Koch conglomerate launches NAFTA legacy claim against Canada over cancellation of emissions trading program

Two members of the Koch Brothers’ US-based conglomerate, Koch Industries and Koch Supply & Trading, have initiated arbitration proceedings against Canada, invoking the North American Free Trade Agreement (NAFTA).*

ICSID registered the claim on December 17, 2020.

IAReporter has learned that the dispute arises out of an emissions trading program (the “cap-and-trade” program), which was organized – and subsequently cancelled – by the Canadian Province of Ontario.

Ontario’s cap-and-trade program was enacted in May 2016. Similar to other emissions trading programs, it was intended to place an annual limit on overall emissions, distributing (or selling) allowances up to that limit, and allowing for the trade of these allowances. The system permitted the purchase of emissions rights on a secondary market by “market participants”. The system was to be integrated with similar cap-and-trade markets in the Canadian Province of Quebec and in California.

However, following a change of government in Ontario, the cap-and-trade system was revoked as of July 3, 2018, and all trading of emission allowances was prohibited. The system came to a definitive end with the adoption of an October 31, 2018 Act. This act provided that no compensation was owed to market participants, and it specified that nothing “done or not done in accordance with this Act […] constitutes an expropriation or injurious affection for the purposes of the Expropriations Act or otherwise at law”.

IAReporter understands that, during a May 2018 auction, Koch Supply & Trading purchased 30 million USD worth of emission allowances under this system, as a market participant. After the cap-and-trade system was revoked, the claimants filed for compensation, but this request was denied on the basis that Koch Supply & Trading was a market participant. Thus, the claimants initiated arbitration proceedings, claiming that the reversal of the cap-and-trade system (and Ontario’s failure to reimburse the purchase price paid by the claimants) amounted to an unlawful expropriation and violated NAFTA’s minimum standard of treatment.

Notably, this appears to be the first NAFTA legacy claim filed since the adoption of the new United States-Mexico-Canada Agreement (USMCA) earlier this year. (Readers may recall that, while the USMCA has put an end to NAFTA as of July 1, 2020 and does not contain Canada’s consent to investor-state arbitration, Annex 14-C of the USMCA allows for submission of claims under NAFTA with respect to a “legacy investment” for a period of three years; see here.)

The claimants are represented by Steptoe & Johnson in London.

Emissions trading programs have given rise to previous claims. In particular, Romania is currently facing several arbitrations brought in relation to the modification of its system for the trade of “green certificates” issued to green energy producers and sold to energy consumers; see our report here.


* UPDATE, December 21, 2020: The Koch Brothers is a shorthand for David and Charles Koch. The two brother were long-time co-owners of their family company Koch Industries. David, stepped down from his role as an Executive Vice President at Koch Industries in 2018 and passed away in 2019. His brother Charles remains active with the company.