Keystone XL was set to become one of the largest pipelines of its kind in North America. As an extension of the existing Keystone pipeline network, owned and operated by the Canadian firm TC Energy, the project was extremely controversial due to concerns about potential leaks along the pipeline route from Alberta to Nebraska as well as significant climate impacts .
In 2021, the United States government revoked a key permit needed by TC Energy to complete the project. In response, the company filed a US$15 billion out-of-court claim against the U.S. government.
The claim was thrown out by a panel of three arbitrators in July 2024 based on a technicality. Nevertheless, the ruling in TC Energy v. United States underscores the importance of protecting vital climate policy initiatives against financial and legal liability.
TC Energy v. United States
President Joe Biden chose to revoke the permit for the Keystone XL pipeline issued by his predecessor because the project was not consistent with his administration’s “ economic and climate imperatives .”
TC Energy, disappointed that extensive lobbying and “ dark money ” campaigns had left them with nothing to show for their efforts, then shifted tactics.
The company launched its case against the U.S. government through a controversial process known as an investor-state dispute settlement (ISDS) . ISDS allows foreign firms to bypass local courts and seek compensation — including for “lost future profits” — if government measures have a negative impact on their investment. Following more than two years of deliberations, a panel of three arbitrators — chosen by both parties — dismissed TC Energy’s case.
The U.S. government escaped potential liability in this case thanks to the decision by Donald Trump’s administration to replace the North American Free Trade Agreement (NAFTA) with the Canada-US-Mexico Agreement (CUMSA) . Unlike NAFTA, CUMSA has no ISDS provisions between the U.S. and Canada .
The “legacy” provisions of the CUMSA permitted ISDS cases to be launched for three years following the termination of NAFTA, but a majority of the tribunal in TC Energy v. United States found that these provisions did not apply to government decisions taken after June 30, 2020, when the CUMSA officially replaced NAFTA.
NAFTA’s legacy
The ruling in TC Energy v. United States , which has yet to be made public, has relevance for several ongoing disputes, including a related one launched by the Alberta Petroleum Marketing Commission (APMC). The APMC is a provincial Crown corporation that was used by the Alberta government to funnel billions of dollars of public money into Keystone XL, a portion of which it was unable to recover when the project was cancelled.
Ruby River v. Canada , a case that arose after both the Québec and federal governments rejected a proposal for a gas terminal, is another critical climate policy case.
It is very possible that the tribunals in these and other ongoing cases will interpret the CUMSA’s legacy provisions differently. A binding interpretation issued by the Canadian, American and Mexican governments that clarifies their original intent would settle the matter and prevent conflicting rulings.
Investment treaties
Although news that the TC Energy case was thrown out was welcomed by environmentalists and trade justice activists , it also highlights the ongoing risk of further ISDS claims from the fossil fuel industry.
NAFTA was one of thousands of treaties that provide access to ISDS mechanisms. Most of these are bilateral investment treaties (BITs), but there are also other large trade agreements such as the Comprehensive and Progressive Agreement for a Trans-Pacific Partnership (CPTPP) that include ISDS provisions.
Worldwide, there have already been at least 349 ISDS cases related to fossil fuel investments, resulting in compensation of US$82.8 billion paid to the industry. A recent report found that investment treaties are protecting fossil fuel assets with the potential to generate two gigatons of carbon emissions annually.
As governments take necessary steps to keep fossil fuels in the ground, they could face very large investor claims .
Paris alignment
Experts at the Organization for Economic Co-operation and Development (OECD) have argued that providing investment treaty protection to the fossil fuel sector is effectively a subsidy that’s incompatible with the objectives of the Paris Climate Agreement.
The European Union and several countries, including the United Kingdom , have drawn similar conclusions and have accordingly withdrawn from the Energy Charter Treaty (ECT) — the most heavily used forum for investors bringing ISDS claims.
Keeping ISDS out of the CUMSA has allowed Canada and the U.S. to pursue climate objectives at a reduced risk of liability. However, both countries continue to impose ISDS on treaty partners around the world, especially the Global South. American and Canadian legislators have called out this hypocrisy.
Read more: Fightback gains pace against trade deals fossil fuel investors can use to sue countries over climate action – podcast
In Canada, the Bloc Québécois, NDP and Green Party all oppose the inclusion of ISDS provisions in trade and investment agreements.
In the U.S., members of Congress and state legislators are pushing the Biden administration, which has committed to not include ISDS in new trade deals, to remove it from existing treaties.
Swift implementation of such proposals is urgently needed to protect the right of governments to regulate in this critical decade of climate action.
Kyla Tienhaara receives funding from the Government of Canada through the Canada Research Chairs program. She is a Non-resident Fellow with the Global Economic Governance Initiative at the Boston University Global Development Policy Center. She collaborates with a number of non-profit organizations and think tanks including the Canadian Centre for Policy Alternatives (CCPA) and the International Institute for Sustainable Development (IISD).
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