International investment agreements are coming under increasing fire for the threat that they pose to the global phasing out of fossil fuel energy sources. Foreign investors can challenge state measures addressing climate change via investor-state dispute settlement, which can lead to huge compensation awards that may deter states from taking such action. This piece discusses how investment law can be problematic in regard to climate change measures and calls for states to acknowledge this threat as they move forward with reforms to the international investment law regime.
Recently, it was announced that German energy company RWE is suing the Netherlands for €1.4 billion in response to the country’s decision to phase out coal energy. The case was brought via the investor-state dispute settlement (ISDS) provisions of the Energy Charter Treaty (ECT), a 1994 multilateral treaty for energy industry cooperation across borders. ISDS is a dispute settlement mechanism through which foreign investors can bring claims directly against host states if investors consider that they have been treated unfairly. The ECT has come under fire in recent years for being a threat to state efforts to switch to renewable energies, because it enables fossil fuel companies to sue states that make regulatory changes aimed at reducing carbon emissions. It has been reported that suits under the ECT could cost taxpayers up to €1.3 trillion by 2050 and protect up to 216 Gt of carbon, which exceeds one-third of the global carbon budget that can be emitted if we are to keep global warming below 1.5 degrees by 2100.
ISDS vs climate change measures
Plans in the Netherlands to close down coal-fired power plants were made necessary by the ruling of the Dutch Supreme Court in the Urgenda case, which held that the Dutch government has obligations to urgently and significantly reduce emissions in line with its human rights obligations. RWE is not the only company to challenge the coal phase-out; in 2020 Uniper also threatened to bring a billion-euro ISDS claim against the Netherlands under the ECT. Other state parties have also felt the sting of these provisions, and Italy is being sued for over US$300 million for banning coastal oil and gas exploration. After protracted arbitration, Germany recently agreed to pay nuclear power station operators over €2 billion euros in compensation after it decided to shut down its nuclear facilities due to health and safety concerns following the Fukushima disaster. In 2017 the French government backed down from a law that would have ended fossil fuel extraction on French territory after Canadian oil and gas company Vermillion threatened to challenge the law under the ECT. Other trade and investment treaties have similarly been used to stymie climate action, such as the NAFTA agreement between Canada, Mexico and the US. In 2016, TransCanada initiated arbitration against the US for $15 billion when the Keystone XL pipeline was denied approval, and in 2019 Westmoreland Coal brought a $470 million claim against Canada in response to Alberta’s decision to phase out coal power. Although it has long been known that phasing out fossil fuels is a matter of survival, corporations are trying to use ISDS as an insurance policy (and some say an additional source of profit) and shifting the costs of being major greenhouse gas emitters to the public. States have been aware for many years that they have obligations to transition to renewable energy, yet they continue to essentially subsidise investments that undermine these goals.
Australia is not immune
Although Australia isn’t exactly at the front of the pack when it comes to the clean energy transition, it will, inevitably, need to take some measures to address climate change that will upset foreign investors. Australia is a member of the ECT and party to several treaties containing ISDS clauses that could have the same chilling effect on climate change measures. The Carmichael coal mine, owned by Indian multinational Adani Group, continues to be strongly opposed by community groups on the basis of climate change concerns (among other things). However, the ‘Stop Adani’ Bill put forward by the Greens in 2017 was met with a threat to take legal recourse against Australia, including seeking lost profits. Scholars concluded that Adani could sue Australia under the Australia-India Bilateral Investment Treaty; although India withdrew from the treaty in 2017, it continues to apply until 2032 due to a 15-year sunset (or ‘zombie’) clause (Article 17(3)), commonly found in such treaties. In 2020, the Department of Foreign Affairs and Trade sought input for its review of its bilateral investment treaties. Submissions to the review expressed concern that ISDS will hamper Australia’s ability to become a clean energy superpower, which will require proactive transition policies. Despite such concerns, Australia continues to include ISDS in its trade and investment agreements.
Regulatory chill
It is becoming increasingly apparent that investment treaties are a threat to climate change measures. Scholars are concerned that ISDS provisions, which are found in over 3,000 bilateral and multilateral investment treaties, have the potential to stall state action on climate change by inducing cross-border regulatory chill. ISDS allows foreign investors to bring claims directly against host states for breaches of vague investment treaty standards such as ‘fair and equitable treatment’ and ‘legitimate expectations’. As investment arbitration does not use a binding precedent system, different tribunals have interpreted these standards differently, meaning that states do not necessarily know in advance what behaviour will give rise to a legitimate expectation of an investor, or what will be a non-compensable exercise of state police powers. Claims are decided by private arbitral tribunals, which are empowered to decide whether state action, undertaken on a democratic basis, is reasonable and proportionate. Unlike in domestic law, corporations can claim future lost profits, leading to multi-billion dollar claims. The ‘discounted cash flow’ method of calculating damages, used by many tribunals, has led to dizzying claims upwards of $8 billion. It is no wonder, then, that some governments might baulk at the prospect of attracting such claims by phasing out use of fossil fuels or closing mines. Although investors are not always successful in ISDS claims, the mere threat of facing such a hefty compensation bill can deter states from action. Such delay and deterrence could have devastating and irreversible effects on the planet.
Where to from here?
Multilateral talks are underway between the 54 member states of the ECT to ‘modernise’ the treaty, however discussions relating to excluding fossil fuels from the purview of the treaty have stalled and it has been reported that agreement is unlikely for several years. EU States are divided as to what extent the treaty should be modernised and whether to withdraw, and the ECT has a 20-year sunset clause that means companies can continue to sue for 20 years after withdrawal, unless states agree otherwise (Article 47(3)). There are a number of options available to states to address the pitfalls of ISDS: terminate treaties containing ISDS, agree to withdraw consent from ISDS arbitration, exclude ISDS provisions from existing and future treaties or carve out climate change measures from ISDS provisions. Civil society groups have called for a moratorium on ISDS claims relating to the COVID-19 pandemic, and indeed states have the ability to mutually agree to immediately terminate or modify investment agreements that are a threat to climate change measures. What is clear is that in this area as in all others, a coordinated global response to the climate crisis is needed in order to achieve meaningful and equitable change. States will need to acknowledge that investment law is a threat to climate change measures and work together to ensure that corporate interests are not prioritised over the fate of the planet.
Stephanie Triefus is an Assistant Editor of ILA Reporter and a PhD Candidate at Erasmus University Rotterdam, Netherlands, researching human rights and international investment law.
Suggested citation: Stephanie Triefus, ‘Climate change and international investment law – a dangerous mix?’ on ILA Reporter (6 March 2021) <https://ilareporter.org.au/2021/03/climate-change-and-international-investment-law-a-dangerous-mix-stephanie-triefus>