TransCanada Sues U.S. Government For Rejecting Keystone Pipeline

Courtesy of the <a href="https://www.aer.ca/about-aer/media-centre/photos">Alberta Energy Regulator</a>

Courtesy of the Alberta Energy Regulator

On Wednesday, TransCanada filed a complaint against the United States in a federal district court in Houston alleging that the President’s rejection of the Keystone XL pipeline was invalid and unconstitutional because it was not authorized by Congress. If successful, this claim would allow construction of the pipeline.

On the same day, TransCanada filed a notice of intent to submit a claim to arbitration under the North American Free Trade Agreement (NAFTA). Even if successful, this claim would not allow construction of the pipeline, but could entitle TransCanada to money damages from the United States. The company is asking for $15 billion in damages.

Like most private lawsuits against the government, these lawsuits face long odds, but both raise important and novel legal issues that will be difficult to decide. TransCanada’s constitutional claim could change the way that the United States approves international oil pipelines. And TransCanada’s NAFTA claim could endanger the United States’ long winning-streak in NAFTA arbitrations.

TransCanada’s Constitutional Claim

The most unexpected part of TransCanada’s legal salvo was the lawsuit that it filed asking a U.S. district court to rule that President Obama’s rejection of the Keystone XL pipeline was unconstitutional. TransCanada notes that Congress has never passed a statute that gives the President authority to reject international oil pipelines and says that, without such a law, the President had no authority for his unilateral rejection of the pipeline.

Congress has never provided a legal framework for regulating oil pipelines that cross the United States’ international borders. By contrast, there are laws that establish a process for the President to decide on international natural gas pipelines and electricity transmission.

In the absence of Congressional authorization, President Lyndon Baines Johnson simply issued an executive order in 1968, Executive Order 11423, that established a process for issuing permits to proposed oil pipelines that “would serve the national interest.” Then in 2004, President George W. Bush issued a new unilateral order, Executive Order 13337 that expedited review of border crossings. Both executive orders delegate decisions on these cross-border permits to the U.S. Secretary of State.

On November 6, the current Secretary of State, John Kerry rejected the Keystone XL pipeline after seven years of review. The official U.S. Record of Decision stuck by the State Department’s controversial previous conclusion that the pipeline would improve U.S. energy security, benefit the economy, and would be unlikely to increase greenhouse gas emissions in Canada. (It also suggested that the pipeline might even decrease greenhouse gas emissions in the United States by moving oil transport from railroads to pipelines, making oil transport more efficient.) But the U.S. concluded that the pipeline was ultimately not in the national interest because it could undercut the nation’s leadership in climate talks because the pipeline was “perceived as enabling further [greenhouse gas] emissions globally.”

TransCanada’s key argument is that, in the absence of any law, the President does not have unilateral authority to reject an international oil pipeline based on this kind of consideration. Although Presidents have claimed power to decide whether a pipeline is in the national interest since President Johnson in 1968, TransCanada argues that this power has never been fully tested because the President has never rejected an international pipeline.

This creates something of a puzzle: if Congress has never passed a law governing international oil pipelines and the President does not have authority to reject an oil pipeline, then who may, in fact, regulate pipeline border crossings?

One possible answer is that international oil pipelines are primarily regulated by the states, just like domestic oil pipelines. The U.S., unlike Canada, primarily relies on state-by-state regulation for interstate oil pipelines. That is, if no law has been enacted governing international oil pipelines, then the only laws that govern them are the same ones that govern domestic oil pipelines.

President Obama’s administration will raise several counterarguments. First, it will argue that the President has inherent and unilateral constitutional authority to control the nation’s borders, so he must have some kind of ability to control international border crossings. Second, if Congress has not established any criteria for the President to use in this decision, then he is free to create his own criteria. Third, President Johnson established this process almost fifty years ago and it has been frequently used to approve pipelines so Congress has, with the passage of time, acquiesced to this process. Fourth, federal district courts have upheld the President’s unilateral decision to approve international pipelines.*

TransCanada will respond that, whatever power the President has, it does not allow him to reject a pipeline based solely on international perceptions that are inconsistent with the government’s own environmental analysis. TransCanada’s complaint also argues that, far from acquiescing in the President’s unilateral authority to reject international pipelines, recent Congresses have repeatedly sought to constrain the President’s authority, citing Congress’s frequent attempts to approve the Keystone XL pipeline. Finally, TransCanada will point to federal court decisions and executive branch opinions from nearly a century ago, which concluded that in the absence of Congressional authorization the President had, at most, limited authority to control border-crossing facilities. Though old, these opinions may remain relevant in the unusual situation where, as with oil pipelines, Congress has not established a process for permitting border crossings.

The continuing saga of the Keystone XL drama overlaid with a tangle of old and new precedents and conflicting constitutional powers will make TransCanada’s U.S. lawsuit a case to watch. If a Republican is elected President this coming November, then the issue will likely be moot because the Republican contenders say they would reverse President Obama’s decision on the pipeline. But if not, then the U.S. courts will have to resolve the thorny issues raised by TransCanada.

TransCanada’s NAFTA Claim

TransCanada’s other action, its notice of intent to submit a claim to NAFTA arbitration, alleges that the U.S. discriminated against Keystone XL’s Canadian investors, violating its obligations to afford them national and most-favored-nation treatment under Article 1102 and Article 1103 of NAFTA. TransCanada also argues that by delaying a decision on the pipeline for seven years, and then denying it, the U.S. government destroyed the value of its investment, expropriating its property in violation of NAFTA Articles 1110 and 1105.

NAFTA claims are decided by three independent arbitrators. These arbitrators are not bound by the decisions of the arbitrators that decided previous claims. Thus, it is very difficult to predict whether a NAFTA claim will be successful.

If past cases are any indication, a Canadian company like TransCanada begins at a serious disadvantage. The United States has never lost a NAFTA decision to a foreign investor. And arbitrators have sometimes gone to great lengths to avoid a finding of discrimination. In one case, California passed a law that, it admitted, used “narrowly crafted language intended to prevent approval of a specific mining project” owned by Canadian investors. But the NAFTA panel for that case held that the law was not discriminatory because, in theory, that narrowly crafted language could apply in the future if another company proposed a similar project.

On the other hand, the extraordinary facts of the Keystone XL review process could end the United States’s NAFTA winning streak. First, throughout the seven-year review, President Obama repeatedly responded to complaints from pipeline supporters by admonishing them to remember “this is Canadian oil, this isn’t U.S. oil.” And the President’s administration was, at the same time, moving to expedite domestic oil pipelines. Second, after repeatedly delaying the decision on Keystone XL and repeated environmental impact studies, the U.S. denied the permit on the basis of a perception that was not supported by the seven years of analysis it had done. It will be difficult to explain why it took seven years to analyze the pipeline if, in the end, the government chose to ignore that analysis.

Finally, TransCanada’s lawsuits may operate in tandem because one relevant set of laws that Congress has passed concerning international energy trade is the set of laws approving and implementing NAFTA. In U.S. court TransCanada will argue that even if Congress has not prescribed a specific process for international oil pipelines, it has, at least ruled out any discriminatory or arbitrary treatment of Canadian investors in those pipelines. One of the chief challenges for U.S. lawyers will be to explain why the federal government should impose a uniquely lengthy and unpredictable process on Canadian oil pipelines while expediting domestic oil pipelines.

Regardless of the outcome, TransCanada’s Keystone XL challenges set the stage for potential blockbuster decisions that will have a lasting impact on energy, constitutional, and trade law.

 

You can see more legal documents & analysis related to the Keystone XL pipeline and other North American oil pipelines at Oil Transport Tracker (Shortcut link: http://j.mp/OilTransportTracker).

 


 

*Full disclosure: Before my academic career, I worked in private practice and represented TransCanada in two of these earlier cases. 

May Provinces (or States) Limit Imports on the Basis of Greenhouse Gas Emissions Elsewhere?

By James ColemanMartin Olszynski

Screen Shot 2015-04-15 at 9.03.54 AMLast week, a group of economists known as “Canada’s Ecofiscal Commission” issued a much-discussed report that urged Canada’s individual provinces to drive Canadian climate policy by adopting their own carbon pricing schemes. But the report barely touched on one of the key challenges for provincial or state regulation without the support of the national government: what may places that price carbon do to avoid losing industry to places that don’t?

This is an urgent question across North America because, for different reasons, Canada and the United States are unlikely to adopt uniform nationwide climate policies in the near future.[1] Instead, climate regulation will be somewhat different in each state and province. But states and provinces lack a key power that national governments use when they adopt climate regulation: the power to adopt trade regulations that control imports. The nation is an economic union so provinces can’t limit trade across their borders.

Climate and trade policies often go hand-in-hand because nations that limit carbon emissions worry they will lose industry to nations that do not. After all, if emissions merely shift to other nations, a phenomenon known as “carbon leakage”, a single nation’s carbon policies won’t do much to help the global climate. One way around this problem is to charge a “carbon tariff” on imports that were produced in nations that do not have similar limits on carbon emissions. This charge is calculated by estimating how much carbon was emitted to produce the imported product and then multiplying that quantity by the importing country’s carbon price. These tariffs are sometimes called “border adjustments” because, in theory, they are supposed to level the playing field between domestically regulated producers and unregulated foreign ones.

You can’t set up a customs house between Manitoba and Ontario, so provinces can’t charge a regular carbon tariff. But states and provinces have found a roundabout way to do more-or-less the same thing. For instance, California and Quebec both have cap-and-trade systems that force power plants to purchase a permit for each ton of carbon that they emit into the atmosphere. Crucially, these cap-and-trade systems also apply to power plants in other states that export electricity to California and Quebec. The effect is the same as the customs house: when a purchaser imports electricity into California or Quebec it must pay a charge for all the carbon that was emitted elsewhere to produce that electricity.

So can states and provinces place a charge on imports that accounts for how much carbon was emitted elsewhere to produce them? It’s a crucial question because such charges could apply to all kinds of goods, not just to electricity. Provinces like British Columbia and states like California are already setting standards for motor fuels that effectively charge imported fuels for the greenhouse gases that were emitted elsewhere in their production. And in theory the same charges could apply to any kind of good. You would just add a surcharge to every item based on the greenhouse gases that were emitted elsewhere to produce it: television sets, fruit, toys, you name it.

In fact, state and provincial climate regulations across North America are increasingly adopting exactly these kind of controls, adding urgency to the underlying legal question: may energy importers export their regulation to cover emissions outside their borders? In the absence of national action on climate change, provinces are looking for creative ways to make sure that they don’t lose industry to provinces that don’t regulate, so they’re regulating imports based on carbon emissions elsewhere.

Canada’s Ecofiscal Commission is recommending provincial action on climate but it has little to say on this crucial topic, and what it says is confusing. The report’s section on “competitiveness” has a subheading titled “Border adjustments could level the playing field,” which sounds promising. It then says “border adjustments could not be implemented by a single province, but would require involvement by the federal government,” which is a major qualification. But then it states that, after all, such adjustments are possible for “specific emissions that fall under provincial jurisdiction” and cites the example of Quebec’s electricity imports. For this proposition it cites a white paper on a U.S. cap-and-trade system written by U.S. law students.

This issue is too important to gloss over. If states and provinces are going to lead the fight against climate change, many legal decisions and many academic pieces will be written on the topic before it is resolved. This post merely flags some of the key rules and arguments that will be in play.

The normal rule has been that states and provinces may not adopt regulations for pollution emitted in other states. These forbidden rules are known as “extraterritorial” regulations. In Interprovincial Co-Operatives Ltd. v. Dryden Chemicals Ltd, the Supreme Court of Canada held that Manitoba could not make a law punishing companies that lawfully emitted pollutants in Saskatchewan and Ontario, even if those pollutants made their way into Manitoba. The rule in the United States is more complicated, but under what is known as the “dormant commerce clause”, the U.S. Supreme Court has held that states cannot adopt a law “if the practical effect of the regulation is to control conduct beyond the boundaries of the State.”

One important reason for the normal rule is that if provinces or states began banning products that were produced elsewhere in ways that they didn’t like, they would quickly run afoul of international trade laws. For example, if Ontario banned all products made by laborers that were not paid its $11 per hour minimum wage that would, as a practical matter, end imports from the developing world. It would also conflict with the General Agreements on Tariff and Trade that govern international trade.

On the other hand, the traditional rule against extraterritorial regulation is on somewhat tenuous footing. In Canada, Interprovincial Co-Operatives involved a 3-1-3 split, which makes the primary ruling open to debate. The decision is also four decades old and has been heavily criticized, including by one of Canada’s leading constitutional scholars. See Peter Hogg, Constitutional Law of Canada, 5th ed., (2007) at 13-10. Similarly, in the United States, scholars and judges have suggested that limits on extraterritorial regulation should be abandoned.

Suffice it to say that import regulations may have a better chance of being upheld where their extra-provincial effects are deemed incidental to their primary purpose, or “pith and substance” in Canadian jurisprudential terms. Reference re Upper Churchill Water Rights Reversion Act, [1984] 1 SCR 297. See also Shi-Ling Hsu and Robin Elliot, “Regulating Greenhouse Gases in Canada: Constitutional and Policy Dimensions” (2009) 54 McGill L.J. 463.

And perhaps the normal rule should bend in the case of provincial climate regulation. For one thing, even if carbon emissions occur in Alberta, they still affect the global climate, which could harm Ontario, Quebec, and every other place in the world. For the same reason, it is vital that climate regulation doesn’t just shift carbon emissions to other provinces: few will want to regulate if the provinces that do lose jobs without securing any net benefit for the climate. If we want provinces to set a model for eventual national regulations, maybe they need the same trade powers.

States and provinces also have long-standing authority to manage the mix of sources providing power to their electrical grid, which includes regulating contracts for electricity imports. This helps to ensure that power will always be available at reasonable prices. But there are limits to this authority as well: a province certainly could not prescribe the wages or working conditions for employees at power plants in other provinces. Can provinces prescribe carbon standards for power plants elsewhere under their traditional authority over electricity markets? That remains an open question.

So far, the U.S. courts are divided on whether states may regulate based on carbon emissions elsewhere. An appellate court said that California could regulate fuels based on emissions elsewhere and a district court said that Minnesota could not regulate electricity based on emissions elsewhere. The Canadian courts have not yet addressed the question. And the first two Canadian cap-and-trade systems are poor test cases because both Quebec and Ontario import far less electricity than they export. But the question will become unavoidable as more provinces adopt the kind of policies recommended in the Ecofiscal Commission’s report.

Finally, these questions will grow more pressing as long as national governments delay action to address climate change. As with recent provincial efforts to improve environmental impact assessments of interprovincial pipelines, the federal policy vacuum is pushing provinces to act on their own. In the United States, one interim solution could be for the federal government to allow non-discriminatory state regulation of energy imports. If Canada’s government is serious about sticking with provincial climate policy, it may have to consider similarly creative solutions. In the meantime, these policies will continue to present difficult and novel legal questions about the boundaries of state and provincial authority.

__________________________

[1] In Canada, the conservative government has repeatedly delayed federal climate regulations and the leader of the liberal party has pledged to leave the provinces in charge of carbon pricing. In the United States, congressional inaction has pushed President Obama to rely on a rarely-used Clean Air Act provision that requires states to adopt their own regulations for power plant carbon emissions.