NAFTA’s Chapter 11 and the Environment

The document argues that NAFTA's Chapter 11 provisions are interpreted too broadly, potentially creating a 'regulatory chill' where governments avoid public welfare regulations to avoid compensating foreign investors. It highlights a lack of transparency and accountability in the investor-state dispute mechanism, which follows a commercial arbitration model rather than a public justice model. The author examines three reform options—interpretive statements, environment, health, and safety (EH&S) exceptions, and full amendment—concluding that only a comprehensive amendment can fully address both substantive and process-related shortcomings.

• The definitions of 'measures' and 'investments' in Chapter 11 are unusually broad, potentially bringing almost all government acts—including zoning codes and court actions—under the purview of investment law. This breadth has allowed for rulings where a company's market share is treated as a protectable investment asset.
• There is a significant risk regarding 'indirect expropriation,' as tribunals have indicated that bona fide public welfare regulations can constitute expropriation. The author notes that rulings have focused on the extent of the impact on the investor rather than the purpose of the regulation.
• The Most-Favoured-Nation (MFN) treatment obligation under Article 1103 may allow investors to import higher standards of protection from bilateral investment treaties (BITs) signed by a NAFTA Party with non-NAFTA countries, potentially overriding NAFTA's own intended standards.
• The investor-state dispute mechanism lacks the legitimacy and transparency of domestic judicial systems because it uses a commercial arbitration model. Issues include the ad hoc selection of arbitrators, which may invite bias, and a lack of a permanent appellate body to ensure consistency.
• Interpretive statements by the Free Trade Commission (FTC) are limited in effectiveness because they can be challenged as 'de facto amendments' and cannot override the procedural rules of arbitration bodies like ICSID or UNCITRAL.
• While adding an environment, health, and safety (EH&S) exception is a proposed solution, it is viewed as problematic because it may concede that the right to regulate is not presumed and because such exceptions (similar to GATT Article XX) are often interpreted very strictly by panels.

APA

Cosbey, A. (2003). NAFTA’s Chapter 11 and the Environment. International Institute for Sustainable Development. https://www.iisd.org/system/files/publications/investment_jpac.pdf

Chicago

Cosbey, Aaron. NAFTA’s Chapter 11 and the Environment. International Institute for Sustainable Development, 2003. https://www.iisd.org/system/files/publications/investment_jpac.pdf.

Wikipedia

{{cite report |last1=Cosbey |first1=Aaron |title=NAFTA’s Chapter 11 and the Environment |publisher=International Institute for Sustainable Development |date=24 March 2003 |url=https://www.iisd.org/system/files/publications/investment_jpac.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{cosbey2003naftas, author = {Cosbey, Aaron}, title = {{NAFTA’s Chapter 11 and the Environment}}, institution = {International Institute for Sustainable Development}, year = {2003}, month = mar, url = {https://www.iisd.org/system/files/publications/investment_jpac.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }