Regional and Bilateral Initiatives
Canada's Foreign Investment Protection and Promotion Agreements
(FIPAs)
Initial Environmental Assessment of the Canada-Peru Foreign Investment
Protection Agreement (FIPA)
I. Executive
Summary
This report outlines the results of the Initial Environmental Assessment
(EA) of the Canada-Peru FIPA negotiations. Canada re-engaged Peru
in FIPA negotiations in December 2003 after a hiatus of several
years. The negotiators are using Canada’s new FIPA model as
the basis for the negotiations. It is anticipated the negotiations
will conclude successfully in October 2005.
The Canada-Peru FIPA is the first of such agreements to benefit
from an EA. FIPA EAs follow the process outlined in the 2001 Framework
for the Environmental Assessment of Trade Negotiations. The
process focuses on the environmental impacts in Canada and normally
involves three phases – the initial, draft and final assessments.
The middle, or draft, phase is not undertaken if the FIPA is not
expected to generate significant economic effects in Canada. Public
consultations are an integral part of the EA and are undertaken
throughout the process.
The Initial EA of the Canada-Peru FIPA negotiations identifies
the likely economic effects of the FIPA and, on this basis, draws
conclusions about the potential environmental impacts in Canada.
The report also considers the impact of the FIPA on the ability
of Canada to regulate in the interest of environmental protection.
Other environmental issues are discussed as well. Stakeholder input
was taken into consideration.
The results of the Initial EA indicate that significant changes
to investment flows into Canada are not expected as a result of
these negotiations. As such, the economic effects and resulting
environmental impact in Canada are expected to be minimal to non-existent.
The Canada-Peru FIPA will not have a negative effect on Canada’s
ability to develop and implement environmental policies and regulations.
Canada will safeguard its ability to maintain and expand the current
framework of policies, regulations, and legislation for protection
of the environment in a manner consistent with its domestic and
international obligations.
The Government of Canada welcomes comments on this Initial EA. A
Draft EA will not be carried out as the economic effects in Canada
of the Canada-Peru FIPA are expected to be insignificant. The Final
EA will coincide with the conclusions of the negotiations. Please
submit comments to: consultations@international.gc.ca.
II. Introduction
Enhancing Canada's investment opportunities is essential to Canada's
ongoing international competitiveness. FIPAs provide important disciplines
that help to open international markets and make them more secure
for Canadian investors. This has attendant benefits for Canadian
job creation, the encouragement of increased domestic economy efficiencies
and opportunities to attract new investment and technology in support
of Canadian competitiveness, economic growth and prosperity.
Emerging economies and those in transition are increasingly important
destinations for Canadian investment abroad. By specifying the rights
and obligations of the signatories respecting treatment of foreign
investment, a FIPA contributes to a predictable investment framework
and engenders a stable business environment.
From the perspective of developing countries, investment has a
positive impact on development. FIPAs are a positive and useful
vehicle in that regard. Developing countries need and want the capital
that investment brings and they want to ensure that investment flows
predictably to their countries. FIPAs provide for that necessary
signal of stability.
In 2003, Cabinet approved a FIPA model
that serves as a template for Canada’s discussions with investment
partners on bilateral investment rules. More background on Canada’s
FIPA program is available in Annex I of this report.
The Canadian government is committed to integrating sustainable
development into domestic and foreign policy, and the environmental
assessment of trade and investment negotiations is one mechanism
for doing so. We are therefore committed to conducting environmental
assessments (EAs) of trade negotiations using a process that requires
interdepartmental coordination along with public and stakeholder
consultations, including provincial and territorial governments.
The 2001 Framework for the Environmental Assessment of Trade
Negotiations details this process. It was developed in response
to the 1999 Cabinet Directive on Environmental Assessment of
Policy, Plan and Program Proposals1,
which requires that all initiatives considered by Ministers or Cabinet
must be assessed if implementation of the proposal may result in
important environmental effects, either positive or negative. Detailed
guidance for applying the Framework is contained in the Handbook
for the Environmental Assessment of Trade2.
III. Background on the
EA Process
The Framework provides a methodology for conducting an EA of a
trade negotiation. It is intentionally flexible so that it can be
applied to different types of negotiations (e.g., multilateral,
bilateral, regional) while ensuring a systematic and consistent
approach to meet two key objectives.
The first objective is to assist Canadian negotiators to integrate
environmental considerations into the negotiating process by providing
information on the possible environmental impacts of the proposed
trade agreement. As such, trade negotiators and environmental experts
are involved in the EA and work proceeds in tandem to the negotiations.
The second objective is to respond to the environmental concerns
expressed by the public. The Framework contains a strong commitment
to communications and consultations throughout each EA of trade
negotiations.
Three phases of assessment are generally undertaken: the Initial,
Draft, and Final EA. These phases correspond to progress within
the negotiations. The Initial EA is a preliminary examination to
identify key issues. It occurs early on in the negotiations. The
Draft EA builds on the findings of the Initial EA and requires detailed
analysis. A Draft EA is not undertaken if the negotiations are not
expected to yield large economic changes. The Final EA takes place
at the end of the negotiations. At the conclusion of each phase,
a public report is issued with a request for feedback.
A consistent analytical methodology is applied during each phase.
The Framework recognizes that economic and environmental effects
can relate to changes in the level and pattern of economic activity,
the type of products traded, technology changes, as well as regulatory
and policy implications.
The Government of Canada has completed Initial EAs of the WTO,
FTAA, Singapore, and CA4 trade negotiations, and is currently undertaking
the Draft EA for the WTO negotiations. The Government of Canada
will continue to apply the Framework to future trade and investment
negotiations.
This is the first FIPA concluded since the Framework was issued.
As such, this report marks the first EA of a FIPA negotiation. The
findings of this Initial EA have been communicated to Canada’s
lead negotiator and to an Environmental Assessment Committee. Any
comments the public has on this report will inform the Final EA.
EAs of FIPAs will continue to evolve based on our experience and
feedback from stakeholders and the public.
IV. Invitation to Submit
Comments
In keeping with the Framework, an Environmental Assessment Committee
(EAC) has been formed to undertake the analysis of the FIPA. Coordinated
by Foreign Affairs Canada and International Trade Canada, the Canada-Peru
FIPA Environmental Assessment Committee includes representatives
from other federal government departments. An important responsibility
of the EAC is to gather input from provinces and territories, stakeholders
representing business, academics, and non-governmental organization,
as well as the general public.
As part of its commitment to an open and transparent process, the
Government is opening this Initial EA for public comment from September
16 to October 7, 2005. Feedback on the likely economic effects and
the likelihood and significance of resultant environmental impacts
are especially welcome. Keep in mind that the assessment is focused
on the possible environmental impacts in Canada.
Comments on this document may be sent by email, mail or fax to:
Consultations and Liaison Division (EBC)
Initial Environmental Assessment of the Canada-Peru Foreign Investment
Protection Agreement (FIPA)
International Trade Canada
Lester B. Pearson Building
125 Sussex Drive
Ottawa, Ontario
K1A 0G2
Fax: (613) 944-7981
Email: consultations@international.gc.ca
V. Analysis of the Canada-Peru
FIPA
Canada re-engaged Peru in FIPA negotiations in December 2003 after
a hiatus of several years. The Canada-Peru FIPA negotiations are
anticipated to conclude by September 2005. The treaty will need
to be ratified by both Parties.
a) Identification of Likely Economic Effects
The first step in the EA process is the identification of the likely
economic effects of the FIPA. Peru's total investment in Canada
is small, at only $1 million in 2003. The Canada-Peru FIPA is not
likely to result in a significant increase of investment flows into
Canada.
The stock of Canadian foreign direct investment (FDI) in Peru is
significant, totalling $1,790 million in 2003. Investments in the
mining sector dominate Canada's investment presence in Peru. In
2003, it ranked third in an examination of where large Canadian
mining companies spent their exploration budgets. It ranked fourth
in mineral property owned by Canadian companies abroad. Large investments
also exist in hydro-electric transmission projects and printing
facilities.
While the existence of a FIPA should be a positive and important
factor in investors' decisions on whether to invest in the territory
of the other party, it will be but one of many factors. The main
effect of a FIPA is likely to be greater protection for existing
Canadian investment in Peru. Large changes in investment are not
expected to result from these negotiations.
b) Identification and Assessment of Likely Environmental
Impacts in Canada and the Context for these Impacts
The Framework calls for the identification and assessment of the
environmental impacts that could stem from the anticipated economic
effects of the FIPA. The likelihood and significance of such impacts
would depend on the degree of increase in investment, the sectors
of the investment, and the measures in place to protect the environment
in relation to those activities.
As noted above, Peru’s stock of investment in Canada is modest.
Significant new flows of investment into Canada as a result of the
FIPA are not anticipated. Therefore, it is concluded that the environmental
effects of the Canada-Peru FIPA will be minimal to non-existent.
c) Policy and Regulatory Context
The Framework calls for consideration of the potential policy and
regulatory effects of the FIPA. Foreign investors in Canada are
bound by the same environmental protection regulations that govern
the activities of domestic investors. Proposed projects resulting
from inward investment would be subject to applicable environmental
assessment legislation, including the Canadian Environmental Assessment
Act and provincial environmental assessment regulations.
Recent revisions to the Government of Canada’s FIPA model
have clarified governments’ right to regulate in the public
interest. The new model includes a general exception that permits
a Party to take measures necessary to protect human, animal or plant
life or health, the environment and safety, or measures primarily
aimed at the conservation of exhaustible natural resources, provided
that these measures are not applied in an arbitrary or unjustifiable
manner and are not disguised restrictions on trade or investment.
In addition, the model clarifies the rules governing direct and
indirect expropriation with regard to governments’ right to
regulate. FIPA parties may also reserve existing laws and regulations
such that they are not subject to specified obligations of the treaty,
and they may reserve sensitive sectors for future regulation.
The revised FIPA model is the basis for Canada’s position
in the Canada-Peru negotiations. We anticipate that the final agreement
will not have a negative effect on Canada’s ability to develop
and implement environmental policies and regulations. Canada will
safeguard its ability to maintain and expand the current framework
of policies, regulations, and legislation for protection of the
environment in a manner consistent with its domestic and international
obligations.
In the past, stakeholders have raised pollution havens and regulatory
chill as issues of concern related to the environmental impacts
of investment treaties. Please see Annex II of this report for a
summary literature review of these issues.
VI. Other Environmental
Considerations – Transboundary Effects
Canada’s Framework for Conducting EAs of Trade Negotiations
calls for national assessments, and allows for consideration of
transboundary, regional, and global environmental impacts if they
have a direct impact on the Canadian environment. However, it is
outside of the scope of this study to assess the potential for positive
or negative environmental impacts that could occur in Peru because
of these negotiations, or to judge the measures in place within
Peru to enhance or mitigate such impacts.
Mining is a prime sector of interest to Canadian companies operating
in Peru. We therefore focus on this sector to identify potential
transboundary environmental effects of these investments on the
Canadian environment. Each stage of the mineral production process
(exploration, extraction, processing, closure, and abandonment)
has the potential to have negative environmental impacts (e.g.,
air emissions, water contamination and sedimentation, soil contamination,
and habitat destruction). The geographic scale of these impacts
will vary from local to global. The transboundary environmental
impacts of concern that could most directly affect the Canadian
environment relate to air emissions, which can result in the deposition
of heavy metals thousands of miles from the primary source. Emissions
from mining can also contribute to global issues such as global
warming. To our knowledge, there is no specific evidence that mining
in Peru has transboundary impacts on Canada.
VII. Stakeholder Feedback
The Notice of Intent to conduct an EA of the Canada-Peru FIPA was
posted on the Trade Negotiations and Agreements website of International
Trade Canada on June 2, 2005. The notice included an invitation
to interested parties to submit their views on the likely environmental
impacts of the Canada-Peru FIPA on Canada. The majority of comments
received pertained to the environmental impact of Canadian investment
in Peru and concerns regarding governance issues in Peru. All comments
received were distributed to the interdepartmental EA Committee
for the Canada-Peru FIPA and to the negotiators. The comments will
also inform the ongoing efforts to improve the EA process associated
with trade negotiations.
While it is outside the scope of this study to analyze the potential
environmental effects of the Canada-Peru FIPA on Peru, the following
is a review of information and resources on issues raised in the
consultations respecting investment activity in Peru. Issues relating
to mining activity were of particular interest to stakeholders.
The environmental impacts of mining can be identified and partially
mitigated via environmental impact assessments, use of new technologies,
and ongoing environmental management and reclamation processes.
Domestic regulations, multilateral agreements, and voluntary initiatives
work in concert to promote higher standards in the mining sector.
To this end, it is pertinent to note that Article 8 of Peru’s
Environment and Natural Resources Code requires an environmental
impact study be submitted to the Ministry of Energy and Mines prior
to the development of a mine, or when an existing mine expands production
by more than 50%. Some Canadian mining companies have been recognized
for Environmental Impact Assessments (EIAs) conducted in association
with operations in Peru. For example, an independently produced
environmental impact assessment study for a Canadian mining project
recently received high regards from the local environmental authorities
responsible for the issuance of mining permits. Moreover, elements
considered in this study have been taken as a new standard by Peruvian
authorities for new mining projects.
The Environmental Policy of the Mining Association of Canada (MAC)
applies to all operations of member companies regardless of location.
MAC recently issued Towards Sustainable Mining Progress Report
2004, which provides an overview of the environmental performance
of members. The OECD Guidelines for Multinational Enterprises includes
a recommendation addressing the importance of EIAs where companies’
activities may have significant environmental impacts.
Since March 1999, the Canadian International Development Agency
has funded a bilateral project designed to improve the capacity
of the Ministry of Energy and Mines (MEM) to monitor and control
the environment and the occupational health and safety in Peruvian
mines, improve emergency response capabilities, and digitalise access
to the mining titles and permits. The project was implemented by
the British Columbia Ministry of Energy and Mines until March 2002.
In 2003, CIDA committed another 9.6M$ for 4 years to provide technical
assistance to Peru's Ministry of Energy and Mines on policy and
regulatory reform issues related to the minerals and metals sector.
The project is helping the Government of Peru improve the enforcement
of environmental and health regulations in the mining sector, decentralize
services to mine-producing regions, and mitigate the impact of mineral
activities on local communities.
a) Third Party Documents
Documents by third parties provide further insight into the environmental
impacts associated with Canadian mining operations in Peru. A case
study of a large Canadian mining company’s social responsibility
work in Peru illustrates the importance of effective stakeholder
engagement and community development initiatives.
York University’s Centre for America and the Caribbean and
Mining Watch Canada hosted a conference in May 2002 to examine the
actions of Canadian mining companies in the Latin American region,
including Peru. The conference report focuses on issues related
to community rights and CSR.
VIII. Conclusion and Next
Steps
The Initial EA concludes that significant changes to investment
in Canada are not expected as a result of the Canada-Peru FIPA negotiations.
As such, the environmental impacts on Canada are expected to be
minimal.
The Initial EA will be circulated to decision makers to inform
the conclusion of the Canada-Peru FIPA negotiations as well as other
policy development activities.
Following the receipt of public comments on the Initial EA, the
Final EA will be completed taking into account the consultative
findings. In the light of the Initial EA’s conclusions regarding
the unlikelihood of significant economic activity and environmental
impacts in Canada, preparation of a Draft EA is deemed to be unnecessary.
The final EA will follow the conclusion of the negotiations with
Peru.
Annex 1
Canada’s FIPA Program
a) Background on Canada’s FIPA Program
A FIPA (Foreign Investment Promotion and Protection Agreement)
is a bilateral agreement aimed at protecting and promoting foreign
investment through legally-binding rights and obligations.
FIPAs accomplish their objectives by setting out the respective
rights and obligations of the countries that are parties to the
treaty with respect to the treatment of foreign investment. Typically,
there are agreed exceptions to the obligations. FIPAs seek to ensure
that foreign investors: will not be treated worse than similarly
situated domestic investors or other foreign investors; will not
have their investments expropriated without prompt and adequate
compensation; and, in any case, will not be subject to treatment
lower than the minimum standard established in customary international
law. As well, in most circumstances, investors should be free to
invest capital and repatriate their investments and returns.
Canada’s policy is to promote and protect investment through
a transparent rules-based system in a manner that reaffirms the
right of Governments to regulate in the public interest, including
developmental interests. As an instrument that supports the rule
of law and fosters fairness, transparency, non-discrimination and
accountability, a FIPA encourages good governance. A FIPA also promotes
sustainable development principles by exhorting Governments to not
lower health, safety or environmental measures in order to attract
investment.
Canada began negotiating FIPAs in 1989 to secure investment liberalisation
and protection commitments on the basis of a model agreement developed
under the auspices of the OECD (Organization for Economic Cooperation
and Development). In 1994, Canada introduced a FIPA model incorporating
the enhanced investment protection afforded under the NAFTA (North
American Free Trade Agreement). Canada signed 5 agreements using
the OECD model and signed 18 FIPAs based on the 1994 model for a
total of 23 FIPAs to date.
b) Canada’s New FIPA Model
In 2003, Canada began updating its FIPA model to reflect lessons
learned from its experience with the implementation and operation
of the investment chapter of the NAFTA. The principal objectives
of this exercise were: to enhance clarity in the substantive obligations;
to maximize openness and transparency in the dispute settlement
process; and to discipline and improve efficiency in the dispute
settlement procedures. Canada also sought to enhance transparency
in the listing of reservations and exceptions from the substantive
disciplines of the Agreement.
In May 2004, Canada's new model for the negotiation of FIPAs was
published on ITCan's website. The new
FIPA model provides for a high standard of investment protection
and incorporates several key principles: treatment that is non-discriminatory
and that meets a minimum standard; protection against expropriation
without compensation and restraints on the transfer of funds; transparency
of measures affecting investment; and dispute settlement procedures.
The new model serves as a template for Canada in discussions with
investment partners on bilateral investment rules. As a template,
the provisions contained therein remain subject to negotiation and
further refinement by negotiating parties. Thus, although all FIPAs
can be expected to follow this approach, it is highly unlikely that
any two agreements will be identical.
Canada's FIPA negotiating program is intended to reflect the priorities
of Canadian investors. With many countries expressing great interest
in negotiating FIPAs with Canada, we are currently undertaking a
comprehensive priority setting exercise to consider potential FIPA
partners based on the following factors: 1) likelihood of engagement
2) commercial and economic interests 3) lack of investor protection
4) trade policy interests 5) political / developmental interests.
c) Environmental Issues Related to the new FIPA Model
Underlying Canada's new FIPA model are renewed commitments to transparency,
including with respect to crosswalks between investment agreements
and environmental issues. For instance, Canada seeks commitments
whereby Parties would agree to publish laws, regulations and other
procedures respecting any matter covered by the FIPA. We also seek
to allow Parties an opportunity for prior comment on future legislation
covering inward investment.
Canada also recognizes the benefits of transparency with respect
to procedural arrangements associated with our investment agreements.
This includes investor-state dispute settlement procedures, whereby
Canada seeks to facilitate third-party (amicus) submissions to tribunals,
for example.
Canada’s new FIPA model incorporates various safeguards aimed
at protecting Canada’s right to regulate for legitimate public
welfare objectives. It also includes a statement in the preamble
on the consistency of the agreement with sustainable development,
and general exceptions with respect to human, animal or plant life
or health based on GATT article XX/GATS article XIV.
The revised FIPA model clarifies Canada’s position that non-discriminatory
measures, such as a regulation, designed and applied to protect
legitimate public welfare objectives, such as health, safety and
the environment, do not constitute an indirect expropriation. This
provision is intended to ensure that crucial regulations (including
environmental) are not stifled by the obligation to provide costly
compensation. For example, unless a measure is so severe that it
cannot be reasonably viewed as having been adopted and applied in
good faith, a non-discriminatory environmental regulation that may
adversely affect an investor would not constitute a breach of indirect
expropriation rules and would not require compensation under the
treaty.
The revised FIPA model strengthened a clause on "not lowering
standards", whereby signatories recognize that it is inappropriate
to attract investment through lowering health, safety, and environmental
standards. Specifically, this clause recognizes that it is inappropriate
to encourage investment by relaxing domestic health, safety or environmental
measures. In the event a Party has offered such encouragement, the
other party may request consultation.
Annex II Public
Concerns Regarding the Environmental Impact of Investment
Canada’s Framework for Conducting EAs of Trade Negotiations
indicates that addressing public concerns is a key objective of
an EA of trade negotiations. Therefore, in this section, we consider
two key public concerns regarding environmental impacts of investment
treaties: pollution havens and regulatory chills. We provide an
overview of the evidence for each concern based on a review of existing
literature and identify how the new FIPA model and other Government
of Canada initiatives respond to the concerns.
The pollution havens hypothesis anticipates the purposeful movement
of companies to locations with lower environmental regulations and
standards due to opportunities for cost savings. Another description
for this concern is ‘a race to the bottom’. While the
Government of Canada respects the right of each country to set their
own environmental standards, our FIPA model does include clauses
that asks partners not to lower their environmental standards to
attract investment, and to enforce the laws they have in place.
We also encourage Canadian companies to operate at a high standard
while operating abroad, for example, by following the OECD Guidelines
for Multinational Corporations.
There is debate over whether the pollution haven hypothesis is
well founded. The literature on the subject contains the following
arguments against it.
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Environmental compliance costs are estimated to be minor compared
to overall costs with only a few industries likely to receive
a cost saving from lower environmental regulations.
-
Multinational corporations may use the most recent technology
and equivalent standards regardless of location. They maintain
a proactive environmental strategy for reasons of competitiveness
and in response to stakeholder demands.
-
Benefits associated with use of lower environmental standards
can be offset by the uncertainty of management and potential
costs to reputation.
-
Producers in locations with low standards may be at a disadvantage
if they want to compete in a foreign market that demands higher
standards.
-
Certain sectors have limited mobility because of inputs to
production or transportation costs.
The evidence regarding pollution havens is not conclusive. Studies
generally indicate an absence of systematic empirical evidence of
a general movement of industry to locations where environmental
standards are lower. However, studies focusing on specific sectors
and regions have found an indication of such evidence. Alternatively,
some sectors and companies have demonstrated a purposeful ‘race
to the top’ and use higher environmental standards due to
cost savings, reduced risk, and expectations of stakeholders. Management
experts have underscored the potential for companies with proactive
environmental strategies to be able to easily respond to new consumer
demands and market requirements and be at an advantage, therefore
supporting the potential for a race to the top where proper incentives
and disincentives are in place. In addition, studies have found
that technology associated with FDI can offset scale impacts.
A lack of conclusive evidence does not negate the need to recognize
the potential for pollution haven seeking behaviour in the future.
Therefore, the Government of Canada will continue its strategy to
incorporate environment-related provisions within investment agreements,
encourage Canadian firms to use high standards regardless of where
they are located, and engage in discussions at the national and
multilateral level to facilitate the mutual supportiveness of environmental
and economic goals during investment liberalization.
Concerns regarding ‘regulatory chill’ refer to limitations
on the ability of governments to regulate because of commitments
within trade and investment agreements, and the ability or will
of governments to increase environmental regulations and standards
due to competitiveness concerns.
Studies have found anecdotal evidence of environmental standards
being reduced or not improved as a result of international trade
and FDI activities. However, there are no definitive trends. Specific
regulatory chill concerns have been raised in relation to investor-state
disputes under Chapter 11 of the NAFTA. The North American Commission
for Environmental Cooperation has indicated that the evidence does
not warrant a conclusion that an environmental regulatory chill
exists, but does warrant consideration by policy makers and continued
examination. As discussed in this report, the new FIPA model has
clarified the right of governments to regulate in the public interest.
1. Available at: http://www.ceaa-acee.gc.ca/016/directive_e.htm
2. Available at: http://www.dfait-maeci.gc.ca/tna-nac/env/env-ea-en.asp.
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