Carbon taxes and border tax adjustments

In Archer Daniels Midland v. Mexico, Corn Products International v. Mexico, and Cargill v. Mexico, foreign investors succeeded in their damage claims under NAFTA

Chapter 11 for a Mexican tax on the use of high fructose corn syrup that discriminated in favor of Mexican sugar producers. In Cargill v. Mexico, the Tribunal compensated Cargill not only for the lost sales of the Mexican subsidiary, but for the lost sales of the American company to the Mexican subsidiary. Mexico sought judicial review at the Ontario Superior Court of Justice, unsuccessfully, on the grounds that the American company’s losses were not compensable because it was not a foreign investor. Mexico lost a further appeal to the Ontario Court of Appeal and was denied leave to appeal to the Supreme Court of Canada. These cases show that trade-related losses from discriminatory taxes may be compensable under IIAs as a violation of national treatment, where the taxes discriminate between a foreign investor and a domestic competitor that is in “like circumstances.” We analyze the national treatment obligation below.

It might be possible to argue that the taxes are countermeasures, if they are used to induce compliance with international climate change obligations. In Archer Daniels Midland v. Mexico, the Tribunal concluded that a countermeasures defense could constitute a defense to a claim under NAFTA Chapter 11, but that Mexico did not prove the elements of the defense. In contrast, in Corn Products International v. Mexico, the Tribunal found that this defense is not available, because the measures were applied to the private sector, not to a government. Where national climate change regulation is based on a multilateral agreement, the agreement provides evidence of the legitimacy of the regulation, and would buttress the countermeasures defense. However, where discriminatory taxes are used to induce a successful conclusion to climate change negotiations, this defense would not be available.

If the taxes are nondiscriminatory, legitimate environmental measures, they might not be subject to IIA obligations, since they would not qualify as measures “relating to” investments. The term “relating to” can be interpreted to exclude legitimate environmental regulation from the application ofIIAs, a point we discuss below.

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