Can Investor-State Dispute Settlement Be Good for the Environment?
Investment provisions in trade agreements and bilateral investment treaties are a hot topic for many, including in the environmental community. They were flashpoints in the civil society opposition to trade and investment agreements like the Trans-Pacific Partnership and the Canada-EU Comprehensive Economic and Trade Agreement (CETA).
But they have also been used extensively in recent years by renewable energy investors alleging poor treatment in their host countries. Under one treaty alone—the Energy Charter Treaty (ECT), an investment agreement focused on energy—there are now 32 such cases registered against Spain, and seven more each against Italy and the Czech Republic. Does this mean that the investor-state dispute settlement (ISDS) mechanisms in treaties like the ECT are good for the environment, protecting clean energy investments?
It’s complicated. While ISDS may be good for renewable energy investors, it may also hinder states in their broader pursuit of environmental objectives like addressing climate change (which is more than just clean energy) and pollution.
It’s definitely a good thing that the EU’s renewable energy investors have recourse to justice if they have been mistreated. In all three of those countries the host governments used strong incentives, including premium prices for renewably generated electricity (feed-in tariffs and feed-in premiums), to boost renewable energy investment, but then were forced to scale back those incentives, in some cases retroactively, when the response to them far exceeded expectations and budgets. Renewable energy investors have taken significant hits—one estimate for Spain pegged the costs of a 2013 regulatory change at EUR 1.7 billion. That kind of thing is terrible for the global dissemination of urgently needed technologies that already struggle to get financing, and that pay significant risk premiums.
The spectacle of host countries being dragged through costly arbitration has no doubt contributed to speedy learning by regulators and policy-makers
The spectacle of host countries being dragged through costly arbitration has no doubt contributed to speedy learning by regulators and policy-makers in the renewable energy space, some of whom are now using advanced regimes such as reverse auctions to manage procurement of renewably generated electricity.
Flaws in current investment treaties outweight benefits
But while investment treaties can have this sort of positive influence, the current ones are far from ideal for a slew of reasons. Like many such treaties, the ECT allows investors to either skip pursuing their grievances in domestic courts and go straight to international arbitration or to pursue both at the same time. Procedural standards are below national and international norms: no investment treaty has a proper appellate mechanism; none of the arbitrations are obliged to follow precedent in case law; and transparency is patchy at best. ISDS arbitrators are not drawn from a standing roster, but are instead nominated by the disputing parties, often drawn from the same firms that offer litigation services. This leads to glaring conflicts of interest in a multi-million dollar industry: arbitrators’ decisions on points of law could either expand or contract their firms’ prospective business in future arbitrations. And arbitrators’ decisions may, if they resonate with firms or states, get them repeatedly nominated (and well paid).
Moreover, the substance of the obligations in many investment treaties is problematic. As of this writing only two of the above ECT cases have seen decisions, only one has been made public (Charanne and Construction Investments v. Spain) and the rest will not even reveal the points of law at issue (did I mention transparency problems?). But it is clear that most will use the commitments on expropriation and fair and equitable treatment (FET) as primary arguments.
As noted by UNCTAD, FET has been variously defined by different tribunals as “a State’s obligation to act consistently, transparently, reasonably, without ambiguity, arbitrariness or discrimination, in an even-handed manner, to ensure due process in decision-making and respect investors’ legitimate expectations.” Interpretations have ranged from simple procedural fairness to an effective freeze on any regulatory changes that affect investors’ bottom lines.
A recipe for regulatory chill
Full expropriation is not an issue, but the renewable energy investor cases will probably all argue indirect expropriation. Like FET, this has seen a variety of interpretations, and the most dangerous of them hold that the public purpose involved is not relevant—it is enough to find that regulations have a significant impact on the investor’s bottom line. This is a recipe for regulatory chill.
These sometimes broadly interpreted obligations may be comforting for renewable energy investors. But there is less comfort for states trying to address climate change and other environmental issues outside the renewable energy space. The fundamental transition implied by addressing climate change may force states to be disruptive. In cases like TransCanada v. the USA (denial of oilsands pipeline permit), that kind of disruptive action was challenged as a violation of FET and expropriation provisions. Other sorts of disruptive environmental laws have been similarly challenged in Vattenfall v. Germany II (nuclear phase-out), Lone Pine v. Canada (Quebec’s fracking ban), Rockhopper v. Italy (offshore drilling ban) and others.
While FET and expropriation provisions may be good for renewable energy investors, they are seriously flawed and are a double-edged sword for the environment more broadly. So yes, investment agreements with ISDS might be a positive force for disseminating urgently needed renewable energy technologies (and we will have years to revisit this question as the dozens of ECT cases play out). But they may also stymie environmental progress in other areas. We could imagine much better tools for the job.
You might also be interested in
The Influential Amici in Philip Morris v. Uruguay: A new role for intergovernmental organizations in investment treaty arbitration?
The role of amicus curiae briefs in the outcome of the Philip Morris v. Uruguay dispute suggests that intergovernmental organizations could play a more useful role in investment treaty arbitration.
Strengthening the Legal Framework for Environmental and Social Impact Assessment in the Mining Sector in Madagascar: Selected issues
This summary note presents the main strengths and weaknesses of the legal framework on ESIA in the mining sector in Madagascar.
Lukas Schaugg: "The Energy Charter Treaty hinders climate action"
The Energy Charter Treaty (ECT), established decades ago to facilitate energy investments in Europe and Central Asia, is now being challenged and accused of protecting investments in fossil fuels. Faced with the failure of the reform processes undertaken so far, several European countries, notably France and Germany, have decided to exit the ECT. However, the treaty is trying to expand to Africa as new oil and gas fields are discovered on the continent. In this interview, Lukas Schaugg, International Law Analyst at the International Institute for Sustainable Development (IISD), describes the challenges of the ECT in the face of the climate emergency.
Lukas Schaugg : « Le Traité sur la charte de l’énergie entrave l’action climatique » (in French)
Mis en place il y a plusieurs décennies pour faciliter les investissements dans l’énergie en Europe et en Asie centrale, le Traité sur la charte de l’énergie (TCE) est aujourd’hui contesté et accusé de protéger les investissements dans les énergies fossiles. Face à l’échec des processus de réforme engagés à ce jour, plusieurs pays européens, notamment la France et l’Allemagne, ont décidé de sortir du TCE. Cependant, le traité tente de s’étendre vers l’Afrique au moment où de nouveaux gisements de gaz et de pétrole sont découverts sur le continent. Dans cet entretien, Lukas Schaugg, Analyste en droit international à l’Institut international du développement durable (IISD), décrit les enjeux du TCE à l’heure de l’urgence climatique.