OCTA). The program was linked with similar emissions trading schemes in California and Québec, allowing participants to trade emission allowances across these jurisdictions. KS&T, a market participant, held tracking accounts for emission allowances in both Ontario and California. In 2018, Ontario’s new government repealed the OCTP, stipulating no compensation for unused allowances and barring proceedings against the government for this cancellation. In response, KS&T and Koch Industries initiated ICSID arbitration in December 2020, alleging breaches of investment protections under NAFTA.
Jurisdictional Findings of the Tribunal:
Emission Allowances as Investments
The Tribunal examined whether KS&T’s emission allowances constituted an "investment" under NAFTA Article 1139(g). NAFTA defines "investment" as “property, tangible or intangible, acquired in the expectation or used for economic benefit.” The Tribunal noted that international law protects property rights created under municipal law. However, since Ontario or Canadian law did not explicitly define emission allowances as property, the Tribunal concluded that KS&T's allowances did not meet the definition of property under Ontario common law due to a lack of “exclusive control” over these allowances.
Commitment of Capital
Under NAFTA Article 1139(h), "investment" includes interests arising from the commitment of capital or resources in the host State. The Tribunal found that KS&T's activities—primarily purchasing allowances in Ontario for resale in California—did not constitute significant economic activity within Ontario. Furthermore, KS&T's minimal physical or corporate presence in Ontario was insufficient to qualify its activities as an investment under NAFTA.
Parent Company’s Investment
Koch Industries argued that its ownership of KS&T constituted a qualifying investment. However, the Tribunal rejected this, stating that Koch Industries could not establish jurisdiction through KS&T's non-qualifying investments. Additionally, Koch Industries' ownership of other Canadian entities was irrelevant to the claims at hand.
Implications for Emissions Trading Schemes:
Emission Allowances as Property
This decision raises important questions about the classification of emission allowances in investment treaties. The Tribunal’s reliance on local law to determine the nature of property rights highlights potential fragmentation in investment protection for emissions trading schemes (ETS). As various jurisdictions may classify emission allowances differently, future disputes could require extensive local legal analysis, complicating arbitration proceedings.
Impact on Business Models
The Tribunal's interpretation of NAFTA’s investment definitions suggests stricter criteria for what constitutes a protected investment. Emissions trading businesses must demonstrate significant economic activity and capital commitment within the host State to qualify for protection. This precedent could affect companies operating in cross-border ETS, particularly in jurisdictions with similar treaty language.
Clarity in Investment Protections
The termination of the OCTP without compensation or legal recourse for market participants undermines confidence in emissions trading schemes. Consistent and clear investment protections are essential to encourage private sector participation in climate change mitigation. As economist Tom Tietenberg notes, the security of permits is crucial for the effectiveness of these markets.
Conclusion:
The Koch v. Canada award underscores the importance of clear and consistent investment protections for emissions trading schemes. The Tribunal's decision reflects a careful analysis of NAFTA’s definitions of investment and highlights the potential challenges for cross-border ETS participants. As the harmonization of emissions trading schemes increases globally, ensuring secure and well-defined investment protections will be critical to their success.
- This decision raises important questions about the classification of emission allowances in investment treaties.
- The Tribunal found that KS&T's activities—primarily purchasing allowances in Ontario for resale in California—did not constitute significant economic activity within Ontario.
- The Tribunal noted that international law protects property rights created under municipal law.
