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Why doesn't the state of California sue Methanex for the remediation of MTBE contamination, as well as direct, indirect and anticipated human health costs??
Margaret Schneider, former MIIS student
When Governor Gray Davis took steps toward banning MTBE from gasoline,
he intended to protect California groundwater basins from further
contamination. However, that decision also triggered a major
international dispute under NAFTA. Canadian-based Methanex Corporation,
the largest manufacturer of methanol (the primary ingredient of MTBE) in
the world, filed a claim against the United States government in order
to recover lost stock market value and anticipated profits. At least
half a dozen similar cases are pending which challenge domestic
regulatory decisions under NAFTA's Chapter 11, seeking both compensation
and regulatory reversals. This pattern highlights unresolved conflict between domestic
environmental regulation and international free trade and foreign
The Environmental Problem
Early one August morning in 1995, while performing a routine inspection of water supply operations in the Charnock Wellfield, City of Santa Monica employee Andy Garcia* smelled turpentine in the water. Not a good thing, he thought. It turned out to be MTBE (methyl tertiary butyl ether) contamination from a nearby gas station's leaking underground storage tanks. The city had to shut down these water wells, pending cleanup actions expected to take several years. Then the Arcadia Wellfield tested way too high for MTBE. By 1996, the affluent and trendy City of Santa Monica had lost 50-80 percent of its local water supply wells to the turpentine stench, incurring an estimated cost of $150 million to remediate; and $3.3 million per year to buy replacement water. Then other cities began to complain. A pattern of groundwater pollution was emerging throughout California. Definitely not a good thing.
The MTBE Story
some gasoline by the late 1970s as an octane booster, MTBE was
originally hailed as one solution to air pollution. A substitute for the
lead in old- fashioned "regular" gasoline (an environmental
and public health disaster), MTBE is an oxygenate that helps gasoline
burn more completely, thus reducing carbon monoxide and other tailpipe
emissions. MTBE is generally preferred over another oxygenate, ethanol,
because of its lower cost, ease of production (it is a byproduct of the
oil refining process), and favorable blending characteristics with
content in gasoline increased dramatically when the federal Clean Air
Act amendments of 1990 required reformulated gasoline (RFG: oxygenated
fuel) in the smoggiest locations. For California, this meant MTBE was
added to all gasoline sold in the Los Angeles area, Sacramento, and
several other major metropolitan areas. The State Air Resources Board
credits MTBE with a reduction in emissions of about 15 percent over the
last 10 years, a considerable improvement in air quality.
gasoline escapes into the environment through various pathways: through
leaking underground storage tanks (LUSTS), pipelines and spills,
vaporizing at refueling operations, at manufacturing and industrial user
sites, even from recreational watercraft. MTBE's physicochemical
properties allow it to contaminate surface and groundwaters quickly. It
is highly soluble, volatile, mobile and persistent, spreading faster and
farther than other gasoline components. Even at extremely small
percentages, MTBE is detectable in water by its distasteful turpentine
smell. Called a "recalcitrant compound", MTBE is resistant to
conventional water treatment techniques, and cleanup is very difficult
pattern all too familiar, the environmental savior had become the
environmental despoiler. There are no completed studies of long-term
effects to humans from exposure to MTBE. Governor Gray Davis and the
state legislature commissioned the University of California to do a
study of MTBE, and to recommend regulatory action. That report, issued
in November 1998 , after a thorough review of all the scientific
literature available, found that MTBE caused: 1) objectionable taste and
odor in water at concentrations as low as 5 ppm; 2) acute exposure
effects of headache, nausea, vomiting, cough, dizziness, disorientation,
or eye irritation; 3) cancer in rats, with the potential to cause cancer
in humans. The research was inconclusive on whether or not MTBE
exacerbated asthma, was neurotoxic, or affected reproductive or
developmental processes. These university scientists urged the governor
to ban the use of MTBE from his jurisdiction, the State of California.
consideration and consultation, on March 25, 1999, Governor Davis
ordered state agencies to take the initial steps towards the elimination
of MTBE from any gasoline sold or used in the state. To allow time for
necessary industry adjustments, the ban would be accomplished in a
phase-out fashion by the end of 2002.
scientific body, the USEPA's Blue Ribbon Panel on Oxygenates in
Gasoline, confirmed the UC findings, and recommended on July 27, 1999, a
discontinuation of MTBE use. An occurrence survey found MTBE in the
groundwaters of 49 states, many of which are developing their own
regulations. The federal government is also considering action against
MTBE, although currently the EPA has classified it as a "potential
carcinogen" and issued only an "advisory" warning to
municipal water purveyors. EPA set their advisory limit level based on
kidney and liver effects observed in laboratory animal experiments.
controversy has spawned new research on the health effects of MTBE
exposure, air quality impacts, actual occurrence, fate, and transport in
the environment, and site remediation and water treatment techniques.
response to California's actions, the Shell
Corporation began research into the microbial cleanup treatment of
MTBE; the Tosco Corporation
(76 & Circle K gasoline brands) and BP
Amoco declared cooperation with government through rapid elimination
of MTBE from their products. However, the Canadian
Methanex Corporation, the major methanol manufacturer, with their
market most severely threatened, took a very different action.
NAFTA's Chapter 11 and the Methanex Law Suit
brought a claim against the United States government under NAFTA's
Chapter 11, seeking compensation of US$970 million for business lost due
to "indirect expropriation."
They claimed that the California measure cost them the loss of
anticipated profits, of their customer base and of a substantial portion
of the market for methanol. It caused a drop in both the global
commodity price and stock market value, reduced return on their capital
investments in methanol production facilities, and diminished their
Chapter 11 (see specific text in Annex 1) provides the basic protections
of non-discriminatory, fair and equitable treatment for foreign
investors, and payment of compensation in cases of expropriation. Its
scope and definitions are very broad, and its objectives are to
establish a secure investment climate, to remove barriers to investment,
and to provide an effective dispute resolution process for disagreements
between investors and host governments. Methanex primarily cites Article
1110 on Expropriation and Compensation as the legal basis for their
claim, among other pertinent sections of the chapter.
parties to NAFTA (Canada, Mexico, and the United States) strongly
supported the particular investor protection regime embodied in NAFTA's
Chapter 11, under which Methanex brought its claim. Through Chapter 11's
unprecedented grant of standing to private companies to directly pursue
complaints against sovereign governments, the parties hoped to restore
investor confidence. The United States leads the trend toward lifting
traditional constraints on standing in international law, going beyond
government-to-government legal relations. Chapter 11 allows corporations
access to international tribunal arbitration directly, without
consulting their home or host governments, and by-passing all domestic
legal court systems.
particular needed to dispel the persistent corporate memories of its
sudden take-over (nationalization) of all the foreign oil industry
assets in 1938, and indeed the general historic reputation of capricious
and unfair treatment of foreign investors. Mexico is very clear today
that direct foreign investment is an essential component of the
country's development, offering new jobs and training, increased capital
flows, current technologies, infrastructure, and sometimes even
environmental leadership. Attracting such vital investment depends upon
a stable "investment-friendly" climate, with no hint of market
access restrictions, fear of expropriation, or business operations
interference. Reasonable certainty and predictability inspire investor
Chapter 11 seeks to offer redress for any arbitrary or discriminatory
government acts against foreign investors or investments. It presents a
very broad scope in defining "expropriation," going beyond the
seizure of property or deprivation of full use of the investment to
include "creeping expropriation" or "disguised, de facto,
or indirect expropriation", or measures "tantamount to
expropriation." Both established and future investments are covered. Some
U.S. government negotiators have reportedly argued that this legal
threat encourages legislators to refrain from passing laws that violate
their own international agreements.
not the first Chapter 11 case involving gasoline additives. A year
earlier in 1998, an apparently similar case had been settled in advance
of any arbitration covering the merits of the case. Its cast of
characters were reversed from the MTBE case: an American company, Ethyl
Corporation, sued the Canadian government, under NAFTA Chapter 11, for
regulating Ethyl's gasoline octane booster product MMT (methylcyclopentadienyl
manganese tricarbonyl). Canada finally paid Ethyl Corporation about
US$13 million dollars and revoked the MMT regulation.
The MMT Story
Ethyl Corporation is the sole North American producer of MMT, known
commercially as HiTec 3000, which it distributes through its subsidiary,
Ethyl Canada, Inc., located in Ontario. Also a fuel additive which
boosts octane in gasoline and thus reduces engine "knocking",
increases the efficiency of gasoline production, and cuts nitrogen oxide
emissions, MMT replaced lead in some gasolines as early as 1977. Ethyl
was also the primary producer of lead gasoline additive, which was
finally completely banned from United States gasoline in 1995, after the
damaging effects of lead exposure on children's brain development was
not approved for use in reformulated gasolines in the United States, is
banned totally in the state of California, and is very little used by
any other industrialized countries. Automobile manufacturers in North
America complained that MMT damaged modern emissions diagnostics and
pollution control equipment in cars, just as lead did.
evidence identifies inhaled air-borne manganese in acute doses as a
neurotoxin, marked by symptoms like Parkinson's disease and premature
aging of the brain. Workers suffering moderate exposure showed impaired
hand-eye coordination, reaction time, and lung function. However, in
1994 Health Canada acknowledged significant data gaps when it
recommended that further studies were needed to measure long-term,
low-dose, chronic exposure effects on people, especially on those
vulnerable groups such as the elderly, pregnant women, and children. A
study by the Research Triangle Institute concluded that the risks of MMT
exposure were acceptable. With the scientific uncertainty about the
health risks, the CEPA (Canadian Environmental Protection Agency) did
not have the authority to ban the use of MMT directly.
Canadian Minister of the Environment in 1995, Sheila Copps, (and later
her successor, Sergio Marchi) introduced bills to ban the import and
interprovincial trade of MMT in response to public concerns. On June 24,
1997, the MMT bill became law, and Canada banned the import or
interprovincial transfer of the substance.
this outcome, Ethyl Corporation sued the Canadian Government under NAFTA
Chapter 11 on April 14, 1997, commencing the international proceedings
before the Canadian Parliament had completed its legislative process.
Ethyl sought US$200 million in compensation for losses resulting from
"expropriation" of assets, and for loss of its good
reputation. Specifically, it brought a claim under Article 1102 National
Treatment, Article 1106 Performance requirements and Article 1110
Expropriation and Compensation.
general, trade policy officials reject the use of trade tools as
environmental policy instruments. They emphasize that domestic
environmental protection goals should be achieved through normal
environmental regulation, or the use of the new market tools (targeted
taxation, tradable permits, etc.), not the manipulation of import/export
policies. A healthy segregation of trade and environment is best,
according to the trade community.
defended itself by insisting the Act was part of a comprehensive air
pollution control effort which fulfilled the governmental responsibility
to public health protection, that the ban applied to everyone, and that
there were no domestic manufacturers of MMT to be covertly protected. It
grants no special privileges to Canadian goods or services. The
government confiscated no property or investment, but only exercised
normal sovereign regulatory powers.
A year later (24 June 1998) the three-person tribunal officially awarded itself (and NAFTA) jurisdiction over the case. Less than a month after that, the parties settled the case between themselves, prior to full substantive arbitration. The Canadian government agreed to pay US$13 million in compensation to Ethyl Corporation. In addition, on July 20, 1998, the Government of Canada announced that it lifted the ban on importation or interprovincial transfer of MMT. The government's statement that morning:
Current scientific information fails to demonstrate
that MMT impairs the proper functioning of automobile on-board
diagnostic systems. Furthermore, there is no new scientific evidence to
modify the conclusions drawn by Health Canada in 1994 that MMT poses no
(Ethyl Corporation Website)
Although legally binding precedent does not exist in international law, this apparently comparable case cast a long shadow over the MTBE case in the minds of public activists. Reactions from non-governmental organizations (NGOs) were immediate and extremely harsh, as this example from the Environmental Defense Fund indicates:
The rollback of the Canadian MMT ban is bad politics
and bad public health policy. The Canadian government has gotten the
critical issue backwards. The key point is not that there are scientific
uncertainties about whether MMT is toxic, it's that there's not enough
information to show that MMT is safe.
Karen Florini, EDF
Department of State: Legal
The Methanex claim came into the
legal affairs office of the U.S. State Department, where Dan Lewis*
and his team had the task of crafting the defense. He needed to
neutralize Methanex' demand, yet at the same time preserve the general
principles of investment protection and of environmental protection.
Both the U.S. Environmental Protection Agency (USEPA) and the U.S. Trade
Representative's (USTR's) office were already expressing specific
concerns to him at the interagency meetings.
USTR reminded State of their abiding concern for maintaining a
healthy NAFTA agreement, and of the history and concepts supporting the
investor protection chapter. Its fundamental intent has always been to
encourage good governance, that is, government which is neither
arbitrary nor discriminatory against foreigners. The goal of the Chapter
11 language is to provide accountability for governmental actions,
seeking even-handed decisions even in the face of typical political
dynamics which all too often shift cost burdens to outsiders.
policy is not immune to expedient political responses to pressure from
vested-interests. If environmental goals can be accomplished through one
of several methods, the natural tendency of countries is to choose the
way which would also benefit domestic industry over foreign competition.
Multilateral, collective, agreed-upon oversight of local political
vagaries can reinforce good domestic governance. It is very important to
have a neutral venue where regulatory actions can be scrutinized for
disguised protectionism. Otherwise clever specialized interests can
successfully undermine the free trading system for their own private
gain, costing domestic consumers and international investors unfairly.
Environmental officials' first major
concern about the Chapter 11 cases, and the Methanex case in particular,
is the challenge those cases make to the sovereign right to govern and
regulate in the public interest. International law recognizes the
permanent sovereign right of nations over their domestic natural
resources and environment. If the government had to pay compensation
every time an environmental regulation affected an industry, the
potential crushing liability would paralyze public agencies. So far the
public has not had to pay for the right to clean air, water, and soils.
Private industry's right to make a profit has until now always been
circumscribed by the collective need to protect environmental quality.
This public/private balance has never been easy, but the universally
accepted Polluter Pays Principle clearly identifies who should pay the
costs of environmental compliance.
In the United States, a convoluted and
politically-charged controversy over "regulatory takings"
spawned many new state laws which favor compensation to private property
owners when environmental regulations significantly reduce the value of
property. The property no longer has to be physically taken, nor full
use of the property denied, as in classic expropriation situations. This
potential liability has chilled many land-use environmental regulatory
actions. USEPA worries that NAFTA Chapter 11 claims reflect an
international version of the domestic controversy, which has already
gone too far in the wrong direction. Of course, Chapter 11 goes far
beyond physical property value.
Environmentalists both inside and
outside USEPA have another serious complaint about this tribunal
arbitration process: the lack of transparency and citizen access. The
Investor-State Dispute Mechanism (ISDM), as it is legally called, is
built upon the traditional commercial arbitration model, which values
business confidentiality. Typically, all three tribunal members are
lawyers familiar with trade policy and law, without environmental
expertise whatsoever. They need not consult experts, allow observers,
nor accept information from anyone not directly involved in the case.
Release of any information in the case is voluntary, at the discretion
of the parties and the principles of the case. One environmental
thinktank criticized the process as "closed, secretive,
non-transparent, and one-sided," which amounted to "a
significant loss of democratic legitimacy."
under Chapter 11 completely bypasses domestic courts, and thus tribunals
operate in a legal atmosphere defined by NAFTA alone, without any
constitutional safeguards; no standing roster of neutral judges; no
appeals procedures; no defined due process; no public access or review;
no body of case law with which decisions must be consistent. In
international law, binding precedent based on previous case decisions
does not exist as a legal construct.
other cases under NAFTA's Chapter 11 are proceeding towards arbitration,
asking for both compensation and regulatory reversals. Like the MTBE
case, they raise serious questions about how to balance important
protections for investors and the environment alike. Any work on these
claims also illuminates larger political and legal issues such as
jurisdiction, sovereignty, standing, transparency, and democracy. The
State Department team needed to integrate these trade and environmental
values while at the same time presenting a solid defense against the
personally sympathized with environmentalists' demands about process and
participation. In a commitment to transparency, he made many finished
documents available by email to anyone who asked for them. Precious few
has now gone into arbitration before the NAFTA tribunal selected
specifically for the purpose. The United States Department of State, the
defendant, bestowed their one choice upon Warren Christopher, a
well-known statesman and lawyer, once the Secretary of State himself,
and most recently a major player in sorting out the confusing U.S.
Gore-Bush presidential election of 2000. Methanex, the claimant,
selected William Rowley, an important Canadian corporate lawyer; and
together they appointed V. Veeder, an English lawyer, as the third
member of the tribunal, and its presiding arbitrator.
tribunal is charged to decide this case under NAFTA's Chapter 11, using
that agreement's specific language and general international law as
their guide. Some legal opinions suggest that they may only consider the
effect of the California measures upon the investor, rather that the
appeal to their decision is extremely limited. They have received the
original claim from Methanex, the State Department's statement of
defense against the claim, responses and counter-responses, and other
addition to these documents from the principles in the case, the
tribunal has also been asked to accept an amicus
curiae (friend of the court) brief from a Canadian thinktank called
the International Institute for Sustainable Development (IISD),
headquartered in Winnipeg. The brief would describe some legal and
political options for modifying or interpreting NAFTA's Chapter 11
intentions and language. IISD had also asked for observer status, a role
quite often granted by the United Nations and other international
tribunal in turn inquired of the NAFTA parties whether or not they
should accept such input to the case from non-principles, to which both
Canada and the United States responded affirmatively, but Mexico
the tribunal accept the IISD brief and grant them observer status?
should the tribunal decide the case before them?
U.S. State Department
Documents available from author at firstname.lastname@example.org:
§ Statement of Defense of Respondent United States of America, August 10, 2000, by United States Department of State, Office of International Claims and Investments Disputes
Claimant’s Reply To The Statement Of Defense by Methanex
§ Rejoinder of the Respondent of the United States of America, Sept 14, 2000
§ Statement of Defence: Ethyl Corporation v. Gov't of Canada, Nov 27, 1997
See also www.naftaclaims.com
Dhooge, Lucien J. (2001). The Revenge of the Trail Smelter: Environmental Regulation as Expropriation Pursuant to the North American Free Trade Agreement. American Business Law Journal, Spring (forthcoming), 48 pages.
Ganguly, Samrat (1999). The Investor-State Dispute Mechanism (ISDM) and a Sovereign's Power to Protect Public Health. Columbia Journal of Transnational Law, 38:113, 49 pages.
International Institute for Sustainable Development and WWF (2001). Private Rights, Public Problems: A Guide to NAFTA's Controversial Chapter on Investor Rights. Canada: IISD. Available at http://iisd.ca.
Mann, Howard and Konrad von Moltke (1999). NAFTA's Chapter 11 and the Environment: Addressing the Impacts of the Investor-State Process on the Environment. Working Paper of the International Institute for Sustainable Development (http://iisd.ca), 80 pages.
Von Moltke, Konrad (2000). An International Investment Regime?: Issues of Sustainability. International Institute for Sustainable Development (http://iisd.ca), 76 pages.
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