The Trans-Pacific Partnership (TPP) agreement might represent a serious hindrance for attempts to reform New Zealand’s emissions trading scheme as it could leave the government open to lawsuits by foreign investors, a report found.

The free trade agreement spans 12 nations in the Pacific region, including Australia, Canada, Japan, Mexico, New Zealand, and the US, and is expected to be signed by all participants at a ceremony in New Zealand on Feb. 4.

But the latest in a series of peer-reviewed studies on the impacts of the agreement, funded by the New Zealand Law Foundation and the NZ Public Service Association, found that the agreement adds significant risk for governments wanting to implement new environmental regulations, including tightening up domestic carbon markets.

“The TPP’s investment rules could make reform of the [NZ] ETS considerably harder, by allowing foreign investors to try to reframe this from a climate change issue to a property rights issue. It would allow polluters to pursue claims that could total billions of dollars and cannot be filed under domestic law,” Simon Terry, executive director of the Sustainability Council and author of the report, told Carbon Pulse.

DISPUTE SETTLEMENTS

At the heart of the matter is the TPP’s Investor State Dispute Settlement (ISDS) provisions, which allow foreign investors to sue any government introducing new policies that might negatively impact their investment expectations. The suits would be handled by an offshore tribunal rather than national courts.

“In addition to guarding against the kind of expropriation traditionally understood, ISDS proceedings have opened the way for governments to be sued for regulating in the public interest, even when such regulations are non-discriminatory in their application. And if an investors’ case is upheld, the tribunal can force a government to pay compensation to the foreign investor, including for future lost profits, and there is no appeal process,” the report said.

Moves by the NZ government to reform the ETS in an attempt to lift carbon prices or expand the market’s coverage to include sectors such as agriculture – the biggest-emitting sector in New Zealand – would be potential targets under the treaty, according to Terry.

“Setting meaningful carbon charges under the ETS would impact on the agriculture, forestry and large industry sectors. Federated Farmers for example has indicated it would seek compensation if an ETS regime were to charge for agricultural gases, and foreign-owned farms could use the TPP’s ISDS provisions to pursue this,” he said.

“Carbon credits would count as ‘investments’ that are protected under the TPP’s cross-border financial services and investment chapters. Changes to the ETS that damaged the value of those investments could also be subject to an investment dispute,” he added.

“The uncertainty and the unpredictability of tribunal outcomes means the ISDS provisions offer polluters an additional means of pressuring the government to hold implicit subsidies in place.”

SAFEGUARDS

In an emailed response to questions from Carbon Pulse, New Zealand Trade Minister Todd McClay dismissed the notion that the TPP would impact domestic environmental regulations.

“TPP will not stop the New Zealand Government from regulating to protect the environment,” he said.

“TPP has the same types of protections as existing New Zealand FTAs [free trade agreements] to ensure this. We have had these agreements for over 20 years, and have never been taken to arbitration by an international investor under them because these safeguards protect legitimate regulation.”

But the report referenced research showing that the same type of safeguards that are in the TPP have proven ineffective in more than 97% of their attempted uses in the WTO over the past 20 years.

“What the TPP has delivered on ISDS are provisions that completely fail to protect governments from being exposed to suits when they regulate to protect the public interest,” the report said.

Kennedy Graham, trade spokesperson for the New Zealand Green Party, said the TPP would be likely to restrict policy actions in the future.

“The fact that New Zealand can be sued will make future governments think twice before doing anything that could aggravate multinational corporations,” he said in a statement.

“It’s bad enough that the words ‘climate change’ disappeared from the TPP sometime between the draft text and the final text.  Now it’s clear that the TPP will actually make it harder to prevent climate change.”

MARKET REFORM

New Zealand is in the middle of an ETS review process that is expected to lead to stricter market rules and higher prices, although the government has ruled out including agriculture this time around.

The public response deadline for the most urgent issues, such as whether the government should drop the provision that emitters must only surrender a permit for every second tonne of CO2e it emits, is Feb. 19, while comments on other issues can be submitted until Apr. 30.

The review and potential rule changes are expected to be finalised during the first half of 2016, which report author Terry said might be too soon for the TPP to affect, because the international pact will need some time to be ratified.

“In any case, future reviews are also planned and the TPP would affect those reviews,” he added.

By Stian Reklev – stian@carbon-pulse.com

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