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Climate Accountability Through Arbitration – Scrapping Fossil Fuel Investments?

Abstract


600 and more – the highest amount of fossil fuel lobbyists in attendance at the COP27 Climate Conference. Fossil fuels remain the highest carbon emitter globally, compromising 80% of the total energy supply internationally. Despite the alarming numbers, the concerns surrounding the dated Energy Charter Treaty (ECT) were not featured in the conference’s agenda. The ECT was formed in the 1990s to facilitate greater cooperation in the energy sector and protect foreign investors in post-Cold War Europe. The treaty is the most significant multilateral investment treaty to date, garnering over 54 signatories across Europe and the Middle East. However, the ECT has not been revised to meet 21st Century challenges amid tensions arising from fossil fuel investments that conflict with global shifts to renewable energy. Such pressures have fuelled dissent among contracting states to leave the ECT and resulted in negotiations to modernise the ECT in catering to sustainable energy investments; a finalised textual revision is yet to be seen, but contracting parties, as of now, have agreed in principle that the ECT will be reformed to align with net-zero goals under the Paris Agreement. This article reviews the role of the ECT in providing climate accountability through its investor-statearbitration mechanism and whether prospective reforms will play out in tackling climate change. Part I provides an overview of the categories of climate change disputes. Part II hones in on investor-state arbitration by examining case law arising from the ECT and other investment treaties. Part III evaluates the role of arbitration in ever-evolving climate change policies, followed by possible reforms to accentuate climate action in arbitration.



I. Types of Climate Change Related Disputes


The International Chamber of Commerce (ICC) adopts a broad definition of climate change related disputes to encompass disputes directly or indirectly impacted by climate change instruments such as the United Nations Framework Convention on Climate Change (UNFCC) and the Paris Agreement. The ICC further clarifies change related arbitration disputes into three categories: Category 1: Specific transition, adaptation or mitigationcontracts which directly address climate action commitments aligned with the Paris Agreement or the UNFCC. For example, the Green Climate Fund (GCF) under the UNFCC establishes a climate finance mechanism allowing for financial support to developing countries; funding agreements of this nature typically include arbitration clauses. Category 2: Commercial contracts which do not specifically address climate action but are impacted by changes in environmental laws and international commitments. Commercial contracts include but are not limited to energy, infrastructure, and real estate. Category 3: Submission agreements (arbitration agreements) that are entered upon a dispute directly or indirectly impacted by environmental changes or legal instruments. Submission agreements can also originatefrom a non-contractual legal basis and may not necessarily be an ancillary agreement.

 

It is also imperative to note that there is no definitive method to categorise climate change related disputes. However, the abovementioned ICC categories are predominantly used by academics and practitioners; for clarity purposes, this article will adopt the ICC’s approach in conceptualising ‘climate related’ disputes.Investor-state disputes may arise from any of the categories above, which will be explored further in Part II.


II. Investor-State Arbitration About Climate Action


This section explores the state of investor-state arbitration concerning climate change by assessing the case laws of the ECT, the North American Free Trade Agreement (NAFTA) and bilateral treaties. The Fair and Equitable Treatment (FET) standard are significant in this respect; the FET prescribes the minimum standard of foreign investor protection globally.


Investors’ Claims Against Host States due to Regulatory Changes


Article 10 of the ECT provides the FET Standard required to protect investors. However, the application of FET is not unconditional; it is subject to the case’s particular circumstances. It should be noted that the ECT does not exclusively regulate foreign investments solely concerning fossil fuels; any form of energy investment, including renewable energy, is under the purview of the ECT. Hence, domestic regulatory changes to improve or stagnate climate action impact foreign energy investments. Accordingly, Part A in this sectionillustrates cases in which fossil fuel investments are impacted by regulatory change, while Part B highlights issues in which renewable energy investments are affected by regulatory change.


A. Foreign Fossil Fuel Investments


States attempting to reach Paris Agreement Commitments are in the process or have taken considerable reform in industrial sectors to meet net-zero goals. Transitioning to climate-friendly policies comes at the cost of breaching prior commitments to non-renewable energy.

In Rockhopper Italia SPA and others v Italian Republic,the Italian Government’s ban on oil-and-gas exploration has curtailed Rockhopper’s production concession rightsfor the Ombrina Mare Field coast. Rockhopper initiated proceedings because Italy breached the ECT for violating FET. The Tribunal found in favour of Rockhopper, stating that Italy has unlawfully expropriated Rockhopper’s investment in revoking its production concession and the precautionary principle is “irreconcilable with a “positive opinion on the environmental compatibility assessment”. The Rockhopper case illustrates that climate-related regulatory reforms do not circumvent FET obligations iffossil-fuel investments have passed environmental compatibility assessments. In Long Pine Resources Inc v Canada, Long Pine sought a claim regarding Canada’s alleged breach of NAFTA in revoking the company’s right to mine for oil and gas, resulting from ‘An Act to limit oil and gas activities’ in Quebec - the rationale behind the act was environmental concerns due to fracking, long pile argues that the passing of the show was arbitrary to cater to political sentiment and violates Article 1105 which provides the standard of FET. A decision has yet to be issued by the Tribunal.


B. Foreign Renewable Energy Investments


Spain has attracted the most extraordinary claims under the ECT, totalling up to 51 claims due to its reduction of fiscal spending on renewable energy support schemes.Spain had initially incentivised investors with feed-in tariffs (FITs) to transition to renewable energy, particularly solar power; FITs and other incentives were eventually curtailed due to the nation’s financial crisis.As a result, claims for the breach of FET were brought by foreign investors. However, jurisprudence regarding regulatory changes differs, depending on the factual matrix of the case. In Charanne and Construction Investments v Spain, the foreign investor brought a claim against Spain for amendments to its FITs and subsidies for renewable energy. The Tribunal dismissed the claim and held that the original legislative frameworks were not legitimate expectations vis-à-vis specific commitments made to foreign investors as it should be expected that legislative frameworks are subject to regulatory change over the “lifetime of their plants”.

 

However, in Eiser Infrastructure Limited and EnergiaSolar Luxembourg Sarl v Kingdom of Spain, the tribunal adopted a different position from Charanne. The Tribunal distinguishes the facts of Charanne in which the economic impacts of the particular regulatory changes in Eiser were much more substantial. Hence, the tribunal clarified that although FET does not circumvent regulatory changes in all scenarios, if the regulatory change amounts to a “stripping Claimants of virtually all of the value of their investment”, is it sufficient to render a breach in FET.

 

Be that as it may – this is not the end of conflicting decisions. Following decisions issued by various Tribunals regarding Spain’s regulatory reform conflicted with one another regarding whether the permanence of aregulatory framework amounted to legitimate expectations in violating FET or unreasonable therein.Helen Pang argues that the current state of legitimate expectations is an “elusive concept” and argues for a clearer redefinition of legitimate expectations in encompassing broader policy concerns.

 

Host States’ Counterclaims Against Investors for Environmental Harm


Host states may tackle harmful domestic climate impacts from foreign investment through the use of ‘counterclaims’. In Burlington v Ecuador, Ecuador filed a counterclaim against Burlington’s claim regarding the breach of US-Ecuador’s Bilateral Investment Treaty. The counterclaim alleges that Burlington has violated Ecuadorian environmental laws. The Tribunal found in favour of Ecuador for the counterclaim as case law provided a strict liability regime for oilfield activities thatharming the environment and awarded a compensation of USD 41.7 million.

 

In David Aven v Costa Rica, David Aven sought to claim against Costa’s Rica breach of the Dominican Republican-Central America Free Trade Agreement for the Host State’s closure of the company’s real estate project citing environmental purposes. Costa Rica counterclaimed and argued that environmental protection takes precedence over investor protection. Although the Tribunal dismisses the counterclaim due to a lack of evidence supplied by the Host State, it is imperative to note the Tribunal’s acknowledgement in stating that “foreign investors have an obligation to abide by and comply with the measures taken by the host State to protect the environment”.


Intra EU-disputes


Given the conflicting case laws in determining FETs in light of developing climate policies and legislation – this invites the question: of whether European Union (EU) member states (MS) can benefit from fossil fuel investment protections among MS disputes under the ECT or must forsake ECT protections in light of the collective EU stance in meeting net-zero goals enshrined in EU Law? In Republique de Moldavie v Komstroy LLC, the European Court of Justice delivered its landmark judgement stating that the arbitration mechanism under Article 26 ECT cannot apply to intra-EU MS investment disputes; intra-EU disputes fall squarely under the jurisdiction of the EU exclusively.


III. Climate Related Arbitrations Moving Forward


Arbitration is the optimum forum for solving international climate disputes, given the neutrality of the forum and the recognition of the New York Convention, which allows for the international recognition and enforcement of arbitral awards. Further, the most majorbenefit would be the expertise emanating from qualified arbitrators in resolving complex and scientific disputes. However, the primary concern of such proceedings is inevitably transparency, as highlighted by the ICC.Arbitration enjoys the comforts of confidentiality and disclosure with discretion. However, given the growing public concern and interest in climate change disputes, disclosure of documents of arbitration proceedings and other transparency measures may be enhanced. It may be fair to conclude, in light of the disclosure of arbitration documents in the abovementioned investor-state cases isconsidered adequate in comparison to commercial arbitration cases. Reform, however, is much welcome to improve the current state of transparency. Commercial arbitration also has the potential to furthercorporate sustainability agendas. The ICC highlights the importance of drafting climate commitments or laws within commercial arbitration agreements when parties intend to meet net-zero goals; in allowing the Tribunal to account for climate change considerations in arriving atits decisions. The notable efforts from The Chancery Lane Project (TCLP) must also be highlighted in this respect. "The Chancery Lane Project believes that lawyers are one of the most powerful agents of social change who can help the world to decarbonise. Behind every commercial transaction is a legal agreement that is hardwired for a high carbon business-as-usual approach. Lawyers have the power to rewire those agreements to take account of the climate risks and impacts of the transaction and deliver rapid decarbonisation for their clients. This doesn't require significant retraining, just a commitment on the part of individual lawyers to ask different questions and add TCLP's free climate clauses to their contracts."  - Becky Clissmann, Managing Director at the TCLP [1]The TCLP is a body of international legal practitioners which aims to provide contractual climate solutions bydisseminating free contractual frameworks and drafts embedded with climate commitments. Climate-themedarbitration clauses are also provided under the TCLP. As of 24 November 2022, the EU Parliament has voted in favour of its MS withdrawing from the dated ECT and called for the European Commission to initiate a coordination withdrawal plan. The EU Parliament notes the modernised ECT negotiations have failed to rectifyspecific areas of concern to the EU, including but not limited to: expected future profits and the sunset clause, which has resulted in the lack of support from EU MS.


Efforts to modernise the ECT are still ongoing; only time will tell whether concerns ranging from activists to governments will be manifested in further reform or fall on deaf ears.

 

[1] Quote provided by Becky Clissmann, the Managing Director of The Chancery Lane Project for the purposes of this article.

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