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Coal Power Phase Out Regulations as Non-compensable Regulation under New IIAs

Chapter 4 Coal Power Phase Out Regulations and Regulatory Expropriation?

4.2. Coal Power Phase Out Regulations as Non-compensable Regulation under New IIAs

Contextualised expropriation clauses give tribunals the directions as to which factors should be taken into account when determining if a measure constitutes indirect expropriation. When a clause such as the one found in CETA118 is applied to coal power phase out regulations, the tribunal at least has to examine its economic impact, duration, character, and the existence of reasonable investment backed expectations.

The economic impact and duration of the coal power plant phase out will likely be substantial and cause permanent effects. These factors are the same as adopted by tribunals relying on the sole effect doctrine. Thus, the result these regulations have on the investment are likely the same as discussed in paragraph 2.2.3; the coal power plant phase out regulations will cause a substantial and permanent deprivation. However, a difference is that contrarily to the sole effect doctrine, the economic impact of the measure may not be the sole factor to decide whether an expropriation has occurred. Thus, clauses with similar phrasing could prevent tribunals from adopting a sole effect approach.

Additionally, the tribunal has to examine the coal power phase out regulation’s character and the existence of reasonable investment-backed expectations. These requirements will likely result in a similar exercise and outcome as under the application of the police powers doctrine.119 As to the character of the measure, it depends on how the treaty defines this term, or absent any definition, how the tribunal defines the term. For tribunals applying CETA, this would entail examining the measure’s object, context and intent. The object of the coal power phase out regulations is the protection of the environment and the mitigation of climate change.

They are taken in the context of regulatory efforts to mitigate the effects of climate change and of States to adhere to their climate goals. When the coal power phase out regulations are taken properly, they will have the intention to serve public purpose pursued and will not be discriminatory. As to the existence of investment-backed expectations, this will likely depend on the specific commitments made to the investor. However, due to the state of climate science it is unlikely that investors can have reasonable expectations that coal power plant regulations would not have been adopted.

118 See par. 3.2.1.

119 See par. 4.1.1.

Accordingly, the question may be asked what additional value these clauses will have in practice. As these contextual expropriation clauses generally list factors that are already taken into account by tribunals under their current approaches, it cannot be expected that they will cause a significant change to the current state of the art.

4.2.2. Coal Power Phase Outs and General Exception Clauses

General exception clauses are often modelled after Article XX GATT and show strong resemblance to the requirements of this provision. Thus, for current purposes the similarly drafted clause included in the Canada-Colombia FTA will be used to assess the case of coal power phase out regulations.120 In case the host State is in breach of the indirect expropriation standard in the IIA, it first has to prove that the coal power phase out regulation served a listed policy objective. In this case that would be environmental to protect human, animal or plant life and health. The primary objective of coal power phase out regulations is environmental protection or climate change mitigation, so some investors may argue that these measures are not covered. However, climate change mitigation eventually serves the protection of human, animal, and plant life and health. Alternatively, the host State could argue under the conservation of non-living exhaustible natural resources. Thus, coal power phase out regulations are likely to pursue a policy objective.

Second, the host State has to prove the environmental measure was necessary to protect human, animal, or plant life and health. In this context, it depends which meaning the tribunal attaches to the term ‘necessary’ as it could rely on decisions by WTO jurisprudence to interpret these clauses. On the other hand, tribunals may opt for an approach of necessity similar to the one adopted under the proportionality analysis which examines the availability of less intrusive means, or simply assess the measures reasonableness. Thus, this requirement causes some uncertainty as to what tribunals will understand as ‘necessary’. It is likely that coal power phase out regulations will pass a reasonableness test as these measures likely improve the quality of human, animal and plant life and health, but more difficulty could be expected when the tribunal adopts a least intrusive means approach.

Third, it has to prove that the measure does not constitute arbitrary or unjustifiable discrimination between investments or investors. This requirement will likely entail an examination of whether the coal power phase out is applied in a manner that is discriminatory

120 See par. 3.2.2.

and this discrimination cannot be justified by objective reasons, or is not in accordance with good faith. It is likely that the coal power phase out regulations pass this examination as they are general regulations that do not target individual investors. This may be different if the measure treats some investors or investments more favourable than others.

Finally, the host State has to prove that the measure does not constitute a disguised restriction international trade or investment. This requirement likely entails the examination of whether the coal power plant phase out regulations is not a measure intended to restrict international trade or investment, disguised in a bona fide coating of environmental protection. This may become clear in case the coal power phase out regulations favour domestic coal power investors over foreign coal power investors. However, the measures that are currently adopted do not give an indication that this is the case, or that they were intended to restrict international investments.

Therefore, it is likely that coal power phase out regulations will qualify as an exception to investment protection obligations in the IIA. However, as discussed in paragraph 3.2.2, it is unclear whether this will actually have the effect of relieving the host State of paying compensation. Furthermore, the application of these clauses to coal power phase outs shows that much remains uncertain as to the exact meaning of the terms employed. It could be that host States are subjecting themselves to a more stringent and difficult to prove regime than when tribunals rely on the police powers doctrine or a proportionality analysis. Accordingly, it may be questioned whether these clauses actually grant States more clarity and certainty regarding their regulatory freedom.

4.2.3. Coal Power Phase Outs and Carve-outs or Exclusion Clauses

When it comes to carve-outs, the language of the clause will have an impact on the effects the carve-out entails. Provisions like the carve-out in the ASEAN Comprehensive Investment Agreement121 will have more absolute effect on the State’s right to regulate climate change mitigation. Essentially, references to non-discrimination, protection of legitimate public welfare objectives or good faith can be seen as an incorporation of the police powers doctrine.122 Provisions like the one found in CETA123 will have a less absolute impact on the State’s right to regulate climate change mitigation. This carve-out allows for a narrow exception in cases of

121 See par. 3.2.3.

122 Eco Oro v. Colombia (n 68) [635].

123 See par. 3.2.3.

‘rare circumstances’, when the requirements of the police powers are fulfilled. The bar for the existence of the rare circumstances will depend on the wording of the particular clause at hand.

Under CETA that would require the measures to be manifestly excessive, but less stringent standards could also apply. Thus, the investor has to prove that the coal power phase out was a rare circumstance that goes beyond the standard that is qualified in the provision. When it comes to a ‘manifestly excessive’ measure, the fact that the measure causes a substantial deprivation probably will not suffice. An investor may argue that the amount of deprivation endured is so substantial that it is excessive. However, it seems unlikely that the tribunal deems it manifestly excessive in light the purpose of pursuing climate change mitigation.

4.3. The State’s Policy Space to Adopt Climate Change Regulation as Non-compensable Regulation

The prior discussion and analysis have shown that there is not a single answer to the question whether coal power plant phase out regulations will qualify as non-compensable regulation.

This also means that there is not a single answer to the question whether States are able to adopt non-compensable climate change regulation under international investment law. Rather, the determination of whether the regulation will require the payment of compensation, depends on the particularities of the applicable IIA and the interpretation method employed by the tribunal.

However, in abstract, the following observations may be made.

In general, the assumption that States have to fear that their legitimate and non-discriminatory climate change regulations will lead to liability for regulatory expropriation is unfounded.

When States design their climate change regulations like the coal power phase out regulations, they have a potential to cause a substantial deprivation. However, the view that this necessarily problematic means that one assumes tribunals will stop their analysis at the economic impact the regulation has on the investment. This view seems to correspond with both the approach of most investment tribunals up until the early 2000s, but it is not in line with the body of arbitral case law that has been taking into account the right to regulate through the police powers doctrine and a proportionality analysis.

Under the police powers doctrine, States will have sufficient regulatory freedom to adopt climate change mitigation measures. Even the coal power phase out regulations that will likely cause a substantial deprivation, will be justified as they are bona fide regulation for a public purpose that is non-discriminatory and enacted in accordance with due process. This conclusion will only be different in case the host State makes or has made specific commitments. However,

more uncertainty exists if the tribunal employs a proportionality analysis. This approach requires the regulation to achieve a balance between the public purpose of pursuing climate change mitigation and the economic impact it has on the investment. For regulations like the coal power phase outs this may pose less of a problem because they effectively serve climate change mitigation by significantly reducing GHG emissions. However, in case the regulation does not effectively contribute to climate change mitigation or if it is unreasonable, the tribunal may deem it to impose an excessive burden on the investor and the measure will be considered expropriatory. In this context, tribunals could opt for using the effectiveness of the measure in reducing GHG emissions as a factor to determine whether these regulations should be considered as non-compensable regulation.

Furthermore, States have increasingly taken matters in their own hands when drafting new IIAs.

Under these clauses, States will also be able to adopt climate change mitigation measures such as the coal power phase out regulations, although the question may be raised whether these provisions are effective. The contextualised expropriation clauses do not necessarily make investment tribunals consider factors they do not consider already. Similarly, carve-outs seem to rely on the criteria of the police powers doctrine. Moreover, general exception clauses seem to put more stringent requirements on the host State to prove.

Therefore, in general host States will likely be able to adopt non-compensable climate change mitigations regulations under international investment law, such as coal power phase out regulations.