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Rights of Investors versus Right to Regulate

Some argue that NAFTA Chapter 11 strikes the right balance between noncompensable exercises of regulatory authority and exercises of regulatory authority that amount to expropriation of an investment, achieving sustainable development through the right balance between environmental protection and economic devel- opment.[1] It is difficult to determine where to draw the line between these two objectives, other than on a case-by-case basis. In some cases, environmental protection and economic development may be mutually supportive. However, given the economic and environmental consequences of climate change, it seems that bona fide climate change regulation should take precedence over investors’ rights, though the correct balance likely will have to be decided on a case-by-case basis. It is also important to protect foreign investors from unfair or arbitrary treatment by governments that are motivated by short-term political interests rather than long-term environmental risks. For this reason, we emphasize that we are referring to bona fide climate change regulation.

Striking the right balance between the regulatory risks that investors face and the litigation risk that governments face is not the same for all markets. Larger markets can have a greater degree of regulatory risk and still attract foreign investors. In contrast, smaller, less economically attractive markets may need to strike a balance that is more in favor of investors’ rights and reduces regulatory risk to a greater degree, in order to attract foreign investment. Larger markets are also a greater source of GHG emissions, so the balance should favor climate change regulations over compensation to foreign investors, in order to limit the risk of regulatory chill and to enhance the right to regulate. Their attractiveness to foreign investors means that large markets should seek to negotiate IIAs that leave adequate regulatory space to combat climate change. However, there may be limits to how precise the provisions should be in this regard. For example, the negotiating history of NAFTA Chapter 11 indicates that there has been no attempt to address directly the problem of how to distinguish legitimate non-compensable regulations having an effect on the economic value of foreign investments, and “regulatory takings” requiring compensation, instead leaving this determination to be made on a case- by-case basis.[2]

The NAFTA Preamble is a relevant context for interpreting the provisions of Chapter 11. According to the Preamble, the NAFTA parties seek to ensure a predictable commercial framework for business planning and investment, in a manner consistent with environmental protection and conservation. At the same time, they seek to preserve their flexibility to safeguard the public welfare, promote sustainable development, and strengthen the development and enforcement of environmental laws and regulations. These aspects of the Preamble support an interpretation of NAFTA Chapter 11 that gives bona fide climate change regulation precedence over investors’ rights.

The Methanex case indicates that science-based regulatory decisions are likely to withstand scrutiny in NAFTA Chapter 11.[3] In that case, the science was preliminary, but there was sufficient scientific evidence of the potentially serious health effects of methanol to support the State regulation. The Methanex case is of particular relevance to climate change regulation, since it shows that regulation based on the precautionary principle can survive a challenge by foreign investors. There is sufficient scientific evidence of the potentially serious effects of climate change to justify climate change regulation, even if it also has the effect of diminishing the value of some foreign investments. There are 66 IIAs with general language in preambles that mentions environmental concerns and establishes protection of the environment as a concern of the parties to the treaty.[4]

  • [1] Sanford E. Gaines, “Protecting Investors, Protecting the Environment: The Unexpected Storyof NAFTA Chapter11 ” in David L. Markell andJohn H. Knox (eds.), Greening NAFTA: The NorthAmerican Commission for Environmental Cooperation (Stanford University Press, Stanford 2003) 173,184, 190-1.
  • [2] Daniel M. Price, “Chapter 11—Private Party Vs. Government, Investor-State Dispute Settlement: Frankenstein or Safety Valve?” (2000) 26 Canada—U.S. L.J. 107.
  • [3] This stands in contrast to Ethyl Corporation v. The Government of Canada, NAFTA/UNCI-TRAL, Award (June 24, 1998), a case in which the Canadian government agreed to withdraw a tradeban and publicly concede that there was no scientific basis for the ban. Gaines, “Protecting Investors,Protecting the Environment” 182—3.
  • [4] Gordon and Pohl, “Environmental Concerns in International Investment Agreements” 9.
 
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