Theresa May is understandably keen to cement her legacy in her final month as Prime Minister. This week she announced that the UK will become the first G7 country to commit in legislation to being carbon-neutral by 2050. This is one of the most ambitious climate change goals set by a major polluting nation, and has subsequently been warmly received by many environmental groups.
However, it is difficult to square the government’s 2050 commitment with its trade policy. The Conservative Party continues to support Investor-State Dispute Settlement (ISDS), mechanisms in trade agreements which are used by investors to sue government for changes in policy which harms their profits. The UK has ISDS agreements with 106 countries around the world, and is likely to sign more such agreements after Brexit. This is not just Theresa May’s idea: of the Conservative leadership candidates who are actually in with a shot, all are campaigning for the UK to adopt a fully independent trade policy after Brexit.
ISDS severely hinders progress on climate change. It has been used by dozens of multinational companies, many of them headquartered in Britain, to challenge environmental legislation - sometimes successfully. Furthermore, ISDS can lead to ‘regulatory chill’, where governments choose not to bring in environmental legislation (such as a ban on fracking) for fear that they will be challenged by investors.
In 2009, Swedish energy firm Vattenfall sued Germany for introducing policies designed to curb water pollution and carbon emissions - both of which, unsurprisingly, affected the profitability of their coal power station. The case resulted in a settlement where the local authority repealed the environmental legislation despite the fact that this led to Germany being found in breach of the EU habitats directive.
More recently, in 2012, US energy firm Lone Pine sued Canada over a ban on fracking in Quebec, under Canada’s free trade agreement with the US (NAFTA, since replaced by USMCA). The case went ahead despite local opposition to fracking, and evidence of the risks of fracking to the environment and human health. Although the outcome of the case is still pending, the precedent is likely to discourage other local and national authorities from regulating fracking.
There are many other cases of companies using ISDS to challenge environmental legislation, which has led environmental campaigners to oppose the inclusion of ISDS in trade agreements. It is difficult to see how ISDS clauses are consistent with the objectives of international action on climate change, such as the Paris agreement, and this week’s proposals for the UK to be carbon-neutral by 2050.
But despite the opposition from civil society and environmental experts, the Government remains firmly pro-ISDS. Indeed recently the Trade Secretary Liam Fox said that civil society groups’ suggestion that it should be banned is “nonsensical”.
After Brexit, the UK is likely to pursue ISDS in new trade agreements. The Government has repeatedly stated its aim that Britain will strike rapid, ambitious new trade deals after Brexit, including with the United States. Dominic Raab, for instance, has stated that the UK must have a “buccaneering” approach to trade after Brexit - which presumably means pursuing new deals with new countries.
A US trade deal is likely to be pursued most zealously by Boris Johnson, who has the backing of President Trump himself, and has stated his desire for Britain to look beyond the EU for new trading relationships. Indeed, pursuing a US trade deal is likely to be a priority in a no-deal scenario, as a political signal that the UK does not rely on the EU for trade.
The potential for inclusion of ISDS means that a US-UK trade deal could be disastrous for the environment. US firms would be able to sue the UK government in the same way that they sued Canada over its fracking legislation.
It is difficult to see how the UK would be able to introduce the new environmental policy required to achieve net-zero by 2050 if these policies can be legally challenged by foreign investors through ISDS mechanisms in trade deals. Until the Government listens to environmental campaigners’ concerns about its post-Brexit trade policy, it is hard to take this latest pledge seriously.