Environmental Policy Implications of Investor-State Arbitration Under NAFTA Chapter 11

44 Pages Posted: 29 Mar 2006

See all articles by Sanford E. Gaines

Sanford E. Gaines

University of New Mexico - School of Law

Date Written: October 2005


Have investors used NAFTA Chapter 11 to thwart the fair application of environmental protection measures? Are the compensation awards discouraging governments from taking environmental protection measures they would otherwise want to take? This report empirically reviews four arbitrations under Chapter 11 to try to answer those two questions. The case studies address the first question objectively. The government paid compensation in three cases (Metalclad, Ethyl, and S.D. Myers) in which the government had little scientific information to support its action and the surrounding circumstances strongly indicate that environmental protection was a cover for local political battles and economic motivations. In the two cases against Canada, the federal government withdrew the measure in question and the underlying environmental issue later resolved itself through changes in technology and market pressures. Nine years after Metalclad filed its case against Mexico, the ecological zone declared by the state governor to block the landfill has yet to be formally created or funded, there is no modern hazardous waste disposal capacity in industrialized central Mexico, pre-existing environmental contamination at the site still has not been cleaned up, and Mexico has had to compensate a Spanish investor in a similar case. In the fourth NAFTA arbitration, Methanex (a Canadian methanol producer), the investor was held not to have a claim under Chapter 11 because the regulation affected a product made by others with methanol, not methanol itself. Moreover, the Chapter 11 tribunal concluded that California had identified a legitimate environmental problem and conducted independent scientific assessment before adopting the MTBE ban, and thus had not acted with deliberate intent to favor a domestic competitor.

The answer to the second question - Is Chapter 11 "chilling" government environmental protection efforts? - is more elusive and subjective, but the report infers from the available evidence that the chilling effect, if it exists at all, is not significant. After Metalclad, Mexico improved environmental regulation with new legislation to establish a national strategy for management of hazardous waste and to improve transparency of public decision making. The circumstances in Canada are less clear, but Ethyl's fuel additive is scarcely used any more in Canada, and the handling of PCB wastes involved in S.D. Myers has shifted to technologies besides stationary incinerators. In the United States, the Methanex Chapter 11 claim did not dissuade other states from following California in banning MTBE. Moreover, the dismissal of the Methanex claim shows that Chapter 11 does not create an easy route to challenge environmental measures. After the four early cases studied here, only one Chapter 11 claim in the last five years involves substantive matters of environmental regulation. Meanwhile, the governments have made Chapter 11 procedures significantly more open and transparent.

Keywords: investments, environment, arbitration, NAFTA

JEL Classification: F13, F21, K32, K33, K41

Suggested Citation

Gaines, Sanford E., Environmental Policy Implications of Investor-State Arbitration Under NAFTA Chapter 11 (October 2005). Available at SSRN: https://ssrn.com/abstract=892438 or http://dx.doi.org/10.2139/ssrn.892438

Sanford E. Gaines (Contact Author)

University of New Mexico - School of Law ( email )

1117 Stanford, N.E.
Albuquerque, NM 87131
United States

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