States face a complex task balancing investment protection obligations and decarbonisation commitments
More investment treaty disputes are likely to arise from the global energy transition as States reduce their reliance on fossil fuels and introduce ambitious renewables programmes in line with their international commitments.
COP26 provides States with a new challenge
The UN Climate Change Conference in Glasgow (COP 26) once again focused the world’s attention on tackling the climate crisis. While the meeting did not secure as far-reaching commitments from participating States as many hoped it would, some progress was made to introduce reforms to ‘keep 1.5° alive’. Many reforms will relate to decarbonisation, as transitioning away from fossil fuels is fundamental to achieving climate targets. A significant shift to renewables (and other innovations) is, however, bound not only to prove challenging but also to generate contention. We expect, in particular, to see an increase in the number of investment treaty arbitrations relating to decarbonisation measures taken by States.
Under investment protection treaties, States agree to afford certain protections to investments made in their territory by foreign investors. These protections commonly include guarantees of fair and equitable treatment and ‘full protection and security’, commitments not to discriminate or expropriate unlawfully, and, sometimes, confirmation that the State will abide by its undertakings (the so-called “umbrella clause”). If a State does not meet its obligations, an investor can typically bring a claim for damages directly against the State in international arbitration.
Some investment treaties include exemptions for government acts designed to protect fundamental public interests, such as the protection of the environment and public health. Even in the absence of express provisions, some argue that arbitral tribunals should take into account these policy objectives when considering claims by investors. For example, tribunals may find that investors should not be compensated for changes in laws and policies that protect the environment, or should share the burden with States, provided such measures are not discriminatory or arbitrary.
Balancing investment protection obligations against emission reduction targets
Finding a balance between a State’s investment treaty obligations and its carbon emissions commitments is not going to be straightforward. We have already seen numerous claims commenced against States, which have moved to reduce reliance on power generated from fossil fuels, and even more claims arising where States have introduced, but then retreated from, ambitious renewables programmes.
In the first category, for example, are two ongoing claims against Canada brought by US investors under the North American Free Trade Agreement (NAFTA) relating to: (i) a scheme introduced by the Alberta government to phase out coal power (Westmoreland Coal Company v Government of Canada); and (ii) the Quebec government’s decision to revoke certain shale gas exploration licences (Lone Pine Resources Inc. v The Government of Canada). Similarly, in 2021, German energy companies Uniper and RWE filed claims against the Netherlands under the Energy Charter Treaty (ECT) after the Netherlands introduced a law prohibiting the use of coal for the production of electricity, with the aim to phase out coal plants by 2030.
As noted, investment treaty claims are also likely to arise as States find their feet with the regulation of renewable and clean technologies. Indeed, more than 45 claims have already been brought under the ECT by investors against Spain following its rollback of favourable tariffs for renewable energy producers. The modification of renewable energy incentive regimes has also resulted in claims (under the ECT and other treaties) against Italy, Romania, the Czech Republic, Mexico and Ukraine.
Even as States consider how best to balance their commitments to decarbonise with their obligations to treat foreign investors fairly, it is possible that a failure to introduce adequate decarbonisation measures could give rise to claims against States too. Notably, negotiations are ongoing to reform the ECT. While the focus of these discussions is primarily on limiting States’ exposure to investor-State claims resulting from progressive environmental measures (by restricting investor protections), there is also a proposal by the EU to include an obligation in the treaty on States to adhere to their climate-related obligations (for example, under the Paris Agreement). Should a reform like this be agreed, States may in future be held to account for their failure to act to advance the clean energy transition. States and investors should keep abreast of relevant developments.