Why an EU-US trade deal matters for the energy sector

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This week the second round of negotiations for an EU-US free trade agreement is taking place. Energy has not been making headlines in the context of these talks, but a TTIP (Transatlantic Trade and Investment Partnership) will have far-reaching implications for the energy sector, e.g. with regard to oil sands, LNG and shale gas. NGO’s worry that the TTIP will give big business the chance to undermine Europe’s environmental legislation. Sonja van Renssen has the inside story from Brussels. (Photo: US trade representative Michael Froman, US trade mission Geneva)

The purpose of TTIP (a transatlantic trade and investment partnership) is to “liberalise trade and investment” between the EU and the US. This is significant, and not just for these two partners. Together the EU and US make up 40% of global economic output and their bilateral economic relationship is the world’s largest. Whatever they decide will set a blueprint for future free-trade agreements with other nations, from China to Brazil. Also significant is that this is a trade agreement that aims to go further than any before it: the goal is to align regulations and standards rather than simply removing trade-inhibiting tariffs (of which there are few in any case – tariffs between the EU and US average 4%).

Any decision that affects future trade in fuels is significant: EU-US trade in diesel and petrol was worth US$32 billion in 2012

The European Commission has already reeled off a list of probable benefits to Europe, from the fact that EU exports to the US could rise by 28% (equal to €187 billion extra per year for exporters) to an extra 545 euros in disposable income to a family of four living in the EU per year. In an initial position paper dedicated to raw materials and energy, it argues that World Trade Organisation (WTO) rules “do not fully reflect issues related to international production and trade in… energy”. TTIP could contribute to “a stronger set of rules in the area of energy” which “could serve as a model for subsequent negotiations involving third countries”.

What will be in these new rules? With regard to energy trade, the Commission believes they should set out the “fundamental principles of transparency, market access and non-discrimination [and] …would also contribute to developing and promoting sustainability”.  Neither side should be allowed to impose a “local content requirement” (reserving business for local companies), yet both sides “should remain fully sovereign regarding decisions… to allow the exploitation of their natural resources”. Government intervention in the pricing of energy goods “should be limited” and dual pricing – subsidising sales to industrial users – prohibited.

Oil sands: elephant in the room

There is plenty in the negotiations to debate about, but currently the overriding issue between Europe and the US is a clash over sustainability policies/red tape (depending on whom you’re speaking to) embodied in the EU’s fuel quality directive (FQD) and related plans. The FQD would effectively ban oil sands from Europe. It requires fuel suppliers in Europe to reduce the greenhouse gas emissions from road fuels by 6% by 2020 relative to 2010. It opens the door to the EU assigning separate emissions values to different types of fuel to calculate compliance with the FQD. The Commission wants to assign a higher emission value to oil from oil sands and issued a proposal to that effect back in 2011. This was subsequently blocked by member states in 2012.

At this moment a new proposal – backed by a new impact assessment – is in the works, reportedly due out by the end of the year though it may well come later. The problem (for some in any case) is that this proposal reportedly largely mirrors the original one, i.e. it foresees a 107gCO2/MJ emissions value for oil sands versus 87.5 g CO2/MJ for conventional crudes (a 23% difference). The oil business on both sides of the Atlantic has long argued that this is artificial discrimination between what are essentially two versions of the same product, that it threatens Europe’s supply of oil products and that it could ultimately raise global greenhouse gas emissions because oil sands would simply be shipped elsewhere (requiring more transport).

NGOs conversely have argued that oil from oil sands requires much more energy to get out and process than conventional crude: up to 49% more and 23% more on average (matching the Commission’s proposals). Differentiated emissions values would not impose significant administrative costs on US refiners, have no effect on EU refiners (which are not equipped to process unconventional crudes), and could save up to 19 million tons of CO2 emissions per year (equivalent to removing 7 million cars from European roads) by shifting investment to lower-carbon oil sources.

Free trade vs. sustainability

How does TTIP weigh into this debate? On the one hand, it is set to apply the principles of non-discrimination, market access, etcetera; on the other hand, promote sustainability. Any decision that affects future trade in fuels is significant: EU-US trade in diesel and petrol was worth US$32 billion in 2012. Note that Canadian oil sands are expected to be largely refined in the US, hence the US’s involvement in this debate (although one NGO recently suggested Canadian oil sands might actually be exported as crude from US ports).

In future EU agreements, all submissions will be public, all hearings will be open, all decisions of the tribunal shall be public and interested parties will be able to make their views known

What is clear is that the oil business on both sides of the Atlantic believes that singling out oil sands for a separate emissions value would amount to erecting a new trade barrier. The US government has indicated it is sympathetic to this view: trade representative Michael Froman responded to concern from US senator Kevin Brady in July by saying: “I share your concerns regarding the EU’s development of proposals for amendments to the fuel quality directive… We continue to press the Commission to take the views of stakeholders, including US refiners, under consideration… We are seeking through the TTIP negotiations improvements in the EU’s overall regulatory practices.”

For NGOs, this is tantamount to acknowledging that what the US is really pursuing with TTIP is deregulation (although Froman has explicitly denied this).  Their biggest worry however is not even TTIP as a whole but one very specific mechanism that the deal is set to include: the “investor-state dispute settlement” (ISDS) mechanism. This is not new in the trade world. It is a procedure that allows foreign investors to take their host government to a special arbitration court if they feel this government has acted to undermine their investments. Both the EU and the US are keen for ISDS to be part of TTIP, just as it is part of the recent free trade deal between the EU and Canada.

Dispute over dispute settlement

So what’s the problem? The Commission does not see one and put out a factsheet to dispel “incorrect claims” about ISDS in early October. According to the Commission, ISDS “does not subvert democracy by allowing companies to go outside national legal systems”. It “does not allow companies to sue states just because they might lose profits”. And “it does not undermine public choices: the EU will negotiate in such a way to ensure that legislation reflecting legitimate public choices e.g. on the environment, cannot be undermined through ISDS.” As for the fact that ISDS cases are typically heard behind closed doors by a small circle of international lawyers who rotate from arbitrator to advocate and back again, the EU will work to change this and ensure no conflict of interest: “In future EU agreements, all submissions will be public, all hearings will be open, all decisions of the tribunal shall be public and interested parties will be able to make their views known.”

The biggest payout to date came in 2012 with a ruling for Ecuador to pay out US$1.77 billion to US oil company Occidental Petroleum for unilateral termination of its contract

This does not reassure NGOs. Their core concern is that ISDS could let companies pressure governments into tempering environmental, health and social protection regulation. “The EU negotiating mandate… reveals the European Commission’s plans to enshrine more powers for corporations,” warns Corporate Europe Observatory, an NGO working to expose and challenge business interests in policymaking. “Across the world, big business has already used ISDS provisions… to claim dizzying sums in compensation against democratically-made laws to protect the public interest.” Unlike WTO cases, ISDS cases cannot force losing governments to change their laws, but can require them to pay out compensation to make up for lost profits.

The biggest payout to date came in 2012 with a ruling for Ecuador to pay out US$1.77 billion to US oil company Occidental Petroleum for unilateral termination of its contract. Nearly a third of cases concluded by 2012 found in favour of the investor (governments won just over 40%). Far and away most of the disputes to date have been initiated by US investors, followed by investors from the Netherlands, UK and Germany.

NGOs fear the prospect of having to hand over precious taxpayers’ money to foreign investors could deter governments from ambition on environmental protection. They point to other pending cases to illustrate the threat of attack. Vattenfall is suing Germany for a reported €3.7bn over the state’s decision to phase out nuclear power (the company will have to shut two power plants). US-based Lone Pine Resources is suing the Canadian province of Quebec for US$250m over its 2011 introduction of a moratorium on fracking. What might US firms probing for shale gas in Europe do about moratoria there? How might they react to new environmental impact assessment rules brewing in Brussels?

A look to Canada and ahead

One avenue to investigate the potential implications of TTIP for oil sands specifically would be to look to the recently announced EU-Canada trade deal (CETA). Although there was officially no link between CETA and oil sands, Canada – as the main potential supplier of oil sands to Europe – has reportedly dragged the issue into the trade negotiations. What did they decide?

The problem is that the text of the agreement announced by the EU on 18 October, is not publicly available yet. (According to the Commission, “technical discussions” have yet to be completed before the legal text of the agreement can be finalised.)Nor is any mention of what it said or didn’t say about oil sands. Perhaps the whole issue was bracketed. Perhaps the parties agreed to defer to TTIP (as CETA reportedly does on several issues). One source suggests CETA has made it more difficult for the EU to regulate oil sands.

There are many energy-related issues in TTIP that will start taking form over the next months (and probably years). At the forefront is how to deal with oil sands. But even more important for Europe will be access to US-produced LNG, to benefit from its shale gas boom. The US currently has crude oil and gas export restrictions in place. Some suggest these will be automatically lifted with the signing of TTIP. Others suggest it will not be quite so straightforward and TTIP must contain provisions to make sure this is the case.

Other issues that may prove difficult to achieve are an end to local content requirements and full opening up of public procurement markets – both of them a state competence in the US and some states already enjoying exemptions under existing trade agreements e.g. with Canada.

It is still undecided whether TTIP will devote a separate chapter to energy or deal with it through horizontal provisions. The line taken by the broader talks is in any case relevant. There are tentative plans for continued regulatory alignment even after TTIP is signed. These will be just as relevant for energy as for other sectors.

For the EU, the challenge will be to align rather than unravel regulation. This is a trade agreement that will test the limits of what is possible without further alignment of more basic policy objectives, such as on climate change. It will pit businesses against NGOs. A third round of talks is scheduled for December. Watch this space.

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