The international investment regime and climate change: An opportunity for the European Union to shine as a global actor

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University of Amsterdam

Amsterdam Graduate Law School

Master thesis

International and European Union Law: European Union Law

The international investment regime and

climate change:

An opportunity for the European Union to

shine as a global actor

Author: Veronica Pili Supervisor: Prof. dhr. Nikos Lavranos Email: veronicapili527@gmail.com Date of submission: 24-07-2020

Student number:12905445

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Abstract

With the Paris Agreement, 197 nations in world committed to re-define their economic and legal relations to keep the global temperatures below 2 degrees in order to avoid a global catastrophe. In practice, this would imply on the one hand, the mobilization of international investment flows towards the transition to a green economy and, on the other hand, the radical change of regulatory frameworks at both international and domestic levels, in order to facilitate the necessary transition. For this purpose, mutual supportiveness and synergy between the international investment regime and institutional climate action is of utmost importance.

This paper evaluates the contribution of the European Union to the modernization and adaptation of the international investment regime to univocally align it with the objectives of the Paris Agreement. As the existing investment regime is designed to grant special protection indiscriminately to all foreign investments, it can be understood as a double-edged sword: while it can represent an opportunity to enhance states’ commitments under the Paris Agreement, there is also a high risk that the necessary disruptive changes in domestic regulatory environment will be threatened or directly challenged by investors with conflicting interests, such as fossil fuels corporations.

The paper first discusses this ambiguity through the assessment of the interconnection between investment guarantees with environmental and climate obligations and illustrates the international dynamics through emblematic environmental-related case law.

Then, the research focuses on the constitutional mandate of the EU to harmonize its investment and end environmental policies and on its recent commitment to pull together all its actions to achieve a successful and just transition towards climate neutrality and a sustainable future. The paper revisits the most problematic environmental-related case law under CETA and analyses the most recent Commission proposals for the reform of the Energy Charter Treaty and the EU-UK free trade agreement in order to test to what extent the EU managed so far to integrate environmental and climate protection into its investment policies.

The main argument of the paper is that although CETA and the post-CETA proposed investment agreements signal a progressive increase of commitments to respond to the climate crisis, the institutional efforts put forward so far by the EU still do not express the full potential of the European external action as a thoroughly integrated climate and investment policy.

The conclusions suggest that for the investment regime to become fully compatible with the Paris Agreement and to contribute to a truly sustainable development, more far-reaching reforms are necessary. In this sense, the paper outlines two sets of good templates designed by academics and practitioners as illustrative suggestions for the EU future investment policy to successfully tackle man-made climate change.

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My research will assess and evaluate the role of the EU in the general debate on the adaptation of the international investment treaties regime to the climate imperatives. The evaluation will be conducted against the standards of the Paris Agreement goals, as embraced by the EU value-based investment policy framework.

The first chapter will set the scene by describing and analysing the state of play of the international regime for what concerns the interrelation between climate change and investment protection. The relative problematics and ambiguities of the current legal framework will be assessed against the background of the new generation investment agreements, with particular reference to NAFTA and the arbitral interpretation of its investment protection clauses in a selection of environmental-related cases.

The second chapter will be dedicated to the analysis of the extent to which EU environmental standards, as incapsulating climate change imperatives, are reflected and concretized into the investment policy of the EU. For this purpose, the attention will be focused on CETA, as deemed to be the most progressive EU investment agreement. Its integrative force will be assessed through the revisitation of the most problematic environmental-related cases analysed in the first chapter.

The third chapter will explore the most recent developments of the Union action towards the integration of climate objectives into its external investment policies and test their compatibility, adequacy and coherence in respect of the Paris agreement. Finally, relevant recommendations on the desirable future scenario will be presented.

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1 Climate change and international investment law 1.1 The Paris Agreement

Unsustainable human activity, mainly consisting of the overexploitation of natural resources as well as over-industrialization of the world economy, has brought to an unprecedent increase of carbon dioxide levels in the atmosphere, with potentially disastrous consequences for the environment and all humankind if not tackled on time in a collective global effort.1

In 1992 the United Nations adopted the Framework Convention on Climate Change (UNFCCC)2_with

the declared objective of stabilizing ‘greenhouse gas concentrations in the atmosphere at a level that

would prevent dangerous anthropogenic interference with the climate system.’3_{In 2015 the Paris}

Agreement 4_{defined the objective of keeping the temperature increase to ‘well below 2°C above}

pre-industrial levels’, with the effort to stay at a 1.5°C warming threshold.5 To reach this ambitious aim, States from all over the world committed to progressively reduce their emissions of greenhouse gases (GHGs) into the atmosphere according to their ‘nationally determined contributions’ (NDCs).6_The

NDCs are to be regularly monitored in their individual implementation and assessed in their collective effectiveness every five years through a global stocktake system.7

1.2 The international investment regime

There are numerous international investment agreements (IIAs) in place all over the world,8 the aim of which is the protection of foreign investment abroad. IIAs can either have the form of bilateral investment agreements (BITs) or of investment chapters within more comprehensive free trade agreements (FTAs). They confer upon nationals of a certain country (home state) investing in another country (host state) special rights to be invoked directly against the host state. The violation of such rights can be claimed before international arbitration tribunals for monetary damages, usually without the need for the investor to first exhaust jurisdictional remedies in the host state.9 The arbitration tribunals are constituted ad hoc by three arbitrators, two of which are nominated by the investor and

1_{IPCC Special Report on the impacts of global warming of 1.5°C above pre-industrial levels and related global}

greenhouse gas emission pathways, in the context of strengthening the global response to the threat of climate change, sustainable development, and efforts to eradicate poverty (2018) <https://www.ipcc.ch/sr15/chapter/spm/> accessed 20 April 2020.

2_{United Nations Framework Convention on Climate Change (Adopted 9 May 1992, entered into force 21 March 1994)}

1771 UNTS 107.

3_{Article 2 UNFCCC.}

4_{Paris Agreement (adopted 12 December 2015, entered into force 5 October 2016) OJ L 282/4.} 5_{Ibid. Article 2.1(a).}

6_{Ibid. Articles 3 and 4.}

7_{UNFCCC, ‘Climate Change: The Paris Agreement- Progress Tracker’} _{http://unfccc.int/paris_agreement/} items/9485.php, accessed 20 April 2020.

8_{The current amount of adopted IIAs is 3287. United Nations Conference on Trade and Development (UNCTAD)}

International Investment Agreements Navigator https://investmentpolicy.unctad.org/international-investment-agreements, accessed 20 April 2020.

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4 the host state respectively, and the third is decided by both jointly. Most of the disputes are referred to the International Centre for the Settlement of Investment Disputes (ICSID), but also to the Permanent Court of Arbitration (PCA) or other fora with the adoption of the arbitration rules of the United Nations Commission on International Trade Law (UNCITRAL). Other frequently involved institutions are the International Chamber of Commerce (ICC) and the Stockholm Chamber of Commerce (SCC).

The investor-state dispute settlement (ISDS) decisions are binding upon the parties as judgement of last instance of national courts and they are not governed by the principle of stare decisis.

The special rights are generally incapsulated into three traditional protection clauses, namely, the guarantee against uncompensated expropriation, discriminatory national treatment, and fair and equitable standard.

1.2.1 Indirect expropriation

Indirect expropriation occurs whereas the exercise of investors’ property rights are defeated or interfered with, without the ownership itself being formally transferred.10 It refers to the government measures that cause an effective deprivation of the ‘use and benefit of an investment without the

physical occupation or transfer or title.’11

1.2.2 National treatment and most favourite nation

These two clauses refer to the guarantee against any discrimination on grounds of nationality. Accordingly, host states are required to grant foreign investors no less favourable treatment than that accorded to domestic investors, in the case of the national treatment standard (NT), and to other third countries investors, in the case of the most favourite nation clause (MNF). Key concept in the assessment of such discrimination, is the ‘like circumstances’: the foreign investor needs to result in a comparable situation of the domestic or other third country investor respectively for the tribunal to find a breach of the standards. The like circumstances generally refer to the same business or sector,12 or sometimes also to the same legal requirement to a certain regulatory treatment.13

10_{Muthucumaraswamy Sornarajah, The International Law on Foreign Investment (2nd edn Cambridge University Press}

2004), 349-350.

11_{Vicki Been, Joel C. Beauvais, ‘The Global Fifth Amendment? NAFTA's Investment Protections and the Misguided.}

Quest for an International "Regulatory Takings" Doctrine’, (2003) 78/30, New York University Law Review, 54.

12_{Center for International Environmental Law, ‘Foreign Investment and Sustainable Development: Brief for the World}

Summit on Sustainable Development’(2002) <http://www.ciel.org/Publications/investment.pdf> accessed 22 April 2020. Kate Miles, 'Arbitrating Climate Change: Regulatory Regimes and Investor-State Disputes' (2010) 1/63 Climate Law, 77.

13_{Rudolf Dolzer, Christoph Schreuer, Principles of International Investment Law (2nd edn OUP 2012) 200, referring to}

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1.2.3 Fair and equitable treatment

This is currently the most relevant clause, as its breach was the ground of the majority of victorious arbitration claims.14

The basic function of the fair and equitable treatment (FET) is to supplement the more specific investment standards in those situations that fall out of their scope but nonetheless are to be considered within the intended level of protection of the treaties.15

Differently from the national discrimination clauses, FET is an absolute clause, in the sense that its violation is ascertained independently from the treatment accorded to other investors by the host state.16_{It also differs from both the national discrimination and the expropriation clauses for its wider}

flexibility. Such flexibility is related to the vagueness and relativity of the terms “fair” and “equitable”, which have not been subject to uniform interpretations by investment tribunals.17

Nonetheless, it can generally be said that the recurrent elements for the identification of its breach are the observance of due and reasonable procedures, the satisfaction of the legitimate expectations of the investor and the presence of a stable investment environment.18

1.3 Interconnection between climate and environment protection with the investment regime

Governments’ efforts under the Paris Agreement are expected to result on the one side in an increase of green international investments,19 and on the other side in significant regulatory changes in states’ policies. A new approach is particularly likely towards investments in fossil fuels, considering that in order to achieve the objective of the ‘less below two degrees’ more than the eighty per cent of coal reserves, as well as half of the gas and a third of oil deposits should not be extracted or used until 2050.20 This means that fossil fuels industries are set to face significant losses21 as a result of the adaptation of national regulatory frameworks to the objectives of the Paris Agreement.

14_{Ibid. 130.}

15_{Sempra Energy International v. The Argentine Republic (28 September 2007) ICSID Case No. ARB/02/16, para 297.} 16_{UNCTAD, ‘Fair and Equitable Treatment - A Sequel: UNCTAD Series on Issues in International Investment}

Agreements II Explanation of the issue’ (2014) < https://unctad.org/en/pages/publications/Intl-Investment-Agreements---Issue-Series-II-(Revised-Editions---Sequels).aspx> accessed 25 April 2020.

17_{UNCTAD, ‘Fair and Equitable Treatment’ UNCTAD/ITE/IIT/11, Vol.III (United Nations, 1999).}

18_{Ioana Tudor, The Fair and Equitable Treatment Standard in the International Law of Foreign Investment (OUP 2008)}

163-72; Dolzer, Schreuer (n.13) 134.

19_{A recent report from the International Finance Corporation (IFC) noted that the adaptation and mitigation measures}

necessary to implement the current NDCs would require investments for up to a 90 trillion US dollars. See IFC, ‘Creating Markets for Climate Business - An IFC Climate Investment Opportunities Report’ (2017)<https://www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/climate+business/resourc es/creating+markets+for+climate+business+report> accessed 25 April 2020.

20_{Christophe McGlade, Paul Ekins, ‘The Geographical Distribution of Fossil Fuels Unused when Limiting Global}

Warming to 2°C’ (2015) 517, Nature, 187.

21_{The losses for the big oil companies will amount to 1.6 trillion US dollars between 2018-2025. Carbon Tracker}

Initiative, Mind the Gap: The $ 1.6 Trillion Energy Transition Risk (2018) < https://www.carbontracker.org/reports/mind-thegap/> accessed 25 April 2020. See also the declaration of the German Bank for International Development <the question is no longer if, but rather when fossil fuels and power plants will be entirely devalued, causing losses and divestment>, Deutsche Gesellschaft für Internationale Zusammenarbeit, ‘From Riches to Rags: Stranded Assets and the

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6 The possible measures are manifold and range from the elimination of fossil fuel subsidies to the phase out of unsustainable energy sources, from the rejection of permits for exploitation of gas, petroleum or coal to the introduction of carbon taxes.22

Dupuy and Viñuales described the potential synergies and contrasts between the investment protection regime and environmental protection by juxtaposing on the one side the guarantees indirectly provided for by IAs to pro-environment operations, as a result of the reduction of risks for foreign investments,23_{and on the other side, the potential conflicts that may rise between the host}

states’ obligations under the IAs with their international and domestic action for the protection of the environment.24

Indeed, it has been acknowledged that it would just be a matter of time before states measures implementing international climate obligations will be challenged before international investment tribunals.25

To be sure, the investment protection regime has been used in many circumstances both against states’ enactment of environmental protection policies,26 and, although to a lesser extent and only more recently, against states’ failure to comply with environmental duties to the detriment of foreign investments.27 It has been reported a progressive increase of investment proceedings involving environmental concerns, especially since the last decade of the past century.28 The public attention and the economic risks deriving from foreign investors claims encouraged public powers to reconsider the essential features of their IIAs. Accordingly, a new wave of more structures comprehensive free trade and investment agreements started in North America from the 1990s and continued in Europe since 200629_{. The so-called second-generation investment agreements}

Governance Implications for the Fossil Fuel Sector’, 2017, 39, https://www.adelphi.de/en/publication/riches-rags, accessed 26 April 2020.

22_{Brooke Skartvedt Güven, Lise Johnson, ‘International Investment Agreements: Impact on Climate Change Policies in}

India, China, and Beyond’, in Trade in the Balance: Reconciling Trade and Climate Policy, Report of the Working Group

on Trade, Investment and Climate Policy, (2016) Chapter Seven, Columbia Center for Sustainable Investment (CCSI)

< http://ccsi.columbia.edu/files/2016/12/Trade-in-the-Balance-International-Investment-Agreements-Impacts-on-Climate-Change-Policies-in-India-China-and-Beyond-Nov-2016.pdf> accessed on 27 April 2020.

23_{Pierre-Marie M. Dupuy, Jorge E. Viñuales, ‘Environmental Protection and International Economic Law’, International}

Environmental Law (2nd Cambridge University Press 2018) 453-454.

24_Ibid.

25_{Nikos Lavranos, ‘Using the Paris Agreement in arbitrations’ (Arbitration Blog 31 March 2020)}

<http://arbitrationblog.practicallaw.com/using-the-paris-agreement-in-arbitrations/>accessed 27 April 2020.

26_{Regarding natural reserves see for example: Burlington Resources v. Ecuador, (14 December 2012) ICSID, Case}

No.ARB/08/5; Grand River Enterprises (n.13); regarding nuclear power Vattenfall v. Germany (11 March 2011) ICSID, Case No. ARB/09/6.

27_{Peter A. Allard v. Barbados (27 June 2016) PCA Case No. 2012-06.}

28_{Viñuales compiled a set of 117 decisions, not amounting to an exhaustive list, and noted that while only two claims}

were filed before 1990, from 1990 to 2001 the claims became 11, from 2001 to 2011 the number further rise to 44, and from 2012 to 2015 there has already been 60 claims. Jorge E. Viñuales ‘Foreign Investment and the Environment in International Law: Current Trends’, in K. Miles (ed.) Research Handbook on Environment and Investment Law (Edward Elgar 2019).

29_{Rok Žvelc, ‘Environmental Integration in EU Trade Policy: the Generalised System of Preferences, Trade Sustainability}

Impact Assessments and Free Trade Agreements’ in Elisa Morgera (ed), The External Environmental Policy of the

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7 encapsulate environment and sustainable development chapters as well as regulatory cooperation provisions and a better consideration of the public interest, alongside the classic investment protection provisions.

The North America Free Trade Agreement (NAFTA)30_{is emblematic of such new wave. At the time}

of its conclusion, 1994, it has been proudly defined as ‘the most environmentally sensitive, the

greenest free trade agreement ever negotiated anywhere.’31

Its Preamble explicitly calls the parties to ‘promote sustainable development’, to operate ‘in a manner consistent with environmental protection and conservation’, and to ‘strengthen the development and enforcement of environmental laws and regulations’.32_{Furthermore, environmental cooperation is}

the specific aim of a side agreement of NAFTA33_{which imposes to all parties to provide for high}

levels of environmental protection.34

Notwithstanding, the parties environmental obligations are vague and aspirational and what is meant with ‘high standards’ is not defined: it is instead explicitly left to each party to set out its own level of protection35 and unilaterally define its own environmental regulatory framework. Importantly, environmental obligations did not become a priority over investment protection, which remained the primary and prevalent goal of the agreement.

The parties’ right to regulate in the environmental field has been challenged in many ways during the past twenty years in arbitration proceedings under Chapter 11 of the agreement.Chapter 11 indeed has been widely criticised for the environmental implications of the wide protection accorded to private investors through the clauses of the minimum standard of treatment,36 expropriation, national standard through the ISDS mechanism provided for their enforcement.37

The next section will analyse four emblematic cases where public decisions taken for the protection of the environment were challenged against an arbitration tribunal. The purpose is to assess how these two fields interact within the legal framework of a new generation investment agreement such as

30_{North American Free Trade Agreement, US-Canada-Mexico (Adopted 17 December 1992, entered into force 1 January}

1994) 32 ILM 296.

31_{The expression was used by William Reilly, the Bush Administration EPA chief at the time of NAFTA conclusion.}

James E. Bailey, ‘Free Trade and the Environment? Can NAFTA Reconcile the Irreconcilable?’ (1993) 8/4 American University International Law Review ,839.

32_{NAFTA, Preamble.}

33_{North American Agreement on Environmental Cooperation, US-Canada-Mexico (Entered into force on 1 January 1994)}

32 I.L.M. 1480 (NAEC).

34_{Article 3,321, NAEC.} 35_{Article 904 NAFTA.}

36_{In NAFTA the FET standard is embodied in the customary international law minimum standard of treatment, stated in}

Article 1105 as follows: ‘Each Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security’.

37_{Michael Nolan, ‘Challenges to the Credibility of the Investor-State Arbitration System’ (2015) 5/3, American}

University Business Law Review; Jeffery Atik, ‘Repenser NAFTA Chapter 11: A catalogue of legitimacy critiques’, (2003) 29/3 Asper Review International Business & Trade Law.

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8 NAFTA and, subsequently, the legal consequences of such interaction on the pursuance of the binding objectives of the Paris Agreement.

1.3.1 Methanex Corporation v. United States

The measure challenged in this early NAFTA case was the Californian prohibition of the use of methyl tertiary-butyl ether (MTBE) as a gasoline component, on the basis of its contaminating effects on groundwater. The claimant was a Canadian corporation which supplied methanol to the United States for the production of MTBE. The Canadian company filed a lawsuit in 1999 against the U.S. and sought damages for 970 million US dollars.38

The company claimed that the ban on MTBE represented a substantial taking of its investment and deprived the company of its economic value.39 Therefore it claimed a breach of NAFTA Article 1110 (1) which guaranteed protection against uncompensated expropriation.

Furthermore, the Canadian corporation claimed a breach of the national treatment standard under NAFTA Article 1102 on the grounds that the ban was not, in its view, based on environmental grounds but aimed instead at the protection of the US ethanol producers to the detriment of foreign competitors.40

The Methanex tribunal addressed the dispute in broad consideration of the regulatory space of the defendant government and rejected all claims of the corporation. Meaningfully, the tribunal stated that:

‘As a matter of general international law, a non-discriminatory regulation for a public purpose,

which is enacted in accordance with due process and which affects, inter alia, a foreign investor or investment is not deemed expropriatory and compensatory unless specific commitments had been given to the then putative foreign investor contemplating investment that the government would refrain from such regulation.’41

The decision is important in relation to its expansive interpretation of the doctrine of police powers,42 in open contrast to previous decisions which looked at the mere negative effects on the investment in order to identify a violation of NAFTA Article 1110, independently from the purpose of the

38_{Methanex Corporation v. United States, UNCITRAL (Methanex) Notice of Intent to Submit a Claim to Arbitration (2}

July 1999)< https://www.italaw.com/cases/683> accessed on 22 April 2020.

39_Ibid.

40_{Methanex, Amended Statement of Claim (12 February 2001)}_{<https://www.italaw.com/cases/documents/6064}_>

accessed 22 April 2020, paras. 42, 47.

41_{Methanex, Award (3 August 2005) Chapter D, para 7 <}_{https://www.italaw.com/cases/683}_{> accessed 22 April 2020.} 42_{For a detailed analysis of the doctrine of police powers see Jorge E. Viñuales, ‘Foreign Investment and the Environment}

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9 government action at issue.43 It has been argued that if the same approach was adopted in future awards, this would lessen the risk of unjustified restrictions on state public policy sphere.44

Nonetheless, it is also important to point out that the police powers as recognized by the tribunal are not unconditional, as the absence or presence of a specific commitment is set as determinative for the breach of the expropriation standard. It is apparent from such reasoning that if there was a promise from the state to regulate (or not to) in a certain manner the state measure would qualify as a compensatory expropriation, no matter what public interest the measure pursued.

It is also worth noting that the tribunal did not place its decision in the context of the environmental objectives of NAFTA and NAEC,45_{nor did it mention the relevance of environmental considerations}

in the regulatory decision of the government.46

1.3.2 Chemtura Corporation v. Canada

Only few years later, the American lindane producer Chemtura challenged the ban of lindane-based pesticides issued by the Canadian Pest Management Regulatory Agency (PMRA) under NAFTA Chapter 11 as illegitimate expropriation and discriminatory treatment.47

Chemtura argued that the real reason behind the PMRA’s measure was a purely commercial one, namely that it was a ‘trade irritant’ for the Canadian market.48 The corporation requested around 79 million US dollars in damages and costs.

The Canadian government in its counter memorial highlighted the health and environmental concerns behind the lindane phase out. It argued that the high toxicity level of the substance was officially recognized in international environmental legislation and already internationally banned for this reason.

The tribunal, on its side, assessed the appropriateness and proportionality of the Canadian conduct in the light of its international obligations under the Aarhus POP Protocol49 and found that the contested

43_{See Metalclad case, where the Tribunal found the defendant government liable for unjustified indirect expropriation}

under NAFTA Article 1110 explicitly excluding the purposes of the measure effecting the investment. The Metalclad tribunal held that ‘The Tribunal need not decide or consider the motivation or intent of the adoption of the Ecological

Decree. Indeed, a finding of expropriation on the basis of the Ecological Decree is not essential to the Tribunal’s finding of a violation of NAFTA Article 1110. However, the Tribunal considers that the implementation of the Ecological Decree would, in and of itself, constitute an act tantamount to expropriation’. Metalclad Corporation v. Mexico (25 August 2000)

ICSID Case No ARB(AF)/97/1.

44_{K. Miles (n.12) 74-75.}

45_{Methanex, Award (n.41) Part II, B.}

46_{Methanex, Amicus Curiae Submissions by the International Institute for Sustainable Development (9 March 2004) paras}

16, 23, 27; Submission of Non-Disputing Parties Bluewater Network, Communities for a Better Environment and Centre for International Environmental Law (9 March 2004) paras 3, 7, 10–11, <http:// www.state.gov/s/l/c5818.htm> accessed 22 April 2020.

47_{Chemtura Corporation. v. Canada, PCA Case No. 2008-11, UNCITRAL (Chemtura) Notice of Arbitration (17 October}

2002) https://www.italaw.com/cases/249 accessed 22 April 2020.

48_Ibid.

49_{Aarhus Protocol on Persistent Organic Pollutants to the 1979 Convention on Long Range Transboundary Air Pollution}

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10 measures were indeed necessary under the mentioned convention.50 As a result, it unanimously decided to exclude Canada’s responsibility under NAFTA.51

What is remarkable about this decision is that not only the tribunal referred to the international environmental obligations of Canadabut also made a clear and unconditional articulation of the police powers doctrine. Differently from the reasoning of the Methanex tribunal, the arbitrators did not subject the breach of the expropriation clause to the existence of commitments of the state vis a vis the investors but simply stated that Canada:

‘took measures within its mandate, in a non-discriminatory manner, motivated by the increasing

awareness of the dangers presented by lindane for human health and the environment. A measure adopted under such circumstances is a valid exercise of the State’s police powers and, as a result, does not constitute an expropriation.’52

The above is considered the most remarkable elaboration of the state’s police powers,53 as it made clear that measures through which a State interferes with investors property rights to protect the environment cannot translate into an indirect expropriation under Article 1110 NAFTA and therefore cannot provide entitlement to compensation.

1.3.3 Bilcon of Delaware et al v. Canada

The U.S. investors Claytons and Bilcon (Bilcon) initiated arbitration proceedings in 2008 under NAFTA Chapter 11 against Canada.54 The investors challenged the refusal of the Canadian authorities to permit the construction of a quarry and marine terminal at White Points, Nova Scotia with the purpose of exporting the extracted basalt aggregates to the U.S.55

The reason for the rejection was the adverse environmental effect of the project on the “community core values” of the area. Bilcon claimed that the rejection was unjust and discriminatory and frustrated its legitimate expectations as to the continuation of the project. Therefore, it claimed a violation of Articles 1102 (National Treatment) and 1105 (Minimum Standard of Treatment) and damages for the amount of almost 500,000,000 US dollars.56

The dispute was mainly centred on the procedural safeguards of the environmental impact assessment (EIA) review of the project, as carried out by a joint federal-provincial review panel (JPR), and on the criterion of ‘community core values’ on which the JPR based its negative recommendation to the responsible authorities.

50_{Chemtura, Award (2 August 2010) para.139.} 51_{Ibid. paras 139- 141.}

52_{Ibid., para. 266.} 53_{Viñuales (n.42) 58.}

54_{Bilcon of Delaware et al v. Government of Canada, PCA Case No. 2009-04. Notice of arbitration (26 May 2008)}

<https://www.italaw.com/cases/1588> accessed 25 April 2020.

55_Ibid.

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11 The majority of the tribunal agreed with the investors by finding Canada in breach of the minimum standard of treatment for the following reasons57: first, the Canadian authorities strongly encouraged the development of the project, thereby granting legitimate expectations as to the successful outcome of the EIA, and then disregarded such expectations;58 second, that the EIA procedure was not conducted in accordance with Canadian laws; and third, that the notion of ‘community core values’ was unknown to the Canadian regulatory framework and that therefore, its use could not be expected by the investors.59

For what concerns the standard of treatment clause, a broad interpretation of the same led the majority to upheld that the JPR’s approach constituted an unequal and unfavourable treatment of the investors,60_{as compared with three other ‘quarry and marine terminal projects that had the potential}

to affect a local community’61 run by Canadian companies. The tribunal found that those three projects brought forward by the Canadian investors received a more favourable treatment.62 In this regard, the arbitrators did not consider Canada’s arguments that the other projects used for comparison had different concerns, locations and scope as a valid “rational government policy” justification for the differentiation.63

This case has been considered as a ‘step back’ towards a scarce consideration of public environmental concerns vis a vis the economic reasons of investment protection, typical of the early ISDS tribunal practice.64 It is very meaningful in this regard the opinion of the dissenting arbitrator McRae, who expressed great concerns for the fact that the Canadian government’s decision taken in deference to the human environment interests gave rise to international liability for damages in favour of a private investor.65 Mc Rae considered the assessment of the majority decision as 'an intrusion into the

environmental public policy of the state.’66 Another meaningful and related issue addressed by the dissenting arbitrator was that of ‘regulatory chill’67: the dissenting arbitrator argued that the award could lead future domestic environmental review panels not to grant enough consideration to the

57_{Ibid. After having considered that the threshold for the breach of such standard should not be that high to amount to an}

outrageous or shocking conduct, para. 444.

58_{Ibid. para.592.} 59_{Ibid. para.594.} 60_{Ibid. para.716.} 61_{Ibid. para. 696.} 62_Ibid. 63_{Ibid. para.724.}

64_{IISD, ‘International investment law and sustainable development: Key cases from 2000–2010’ (July 2011) Nathalie}

Bernasconi-Osterwalder, Lise Johnson (ed) Geneva, 54 < https://www.iisd.org/library/international-investment-law-and-sustainable-development-key-cases-2000-2010> accessed 27 April 2020; Jez, Areta. ‘Environmental Policy-Making and Tribunal Decision-Making: Assessing the Scope of Regulatory Power in International Investment Arbitration’ (2019) University of Pennsylvania Journal of International Law, 40/4, 1013.

65_{Bilcon, Dissenting Opinion of Professor Donald McRae (10 March 2015) para. 49.} 66_Ibid.

67_{Regulatory chill is understood as the ‘effect whereby the government delays, waters down, or otherwise negatively}

affects public interest decision-making out of fear of investment arbitration litigation’. Laurens Ankersmith, ‘Regulatory

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12 socio-economic effects of projects on human environment for the risk to trigger damages claims against the government.68

1.3.4 TransCanada Corporation v. United States

The Canadian oil company TransCanada filed a lawsuit in 2015 against the United States further to the presidential denial of the permit to construct Keystone XL, a pipeline aimed at transporting oil sand bitumen from Canada to the US.69_{The company requested over 15 billion dollars of damages}70

for the “unreasonably delaying approval” of the project by the U.S. authorities,71_{which allegedly}

breached US obligations under NAFTA Articles 1102, 1103, and 1105. The company claimed that the denial of the project after an initial authorization to go through an extensive EIA constituted an indirect expropriation of its assets.72 Furthermore, it argued that it was discriminated against by the refusal because the presidential decision was grounded on new and arbitrary criteria.73 It further argued that the denial was unjustified as it was not based on the merits of the application but merely on politics.74 More specifically, on ‘how the international community might react to an approval in

light of the erroneous perception that the pipeline would result in higher GHG emissions’.75

Indeed, the case aroused a great deal of interest amongst environmentalists for the open enhancement of fossil fuel production and consumption76in open contrast with the objectives of the Paris Agreement, which was concluded only three weeks after the denial of the construction permit. Although TransCanada dropped its claim in 2017,77 after the approbation of the Keystone XL by the neo elected Trump administration78, the case remains of high salience for it clearly shows the potential conflict between governments’ collective efforts to transit to a sustainable economy and the strong economic interests of fossil fuels companies who sustain significant damages as a result of such measures and have room and legal grounds to claim them.

68_{Ibid. para.51.}

69_{TransCanada Corp. v. U.S., ICSID Case No. ARB/16/21 (TransCanada) Notice of intent to submit a claim to arbitration}

(6 January 2016), para. 13.

70_Ibid.

71_{Ibid. para. 43.}

72_{Ibid. paras. 1-3 and 12.}

73_{TransCanada, Request for arbitration (24 June 2016) para. 72.} 74_{TranCanada, Notice of intent (n. 68) para. 8.}

75_{Ibid., para. 59.}

76_{Nia Williams, Catherine Ngai, ‘Activists disrupt key Canada-U.S. oil pipelines’ (Reuters, 11 October 2016)}

< https://www.reuters.com/article/us-usa-canada-pipelines/activists-disrupt-key-canada-u-s-oil-pipelines-idUSKCN12B26O> accessed 30 May 2020.

77_{TransCanada, Joint Request for Order Taking Note of Discontinuance of the Proceeding (23 March 2017)} https://www.italaw.com/cases/3823 accessed 30 May 2020.

78_{Presidential Permit (issued 24 March 2017, updated 29 March 2019)<} https://www.whitehouse.gov/presidential-actions/presidential-permit/> accessed 20 May 2020.

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13

1.4 Interim conclusions

The above cases exemplify the possible different ways and scenarios in which environmental and climate protection policies may intersect with investment guarantees under the current system and how this relation can be shaped by arbitral decisions.

The first two decisions, Methanex and Chemtura, represent a strong signal of the integration of the environmental discourse into arbitration tribunals’ reasoning. In both cases the tribunals recognized the importance of the domestic right to regulate for the protection of the environment, to the detriment of the investors economic interests.

In the Bilcon case, environmental considerations were also taken into account, both in the opinion of the dissenting judge and in various obiter dicta of the majority,79_{but differently from the previous}

cases, they did not play a prominent role over the legitimate expectations of the foreign investors. This decision shows that scarce consideration might be given to the particularities of the environmental legal context of the host states, as the arbitral tribunal are not required to possess knowledge in this specific field. It also shows the risks of “regulatory chill” as evidenced by the dissenting opinion.

In general, all three cases above show that investment protection clauses allow broad interpretative discretion to the arbitral tribunals, which can it turn lead to the inconsistency of arbitral tribunal decisions.80

For what concerns TransCanada case, the claim of the oil corporation represents the concrete and actual risk that the investment system could be used to challenge climate change related measures. Indeed, cases such as TransCanada elicited many public protests and bear strong political implications which are out of the scope of the present research.

Suffice here to mention though, that the current climate emergency requires combined and mutually supportive efforts of both the private and public sector towards the common direction of the progressive emissions reduction, and the possibility for fossil fuels industries to bring claims that run counter such direction might not be compatible with the effective transition to a green economy as imposed by the binding targets of the Paris Agreement.81

79_{Bilcon, award (n.56) paras 531, 595-601, 735-738.}

80_{The wide discretion of the arbitration tribunals can lead both to appreciable results, as in Methanex and Chemtura, and}

to critical outcomes, as in Bilcon. The inconsistency of the decisions is one of the issues currently debated at the United Nation Commission on International Trade Law (UNCITRAL) working group on the reformation of ISDS, see UNCITRAL, ‘Possible Reform of Investor-State Dispute Settlement (ISDS) – Note by the Secretariat’ (18 September 2017) UN Doc No A/CN.9/WG.III/WP.142, paras 20 ff. For an updated status of the discussions see the UNCITRAL Working Group III website < https://uncitral.un.org/en/working_groups/3/investor-state>accessed 15 May 2020.

81_{It might be meaningful in this regard that the new NAFTA as concluded in May 2020 does not include ISDS}

mechanisms anymore for the resolution of disputes between Canada and the US and subject its use to the exhaustion domestic remedies for disputes between the US and Mexico. See States-Mexico-Canada Agreement (USMCA) (adopted 30 November 2018, entered into force 1 July 2020).

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14 It is worth remembering that also green investors are in the position to challenge the failure of host states to implement environmental and climate protection measures under the same legal framework. In this sense, the investor-state dispute settlement would have the potential to enhance the enactment of strong and effective climate policies, enforced by the potential environmental-friendly assessments of arbitral tribunals. In such scenario, the effects could interestingly provide a valid counterbalance to the lack of strong enforcement mechanisms under the climate agreements.

Unfortunately, though, the system in place in most of the existing IAs, including the new generation agreements such as NAFTA, is still ‘climate blind’82 as it does not favour the latter type of virtuous claims over the other climate-threatening ones. Furthermore, it provides no guarantees that the ad hoc tribunals would interpret the same broad investment protection provisions consistently, in the absence of a precedents principle and of a hierarchical relation between environmental imperatives and economic imperatives.

Overall, the investment regime framework under the second-generation agreements such as NAFTA, proved itself not sufficiently equipped to deal with the current climate emergency.

The next chapter will analyse and evaluate the EU approach to the international investment regime in the light of its constitutional and policy framework, in order to assess whether its attempts to the harmonization of the environment and investment regimes are adequate to address the climate crisis.

2 The European Union as international environmental actor and its new investment policies 2.1 The integration of climate change and environmental protection in the Foreign Direct Policy of the European Union

In the wake of the Paris Agreement, the former President of the European Commission Jean-Claude Juncker proudly defined the EU as the most influential global actor in the fight against climate change: ‘We Europeans are the world leaders on climate action. [...] it is about Europe’s global influence.’83

Indeed, the first EU efforts to combat climate change can be dated to the 1990s when it was for the first time included amongst the common goals of the EU.84 After the Treaty of Lisbon, tackling climate change became a stronger objective for the EU with its incorporation in Article 191 (1) TFEU,85_{as combined with the high level of environmental protection imposed on all EU policies,}

both from an internal and an external perspective.86_{Pivotal in this sense is Article 11 TFEU which}

82_{Gus Van Harten, ‘Foreign Investor Protection and Climate Action: A New Price Tag for Urgent Policies’ (2016) 12/5,}

Osgoode Legal Studies Research, 1.

83_{Commission, ‘Towards a better Europe - a Europe that protects, empowers and defends’ (14 September 2016) State of}

the EU speech 2016 <http://europa.eu/rapid/press-release_SPEECH-16-3043_en.htm> accessed 15 May 2020.

84_{European Council, Presidency Conclusions (Dublin 25/26 June 1990) Annex II: The Environmental Imperative,}

Council of the European Union, SN 60/1/90.

85_{‘Union policy on the environment shall contribute to pursuit of the following objectives: [...] promoting measures at}

international level to deal with regional or worldwide environmental problems, and in particular combating climate change’.

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15 provides that ‘environmental protection requirements must be integrated in the definition and

implementation of the Union’s policies and activities, in particular with a view to promoting sustainable development’.87

Accordingly, the EU Common Commercial Policy (CCP) is one of the fields to be read in conjunction with the environmental and climate objectives of the EU. This is also induced by the inclusion of the CCP within the EU external action framework,88 which provides that external competences shall be exercised in a way to foster the respect of UN principles and values,89_{to enhance the preservation of}

the environment and the sustainable management of global resources.90

In its Communication on the EU new trade and investment strategy91_{the Commission committed to}

‘maximize the potential of increased trade and investment to decent work and to environmental protection, including the fight against climate change, and engage with partner countries in a cooperative process fostering transparency and civil society involvement.’92

Indeed, the achievement of the declared objective of a comprehensive ‘value-based’ common commercial policy has been facilitated by the transfer of competences in investment matters from the Member States to the EU with the Treaty of Lisbon. Such shift of power from the Member States to the EU was grounded on the desire to enhance the external economic action of the Union and its role in the elaboration of international investment norms.93

It is in this legal context that the EU started to negotiate and conclude new generation free trade and investment agreements,94 thereby including sustainable development and environmental provisions aimed at the creation of common basic levels of environmental and labour standards, together with regulatory cooperation platforms to progressively better such standards.95

Despite most of the EU new generation agreements do not contain specific commitments towards the objectives of the Paris Agreement,96 on the one hand they represent a step forward respect to traditional Member States’ BITs which rarely contained any non-economic related provision,97_and

87_{Article 11 TFEU.} 88_{Article 207(1)2 TFEU.} 89_{Article 21 (1) TEU.} 90_{Article 21 (2) f TEU.}

91_{Commission, ‘Trade for All - Towards a more responsible trade and investment policy’ (2015)}_{COM/2015/0497 final.} 92_Ibid.

93_{Marc Bungenberg, Stephan Hobe, ‘The Relationship of International Investment Law and European Union Law’, in}

Marc Bungenberg et al. (ed), International Investment Law: A Handbook (Hart 2015) 1602.

94_{Before the Lisbon Treaty the EU competence for investment matters was restricted to market access regulation and}

accordingly, the investment chapters of the pre-Lisbon free trade agreements, when present, only covered market access.

95_{Jacob Werksman, Ilaria Buri, ‘European Union Trade and Climate Change Policy: Pursuing a “Cooperative Approach”}

to Promoting the Implementation of the Paris Agreement’(2019) in Cool Heads in a Warming World: How Trade Policy

Can Help Fight Climate Change, Yale Center for Environmental Law & Policy, 4, < https://envirocenter.yale.edu/cool-heads-warming-world-how-trade-policy-can-help-fight-climate-change> accessed 25 May 2020.

96_{The EU-Japan FTA is the first EU free trade agreement to contain binding provision to respect Paris Agreement. See}

Commission, ‘EU-Japan trade agreement on track to enter into force in February 2019’ (Press Release December 2018) <https://ec.europa.eu/commission/presscorner/detail/en/IP_18_6749> accessed 20 June 2020.

97_{Belen Olmos Giupponi, ‘Squaring the Circle Balancing Sustainable Development and Investment Protection in the EU}

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16 on the other hand broadly align with the North American practice of new investment treaties of explicitly reinforcing the domestic right to regulate.98

2.2 CETA

2.2.1 General overview

The Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union was signed on 26 October 2016, two weeks before the entry into force of the Paris Agreement. The Commission referred to CETA as the ‘best and most progressive’ EU FTA, containing strong rules on the protection of the environment.99

In line with the new generation agreements wave, CETA contains a whole chapter on ‘Trade and Sustainable Development’100_{and a whole chapter on ‘Trade and Environment’.}101_{In the latter is}

emphasised that ‘Parties are committed to high levels of protection for the environment’102 and that

‘it is inappropriate to encourage trade or investment by weakening the levels of protection afforded

in their environmental law’.103 The parties are also encouraged in the same chapter to facilitate free trade and investment in goods and services of special relevance for climate change mitigation104 and to cooperate in trade-related aspects of the international climate change regime, and domestic climate policies and programmes, including issues relating to the transition to a low-carbon economy.105 In the same line of the new generation agreements, the nature or the environmental provisions is merely aspirational and there is no further clarification on the common legal expectation as to the transition to a greener economy.106 The Recommendation on Trade, Climate Action and the Paris Agreement107 issued by the CETA Joint Committee108 in 2018 attempted to compensate for this shortcoming. In its statement the Joint Committee notably addressed the urgency of the action against climate change and the importance of achieving the goals of the Paris Agreement. The Committee specified that the Paris Agreement is included within the multilateral environmental agreements the effective implementation of which is generically referred to in Article 24.4 and that it is therefore a

Law and the European Union: Towards a New Generation of International Investment Agreements’ (2015) 26/3 European Journal of International Law, 647-649.

98_{Titi, ibid., 644. In this case the author refers to the new generation BITs of 2004 and 2012 which signal a stronger}

affirmation of the right to regulate respect of NAFTA.

99_{Commission, ‘European Commission proposes signature and conclusion of EU–Canada trade deal’ (Press release 5}

July 2016) <https://ec.europa.eu/commission/presscorner/detail/en/IP_16_2371> accessed 5 June 2020.

100_{CETA, Chapter 22.} 101_{CETA, Chapter 24.} 102_{CETA, Article 21.2.2.} 103_{CETA, Article 24.5.} 104_{CETA, Article 24.9.} 105_{CETA, Article 24.12. 1.(e).}

106_{Delphine Misonne, ‘Exploring CETA's Relation to Environmental Law’ (2016) 2/2, ELNI Review, 53.}

107_{CETA Joint Committee, Recommendation on Trade, Climate Action and the Paris Agreement, N. 001/2018}

<http://trade.ec.europa.eu/doclib/press/index.cfm?id=1811> accessed 3 June 2020.

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17 duty of the Parties to ‘progressively increase their efforts to mitigate climate change.’109 The Joint Committee finally recommended the parties to contribute to the mutual supportiveness of trade and climate policies and to cooperate to contribute to the transition to a low emissions economic growth.110

2.2.2 The investment chapter

The new EU investment approach in CETA is expressed through the recognition of the right to regulate, the redefinition of investment protection standards, the transparency of the proceedings and the introduction of a new dispute settlement mechanism.

What has been considered the most important novelty is the reaffirmation of the Parties’ right to regulate, both in the Preamble111 and in the investment chapter of the Agreement.112 It is specified that the right to regulate is recognized in relation to the achievement of “legitimacy policy objectives,

such as the protection of public health and the environment”.113 CETA notably incorporated the police powers doctrine114 and emphasised its importance by placing it in as introductory clause to the investment protection section.

For what concerns the reform of the standards of protection, these have been more precisely defined in order to restrict the discretion of adjudicators when assessing potential breaches. In this sense Article 8.9 specifies ‘for greater certainty’ that ‘the mere fact that a Party regulates, including

through a modification to its laws, in a manner which negatively affects an investment or interferes with an investor’s expectations, including its expectations of profits, does not amount to a breach of an obligation under this Section’.115

Article 8.10 circumscribes the fair and equitable treatment to a closed list of damaging behaviours such as denial of justice, fundamental breach of due process or manifest arbitration.116

Compensatory expropriation is extensively defined in Article 8.12 and an entire annex (8a) is dedicated to the clarification of the scope of indirect expropriation which is specified to occur only in case of a substantial taking of the property right of the investor.

Finally, for what concerns the procedural aspects, section F introduced a new Investment Court System (ICS) in replacement of traditional arbitration with the declared purpose to rebalance the states’ public policy space and the room for investors’ claims.

109_{CETA Joint Committee (n.105).} 110_Ibid.

111_{CETA, Preamble, para.3.} 112_{CETA, Chapter 8.} 113_{CETA Art. 8.9.1.} 114_{See Chapter 1, 1.3.} 115_{Article 8.9.2.}

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18 Further to the numerous public protests in the EU in relation to the inclusion of ISDS mechanism in the TPPI,117 the EU Commission acknowledged the problematics of arbitration and affirmed that with the introduction of the ICS the EU demonstrates its commitment to ‘protect governments’ right to

regulate, and to ensure that investment disputes will be adjudicated in full accordance with the rule of law’.118 The aim is pursued through the establishment of a semi-permanent tribunal of 15 members, 10 of which selected in equal number by each party in accordance to the respective nationalities and the remaining five jointly appointed amongst third countries nationals. The members are to be qualified to exercise judicial functions, the traditional arbitration practice to appoint lawyers is thereby excluded.119_{The members are elected every five years and their decisions are subject to the}

revision of an appellate tribunal. Article 8.29, finally, lays down the parties commitment to promote the establishment of a multilateral investment court (MIC) that would replace both the ICS and any other traditional investment dispute resolution mechanism currently in place within the international community.

The ICS represents a step forward in the safeguard of the independence of the adjudicators on the one side, and on the consistency of the decisions on the other side. Another positive feature is the transparency of the proceedings, which represents a novelty in respect of Member States’ old BITs although it shows continuity with the NAFTA practice.

It is albeit important to point out that the dispute settlement procedure as provided for in Article 8.23 generally mirrors the classic ISDS mechanism. It would still be detached from the legal, social and factual domestic contexts both in the sense of not including requirement to exhaust domestic remedies and of not providing specific rights to members of civil society to participate.120

2.3 NAFTA cases - revisited under CETA

This section will revisit the two most problematic NAFTA cases analysed in Chapter 1, TransCanada and Bilcon, under the CETA investment protection provisions. The aim is to test whether the same situations could potentially occur under such reformed legal framework. As the CETA normative effects have not been tested on real cases yet, the plausibility of the following examination is justified upon the similarities and differences between the CETA and the NAFTA provisions, as interpreted by the author.

117_{Commission, ‘Online public consultation on investment protection and investor-to-state dispute settlement (ISDS) in}

the Transatlantic Trade and Investment Partnership Agreement’ Report, SWD (2015) 3 final; Euractive ‘Thousands across Europe protest against TTIP’ (20 April 2015) < https://www.euractiv.com/section/trade-society/news/thousands-across-europe-protest-against-ttip/> accessed 20 June 2020.

118_{Commission, ‘CETA: EU and Canada agree on new approach on investment in trade agreement’ (Press release 29}

February 2016) <http://trade.ec.europa.eu/doclib/press/index.cfm?id=1468> accessed 3 June 2020.

119_{CETA Article 8.27.}

120_{Meinhard Doelle, ‘The Bilcon NAFTA Tribunal: A Clash of Investor Protection and Sustainability-Based}

Environmental Assessments’ (2017) Key Developments in Environmental Law, 20, SSRN: <http://dx.doi.org/10.2139/ssrn.3002626> accessed 3 June 2020.

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19

2.3.1 TransCanada Corporation v. United States

TransCanada would have probably had more restrictions in submitting its claim under CETA, although many of its arguments would still likely to find legal basis in the EU-Canada agreement. First, the ‘manifest arbitrariness’ and ‘fundamental breach of due process... in administrative

proceedings’ provided for in the closed list of Article 8.10 would likely support the claim of the

breach of fair and equitable treatment by the host state. Indeed, the corporation argued that the reasons behind the long delay of the US administration to provide their rejection were ‘arbitrary and

contrived’ as not reflecting the technical analysis on the environmental impact of the project.121

According to the company, the rejection was merely grounded on the will to ‘make the US appear

strong on climate change even though the denial would have no significant impact on the environment’122 as the state department confirmed itself multiple times the absence of such negative environmental effects.123 Furthermore, the five arguments put forward by the corporation to demonstrate the breach of its legitimate expectations, including, inter alia, that the state department confirmed five times that the pipeline would have not resulted in an increase of GHGs emissions124 could assume particular relevance under Article 8.10.4. The latter provision indeed provides the express duty of the CETA tribunal to take into account State’s specific representations upon which the investor relied in deciding to make or maintain the investment and that were subsequently frustrated by the state.

For what concerns the discrimination claims, namely that first, the US administration previously approved other similar pipelines, including from US and Mexico investors, based on criteria that if applied to TransCanada would have resulted in the approval of the project, and second, that it did so in significantly shorter timeframe,125 they could still take place under CETA. In fact, Article 8.6 and 8.7 provide both the national treatment and most favourite nation standards in a very similar form to Article 1102 and 1103 NAFTA.

Finally, for what concerns the expropriation claim, namely the substantial deprivation of the property for the long delay in the process of the application, annex 8a could play a dissuading role for the investor to submit the claim. Annex 8a indeed explicitly excludes from the definition of the standard “non-discriminatory measures... designed and applied to protect legitimate policy objectives, such as

the protection of public health, safety, environment or public morals.” Nonetheless, if the

discrimination and the speciousness of the public purpose of the rejection were accepted by the

121_{TransCanada, Request for arbitration (n.72) para.63.} 122_{Ibid., para. 51.}

123_{Ibid. Notice of intent (n.68) paras. 50 -51-59.} 124_{Ibid., para. 10.}

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20 tribunal, government decision could indeed qualify as indirect expropriation as the claim is not precluded in toto by Article 8.12. Arguably, if the tribunal would agree with the argument that the government measure is “directly contrary to the findings of the Administration’s own studies” in the sense of effects on climate change,126 the same right to regulate as reaffirmed in CETA would be lacking, as a result of the lack of a legitimate public policy objective.

2.3.2 Bilcon of Delaware et al v. Canada

In relation to Bilcon, the analysis is partially different as it is appropriate to focus on the outcome of the case rather than on the claim, for which substantially similar considerations with the previous cases would be applicable.

The Bilcon tribunal considered that the Canadian authorities breached NAFTA minimum standard of treatment for having followed the ‘arbitrary’ and ‘grossly unfair’ environmental assessment of the joint panel, and that therefore their conduct constituted a ‘manifest failure of natural justice’.127 The

CETA tribunal could decide in the same way by applying the CETA criteria for the violation of the fair and equitable treatment standard, in particular the denial of justice in administrative proceedings provided for in Article 8.10.2 (a).

In determining the breach of the minimum standard of treatment the arbitration tribunal also found that the legitimate expectations of the investor were violated as Canadian officials unjustly encouraged the specific mining project of the investor before prohibiting the same.128 The CETA tribunal would also be in the position to give comparable relevance to the legitimate expectations of the investor under Article 8.10.4.

For what concerns instead the violation of the discrimination clauses, whereas the Bilcon tribunal linked the violation of the most favourite nation standard to the breach of domestic law by the Canadian authorities in the determination of the criteria for the rejection of their project, the CETA tribunal would be subject to a further restriction not present in NAFTA. According to Article 8.31(2) the CETA tribunal ‘shall not have jurisdiction to determine the legality of a measure, alleged to

constitute a breach of this Agreement, under the domestic law of the disputing Party’. In this sense,

the threshold determining the discrimination of the investor would be higher than in NAFTA.

126_{Ibid. para. 1.}

127_{‘The Tribunal finds that the conduct of the joint review was arbitrary. The JRP effectively created, without}

legalauthority or fair notice to Bilcon, a new standard of assessment rather than fully carrying out the mandate defined by the applicable law’. Bilcon, award (n.56) para. 591.

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21

2.3.3 Criticisms

The above re-assessment of the NAFTA cases shows that the clarification and limitation of the investment protection clauses would potentially still allow broad claims and leave a significant margin of discretion to the adjudicator in the definition of the right to regulate and the balancing of the latter with the economic interests of the investors. For example, although annex 8a sets out a high threshold for the breach of the indirect expropriation standard, it does not provide a blank public welfare exception nor unambiguous indication as to the weight to be assigned to the private and public interests involved.129

Furthermore, the fact that no environmental expertise is required for the ICS adjudicators leaves the door open for controversial interpretations of climate policies.

Doelle considered that one of the most problematic aspects of the Bilcon decision was the complete extraneity of the arbitration panel to environmental law in general and to the Canadian domestic environmental regulatory framework in particular.130 The author notes that expertise is even less likely in the situation provided in Articles 8.23(5) and 8.27(9) where a dispute is decided by a single adjudicator, considering that the latter should be selected amongst non-party nationals. In this, the chances for the involvement of domestic environmental law expertise would be even lower.131 These considerations support the likelihood that some shortcomings of the system would remain unchanged.

2.4 CETA Proactive Tools and the role of the Court of Justice

It is worth noting that CETA contains also some ‘pro-active tools’132 to correct the broad judicial discretion allowed by the substantive standards which could have a meaningful effect in relation to climate change related measures.

First, Article 8.44 foresees the establishment of a Committee on Service and Investment to address concerns as to the implementation and improvement of the investment chapter ‘in particular in the

light of experience and developments in other international fora and under the Parties’ other

129_{Rumiana Yotova, ‘Balancing Economic Objectives and Social Considerations in the New EU Investment Agreements:}

Commitments versus Realities’ in Frank Vandenbroucke, Catherine Barnard, Geert De Baere (ed) A European Social

Union after the Crisis, (Cambridge University Press, 2017), 290. In this regard also Misonne points out that ‘the elasticity of these ‘rare circumstances’ shall promptly be tested before the arbitrators, whoever they shall be, with a large interrogation point as to who has legally the power to assess the proportionality of a EU or national measure, in relation to environmental protection’. Misonne (n.104) 52.

130_{Doelle (n.117) 19.} 131_{Ibid., 21.}

132_{Nikos Lavranos, ‘How the European Commission and the EU Member States are Reasserting Their Control over Their}

Investment Treaties and ISDS Rules’ in Andreas Kulick (ed), States’ Reassertion of Control Over International