The Interrelationship Between Climate Change and International Investment Law : Can Investor-State Arbitration Help Cooling Down the Planet?

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The Interrelationship

Between Climate Change

and International Investment Law:

Can Investor-State Arbitration

Help Cooling Down the Planet?

Alain Hardy

Master Thesis

International and European Law: International Trade & Investment Law

Supervised by Dr. Michail Risvas Co-supervised by Dr. Hege Elisabeth Kjos

University of Amsterdam Date of submission: 27 July 2018

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Abstract

Under the 2015 Paris Agreement, states are required to formulate national policy and to take

measures to address the adverse effects of climate change. It is expected that foreign investors who

are hit by climate change measures will try to make use of a bilateral investment treaty (BIT)

between the host state and the investor’s home state to challenge such measures in investment

arbitration. On the other hand, the world needs foreign investment to adequately address climate

change. This paper discusses the interrelationship between climate change obligations and

investment arbitration, and aims to clarify whether investment arbitration could also contribute to

the achievement of climate change goals, as there is currently no enforcement mechanism in place.

To this end, an analysis of the climate change framework will be conducted along with an

assessment of modern investment treaties, the procedural rules of investment arbitration and recent

case law which has involved issues of sustainable development. This paper demonstrates that an

investment tribunal can and should consider the international obligations of states under climate

treaties. What is also clarified is that modern tribunals are probably willing to accept climate

change as a defence for measures with an impact on foreign investments. Moreover, this paper

shows that investment arbitration can not only protect climate-friendly investors, but has the ability

to contribute to a credible climate change policy of states in accordance with their commitments

under climate treaties, like the encouragement of renewable energy. It also explores the possibility

of directly enforcing climate change obligations in investment arbitration, while concluding that

this is still unclear.

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1 Introduction

1.1 Introduction and research plan

For years, climate change has been an important international issue and has been named by the G20 as ‘one of the greatest challenges of our time’.1_{A number of international treaties have been adopted over the years}

with the aim of addressing the adverse effects of climate change.2_{The adoption of the 2015 Paris Agreement}

finally embodied the long-lived wish of the international community to adopt an instrument with an almost universal recognition of the threat of climate change, and the need for an effective and progressive response.3_{However, what emerged was a lack of support for the inclusion of binding global emission}

reduction targets or of concrete measures to be taken by the parties.4_{Instead, the most important obligation}

for the state parties to the Paris Agreement is to make nationally determined contributions (or NDCs) to mitigate climate change. Collectively, the states must ensure that the rise in global average temperate is kept well below 2 degrees Celsius.5

The result of this is that the Paris Agreement requires states to formulate national policy and implement their international climate change commitments into the domestic legal framework, in the form of regulations and other measures. The implementation of these climate change commitments is going to affect certain industries.6_{For instance, the transition from an economy based on fossil fuel to an economy based}

on renewable energy could have an impact on energy producers in the carbon-intensive sector. Measures taken to address climate change can also have a negative impact on existing foreign investments. This could potentially be at odds with bilateral investment treaties (or BITs) to which the host state and the investor’s home state are parties. In case foreign investors are targeted by climate change measures of the state in which they operate, there exist concerns that they will make use of an applicable BIT to challenge those measures in investor-state arbitration. If such claims are successful and compensation must be paid to the investor, they could have the potential to frustrate efforts to address climate change.7_{As far as known to}

the author, there has not yet been an investment arbitration case that directly targeted climate change

1_{G20 Leaders’ Communiqué, Antalya Summit, 15-16 November 2015 <available at}

https://www.mofa.go.jp/files/000111117.pdf accessed 20 July 2018; Daniel Bodansky, Jutta Brunnée and Lavanya Rajamani, International Climate Change Law (OUP 2017) 10.

2_{See Chapter 2.2.}

3_{See Paris Agreement (adopted 12 December 2015, entered into force 5 October 2016) preamble.}

4_{Daniel Bodanksy, ‘The Legal Character of the Paris Agreement’ (2016) 25 Review of European Community &}

International Environmental Law 142, 146.

5_{Paris Agreement (n 3) art. 2 and 4.}

6_{Kate Miles, ‘Sustainable Development, National Treatment and Like Circumstances in Investment Law’ in}

Marie-Claire Cordonier Segger, Markus W. Gehring and Andrew Newcombe (eds), Sustainable Development in World

Investment Law (Kluwer 2011) 273-274.

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mitigation measures. However, the 2009 Vattenfall v Germany case is an often-cited example of an investor in a polluting industry challenging host state measures taken to protect the environment.8

The foregoing suggests that international investment law could have a negative impact in relation to the achievement of climate change goals. This paper examines whether host states could use climate change objectives and obligations under climate treaties as a defence for alleged violations of an investment treaty. Moreover, it seems that climate change and international investment law can also be of use to each other. Research has shown that the world needs significant amounts of foreign investment to adequately address climate change. This includes investments in renewable energy, in the transition from fossil fuel to renewables and in climate change mitigation and adaptation projects.9_{For example, a study of the}

International Finance Corporation estimated that the implementation of the Paris Agreement will require almost USD 23 trillion in green investments between 2016 and 2030 in emerging markets alone.10_{One of}

the possibilities states have to address climate change will thus be to attract foreign investments, for instance by offering support to investments in climate-friendly projects. The next question this paper examines is whether international investment arbitration provides a guarantee for investors who have been induced by states to invest in such climate-friendly projects, when the state does not live up to its promise. The lack of a mechanism for enforcement or dispute resolution under the Paris Agreement and the United Nations Framework Convention on Climate Change (or UNFCCC) is also discussed. This paper aims to clarify whether international investment arbitration has the ability to contribute to the achievement of climate change commitments.

The research question of this paper is: What is the interrelationship between climate change obligations and investment arbitration?

8_{Vattenfall v Federal Republic of Germany, Request for Arbitration to ICSID (30 March 2009)}

<https://www.italaw.com/sites/default/files/case-documents/ita0889.pdf> accessed 2 May 2018; See Chapter 3.1.

9_{See e.g. UNFCCC Report, Investment and Financial Flows to Address Climate Change (2007)}

<https://unfccc.int/resource/docs/publications/financial_flows.pdf> accessed 10 July 2018; UNFCCC Report, Climate Change: Impacts, Vulnerabilities and Adaptation in Developing Countries (2007)

<https://unfccc.int/resource/docs/publications/impacts.pdf> accessed 10 July 2018; Fiona Marshall, ‘Investment, ICSID and climate change: turning obstacles into opportunities’, presentation at The Global Institutional Architecture and the Financial Crisis – An Opportunity for Sustainable Development?’ 14 & 15 September 2009, Berlin, Germany <https://www.ecologic.eu/sites/files/soef/ineg/downloads/Marshall.pdf> accessed 14 May 2018; Stephan W. Schill and Vladislav Djanic, ‘Wherefore Art Thou? Towards a Public Interest-Based Justification of International Investment Law’ (2018) ICSID Review 1, fn. 61;

10_{International Finance Corporation Report, Climate Investment Opportunities in Emerging Markets, An IFC Analysis}

(2016) <https://www.ifc.org/wps/wcm/connect/51183b2d-c82e-443e-bb9b-68d9572dd48d/3503-IFC-Climate_Investment_Opportunity-Report-FINAL-11_6_16.pdf?MOD=AJPERES> accessed 15 July 2018.

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This paper is organized as follows.

Chapter 2 begins with an overview of the climate change framework and the binding obligations contained therein. This is followed by a brief discussion of the dispute settlement clause of the UNFCCC and the Paris Agreement. It then goes on to discuss the possibility of climate change law as customary international law. Next, this chapter discusses the trend in recent investment treaties to refer to climate change and the protection of the environment. The remainder of this chapter is dedicated to the issues of jurisdiction and applicable law which are of importance when applying climate change obligations in investment arbitration. Chapter 3 discusses whether states can use climate change obligations as a shield when taking measures necessary to fulfil their commitments under climate treaties. To this end, it firstly analyses case law, literature and reports to find out how tribunals have dealt with the investment protection standards of indirect expropriation, fair and equitable treatment and national treatment, and whether they have been willing to accept a justification based on public interest. Secondly, this chapter discusses how tribunals have dealt with conflicting international obligations of the host state outside the investment context. It then goes on to analyse whether climate change objectives and obligations could also be used as a defence for measures negatively affecting foreign investors.

Chapter 4 examines how climate change obligations could be used as a sword by both investors and states to for the enforcement of their rights. Again, an analysis of case law, literature and reports is conducted. Section 4.1 discusses the possibility for the investor to bring a claim against the host state. It examines whether an alteration by the state of the climate change policy upon which the investor relied can be seen as a violation of the investment treaty. It also examines whether investment arbitration could encourage states to act in accordance with its commitments under climate treaties. Section 4.2. discusses the possibility for the investor to substantiate the alleged violations of an investment treaty by referring to a breach of other treaties by the host state. Chapter 4.3. discusses state counterclaims based on climate change issues. Chapters 4.2 and 4.3 also explore the possibility of directly enforcing climate change obligations in investment arbitration.

Chapter 5 offers general conclusions. Each chapter includes interim conclusions.

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2 Climate change as international law

2.1 Introduction

Climate change has been an important international issue since the late 1980s and has resulted in the adoption of an extensive body of international law. The 1992 United Nations Framework Convention on Climate Change (UNFCCC) has been a successful contributor to the body of climate treaties, to which the 2015 Paris Agreement is the most recent addition.11_{This chapter provides a general background on the}

current climate regime and sets out the treaties and obligations that are of particular relevance in the context of investment arbitration. Moreover, it discusses how climate change obligations can enter the arbitration process so that they can be considered by the investment tribunal.

2.2 The climate change framework

The 1992 UNFCCC created the governance structure for the international climate regime and continues to function today as a basis for negotiating multilateral agreements.12_{To date, the convention has been ratified}

by 197 countries.13_{Next to definitions and principles of the climate regime it lays down institutional and}

procedural mechanisms. The objective of the UFNCCC is to stabilize greenhouse gas concentrations at a level that would prevent dangerous human interference with the climate system.14_{Most importantly, all}

parties commit to report their greenhouse gas emissions and to adopt measures to mitigate climate change.15

These general commitments do not enforce specific actions, but rather they make sure that countries develop and implement their own mitigation programs.16_{In addition, the developed country parties (the}

so-called Annex I countries) agreed to make further commitments in the UNFCCC.17_{The Annex I countries}

also agreed to take measures to limit greenhouse gas emissions with the aim of returning to the 1990 level by the year 2000.18_{However, the legal status of this limitation on emissions is regarded as non-binding.}19

11_{Bodansky, Brunnée and Rajamani (n 1) ibid; United Nations Framework Convention on Climate Change (adopted 9}

May 1992, entered into force 21 March 1994) (UNFCCC); Paris Agreement (adopted 12 December 2015, entered into force 5 October 2016).

12_{Bodansky, Brunnée and Rajamani (n 1) 118;}

13_{‘What is the United Nations Framework Convention on Climate Change?’}

<https://unfccc.int/process/the-convention/what-is-the-united-nations-framework-convention-on-climate-change> accessed 16 April 2018 (UNFCCC website).

14_{UNFCCC (n 11) art. 2.} 15_{Ibid art. 4(1).}

16_{Bodansky, Brunnée and Rajamani (n 1) 130;}

17_{The Annex I countries are industrialized countries that are part of the Organization for Economic Cooperation and}

Development (OECD). This list includes Eastern- and Middle-European countries ‘undergoing the process of transition to a market economy’. See UNFCCC (n 7) Annex I; UNFCCC website (n 9);

18_{UNFCCC (n 7) art. 2(a) and 2(b).}

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In 1997, the Kyoto Protocol was adopted under the framework of the UNFCCC and laid down the first period of commitments from 2008 to 2012.20_{The scope of the Kyoto Protocol is much narrower than the}

UNFCCC as it focusses on strengthening the mitigation commitments of the Annex I countries through specific targets and timetables.21_{The core commitment of the Kyoto Protocol is that Annex I countries shall}

ensure that their aggregate greenhouse gas emissions do not exceed the assigned amounts and are in compliance with their reduction commitments, with a view to reducing overall emissions by at least 5% below 1990 levels.22_{The difference with the UNFCCC is that the Kyoto Protocol uses a mandatory wording}

(‘shall’) and is regarded as a legally binding obligation to reduce emissions.23_{The Kyoto Protocol also}

introduced three flexible market mechanisms: Joint Implementation, the Clean Development Mechanism and International Emissions Trading.24_{These mechanisms are intended to help parties make emission}

reductions where it is most cost-effective.25_{An extension of the Kyoto Protocol was agreed in the Doha}

Amendment, which introduced a second commitment period until 2020 and a collective target of 18% below 1990 emission levels.26_{However, the future of the Kyoto Protocol beyond 2020 is uncertain. The}

Doha Amendment has not yet entered into force because too few countries have ratified it.27_Moreover,

major industrial countries like the US and Japan have opted out and only some parties have set targets for the second commitment period. These countries only represent a fraction of the global greenhouse emissions.28

After what is seen as an unprecedented effort of international diplomacy, the Paris Agreement was adopted under the UNFCCC in December 2015.29_{The Paris Agreement has two main goals. Firstly, through}

mitigation it aims to hold the increase in the global average temperate to well below 2 °C above pre-industrial levels, while also pursuing efforts to limit the increase to 1,5 °C.30_{To achieve this purpose, the}

parties are required to make ambitious efforts in the form of nationally determined contributions.31

20_{Kyoto Protocol to the United Nations Framework Convention on Climate Change (adopted 11 December 1997,}

entered into force 16 February 2005) art. 3 (Kyoto Protocol); ‘What is the Kyoto Protocol?’

<https://unfccc.int/process/the-kyoto-protocol/what-is-the-kyoto-protocol> accessed 16 April 2018 (Kyoto Protocol website).

21_{Bodansky, Brunnée and Rajamani (n 1) 163; Kyoto Protocol website (n 16).} 22_{Kyoto Protocol (n 20) art. 3.}

23_{Bodansky, Brunnée and Rajamani (n 1) 172; Freya Baetens, ‘The Kyoto Protocol in Investor-State Arbitration:}

Reconcling Climate Change and Investment Protection Objectives’ in Marie-Claire Cordonier Segger, Markus W. Gehring and Andrew Newcombe (eds), Sustainable Development in World Investment Law (Kluwer 2011) 686.

24_{Kyoto Protocol (n 20) art. 6, 12 and 17.} 25_{Bodansky, Brunnée and Rajamani (n 1) 79.} 26_{Ibid 203.}

27_{‘Doha Amendment’ <https://unfccc.int/process/the-kyoto-protocol/the-doha-amendment> accessed 2 June 2018.} 28_{Bodansky, Brunnée and Rajamani (n 1) 204 and 205.}

29_{Ibid 209.}

30_{Paris Agreement (n 3) art 2.} 31_{Ibid art. 3.}

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Secondly, through adaptation it seeks to help countries tackle the adverse impacts of climate change.32_By

2017, more than 190 countries had formulated NDCs, representing 99% of global emissions.33_{A number}

of provisions of the Paris Agreement are hard law. They are formulated in mandatory terms for each party and contain rights and obligations that can be assessed for compliance.34_{The most significant one is the}

obligation to prepare, communicate and maintain successive NDCs and to pursue domestic mitigation measures, with the aim of actually achieving these the objectives.35_{A more progressive NDC must be}

formulated every five years.36_{The text makes clear that the obligation is one of conduct, rather than result.}

It has not been possible to require parties to actually achieve their NDCs, as this would have given the NDCs essentially the same legal status as the emission targets set out in the Kyoto Protocol, which has already been rejected by many countries.37_{However, review is made possible due to the obligation of the}

parties to regularly provide an inventory of their greenhouse gas emissions and to report on the progress made in implementing and achieving their NDCs.38

Next to the international treaties, there exist regional instruments that are of importance to the climate change framework. The European Union (EU) Emissions Trading System (ETS) is an example of this.39

The current ETS places an EU-wide cap on the total amount of greenhouse gas emissions in inter alia the power generation sector and energy-intensive industries. The amount decreases every year, thereby reducing the total greenhouse gas emissions within the EU.40_{The covered sectors should achieve an}

emissions cut by 20% in 2020 compared to 2005 levels, while the European Commission has proposed plans to achieve a 40% cut in emissions by 2030.41_{In order to make emission cuts in places where it is most}

cost-effective, an auctioning system for the allocation of emission allowances has been put in place, the revenues of which must be partly invested in climate change mitigation and adaptation projects.42

Enforcing climate change commitments and resolving disputes is a challenging task. The climate regime is mostly based on voluntary compliance; hence it includes no real enforcement mechanism. The UNFCCC

32_{Ibid art. 7.}

33_{Bodansky, Brunnée and Rajamani (n 1) 210.} 34_{Bodansky, Brunnée and Rajamani (n 1) 213.} 35_{Paris Agreement (n 3) art. 4(2).}

36_{Ibid art. 4(9) and 4(3).} 37_{Bodanksy (n 4) 146.}

38_{Paris Agreement (n 3) art. 13(7).}

39_{‘EU Emissions Trading System (EU ETS)’ <https://ec.europa.eu/clima/policies/ets_en> accessed 22 May 2018}

(ETS website).

40_{ETS website (n 39); Sanja Bogojević, ‘Climate Change Law and Policy in the European Union’ in Cinnamon P.}

Carlarne, Kevin R. Gray, Richard Tarasofsky (eds), The Oxford Handbook of International Climate Change Law (OUP 2016) 677.

41_{ETS website (n 39).} 42_{Bogojević (n 40) 677-678.}

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does, however, contain a dispute settlement clause, which is also applicable to the Paris Agreement.43_In

the event of a dispute between states, the parties involved should try and find a solution through negotiation or other peaceful means. The parties may also at any time declare that they recognize as compulsory the jurisdiction of the International Court of Justice and/or arbitration for the settlement of their disputes.44_At

the moment, only a few countries have submitted an arbitration annex and the procedural rules necessary for an arbitration proceeding under the UNFCCC are still not in place.45_{This means that the Paris}

Agreement currently lacks an important mechanism for assuring compliance and resolving disputes. By contrast, the development of investment arbitration in recent decades has led to an advanced system of international dispute resolution, embodied in extensive arbitration rules and an ample amount of arbitral case law. Indeed, the UNFCCC provides for dispute settlement between states, while investment arbitration deals with disputes between investors and states only and is confined to disputes arising out of an investment. Hence, the ability of one state to bring a claim against the other under the UNFCCC would probably be a more effective mechanism for enforcement of the commitments made under the climate treaties. However, one of the issues this paper aims to clarify is whether investment arbitration could in some way contribute to the achievement of climate change commitments.

2.3 Customary international law

A binding obligation is not always the result of an express agreement between states but can also be derived from custom. According to article 38 of the Statute of the International Court of Justice, international custom is evidenced by a ‘general practice accepted as law’.46_{In order to establish a rule of customary}

international law, there must be consistent state practice which is recognized by those states as legally binding. Proving the existence of a rule of customary international law for contemporary issues can be difficult due to the short time frame. However, there are a number of environmental principles recognized under international law.47

One of the most significant principles is the no-harm principle, which lays down that a state has the legal duty to prevent, reduce and control the risk of environmental harm to other states.48_{The roots of this}

43_{UNFCCC (n 11) art. 14; Paris Agreement (n 3) art. 24.} 44_{UNFCCC (n 11) art. 14.}

45_{Bodansky, Brunnée and Rajamani (n 1) 155.}

46_{Statute of the International Court of Justice (1945) art. 38.}

47_{Malcolm N. Shaw, International Law (7th edn, OUP 2014) 53; International Bar Association Climate Change and}

Human Rights Report, Achieving Justice and Human Rights in an Era of Climate Disruption (2014) 65

<https://www.ibanet.org/Document/Default.aspx?DocumentUid=0F8CEE12-EE56-4452-BF43-CFCAB196CC04> accessed 18 April 2018 (IBA Report).

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principle can be found in the Trail Smelter arbitration, which involved a dispute over transboundary polluting emissions from Canadian territory into the United States.49_{The Tribunal argued that under the}

principles of international law, no state may allow the use of its territory for activities that cause serious harm in the territory of another.50_{Despite the fact that the no-harm principle is frequently referred to, it}

seems that - outside the scope of a specific treaty - it does not require a ‘general obligation’ to prevent harm. Rather, it is often used in the context of regional disputes and means that states should consider environmental norms when formulating policy. Moreover, the principle of sustainable development, the precautionary principle and the polluter pays principle are widely recognized by states as important principles. However, these principles cannot be seen as rules of customary international law, largely due to existing disagreements over their exact definition and meaning.51

2.4 Investment treaties

In recent years, sustainable development has received more and more attention in international economic law. This trend can be observed in recent bilateral investment treaties (or BITs) and free trade agreements (FTAs), which increasingly contain language that emphasizes the importance of sustainable development, the environment and climate change. For the purpose of this paper, the used term ‘investment treaty’ refers to both BITs and FTAs that include investment protection provisions. A 2014 OECD study brought to light that more than 75% of recent investment treaties contain language on sustainable development. Almost all of the treaties concluded in 2012 and 2013 contain such language.52

The draft version of the Netherlands Model BIT, which was made public in May 2018, introduces novel provisions explicitly recognizing state obligations under the Paris Agreement and other multilateral environmental agreements.53_{Next to this, the Model BIT recognizes the right of the state to regulate for the}

protection of the environment and emphasizes the importance of sustainable development in investment law.54_{In addition, it lays down that it is inappropriate to encourage investment by lowering levels of}

49_{Trail Smelter Case (United States v Canada) (1941) Arbitral Tribunal (3 United Nations Reports of International}

Arbitration Awards 1905).

50_{Trail Smelter Case (n 49) 1965; See also Lake Lanoux Arbitration (Spain v France) (1957) Arbitral Tribunal (12}

Reports of International Arbitration Awards 281).

51_{IBA Report (n 47) 66.}

52_{Kathryn Gordon, Joachim Pohl, Marie Bouchard, Investment Treaty Law, Sustainable Development and}

Responsible Business Conduct: A Fact Finding Survey, OECD Working Papers on International Investment (2014) 5

<https://www.oecd-ilibrary.org/finance-and-investment/investment-treaty-law-sustainable-development-and-responsible-business-conduct-a-fact-finding-survey_5jz0xvgx1zlt-en> accessed 23 April 2018.

53_{Netherlands Draft Model BIT (2018) art. 6(5)}

<https://globalarbitrationreview.com/digital_assets/820bcdd9-08b5-4bb5-a81e-d69e6c6735ce/Draft-Model-BIT-NL-2018.pdf> accessed 29 May 2018.

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domestic environmental protection.55_{The Canada-EU Comprehensive Economic & Trade Agreement}

(CETA) recognizes the right of each party to adopt environmental regulation on sufficiently high levels and in accordance with multilateral environmental agreements.56_{However, older instruments like the 2012 US}

Model BIT already stressed the importance of environmental law and multilateral environmental agreements.57_{The 2009 Peru-US Trade Promotion Agreement lays down that parties shall adopt laws and}

regulations to fulfil their obligations under a number of multilateral environmental agreements.58_{The 2008}

Canada-Colombia FTA recognizes the right and the duty of states to conserve and protect the environment, as well as the obligations under multilateral environmental treaties.59_{Finally, the preamble of the}

Japan-Switzerland Economic Partnership Agreement states that parties seek to ‘adequately address the challenges of climate change’.60

Although most investment treaties refer to the term ‘international environmental agreements’, it can be assumed that this term also encompasses international agreements targeting climate change. International environmental agreements have been defined in literature as ‘intergovernmental document[s] intended as legally binding with a primary stated purpose of preventing or managing human impacts on natural resources’.61_{Such definition would at least include the binding climate change obligations laid down in}

international climate treaties to which a state is a party.62_{The increasing attention for sustainability, the}

environment and climate change in investment treaties could therefore indicate that climate change is going to play a greater role in future investment arbitrations.

2.5 Jurisdiction of the investment tribunal

55_{Ibid art. 6(3); See also e.g. Canada-EU Comprehensive Economic & Trade Agreement (adopted 30 October 2016,}

provisionally entered into force 21 September 2017) art. 24.5.

<http://trade.ec.europa.eu/doclib/docs/2014/september/tradoc_152806.pdf> accessed 31 May 2018 (CETA) and U.S. Model Bilateral Investment Treaty (2012) art. 12(2) <https://www.state.gov/documents/organization/188371.pdf> accessed 23 April 2018 (US Model BIT).

56_{CETA (n 55) art. 24.2, 24.3 and 24.4} 57_{US Model BIT (n 55) art. 12.}

58_{Unites States – Peru Trade Promotion Agreement (adopted 12 April 2006, entered into force 1 February 2009) art.}

18.2 and Annex 18.2 <https://ustr.gov/trade-agreements/free-trade-agreements/peru-tpa/final-text> accessed 23 April 2018.

59_{Canada-Colombia Free Trade Agreement (adopted 21 November 2008, entered into force 15 August 2011) art.}

1701 and 1702 <http://international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/colombia-colombie/fta-ale/17.aspx?lang=eng> accessed 23 April 2018.

60_{Agreement on Free Trade and Economic Partnership between Japan and the Swiss Confederation (adopted 19}

February 2009, entered into force 1 September 2009) preamble

<http://www.mofa.go.jp/region/europe/switzerland/epa0902/agreement.pdf> accessed 23 April 2018.

61_{Ronald B. Mitchell, ‘International Environmental Agreements: A Survey of Their Features, Formation, and Effects’}

(2003) 28 Annual Review of Environment and Resources 429, 432.

62_{See Vienna Convention on the Law of Treaties (adopted 23 May 1969, entered into force 27 January 1980) art.}

2(1)(a) and 11 (VCLT). See also US Model BIT (n 55) art. 12(4)(a) and CETA (n 55) art. 24.1 which explicitly lay down that ‘environmental law’ encompasses regulation relating to polluting emissions.

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The ability of an investment tribunal to decide on a dispute is based on an agreement between the investor and the host state to arbitrate. Therefore, the scope of jurisdiction of the tribunal and the law governing the dispute is at the parties’ discretion. The question is what this means for the role of climate change obligations in the dispute as this is an issue that mostly goes beyond the substantive provisions in the investment treaty.

To be able to hear the dispute in any type of arbitral proceeding, the tribunal must first establish its own jurisdiction. The majority of investment arbitrations are resolved under the auspices of the International Centre for the Settlement of Investment Disputes (ICSID).63_{The ICSID Convention lays down that the}

arbitral tribunal has jurisdiction over ‘any legal dispute arising directly out of an investment’.64_{There are}

also a number of other options available and the applicable BIT sometimes offers the investor the possibility to choose between ICSID and other arbitration rules, like those of UNCITRAL or ICC.65_{Because arbitration}

is based on agreement the explicit consent of each party is required in order to establish jurisdiction. Consent to arbitrate can be given in the host state’s national legislation, in a bilateral or multilateral investment treaty or in a direct agreement between the foreign investor and the host state.66_{Consent offered through BITs has}

been the basis for most investment arbitrations in recent years.67_{The scope of arbitration clauses in BITs is}

usually broad and, for example, offers consent to arbitrate ‘all disputes concerning investments’ or ‘any legal dispute concerning an investment’. Such clauses establish that the jurisdiction of the tribunal is not limited to violations of the substantive investment protection provisions in the treaty. Rather, it enables tribunals to hear disputes that go beyond the interpretation and application of the BIT, such as disputes over contracts in connection with the investment.68

Another issue relates to the question of who can bring a claim under a BIT. Is this only the foreign investor, or does the tribunal’s jurisdiction extend to counterclaims by states? If the dispute is resolved by ICSID arbitration, article 46 of the ICSID Convention lays down that the tribunal may consider counterclaims ‘arising directly out of the subject matter of the dispute provided that they are within the scope of consent

63_{Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (2nd edn, OUP 2012) 238.} 64_{Convention on the Settlement of Investment Disputes between States and Nationals of Other States (entered into}

force 14 October 1966) art. 25

<https://icsid.worldbank.org/en/Documents/icsiddocs/ICSID%20Convention%20English.pdf> accessed 24 April 2018 (ICSID Convention).

65_{Dolzer & Schreuer (n 63) 241; UNCITRAL Arbitration Rules (adopted 1976, revised 2010 and 2013)}

<http://www.uncitral.org/pdf/english/texts/arbitration/arb-rules-2013/UNCITRAL-Arbitration-Rules-2013-e.pdf > accessed 24 April 2018; ICC Arbitration Rules (adopted 2012, revised 2017, entered into force 1 March 2017) <https://cdn.iccwbo.org/content/uploads/sites/3/2017/01/ICC-2017-Arbitration-and-2014-Mediation-Rules-english-version.pdf.pdf> accessed 24 April 2018.

66_{Dolzer & Schreuer (n 63) 254.} 67_{Ibid 257.}

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of the parties and are otherwise within the jurisdiction of the Centre’.69_{The UNCITRAL and ICC arbitration}

rules also allow counterclaims.70_{Although the ICSID Convention seems to explicitly open the door for}

bringing counterclaims, its reference to the parties’ consent means that a tribunal still has to examine the arbitration clause of the underlying BIT. The arbitration clause will typically provide which party may submit a dispute to arbitration and these clauses differ from treaty to treaty. A sufficiently broad arbitration clause may enable the state to bring a counterclaim. However, it is also important over which subject matter a counterclaim can be brought. In case the state may only base the merits of its counterclaim on the investment protection standards in the BIT, the claim is unlikely to be successful, as these standards usually contain obligations for the host state. Preferably for the host state, the BIT lays down that both parties may also bring claims based on a contract concerning the investment.71

2.6 Applicable law

Foreign investments are regulated by international law as well as by the domestic law of the host state. International law, like the applicable BIT, provides the investment protection standards on which an investor may rely. In addition, the investor and the operations of his investment will need to respect the rules of the domestic legal system, like commercial law, tax law and environmental law. An agreement on the applicable law between the investor and the host state is also possible, and in the majority of cases such an agreement refers to international law together with the domestic law of the host state.72_{Some instruments}

lay down specific provisions on the applicable law. Article 42 of the ICSID Convention, for example, stipulates that the tribunal ‘shall decide a dispute in accordance with such rules of law as may be agreed by the parties’. In case there is no such agreement, the ICSID tribunal shall apply the domestic law of the host state together with applicable international law.73

In case of a conflict between international law (like an applicable BIT) and domestic law of the host state, international law will most likely prevail. International tribunals have consistently followed this approach.74

This approach is also reflected in art. 27 of the Vienna Convention on the Law of Treaties (VCLT), which lays down that a state cannot use its domestic laws to justify non-compliance with international treaties to

69_{ICSID Convention (n 64) art. 46.}

70_{ICC Arbitration Rules (n 65) art. 5; UNCITRAL Arbitration Rules (n x) art. 4.}

71_{Anne Hoffman, ‘Counterclaims in Investment Arbitration’ (2013) ICSID Review 438, 447.} 72_{Dolzer & Schreuer (n 63) 288.}

73_{ICSID Convention (n 64) art. 42.}

74_{Exchange of Greek and Turkish Populations, PCIJ Advisory Opinion, Ser B, No. 10 (21 February 1925).}

Costa v Enel, CJEU Case 6/64 (15 July 1964); Eileen Denza, ‘The Relationship between International and National Law’ in Malcolm D. Evans (ed), International Law (3rd edn, 2010) 413;

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which it is a party.75_{In the context of the European Union, the Court of Justice of the EU (or CJEU) has}

gone even further by maintaining that EU law has an autonomous status with respect to international law and the domestic law of its member states.76_{There exists some tension between the EU-dispute settlement}

system and investment arbitration. In the Electrabel v Hungary arbitration, the jurisdiction of the investment tribunal in intra-EU disputes was contested by the European Commission in an amicus curiae brief.77_The

Commission argued that there was a conflict between EU law and the Energy Charter Treaty (or ECT).78

The situation where an investment tribunal would be asked to interpret EU law was problematic to the Commission, as the exclusive competence for this lies with the CJEU, to which an investment tribunal cannot make a preliminary reference under art. 267 TFEU.79_{Thereafter, the CJEU recognized the}

Commission’s concerns in its March 2018 Slovak Republic v Achmea judgment.80_{In this case, the CJEU}

decided that EU law precludes the settlement of investment disputes by an arbitral tribunal on the basis of a BIT concluded between member states, if the dispute could potentially relate to the interpretation or application of EU law.81_{The consequences of this decision are yet to be seen.}

In investment arbitration, there are a number of ways in which the climate change regime can enter the proceeding. Firstly, the applicability of international law opens the door for international climate change obligations to come into play. When the host state is a party to and bound by international climate treaties like the Paris Agreement, the investment tribunal can apply the climate change regime because it forms part of international law. This is reflected in article 31(3)(c) VCLT, which lays down that any rules of international law applicable between the parties shall be taken into account when interpreting a treaty.82

According to the International Law Commission, this is a mandatory part of treaty interpretation.83_Many

international courts like the International Court of Justice, the European Court of Human Rights and the WTO Appellate Body are increasingly following this approach.84_{Recent investment tribunals have also}

75_{VCLT (n 62) art. 27.}

76_{Costa v Enel, CJEU Case 6/64 (15 July 1964); Slovak Republic v Achmea BV, CJEU Case C-284/16 (6 March}

2018) para 33; Denza (n 74) 415.

77_{Electrabel v Republic of Hungary, ICSID Case No. ARB/07/19, Decision on Jurisdiction, Applicable Law and}

Liability (30 November 2012) para 4.89ff.

78_{The ECT is a multilateral framework that promotes energy cooperation, trade in energy and related materials,}

investment protection and sustainable development (‘The Energy Charter Treaty’

<https://energycharter.org/process/energy-charter-treaty-1994/energy-charter-treaty/> accessed 1 June 2018).

79_{See Andreas Kulick, ‘Case Comments, Electrabel S.A. v. The Republic of Hungary’ (2014) 15 Journal of World}

Investment and Trade 273, 276.

80_{Slovak Republic v Achmea BV, CJEU Case C-284/16 (6 March 2018).} 81_{Ibid par 35 ff.}

82_{VCLT (n 62) art. 31(3)(c).}

83_{Study Group of the International Law Commission, Fragmentation of International Law: Difficulties Arising from the}

Diversification and Expansion of International Law, finalised by Martti Koskenniemi (2006) para 425 <http://legal.un.org/ilc/documentation/english/a_cn4_l682.pdf> accessed 1 June 2018.

84_{Chester Brown, ‘Bringing Sustainable Development Issues before Investment Treaty Tribunals’ in Marie-Claire}

Cordonier Segger, Markus W. Gehring and Andrew Newcombe (eds), Sustainable Development in World Investment

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been willing to take into account other international obligations of the state when interpreting investment treaties.85_{Secondly, specific references contained in an investment treaty can inform the tribunal’s decision}

when it needs to interpret the investment treaty. As discussed before, recent investment treaties increasingly refer to climate change, environmental principles and obligations under international environmental agreements.86_{Such references could be used to demonstrate that the parties intended that climate change}

measures taken in order to fulfil (international) commitments should inform, or even prevail over, investment protection standards.87_{Therefore, this paper argues that an investment tribunal which is}

interpreting the investment protection standards of an investment treaty can and should consider the rules and obligations contained in climate treaties to which the host state and the investor’s home state are parties.

Thirdly, international climate change obligations are going to be implemented in the host state’s domestic law. Climate treaties require states to formulate national policies in order to stop global warming. In the case of the Paris Agreement, these policies are called NDCs to mitigation. Consequently, a state will give effect to these commitments by incorporating regulations into its domestic legal framework. This will lead to the adoption of new domestic laws and the amendment of existing laws. Examples could be the introduction of emission reduction targets, energy efficiency requirements and tax exemptions for green investments.88_{Those laws can be considered by a tribunal as they form part of the domestic law as}

applicable to the dispute. As such, international climate change obligations could also have an indirect relevance in investment arbitration.

Last, even if climate change obligations are not directly argued by one of the parties, they could enter the dispute through amicus curiae, or third-party intervention, in the arbitration process. The participation of non-governmental organisation or other civil society groups could contribute to an incorporation of broader public policy concerns into the dispute. In recent years, interested groups have increasingly been wanting to make use of amicus curiae and arbitral tribunals have become more willing to allow such participation.89

For the purpose of this paper, amicus curiae will not be further discussed.

85_{See Chapter 3.5.} 86_{See Chapter 2.4.}

87_{Risteard de Paor, ‘Climate Change and Arbitration: Annex Time before there won’t be A Next Time’ (2017) 8}

Journal of International Dispute Settlement 179, 212.

88_{Miles (6) ibid.}

89_{Eugenia Levine, ‘Amicus Curiae in International Investment Arbitration: The Implications of an Increase in}

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2.7 Interim conclusion

The Kyoto Protocol and the Paris Agreement both lay down binding international climate change obligations. The Kyoto Protocol lays down a binding obligation to reduce emissions. In the Paris Agreement, the most significant obligation is to make nationally determined contributions to climate change mitigation. However, due to the fact that the support for the Kyoto Protocol has decreased and its destiny is uncertain, the Paris Agreement and its binding obligations are probably going to be of most relevance in the future. Next to this, there are regionals instruments like the EU Emissions Trading Scheme which lay down binding emission reduction targets in order to mitigate climate change.

In recently concluded investment treaties, a clear trend can be observed to address issues of sustainable development. This is done through explicit references to such objectives, like addressing the impact of climate change and protection of the environment. Investment treaties also increasingly refer to international environmental treaties and climate treaties and the right of the state to regulate for the protection of the environment. Some treaties, like the Peru-US Trade Promotion Agreement, explicitly refer to state obligations under multilateral environmental agreements, while the 2018 Draft Netherlands Model BIT recognizes state obligations under the Paris Agreement. It can be assumed that the references to international environmental agreements also include the binding obligations under climate treaties to which the host state is a party. The increasing attention for climate change and environmental protection in investment treaties could therefore indicate that climate change obligations are going to play a greater role in future investment arbitrations.

This paper argues that an investment tribunal which is interpreting the investment protection standards of an investment treaty can and should consider the rules and obligations contained in climate treaties to which the host state and the investor’s home state are parties. Firstly, because most investment treaties provide that international law is applicable to the dispute, climate change obligations laid down in treaties can be applied as they form part of international law. According to the Vienna Convention of the Law of the Treaties, the investment tribunal shall take into account any rules of international law applicable between the parties when it is interpreting an investment treaty. This approach is seen as a mandatory part of treaty interpretation and is consistently followed by international courts. Secondly, references to the environment and climate change in the investment treaty demonstrate that parties intended that climate change mitigation measures should at least inform investment protection standards. Thirdly, climate change obligations could be indirectly considered by the tribunal in an implemented form as part of the domestic law of the host state, and as a result of a possible third-party intervention in the dispute.

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3 Climate change as a shield

3.1 Introduction

The implementation of climate change obligations and the measures taken in order to fulfil its objectives will probably affect certain industries. For example, the transition from an economy based on fossil fuel to an economy based on renewables will have an impact on existing investments in the energy sector. Climate change mitigation measures, adopted to give effect to the NDCs under the Paris Agreement, could involve a prohibition on particular products and activities or the withdrawal of licenses for emitting industries. Moreover, energy efficiency standards could be introduced, as well as tax exemptions or other incentives for green investments. It is expected that investors who fear for the profitability of their investments as a result of measures taken to mitigate climate change are going to use fora like investment arbitration to claim compensation.90

An example of this could be the case Vattenfall v Germany.91_{In 2009, the Swedish energy company}

Vattenfall initiated ICSID arbitration against Germany under the Energy Charter Treaty. The details were confidential, but it was eventually revealed that Vattenfall claimed EUR 1.4bn in damages for alleged violations of the investment protection provisions in the ECT.92_{Vattenfall argued that a number of actions}

taken by the Hamburg authorities amounted to an indirect expropriation and were contrary to the standards of fair and equitable treatment (or FET) under the ECT. According to Vattenfall, the authorities had done so by delaying the permit for a coal-fired power plant operated by Vattenfall, and by imposing restrictions on the usage of cooling water from the Elbe river.93_{The parties eventually agreed to a settlement.}94_Climate

change issues were not a direct motivation for this case, but it had a clear connection with it as the Hamburg authorities allegedly withheld the ‘CO2 intense permit’ for reasons of climate change protection.95_{In May}

2012, Vattenfall filed another request for ICSID arbitration against Germany for its decision to phase-out nuclear power, which led to the closing of two of Vattenfall’s nuclear power plants.96

90_{Kate Miles (n 6) ibid.}

91_{Vattenfall v Federal Republic of Germany, Request for Arbitration to ICSID (30 March 2009)}

<https://www.italaw.com/sites/default/files/case-documents/ita0889.pdf> accessed 2 May 2018.

92_{Roda Verheyen and Cathrin Zengerling, ‘International Dispute Settlement’ in Cinnamon P. Carlarne, Kevin R. Gray,}

Richard Tarasofsky (eds), The Oxford Handbook of International Climate Change Law (OUP 2016) 421-422.

93_{Vattenfall v Federal Republic of Germany, Request for Arbitration to ICSID (30 March 2009) para 50-54.}

<https://www.italaw.com/sites/default/files/case-documents/ita0889.pdf> accessed 2 May 2018.

94_{The settlement agreement is attached to the award (Vattenfall v Federal Republic of Germany , ICSID Case No.}

ARB/09/6, Award (11 March 2011) <https://www.italaw.com/sites/default/files/case-documents/ita0890.pdf> accessed 1 June 2018).

95_{Verheyen and Zengerling (n 92) 422.}

96_{Vattenfall AB and others v. Federal Republic of Germany, ICSID Case No. ARB/12/12; Nathalie}

Bernasconi-Osterwalder and Rhea Tamara Ho mann, ‘The German Nuclear Phase-Out Put to the Test in International

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The Vattenfall example illustrates that investors in polluting industries could be willing to resort to investment arbitration by invoking investment protection standards to challenge unfavourable climate change regulation. This section discusses the investment protection standards of indirect expropriation, fair and equitable treatment and national treatment that are usually included in investment treaties, and which an investor could invoke in case these are conflicting with host state measures. It then goes on to discuss the possibility of the host state to raise climate change objectives and international obligations as a defence for measures negatively affecting investors.

3.2 Indirect expropriation

Investors have relied on the standard of indirect expropriation in a number of cases with an environmental aspect.97_{Investment treaties usually respect the sovereign right of the state to take property, but only if this}

is done for a public purpose and against payment of adequate compensation.98_{The difference between direct}

and indirect expropriation is that the latter is done without an official transfer of title. Rather, the action of the state results in a situation in which the investor can no longer benefit from his investment.99_{Case law}

has demonstrated that there is a high threshold for establishing an indirect expropriation, mostly requiring ‘total’ or ‘substantial’ deprivation of the value of the investment.100_{A number of early environmental cases}

have dealt with indirect expropriation. For example, the Tribunal in Metalclad v Mexico (2000) found that by denying the investor the right to operate a landfill, Mexico’s actions amounted to an expropriation of his investment.101_{In addition, the Tribunal noted that the Ecological Decree issued by the Mexican authorities,}

which created an ecological preserve in the area of the landfill, made it impossible for the investor to operate its investment.102_{The Tribunal did not consider Mexico’s underlying motivation for the ecological decree}

but simply found that issuing the decree by itself would amount to an expropriation under the North American Free Trade Agreement (NAFTA).103_{The findings of the Tribunal illustrate one line of reasoning}

tribunals have used when dealing with allegations of indirect expropriation.104_{This method of interpretation}

Institute for Sustainable Development <https://www.iisd.org/sites/default/files/publications/state-of-play-vattenfall-vs-germany-II-leaving-german-public-dark-en.pdf> accessed 1 June 2018.

97_{Kate Miles, ‘Arbitrating Climate Change: Regulatory Regimes and Investor-State Disputes’ (2010) 1 Climate Law}

63, 71.

98_{Dolzer and Schreuer (n 63) 98-100.} 99_{Ibid 101.}

100_{Ibid 117.}

101_{Metalclad Corporation United Mexican States, ICSID Case No. ARB(AF)/97/1, Award (30 August 2000) para 104.} 102_{Ibid 109.}

103_{Ibid 111.}

104_{See for a similar reasoning e.g. Tecmed v The United Mexican States, ICSID Case No. ARB (AF)/00/2, Award (29}

May 2003) with a reference to environmental protection in para 164; Azurix Corp. v The Argentine Republic, ICSID Case No. ARB/01/12, Award (14 July 2006) para 310.

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has been called the ‘sole effect’ approach.105_{It means that the actual effect of governmental action on the}

investment is a decisive factor for establishing whether an indirect expropriation has taken place. The rationale behind the measure is of significantly less importance. Consequently, even a legitimate measure taken to protect the environment would give rise to compensation for the investor.106_{According to this}

doctrine, the same will be true for climate change measures whenever they have a detrimental impact on foreign investments.

However, most later tribunals tend to use the ‘purpose approach’ by allowing necessary regulations in the public interest and excluding these from the scope of the investment treaty.107_{The UNCITRAL tribunal in}

the 2005 Methanex v United States case found that a regulation enacted by the United States and affecting the investor did not qualify as an indirect expropriation.108_{Instead, it held that it is ‘a matter of general}

international law, [that] a non-discriminatory regulation for a public purpose, which is enacted in accordance with due process and, which affects, inter alios, a foreign investor or investment is not deemed expropriatory’. According to the Tribunal, a regulation meeting those criteria does not qualify as an indirect expropriation nor can it give rise to compensation for the investor, unless specific commitments were given to the investor that the government would not enact such a regulation.109_{Those commitments were not}

given, and the Tribunal noted that the investor was aware of the fact that the public authorities in the market in which he operated continuously enacted legislation for reasons of public health or the environment.110

The Methanex Trbibunal appreciated the right of the state to regulate, and chose to apply an additional requirement for establishing indirect expropriation. Furthermore, the reference to the active public authorities could indicate that the investor should anticipate on an amendment of the law for objectives like the protection of the environment.111_{The right of the state to regulate was also recognized in the 2006}

Saluka v Czech Republic case which refers to Methanex.112_{Here, the Tribunal states that it is a principle of}

customary law that general regulations commonly accepted within the police powers of the state do not

105_{For further reading, see Martins Paparinskis, ‘Regulatory Expropriation and Sustainable Development’ in}

Marie-Claire Cordonier Segger, Markus W. Gehring and Andrew Newcombe (eds), Sustainable Development in World

Investment Law (Kluwer 2011).

106_{Kate Miles (n 97) 72-73.}

107_{Ibid 74; Tribunals have not always been consistent. The 2006 Azurix Award (n 104) again followed the}

effects-based approach.

108_{Methanex Corporation v United States of America, UNCITRAL, Final Award of the Tribunal on Jurisdiction and}

Merits (3 August 2005) Part IV chapter D, page 3, para 6 and 7.

109_{Ibid para 6 and 7.} 110_{Ibid para 9.}

111_{See M. Sornarajah, Resistance and Change in the International Law on Foreign Investment (Cambridge University}

Press 2015) 280.

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amount to an indirect expropriation and consequently no compensation has to be paid to the investor.113_The

‘purpose approach’ is also recognized by the Organisation for Economic Co-operation and Development (OECD), which states in its working paper on indirect expropriation that ‘[i]t is an accepted principle of customary international law that where economic injury results from a bona fide non-discriminatory regulation within the police powers of the State, compensation is not required’.114_{Moreover, the approach}

is reflected in contemporary investment instruments like the 2012 US Model BIT, which lays down that expropriation does not occur when non-discriminatory measures are taken for public purposes, such as the environment, except in rare circumstances.115

3.3 Fair and equitable treatment

Next to expropriation, most investment treaties contain a provision to ensure the fair and equitable treatment of foreign investments. The FET standard has been the most invoked standard in recent years and the majority of successful claims in investment arbitration have been based on this standard.116_{A key element}

of the FET standard is the legitimate expectations of the investor.117_{Although there is some ambiguity about}

its precise meaning, which is also influenced by the exact wording of the provision in the investment treaty, tribunals in the past have often referred to the case Tecmed v Mexico.118_{The Tribunal in Tecmed held that}

the FET standard entails that the host state should treat foreign investments in a way that does not ‘affect the basic expectations that were taken into account by the foreign investor to make the investment’. According to the Tribunal, the foreign investor may expect that the host state acts in a consistent manner, unambiguous and transparently, so that the investor is aware of regulations and practices which enables him to plan his investment accordingly.119_{The Tecmed award can be seen as being ‘pro-investor’ and is}

often criticized because it involves a high standard which the host state can hardly satisfy in practice.120

Many recent investment tribunals have departed from the Tecmed approach. These tribunals have argued that the FET standard requires a balancing act between the legitimate expectations of the investor and the

113_{Ibid para 262.}

114_{OECD, Indirect Expropriation" and the "Right to Regulate" in International Investment Law, OECD Working Papers}

on International Investment (2004 OECD Publishing) 5, n 10.

115_{US Model BIT (n 55) Annex B on Expropriation.} 116_{Dolzer and Schreuer (n 63) 130.}

117_{UNCTAD Series on Issues in International Investment Agreements II, ‘Fair and Equitable Treatment’ (2012) 63}

<http://unctad.org/en/Docs/unctaddiaeia2011d5_en.pdf> accesed 2 June 2018.

118_{Tecmed v The United Mexican States, ICSID Case No. ARB (AF)/00/2, Award (29 May 2003); see Dolzer and}

Schreuer (n 63) 132ff and 142.

120_{David W. Rivkin, Sophie J. Lamb and Nicolas K. Leslie ‘The Future of Investor-State Dispute Settlement in the}

Energy Sector: Engaging with Climate Change, Human Rights and the Rule of Law (2015) 8 Journal of World Energy Law and Business 130, 139-140.

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legitimate regulatory goals of the host state.121_{Those recent awards imply that the FET standard does not}

preclude the host state from taking measures in the public interest, even if they have a negative impact on investments.122_{For example, in Saluka v Czech Republic the Tribunal stated that the host state’s right to}

regulate in the public interest must be considered.123_{In order to establish a violation of the FET standard,}

the investor’s legitimate expectations must be weighed against the legitimate regulatory interests of the host state.124_{According to the Tribunal, the investor may expect that the conduct of the host state is bona fide}

and does not ‘manifestly violate the requirements of consistency, transparency, even-handedness and nondiscrimination’.125_{Moreover, the Tribunal in Philip Morris v Uruguay (2016) made clear that it is now}

settled case law that under the FET standard, states maintain their sovereign authority to legislate and to adapt their legal framework to changing circumstances.126_{Therefore, the Tribunal stated, the state may}

amend general legislation insofar this does not exceed its normal regulatory power to act in the pursuance of public interests and does not alter the legal framework upon which the investor has relied ‘outside the acceptable margin of change’.127

Furthermore, to be able to rely on legitimate expectations, it follows from arbitral case law that the investor must demonstrate that specific commitments have been made that the regulatory framework would not change.128_{Specific commitments can come in the form of representations directly addressed to the investor,}

or by more general rules that are specifically aimed at inducing the investor to invest and on which the investor has relied.129

The protection of the environment has been recognized as an important aspect in a number of cases regarding FET. For example, in Glamis Gold v United States, the investor’s reliance on legitimate expectations was rejected inter alia because the habitat in which the investor operated ‘was becoming more and more sensitive to the environmental consequences’ his activities.130_{Commentators have argued that the}

environmental aspect was a key motivation for the Tribunal to reject the investor’s reliance on legitimate expectations.131_{Furthermore, in Unglaube v Costa Rica, the Tribunal held that the protection of natural}

121_{UNCTAD (n 117) 72-73; Rivkin, Lamb and Leslie (n 120) 140.} 122_{UNCTAD (n 117) 73.}

123_{Saluka Investments BV v Czech Republic, UNCITRAL, Partial Award (17 March 2006) para 305.} 124_{Ibid para 306.}

126_{Philip Morris v Oriental Republic of Uruguay, ICSID Case No. ARB/10/7, Award (8 July 2016) para 422.} 127_{Ibid para 423.}

128_{See Methanex v USA (n 108) para 7; UNCTAD (n 117) 69.} 129_{UNCTAD (n 117) 69.}

130_{Glamis Gold v United States of America, UNCITRAL, Award (8 June 2009) para 767.}

131_{Rivkin, Lamb and Leslie (n 120) 141, with reference to Saverio Di Benedetto, International Investment Law and}

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habitats and biodiversity was as a valid public policy and that the state’s right to regulate for this purpose should be respected.132

3.4 National treatment

The standard of national treatment is commonly included in investment treaties. According to Dolzer & Schreuer, national treatment aims to ‘provide a level playing field between the foreign investor and the local competitor’ and ensures that host state measures and regulations do not differentiate negatively between local and foreign investors.133_{In order to establish a violation of the national treatment standard, it}

must be examined whether the less favourably treated foreign investor and the national investor are in ‘comparable’ or ‘like’ circumstances and if there would be a possible justification for the differentiation.134

Tribunals tend to apply a relatively simple test of comparison in order to establish whether a foreign investor and a domestic investor are in like circumstances, which is generally based on commercial considerations only. In case the sole distinguishing factor for a different treatment is the sustainability or the environmental impact of the investment, the foreign and local investor are probably in like circumstances.135

Arbitral tribunals tend to focus on the effects of the measure rather than on a potential intent of the state to discriminate.136_{Because the emphasis lies on the effect of the measure, a justification on environmental}

grounds will probably not be recognized, as can indeed be seen in the case S.D. Meyers v Canada.137_It

could therefore be imagined that the national treatment standard will be successfully argued by a foreign investor who is affected by a prohibition on certain polluting activities, is excluded from participation in support schemes or when the government awards the contract to a local sustainable investor. This could give rise to treaty claims by foreign investors operating in sectors targeted by climate change mitigation measures, in case the investor can demonstrate that he is treated less favourable than local competitors in ‘like circumstances’.138_{On the other hand, if the host state applies the same policy to all local and all foreign}

investors in a consistent manner, the national treatment standard cannot be successfully invoked.139

132_{Unglaube v Republic of Costa Rica, ICSID Case No. ARB/08/1 and ARB/09/20, Award (16 May 2012) para}

246-247; Rivkin, Lamb and Leslie (n 120) 141.

133_{Dolzer and Schreuer (n 63) 198.} 134_{Ibid 199.}

135_{Miles (n 6) 269} 136_{Ibid 270.}

137_{S.D. Myers, Inc. v Government of Canada, UNCITRAL, Partial Award (11 November 2000); See Chapter 3.5.} 138_{Miles (n 6) 268.}

The Interrelationship Between Climate Change and International Investment Law : Can Investor-State Arbitration Help Cooling Down the Planet?