Reproduced from www.worldbank.org/icsid with permission of ICSID.
II. FACTUAL BACKGROUND
A. Ontario Adopts a Cap and Trade Program for Carbon Emissions Abatement
1. Regional Governments Form the Western Climate Initiative (WCI)
2. Ontario Develops a Cap and Trade Program Based on the WCI Model
3. Ontario Launches its Program and Holds Auctions in 2017
4. KS&T Participates in the Ontario Program in 2017
5. Ontario Harmonizes its Cap and Trade Program
6. KS&T Transfers the Balance of its Ontario CITSS Account to California
7. Ontario Participates in Joint Auctions in 2018
8. KS&T Participates in the February 2018 Joint Auction and Transfers the Balance of its Ontario CITSS Account to California
B. Ontario's Cap and Trade Program Enters a Period of Uncertainty
1. The Progressive Conservative Party Campaigns on Cancelling Cap and Trade
2. Industry Experts Highlight the Cap and Trade Program's Uncertain Future
3. The May 2018 Auction Takes Place During the Election Campaign
4. KS&T Participates in the May 2018 Joint Auction
5. The Progressive Conservative Party Wins a Majority and Prepares for Its Swearing-in
6. Ontario Does Not Provide Notice of Participation in the August 2018 Joint Auction
7. California De-Links its CITSS Accounts from Ontario CITSS Accounts
C. Ontario Winds Down the Cap and Trade Program and Provides Compensation on a Principled Basis
1. Regulation 386/18 Comes into Force on July 3, 2018
2. The Government Introduces Bill 4 Before the Ontario Legislative Assembly
3. The Cancellation Act Comes into Force
4. KS&T Applies for Compensation Despite Its Ineligibility
III. THE CLAIMANTS HAVE FAILED TO ESTABLISH THE JURISDICTION OF THE TRIBUNAL
A. The Claimants Bear the Burden of Proving that the Tribunal Has Jurisdiction
B. The Claimants Must Establish Jurisdiction Under Both the ICSID Convention and NAFTA Chapter Eleven
C. The Claimants' Activities Do Not Constitute an "Investment" Within the Meaning of Article 25 of the ICSID Convention
1. The Claimants Have Not Made a Contribution of Money or Assets
2. The Claimants Have Not Met the "Certain Duration" Requirement
3. The Claimants Have Not Undertaken an Investment Risk
4. The Claimants Have Not Contributed to the Host State's Economic Development
D. The Claimants Do Not Hold Protected "Investments" Under Article 1101 and Article 1139 of the NAFTA
1. The Emission Allowances Held by KS&T Were Not "Property" Under NAFTA Article 1139(g)
2. KS&T Did Not Hold "Interests Arising from the Commitment of Capital or other Resources in the Territory of a Party to Economic Activity in Such Territory" Under NAFTA Article 1139(h)
3. Koch Industries Does Not Hold Protected "Investments" Under Article 1101 and Article 1139
E. Koch Industries Lacks Standing Under NAFTA Article 1116 Because It Has Not Pled Any Cognizable Loss or Damage
IV. THE CLAIMANTS HAVE FAILED TO ESTABLISH A VIOLATION OF NAFTA CHAPTER ELEVEN
A. The Claimants Have Not Established a Breach of Article 1105
1. Summary of Canada's Position
2. The Claimants' Overly Broad Interpretation of NAFTA Article 1105 Must be Rejected
3. The Claimants Have Failed to Establish a Violation of Article 1105
B. The Claimants Have Failed to Establish a Breach of Article 1110
1. Summary of Canada's Position
2. NAFTA Article 1110(1) Incorporates Customary International Law Rules on Expropriation
3. The Claimants' Expropriation Claim Fails Because There Was No "Investment" Capable of Expropriation
4. The Claimants Have Not Established That Ontario Expropriated Any of Their Alleged Property Rights
V. THE CLAIMANTS HAVE FAILED TO ESTABLISH THAT THEY ARE ENTITLED TO COMPENSATION
A. The Claimants Have Failed to Prove that Ontario Caused the Loss They Claim in Relation to the Emission Allowances
B. The Claimants Fail to Prove Legal Causation for Each of their Claims
1. The Claimants Have Failed to Establish Actual and Specific Loss Pursuant to the Alleged Breaches of the Minimum Standard of Treatment
2. The Claimants Have Failed to Establish Actual and Specific Loss of their "Emissions Trading Business in Ontario"
3. The Claimants Have Failed to Establish Actual and Specific Loss with Respect to KS&T's Related Party Contracts
4. The Claimants Have Failed to Establish that They Are Entitled to Lobbying Costs
C. Any Damages Awarded Must Be Diminished or Disallowed As a Result of the Claimants' Role in their Loss
D. The Claimants' Request for Interest Must Be Rejected
VI. REQUEST FOR RELIEF
1. In May 2018, the Claimant Koch Supply & Trading, LP (KS&T), a U.S. entity, bought emission allowances in Ontario for resale in California. In June 2018, California disallowed incoming transfers of emission allowances from Ontario, and KS&T was unable to resell them in California as it had planned. KS&T and its indirect parent, Koch Industries, Inc. (the Claimants), now come to this Tribunal seeking compensation.
2. There is no NAFTA case here. KS&T's cross-border purchase of emission allowances in Ontario for resale in the United States is not an investment in Canada. The emission allowances have none of the characteristics of an "investment" under Article 25 of the ICSID Convention, and they fall outside the scope of an "investment" protected under NAFTA Article 1101 and Article 1139.
3. Perhaps aware of these deficiencies, the Claimants attempt to characterize KS&T's purchases of emission allowances as a "business" in Ontario; they also rely on unrelated and unidentified "interests" of Koch Industries. This is a transparent attempt to create jurisdiction where none exists. KS&T has no subsidiary or personnel in Canada. KS&T's business development efforts, which were led from the United States and related to cross-border sales, are plainly not an investment in Canada. Koch Industries not only has no "investment" relevant to this dispute, but also lacks standing because it has not alleged any cognizable loss.
4. The Ontario legislation that created the emission allowances provided that "no compensation" would be payable and that "no expropriation" could result from changes to the cap and trade program. KS&T assumed these risks and purchased emission allowances in Ontario in 2017, wagering that Ontario would harmonize its cap and trade program with that of California. While Ontario did harmonize its program with California in early 2018, there was never any guarantee that this would remain the case. From January to April 2018, KS&T systematically transferred all of the allowances it had acquired in Ontario to California. When KS&T again bought allowances in Ontario in May 2018 (instead of in California, where it was also registered), there were clear indications that the future of the Ontario cap and trade program was uncertain.
5. In June 2018, Ontario voters elected a party that had made winding down the cap and trade program a central plank of its campaign platform over the preceding months. Once in power, the new government proceeded with the orderly wind down of the cap and trade program. The government also adopted a compensation scheme that focused on participants whose actual emissions of GHGs were lower than their holdings of purchased emission allowances. Given the clear provisions of the legislation that had created the cap and trade program, the Claimants could not reasonably expect that Ontario would offer compensation to any and all participants in the event of a regulatory change. Ontario's rational, non-discriminatory, legitimate policy-based measures fall far short of internationally wrongful conduct.
6. The Claimants have failed to meet their tripartite burden to establish this Tribunal's jurisdiction, to show a violation of NAFTA Chapter Eleven, and to prove any compensable damages.
7. In Part II of this submission, Canada sets out the relevant factual background of this dispute, including Ontario's establishment of a cap and trade program, the harmonization of Ontario's program with those of other sub-national jurisdictions, the election of a new government, and the orderly wind-down of the cap and trade program. Canada corrects the Claimants' exaggerated view of the role of market participants in cap and trade programs generally and their misleading statements about KS&T's participation in the Ontario cap and trade program in particular.
8. In Part III, Canada explains why the Tribunal lacks jurisdiction to hear the dispute. The alleged investments do not meet the objective requirements of Article 25 of the ICSID Convention. In addition, the Tribunal lacks subject-matter jurisdiction under the NAFTA because the Claimants do not hold "investments" in Canada within the meaning of NAFTA Articles 1101 and 1139(a)-(h). The emission allowances are not "property" under Article 1139(g), nor did their purchase give rise to "interests" arising out of the commitment of capital or other resources within the meaning of Article 1139(h). Neither Claimant held relevant enterprises (or interests in enterprises) in Canada under Article 1139(a) or (e). The Tribunal also lacks personal jurisdiction over Koch Industries because it has not alleged a cognizable loss, as required by NAFTA Article 1116. Given the Claimants' failure to establish jurisdiction over their claim, the Tribunal's inquiry should end there.
9. Even if the Tribunal were to conclude it had jurisdiction over the claim, Ontario's actions did not constitute a breach of NAFTA Article 1105 (Minimum Standard of Treatment) or Article (Expropriation and Compensation), as demonstrated in Part IV. Ontario's measures with respect to winding down its cap and trade program were neither manifestly arbitrary nor discriminatory, but were rather based on legitimate policy goals. Nor could Ontario's actions give rise to an expropriation because the emission allowances did not give rise to rights capable of expropriation and in any event Ontario's measures constituted a valid exercise of police powers.
10. Finally, with respect to damages, the Claimants seek to recover the purchase price of the emission allowances bought at the May 2018 auction. However, shown in Part V, the Claimants have failed to establish that Canada's actions caused the losses they seek to recover. Even assuming that such causation could be established, the Claimants contributed to their own losses, such that the full quantum they claim should not be compensable.
11. Canada's submission is accompanied by statements from two witnesses: Mr. Alexander Wood, Assistant Deputy Minister at Ontario's Ministry of the Environment, Conservation and Parks (MECP); and Ms. Nadia Ramlal, Senior Manager, Program Systems and Oversight at MECP. Canada also submits reports by two experts. Mr. Franz Litz was one of the architects of the cap and trade model on which Ontario's system was based; Professor Larissa Katz is a leading authority on property rights under Ontario law.