In this week's blog, NERI Economist Paul Goldrick-Kelly raises questions about the compatibility between proposed trade agreements and environmental goals, particularly where they include so called Investor-state Dispute Settlement (ISDS) mechanisms.
Recently, Free Trade Agreements and their implications have re-entered public debate in Ireland, particularly around the provisionally applied but not yet ratified Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada. This has been accompanied by claims of significant benefits from deals like CETA for Irish workers from supporters.
For the purposes of this blog, I won’t delve into specific economic claims as to the benefits of these deals, though we should notice a number of significant and potentially questionable assumptions that go into many of these models.
Indeed, where global trade is concerned, we tend to ignore the historical opposition of wealthy states – like the US and UK - to “trade liberalisation” who today are among free trade’s leading proponents. Development economists have accused these states of “kicking away the ladder”, availing of policy to promote indigenous development then preventing others from doing the same when they felt their firms were internationally competitive. These countries did a great deal to promote national champions and limit competition before they felt they were sufficiently developed. This somewhat complicates the common “free trade”= development formula we are often presented with.
Rather, like much of the critical commentary on these agreements to date, I hope to raise a few questions about their consistency with environmental and social goals.
The trade provisions of CETA have been provisionally in force since the 21st of September 2017. While the European Commission argued that it was entitled to agree to and enforce the agreement without consulting national governments, the European court of Justice ruled that the agreement required ratification by member states to be fully implemented.
This was due to CETA including an Investor Court System (ICS), sometimes referred to as an Investor-state Dispute Settlement (ISDS) system. These systems create new courts where investors can present cases for damages in host states where they feel their rights been violated. Decisions often occur behind closed doors and beyond scrutiny. More concerningly, these systems can be used to take cases against national governments for introducing more stringent environmental legislation for example. Companies may feel “their rights” include a right to continue making profits from activities that are deemed damaging by society at large.
This is far from hypothetical: the Dutch government, under the Energy Charter Treaty, is currently facing a claim for €2 billion in compensation after the government there committed to ending coal fired power by 2030. The agreement also has a 20 year sunset clause, allowing investors to sue governments for decades after they’ve withdrawn from the treaty.
These sort of investor protections have done little stimulate investment in renewables: between 2013 and 2018, 56% of protected investment occurred in fossil fuels, while only 20% related to renewable sources. Investigate Europe point out that some €345 billion of fossil infrastructure is protected by this treaty, three quarters of which relates to gas and oil fields or pipelines. Claims of this scale, or even the threat of the same could result in a “regulatory chill” where governments are reluctant to pass ambitious sustainability legislation. This could further lock-in carbon use in already entrenched systems – a clear danger when it comes to Ireland’s still fossil intensive energy system and our 2050 net zero target.
Despite some changes from the initial draft including moves to introduce a permanent tribunal and appeal processes, we should note that the Commission ignored the recommendation of its own Trade Sustainability Impact Assessment (TSIA) – where an independent advisor provides an in-depth analysis of the implications of trade negotiations – to omit the ISDS from the treaty. According to the assessment “the conflicting costs and benefits of such a mechanism make it doubtful that its inclusion in CETA would create a net/overall (economic, social and environmental) sustainability benefit for the EU and/or Canada… the policy space reductions caused by ISDS allowances in CETA, while less significant than foreseen by some parties, would be enough to cast doubt on its contribution to net sustainability benefits.”
It is sometimes countered that the agreement contains commitments to regulatory standards between the partners related to environmental and social rights. While the agreement contains chapters on sustainable development, labour rights as well as environment and human health, legal scholar W. TH. Douma is sceptical of the claim that this represents a new “gold standard” for trade agreements that should be imitated moving forward. He points out that the treaty lacks enforcement mechanisms for violations of these commitments unlike the revised US-Canada- Mexico Agreement (USMCA) recently negotiated to replace NAFTA.
These observations should give us pause as CETA and other treaties face ratification by member states including Ireland. It also seems clear that these treaties could do much more to protect the environment and workers. Given the enormous challenge we face to build societies that can safely exist within limited planetary space, the old assurances around these deals should be questioned. We cannot limit our space to address these issues.