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Ethanol vs. MTBE



Ban on MTBE Induces Suit Using NAFTA Provision

February 6, 2002

Santa Monica city officials had no idea they would trigger an
international legal brawl when they sent their water out for routine
testing in 1996 and discovered it contained the foul-smelling
gasoline additive MTBE.

Formally known as methyl tertiary butyl ether, MTBE was banned by
California because of its perceived threat to humans and the water
supply. But what began as an environmental issue took a twist into
international trade when a Canadian firm contested the state order
under a provision of the North American Free Trade Agreement.

In the first such case involving a challenge to a U.S. environmental
measure, Methanex Corp., the world's largest producer of methanol, a
primary ingredient in MTBE, claims Gov. Gray Davis acted in a
protectionist manner by imposing a ban that harmed foreign methanol
producers and benefited Archer-Daniels-Midland Co., a campaign donor
and domestic maker of a competing fuel additive, ethanol. Saying its
investors were hurt, Methanex is demanding nearly $970million in
damages because of the MTBE phaseout, slated to be completed by 2003.

Investors can only sue for compensation and cannot force a government
to change a law. But experts say a multimillion-dollar award in the
Methanex case could have a chilling effect by discouraging federal or
state governments from considering similar measures. More than a
dozen states are considering action to restrict the use of MTBE.

The case also has become a cause celebre for globalization critics
who argue the case underscores their concern that free trade
agreements give companies too much power and undermines the sovereign
rights of governments to protect their citizens.

The Methanex case, brought in 1999 under NAFTA's Chapter 11 which
allows foreign investors to sue a government for violating their
trading rights, is pending before a three-member tribunal in
Washington. A decision is expected soon on whether the tribunal has
jurisdiction in a case that could take years to work its way to

If Methanex is victorious, the firm hopes the U.S. would take steps
to remove the prohibitions on MTBE, according to Jim Emmerton, a
Methanex senior vice president.

He argued that the European Union recently gave the green light to
MTBE after determining that it did not pose a public health or
environmental risk.

* Methanex's Maker Says Product Isn't Dangerous

"We would hope the U.S. would look at what other jurisdictions are
doing," he said. "MTBE is not a threat to human health and it is not
a threat to the environment if it'shandled carefully."

Archer-Daniels-Midland, also known as ADM, did not respond to a
request for comment on the Methanex accusations. "The governor sets
policies based on science and facts concerned with the issue,"
according to David Chai, a spokesman for the governor. "Ethanol
clearly is not getting favorable treatment in the state of

"Methanex is grasping at straws," said William L. Rukeyser, assistant
secretary at Cal-EPA. "If the record is reviewed, you can see that
MTBE regardless of the manufacturer is bad for California. That
decision is based on science and science alone carries the day."

The U.S. government, the defendant in the NAFTA case, termed
Methanex's charge "absurd" and warned that a positive ruling for the
company could hurt the ability of the U.S., Canada and Mexico to
protect public health and the environment, according to court filings.

"No NAFTA party could carry out its most fundamental government
functions unless it were prepared to pay for each and every economic
impact occasioned by doing so," said the U.S. government in its
Methanex filing. "The NAFTA parties never intended the NAFTA to bring
about such a radical change in the way they function and Methanex
cannot show otherwise."

The U.S. is in an awkward position, having been the most vocal
proponent of the so-called investor-state dispute mechanism. These
provisions are designed to give multinationals an independent arbiter
for disputes in countries where the governments and courts are weak
or corrupt. U.S. officials are pushing to have Chapter 11-style
investor protections in the proposed Free Trade Area of the Americas
that would extend NAFTA throughout South America.

In Santa Monica, which has been forced to shut down more than half of
its water supply and spend an additional $3 million a year to
purchase untainted water, officials say they are incredulous that
NAFTA has opened the door to a challenge from the north.

"The state's MTBE law was a prudent and measured effort made to phase
out a chemical that had proven to be harmful or potentially harmful,"
said Assistant City Atty. Joel Lawrence.

"The thanks you get from this is a claim from a Canadian manufacturer
that somehow it has the birthright to produce and force this stuff
down the gas pipes of California residents and down their digestive
tracts as well," Lawrence said.

MTBE was adopted as a fuel additive two decades ago to reduce air
pollution but was later found to be a suspected carcinogen that seeps
into the groundwater through leaking gas tanks or gas spills. Even in
extremely small amounts, the chemical can make water smell and taste
like turpentine. Hundreds of millions of dollars have been spent
removing MTBE from the nation's soil and water.

The U.S. hasn't been on the losing side in a Chapter 11 case, though
it has only faced three claims so far.

Barry Bosworth, a trade expert at the Washington-based Brookings
Institution, warned a loss in the Methanex case could spark a "big
public conflict" because it involves an attack on a popular
environmental measure. Concern over these investor provisions have
arisen in the congressional debate over a bill to give the president
fast-track negotiating authority for future trade agreements since
NAFTA was enacted.

* Previous Challenges to NAFTA Regulations

Fifteen Chapter 11 cases have been filed since NAFTA was enacted. Of
those, the companies prevailed in four cases, lost one and the
remainder are still pending. Canada, the leading target, has lost
several cases involving challenges of environmental regulations.

In the last two months, Kenex Ltd., an Ontario, Canada-based producer
of hemp products, has threatened to file a NAFTA Chapter 11 case
against the U.S. Drug Enforcement Agency for its ban on foods
containing hemp and Crompton Corp., a Greenwich, Conn.-based chemical
firm, and Dallas-based Trammell Crow Co. have filed
multimillion-dollar complaints in Canada.

The rise in Chapter 11 cases and large awards have sparked concern
even among the creators of NAFTA. After reviewing the process, the
NAFTA governments last July issued an "interpretation" of the Chapter
11 provision that would, in effect, make it harder for foreign firms
to prove unfair or discriminatory treatment, according to Todd
Weiler, a Canadian law professor and NAFTA consultant.

As the battle over the Chapter 11 heats up, it is also moving through
the courts. Canada has filed a federal lawsuit challenging S.D.
Myers' successful NAFTA complaint against that government's ban on
the export of PCBs, a toxic chemical. Myers had claimed $20million in
damages. Canadian citizen groups are in court trying to join the
government in the federal lawsuit and have also filed a separate
constitutional challenge of the Chapter 11 process.

"Our strategy is to make sure when tribunals do award in favor of
foreign investors, the cases are appealed all the way up through the
entire process so what is a speedy way to extract money from
governments becomes drawn out and difficult," said Steven Shrybman,
an Ottawa, Canada, environmental attorney who is involved in those
cases. -  LA TIMES

Gov. Davis Delays Fuel Additive Ban

Saturday March 16, 2002 5:20 AM

REDONDO BEACH, Calif. (AP) - Gov. Gray Davis on Friday pushed back a deadline to phase out a fuel additive that pollutes groundwater, saying the state risked gas shortages and prices hikes if the deadline wasn't extended.

The ban on MTBE was set to go into effect on Dec. 31, 2002; Davis extended it to Jan. 1, 2004. The governor said the strain of shifting to other clean-fuel additives, like ethanol, would have resulted in supply problems.

``If I could snap my fingers and eliminate MTBE today I would do it in a heartbeat,'' Davis said.

MTBE, or methyl tertiary butyl ether, is added to gasoline as an oxygenate to make it burn cleaner. Its use has allowed states to meet a federal requirement that gasoline contain a 2 percent oxygen additive to cut down on air pollution, but MTBE also been found to pollute groundwater.

Davis said that under the Clean Air Act, California would require 900 million gallons of ethanol per year to make the transition away from MTBE. But, he said, only about seven companies nationwide produce ethanol, raising fears California refineries and consumers could be gouged by a relatively small supply of the sugar cane- or corn-derived additive.

At least 13 states, including California, have either already banned or plan to ban the additive, but those efforts have been hindered because of a federal requirement that gasoline contain an oxygenate like MTBE.

A bill now before Congress would lead to a nationwide ban of MTBE in four years.,1282,-1589087,00.html



Friday March 15, 4:55 pm Eastern Time

Press Release

SOURCE: Renewable Fuels Association

Gov. Davis' Decision to Delay MTBE Ban a Mistake; RFA Urges California Refiners to End MTBE Use Voluntarily

Oil Industry Says It's Ready to End MTBE Use - Can Follow Consumers' Wishes

Ethanol Industry Stands Ready to Serve Oil Companies Who Do the Right Thing

WASHINGTON, March 15 /PRNewswire/ -- The Renewable Fuels Association (RFA) today expressed dismay that California Governor Gray Davis has delayed the deadline for removing MTBE from California's gasoline supply until January 1, 2004. The ethanol industry trade group urged California refiners to end the use of MTBE voluntarily by the end of this year.

``Governor Davis' about-face on the MTBE phase-out schedule is completely unjustified and places political expediency ahead of safe drinking water,'' said Bob Dinneen, RFA president. ``Today's decision represents a callous breach of faith with California consumers that want MTBE out of their drinking water now, gasoline refiners and marketers that have invested to meet the original deadline, and farmers across the country that have added more than a billion gallons of ethanol capacity to enable the timely transition away from MTBE.''

Polls show more than 76 percent of Californians support the original December 31, 2002 MTBE ban deadline ordered by Gov. Davis in March of 1999. In response to that decision, the U.S. ethanol industry initiated the most aggressive and rapid expansion in its history. By the end of 2002, more than 25 new ethanol plants will be opened and several expansions will be completed, increasing ethanol production capacity by more than 1 billion gallons per year.

``The Governor has made a horrible decision for California, but the oil industry does not need to compound Gov. Davis' mistake by maintaining its reliance on MTBE,'' said Dinneen. ``Every refiner and marketer of gasoline in California has confirmed the industry is ready to transition from MTBE to ethanol as originally planned. We believe many of those companies will uphold their commitment to California consumers and environmental stewardship. Polls show California consumers will reward oil companies who cease using MTBE as scheduled.''

To learn more about ethanol, please visit our web page at: .

SOURCE: Renewable Fuels Association

NAFTA & Environmental Laws: Ethyl Corp. v. Government of Canada


Michelle Sforza and Mark Vallianatos

Chemical Firm Uses Trade Pact to Contest Environmental Law
April, 1997

Ethyl Corporationís $251 million lawsuit against a new Canadian environmental law is sure to set off alarm bells throughout the public interest world. The suit, brought under the terms of the North American Free Trade Agreement, demonstrates how present and future international economic pacts could pose a danger to environmental regulations and other safeguards.

In early April, the Canadian Parliament acted to ban the import and interprovincial transport of an Ethyl product -- the gasoline additive MMT -- which Canada considers to be a dangerous toxin. Ethyl (the company that invented leaded gasoline) responded on April 14 by filing a lawsuit against the Canadian government under NAFTA. Ethyl claims that the Canadian ban on MMT violates various provisions of NAFTA and seeks restitution of $251 million to cover losses resulting from the "expropriation" of both its MMT production plant and its "good reputation."

MMT is a manganese-based compound that is added to gasoline to enhance octane and reduce engine "knocking." Canadian legislators are concerned that the manganese in MMT emissions poses a significant public health risk. In addition, automobile manufacturers have long argued that MMT damages emissions diagnostics and control equipment in cars, thus increasing fuel emissions in general. Ethyl is the productís only manufacturer.1

The Environmental Defense Fund (EDF), which tracks the use of MMT, reports that the additive is used only in Canada. The United States EPA has banned its use in the formulated gasoline, which includes approximately 1/3 of the U.S. gasoline market. An EDF survey of the remaining producers reports that none use the additive.2 California has imposed a total ban on MMT. Canadian legislators wanted to ban the use of MMT in order to protect the Canadian public. Because they could not do so under Canadian Environmental Protection Act (CEPA) provisions, they chose the best available alternative: banning MMTís import and transport.3

NAFTA requires member countries to compensate investors when their property is "expropriated" or when governments take measures "tantamount to expropriation." Ethyl claims that the MMT ban constitutes such an expropriation. The company argues that the ban will reduce the value of Ethylís MMT manufacturing plant, hurt its future sales and harm its corporate reputation. The case will be an important test of how expropriation is to be defined in NAFTA and future agreements.


Methanex to file new NAFTA case on Calif MTBE ban

CANADA: October 23, 2002

VANCOUVER, British Columbia - Canadian chemical producer Methanex
Corp has not given up its fight for $970 million in damages over
California's ban on the gasoline additive MTBE, its chief executive
said yesterday.

Methanex will file a new trade complaint arguing it was the victim of
a backroom political deal between Gov. Gray Davis and agribusiness
company Archer Daniels Midland Co. , which is the largest producer of
the rival additive product ethanol.

A North American Free Trade Agreement arbitration panel in August
rejected Methanex's first claim for damages, but said it could file a
new complaint with more evidence to support its argument that its
trade rights were violated.

"We think we have a great case," chief executive Pierre Choquette
told analysts in a conference call on the company's third quarter

California has decided to phase out the use of MTBE (methyl tertiary
butyl ether), which is used to reduce auto air pollution, because of
concerns the additive was contaminating drinking water supplies.

Methanex, which supplies the base chemical methanol used by firms
that make MTBE, argues the ban was not based on scientific evidence,
and water pollution problems can be solved by fixing leaking
underground tanks at gasoline stations.

The California ban was a financial blow to Methanex because the state
is the largest U.S. gasoline market, consuming 1 million barrels a
day, and other states look to California in setting automobile
environmental standards.

NAFTA prohibits unfair protection of domestic industries, and
Methanex's original complaint alleged U.S. officials acted improperly
to protect the U.S. ethanol industry, which competes against MTBE as
a gasoline additive to reduce toxic emissions.

Methanex amended its initial complaint by adding a claim that Davis
and ADM officials held a secret meeting during the 1998 gubernatorial
campaign at which the commodities giant made over $200,000 in
contributions to Davis's campaign.

Both Davis and ADM have denied any wrongdoing.

U.S. trade official have also questioned how Methanex can claim
damages since it does not directly make MTBE.

In March, Davis pushed back the MTBE ban by one year to 2004, citing
concerns that a quick shift to ethanol could push gas prices higher.

Despite the delay, four of the state's biggest oil refiners, Phillips
Petroleum, BP, Exxon Mobil Corp. and Shell Oil Co., will switch from
MTBE to ethanol as a gasoline additive by the end of this year.

Story by Allan Dowd



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