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TransCanada’s NAFTA claims are based on the old normal

January 26, 2016

Earlier this month TransCanada announced that it would be claiming compensation under the North America Free Trade Agreement (NAFTA) for U.S. President Barack Obama’s decision to reject the Keystone XL pipeline. This is a significant moment in our collective transition from the world as it has been, to the world as it needs to be. Your view of the legitimacy of TransCanada’s demands depend on whether you view fossil fuel use as normal and inevitable or if you recognize the billions of dollars of harm, and loss of life, that Keystone XL pipeline would have caused. 

Trade v. the Climate

Starting with the Canada-U.S. Free Trade Agreement, it has become normal for trade agreements to give rights to private companies to sue when governments take action that “expropriate” their property or discriminate against their interests. West Coast Environmental Law has long expressed concern that environmental regulations could be viewed as expropriation or discriminatory by foreign corporations, but the issue becomes still more problematic when dealing with climate change, which requires that large amounts of fossil fuels be left in the ground and a massive shift of investment from fossil fuels to renewable energy.

As Naomi Klein puts it in her best-seller, This Changes Everything:

…[C]urrent trade and investment rules provide legal grounds for foreign corporations to fight virtually any attempt by governments to restrict the exploitation of fossil fuels, particularly once a carbon deposit has attracted investment and extraction has begun. And when the aim of the investment is explicitly to export the oil, gas, and coal and sell it on the world market – as is increasingly the case – successful campaigns to block those exports could well be met with similar challenges ….

Most trade agreements do explicitly allow governments to impose environmental regulations, as long as they do so in a way that doesn’t discriminate against foreign corporations. That being said, right now the climate impacts of pipeline projects, drilling and other fossil fuel projects are in most cases being considered on a case-by-case basis, and without clear standards about what types of climate pollution, if any, are acceptable.  There is the real possibility that a panel of trade lawyers appointed under a trade agreement to judge corporate claims for compensation will be unsympathetic to ad hoc efforts to rein in fossil fuel infrastructure.   

And, indeed, some legal commentators are saying that TransCanada has a good case, accepting the company’s argument that halting the pipelines is unprecedented and more about politics than climate change, citing comments made by President Obama that have been interpreted as giving priority to “U.S. oil.” 

Fossil fuels v. the planet

The idea that the fossil fuel industry (including both the fossil fuel companies themselves and pipeline and other companies that service them) are claiming and will claim compensation is troubling for those of us who believe that our global security depends upon much of the world’s fossil fuels being left in the ground.

Standing in the middle of a transition away from fossil fuels, we still have one foot in the world that has been. It can be tempting to look at fossil fuels as something normal – because they have been for most of our lives. But since 1992 at least (and much earlier if you’re a fossil fuel company), we’ve known that fossil fuel use destroys the balance of the earth’s atmosphere that makes it possible for life as we know it to exist. It has never been legal to knowingly kill people, displace nations and violate rights on a massive scale.

Transition is not a political choice: it is a legal imperative.

Climate activist, Bill McKibben, in a great piece on “zombie pipelines,” explains why pipeline projects that are built now matter:

[I]f you build a pipeline in 2016, the investment will be amortized for 40 years or more. It is designed to last -- to carry coal slurry or gas or oil -- well into the second half of the twenty-first century. It is, in other words, designed to do the very thing scientists insist we simply can’t keep doing, and do it long past the point when physics swears we must stop.

What’s the harm?

Put another way, and without commenting on the specifics of the TransCanada NAFTA claim, the fossil fuel industry is not entitled to compensation for being told that they can’t harm communities around the world.

Just how much harm are we talking about? TransCanada is planning to transport over 800,000 barrels of crude oil per day through the Keystone XL pipeline, which would result, once burnt, in the release of approximately 253.6 Kilotonnes of carbon dioxide per day, or 92.6 Megatonnes per year.*

There are many different ways to calculate the damage that would be caused by that much carbon dioxide, but using the U.S. government’s “social cost of carbon” calculations, 92.6 MT of CO2 emitted in 2015 could result in economic harm of approximately US$3.3 billion, a figure that would be expected to rise to US$6.4 billion for each year’s emissions by 2050. Social cost of carbon is not without its own controversies, and we have used an economically conservative figure for that calculation – the real figure could be much higher.**

Seen from this point of view, the claim that TransCanada is entitled to compensation is ridiculous – why should a corporation receive compensation for being prevented from transporting a product that causes billions of dollars in economic harm each year when used in accordance with the instructions?

From the moment that it became aware that fossil fuel pollution is resulting in global disruption of the atmosphere, a responsible corporation would have moved away from transporting fossil fuels – instead of expanding fossil fuel infrastructure. If you agree with us that broad climate liability will emerge for corporations that are globally significant contributors to fossil fuel pollution, President Obama may have just saved TransCanada from incurring significant liability.

TransCanada has argued (and the U.S. State Department accepted in some of its reports) that if it doesn’t build its pipeline, the tar sands oil will get to market by other means, and therefore the pipeline will not exacerbate climate change. That’s debatable, particularly given the drop in oil prices, but it’s also irrelevant if you view intentional massive increases in greenhouse gas emissions as itself a violation of legal rights. It has never been a legal defence to claim that: “If I hadn’t released that toxic sludge, someone else would have done it.”

The new normal

If TransCanada were transporting a new energy source that caused over $3 billion of damage per year, there would be no suggestion that the project should be approved, or compensation owed for rejecting it. It’s a mark of how dependent global culture is on fossil fuels that we continue to view its use as normal – even given what we now know about its impacts. But that is changing, as renewables become more energy efficient, as the science mounts, and as we get used to the idea of a zero carbon future. 

Fossil fuels are the old normal. A world where we recognize the harm caused by TransCanada and other fossil fuel industry companies is the new normal. And a world without fossil fuels is tomorrow’s normal. 

By Andrew Gage, Staff Counsel

Demonstration graphic courtesy of Josh Lopez, from Wikimedia Commons, under the Creative Commons Attribution 2.0 Generic license.

* - This calculation is based upon this conversion that estimates that a barrel of crude oil results in approximately 317 Kilograms of CO2 when burnt. It probably under-estimates the emissions, since it is for average crude, not heavy crude/tar sands oil, and other conversions suggest a higher level of emissions.

** - The U.S. government provides 4 different calculations, based on different “discount rates.” We have used a discount-rate of 3% for these calculations, but the EPA does provide a higher discount rate (which discounts the present economic value of harm suffered in the future) of 5%, as well as two more precautionary rates.  Depending on which rate is used, the costs from the pipeline’s annual 800,000 barrels could be as low in 2015 as US$1 billion, or as high as US$9.7 billion, rising to between US$2.4 billion and US$19.6 billion annually by 2050.  However, one recent study suggested that the U.S. EPA figures dramatically under-estimates the social cost of carbon. Using that study’s figures, the 2015 economic cost of 800,000 barrels per year would be over $20 billion/year. Still other commentators criticise the entire concept as ignoring risks, such as ecosystem collapse, that simply cannot be discounted in the way implied by social cost of carbon.