The Energy Charter Treaty and its role in the energy transition

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The Energy Charter Treaty

and its role in the energy transition

Name:

M.H.G. Verberne

Studentnumber:

11401117

L.L.M.:

International and European Law

Track:

International Trade and Investment Law

Supervisor:

Mr. dr. v Prislan

Second reader:

Dr. H.E. Kjos

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Abstract

This thesis discusses the role of the ECT in the energy transition and how the ECT could be used by ISDS tribunals to contribute to the energy transition. The Energy Charter Treaty (ECT), concluded to promote cooperation in between the European Union and post-soviet energy markets, has received increasing criticism that the ECT hinders states achieving their climate obligations included in international climate treaties. To combat climate change, an energy transition has to take place from a carbon intensive economy to a low-emission economy. Regulation implemented by states in order to achieve the energy transition, is increasingly challenge by foreign investors using the ECT investor-state dispute settlement (ISDS) mechanism to protect their investment.

To analyse the role of the ECT in this energy transition an analysis of available methods for ISDS tribunals to include international climate obligations in their reasoning, will be conducted. This thesis demonstrates that three possible methods for arbitrators can be identified: Systemic integration, proportionality analysis, and deferential standard

of review. With these methods in minds, an analysis of ECT case law will be concluded

with on the one hand case law involving fossil fuels and on the other hand, renewable energy production. This thesis demonstrates that ECT based disputes involving restrictive measure on carbon energy sources, show signs of the regulatory chill effect. Investors use the ECT as a weapon to prevent states from implementing regulation. Tribunals involved in renewable energy investment disputes have been reluctant to use the three proposed methods. Renewable energy case law shows, tribunals have been using the tools ineffectively. However, this thesis also demonstrates that some tribunals partially included the three proposed methods. From the analysis of the caselaw this thesis concludes that reasoning in recent awards makes inclusion of climate obligation possible for future tribunals. In the conclusion, this thesis ends with an analysis of the ECT’s role in the energy transition. The current application of the ECT has a negative effect on the energy transition. However, the solution lies not within the ECT framework itself by withdrawal from the ECT or modifying the treaty, but the willingness of tribunals to include international climate obligations by using the three proposed methods. Application of systemic integration, proportionality analysis and

deferential standard of review, would not only contribute to the energy transition, but

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Abbreviations

DSO distribution service operator

ECT Energy Charter Treaty

EEC European Energy Charter

EU European Union

EU27 the 27 Member States of the European Union

FET fair and equitable

FIP feed-in premium

FIT feed-in tariff

GCC German Constitutional Court

GDP gross domestic product

IIA international investment agreement

IIL international investment law

ISDS investor-state dispute settlement

KW/h kilowatt per hour

MLA multilateral agreement

MW/h megawatt per hour

NAFTA North American Free Trade Agreement

OECD Organisation for Economic Co-operation and Development

PV photovoltaics

RES renewable energy sources

RESS renewable energy support scheme

TPP Trans-Pacific Partnership

UNCBD United Nations Convention on Biological Diversity

UNFCCC United Nations Framework Convention on Climate Change

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Introduction

In 1992 climate change got an international legal framework by the adoption of the United Nations Framework Convention on Climate Change (UNFCCC).1_Since

then, climate change has gained more public support. Over the past decades, politicians as Al Gore advocated a radically different approach to energy consumption.2_Public

concern led to more political action by the international community. Most notably is the Paris agreement of 2015.3_{With the emphasis to ‘aggregate emission pathways}

consistent with holding the increase in the global average temperature to well below 2°C above preindustrial levels and pursuing efforts to limit the temperature increase to 1.5°C above preindustrial levels’,4_{national governments are pressured to actively}

decrease the carbon footprint and promote renewable energy resources.

To reach these goals, an energy transition from fossil fuels to renewable energy sources has to take place. An international mechanism or legally binding treaty to achieve this transition has not yet been established. Therefore, governments have to stimulate a renewable energy transition within their borders. The stimulus packages differentiate per country and come in different forms. On the one hand, support policies for renewable energy are introduced in order to make investments in renewables energy production more attractive. On the other hand, restrictions on traditional, polluting energy resources like coal oil, and gas were introduced by taking environmental measures or phasing out production facilities.

To achieve international climate goals, governmental policy alone will not be enough. Private capital plays a central role in accomplishing the transition to a low-carbon economy. Without the involvement of private investors, the 2030 goals will not be achieved. Nevertheless, new measures also meant regulatory instability for investors in the energy market.

While the UNFCCC treaty was concluded, fifty-two countries negotiated the European Energy Charter (EEC) during the early ‘90s. The goal of the EEC was to a create stable

1_{UN General Assembly, United Nations Framework Convention on Climate Change: resolution / adopted by the General} Assembly, 20 January 1994, A/RES/48/189, available at: https://www.refworld.org/docid/3b00f2770.html [Accessed 6 November 2019]

2_{Gore, Al (Albert Arnold). Earth in the Balance: Ecology and the Human Spirit. New York (Plume, 1993). Gore, Al (Albert} Arnold). An Inconvenient Truth: The Planetary Emergency of Global Warming and What We Can Do About It. New York, NY (Rodale, 2006).

3_{United Nations Framework Convention on Climate Change (FCCC/CP/2015/L.9/Rev.1), available at:} https://unfccc.int/resource/docs/2015/cop21/eng/l09r01.pdf [Accessed 6 November 2019].

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energy market and promote long-cooperation in the energy field. This framework would contribute to the welfare of the former soviet countries and form an incentive for Western capital to be invested. The pan-European energy community became a reality when the Energy Charter Treaty (ECT) was signed in 1994. The ECT would be legally binding, pave the way to East-West cooperation and create stable access to the energy market.5

In legal terms, this stable access is also called regulatory stability. It is the holy grail of every investor.6_{Regulatory stability is negatively impacted by any kind of political and}

regulatory change potentially affecting the value of the investment. This includes legislative processes, judiciary structure, and administrative implementation in the particular state where the investment is located.7

The ECT provides a variety of standards of protection for investors to protect against such changes. The treaty contains all standards of protection recognised at the time of signing, including National treatment, most-favoured nation (MFN), fair and equitable treatment (FET), and an ‘umbrella clause.’8 _{This broad set of investment protection}

standards, in combination with its multilateral setup, resulted in the ECT being the most invoked International Investment Agreement (IIA) before the international investment tribunals.9

The first investor claim based on the ECT was initiated in 2001.10 _{Anno 2019, there are}

124 investor claims known to be based on the ECT,11 _{most of them registered in the last}

10 years. An apparent spike of investor claims in the past few years, caused the treaty to get much attention. The general public fiercely opposed ECT arbitration, especially where the public interest is involved.12_{Scholars have noticed public concern and started}

analysing problems of conflicting interests under ECT arbitration.13

5_{Julia Doré and Robert de Bauw, The Energy Charter Treaty: Origins, Aims and Prospects, London: Royal Institute of} International Affairs, 1995.

6_{Giuseppe Bellantuono, ‘Regulatory Stability in the Energy Sector: The Italian Experience’, SSRN (June 6, 2016). Available at} SSRN: https://ssrn.com/abstract=2790980 [Accessed 17 November 2019].

7 _{Bellantuono, ‘Regulatory Stability in the Energy Sector’, page 2.}

8 _{For a detailed analysis of the ECT protection standards: Miljenić Orsat. ‘Energy Charter Treaty – Standards of Investment} Protection’ Croatian International Relations Review 24.83 (2018): 52–83.

9 _{UNCTAD Fact Sheet on Investor-State Dispute Settlement Cases in 2018 (May 2019), page 3. Available at:} https://unctad.org/en/PublicationsLibrary/diaepcbinf2019d4_en.pdf [Accessed 10 January 2020].

10_{Nykomb Synergetics Technology Holding AB v The Republic of Latvia, SCC Case No. 118/2001} 11_{According to the ECT secretariat website: http://Energycharter.org [Accessed 8 December 2019].}

12_{Corporate Europe Observatory (CEO) and Transnational Institute (TNI). ‘One treaty to rule them all: The ever-expanding} Energy Charter Treaty and the power it gives corporations to halt the energy transition’ (June 2018). Available at: https://www.tni.org/files/publication-downloads/one_treaty_to_ruled_them_all.pdf [Accessed 5 December 2019]

13_{Stephan W. Schill, 'Investor-State Arbitration as Governance: Fair and Equitable Treatment, Proportionality and the Emerging} Global Administrative Law,' NYU School of Law, Public Law Research Paper No. 09-46 (2009). C. Henckels, 'Indirect

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States involved in an investment dispute have been in a ‘crossfire’ regarding international investment law and the renewable energy transition.14_{On the one hand,}

investment arbitration includes sovereign states representing public interests. Governments try to fulfil their obligation, under national and international law, to limit polluting energy production and promote renewable energy. At the same time, these governments, which are trying to adjust or limit the impact of energy consumption, are being challenged before international arbitration tribunals. The investors are of the opinion that the measures taken have negatively impacted their investments and constitute a breach of the ECT obligations.

It is likely for environmental and climate issues to get more important to investors across the energy industry and the issues will play an increasing role in investment disputes. The Environmental related policy will have an impact on ‘economic sectors that account for over 55% of ICSID cases… including oil, gas and mining; electric power and other energy; water and sanitation; and construction’15

Research object

This thesis will analyse how the ECT affects the governmental efforts to achieve a low-carbon economy. Scholars have been theorizing the issues around balancing of interests by international tribunals in relation to International Investment agreements (IIA) and sustainable development.16_{However, the examination of the relation between the ECT}

and international climate obligations, in particular to the (renewable) energy transition, remains less explored.17_{This lead to the following research question:}

How does the ECT affect the energy transition to a low carbon economy, and how do ECT tribunals include the international climate obligation in their decisions?

Expropriation and the Right to Regulate: Revisiting Proportionality Analysis and the Standard of Review in Investor-State Arbitration,' 15(1) Journal of International Economic Law (March 1, 2012) 223, 252.

14_{Behn, D. and Fauchald, O.K.’Governments Under Cross-Fire? Renewable Energy and International Economic} Tribunals.’ Manchester Journal of International Economic Law 12.2 (2015): 117–139, page 116.

15_{Sullivan & V. Kirsey, ‘Environmental Policies’, 100-130, page 101.}

16_{Kate Miles, Research handbook on environment and investment law (2019): Van Duzer, A. Sustainable Development} Provisions in International Trade Treaties- What Lessons for International Investment Agreements? (2016), J. E. Viñuales, ‘Green Investment after Rio 2012’, 16 International Community Law Review (2014): David Gaukrodger, The balance between investor protection and the right to regulate in investment treaties: A scoping paper, OECD working paper No. 2017/02: Laura Isotalo, ‘Climate Compatible Investment Treaty Law: The Role of Legitimate Expectations’, Scottish Centre for International Law Working Paper Series 2016-6: Baetens, F. Foreign Investment Law and Climate Change: Legal Conflicts Arising from Implementing the Kyoto Protocol Through Private Investment, (2010): K. Tienhaara, 'Regulatory Chill in a Warming World: The Threat to Climate Policy Posed by Investor-State Dispute Settlement', Transnational Environmental Law, 7:2 (2018), 229–250. 17_{Less explored, but not abandoned. See:. J.M. Tirado. ‘Renewable Energy Claims under the Energy Charter Treaty: An} Overview’, TDM 3 (2015), www.transnational-dispute-management.com: Charles A Patrizia, Jozeph R profaizer, Samual W. Cooper and Igor v Timofeyev ‘Investment Disputes involving the renewable energy industry under the Energy Charter Treaty’ in The guide to erergy arbitration (2017, second edition) Global Arbitration review: Selivanova, Yulia S. ‘Changes in Renewables Support Policy and Investment Protection Under the Energy Charter Treaty: Analysis of Jurisprudence and Outlook for the Current Arbitration Cases.’ ICSID Review - Foreign Investment Law Journal 33.2 (2018): 433–455.

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Research methodology and structure

To answer the above question a combination of research methodologies is used. The comparative law method is used to identify the forms, values, and principles that are common to the various legal systems, for example: national law and international law, in particular IIAs and the ECT. The comparative law method is also used to investigate the interests that are served by the law and attempt to determine the reasoning that arbitrators adopt in the interpretation of the law. From an external perspective, investment arbitration awards will be analysed and eventually criticized by comparing the desired approach to the approach that is actually used. By taking the ECT cases which attracted most public attention, the conflicts of interest will be most visible.

Chapter 1 begins with a short overview of the climate change framework and its

implications for international law, ISDS, and the obligation under ECT. The conflict of interest will be discussed briefly, followed by an overview of the intellectual debate on how these conflicts of interest should be weighed according to different scholars.

Chapter 2 focusses on ECT case law regarding polluting energy sources, such as coal

and nuclear energy. The Vattenfall I v Germany and Rockhopper v Italy are two examples of often-cited disputes in the public debate as evidence of the negative impact on regulatory autonomy. The Mamidoil v Albania award is examined to see if climate obligations play a role in the Tribunal’s reasoning.

Chapter 3 analyses policy measures promoting the renewable energy transition.

Several Member States have, based on EU law introduced measures to stimulate renewable energy production. After initial successes, the renewable energy schemes were modified to disincentivise investment in the sector. The modifications led over 40 ECT arbitration cases. Especially Spain, Italy and the Czech Republic encountered different investor claims under the ECT. These countries will be examined.

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1 Investor-state arbitration and climate goals

1.1 Introduction

Investor-state arbitration has received increasing criticism over the past years.18_Not

only scholars, but also NGO’s have been critical on ISDS arbitration.19_Although

arbitration has deep roots in public international law as a tool for dispute settlement, it is regarded as suitable for commercial disputes. In disputes against states, it is perceived out of balance with only one-sidedly protecting the interests of the investors.20

Scholars have been writing on the different methods to make investor-state disputes less biased and more balanced.21_{This chapter will discuss how international climate}

goals can be included in the interpretation of the ECT. To achieve the inclusion, the first step is to analyse object and purpose of the ECT.

1.2 Underlying object and purpose of ECT

To interpret the articles in a correct manner, it is important for international tribunals to identify the object and purpose of a treaty. The analysis of the object and purpose of a treaty is part of international customary law, codified in Article 31 of the Vienna Convention of the Law of Treaties (VCLT). Several aspects should be taken into account in analysis the object and purpose of a treaty: title, preamble, text of the treaty and the travaux préparatoires, which are the records of negotiation.22

In case of IIA, different views on their object and purpose have emerged. One interpretation is the straightforward purpose ‘to encourage and protect investment’23

On the other side of the spectrum, the broader interpretation of IIAs, promoting ‘greater

18_{H. Mann and K. von Moltke, ‘NAFTA’s Chapter 11 and the Environment’, International Institute for Sustainable} Development (2006) 5–9: Marie - Claire Cordonier Segger, Markus W. Gehring and Andrew Newcombe. Sustainable Development in World Investment Law, (Kluwer Law International, 2010).

19_{See: Open letter to ministers, EU commissioners and members of parliament of 9 December 2019 signed by 278 organisations} including NGOs. Available at: https://www.energy-charter-dirty-secrets.org/open-letter/ [Accessed 25 December 2019]; Also public critique from Economist Magazine ‘A better way to arbitration: Protections for foreign investors are not horror critics claim, but they could be improved’, The Economist, available at: <https://www.economist.com/leaders/2014/10/11/a-better-way-to-arbitrate> [Accessed 25 December 2019] Or: the Corporate Europe Observatory (CEO) and Transnational Institute (TNI) published report: ‘One treaty to rule them all: The ever-expanding Energy Charter Treaty and the power it gives corporations to halt the energy transition’ (June 2018). Available at:

https://www.tni.org/files/publication-downloads/one_treaty_to_ruled_them_all.pdf [Accessed 5 December 2019]

20_{Stephan W Schill, Vladislav Djanic, ‘Wherefore Art Thou? Towards a Public Interest-Based Justification of International} Investment Law’, ICSID Review - Foreign Investment Law Journal, Volume 33, Issue 1, Winter 2018, Pages 29–55, page 30. 21_{Most notably: Catharine Titi, ‘Are Investment Tribunals Adjudicating Political Disputes? Some Reflections on the} Repoliticization of Investment Disputes and (New) Forms of Diplomatic Protection’, Journal of International Arbitration, Kluwer Law International 2015, Volume 32 Issue 3, 261 - 288

22_{Ortino, F., ‘Investment Treaties, Sustainable Development and Reasonableness Review: A Case Against Strict Proportionality} Balancing.’ Leiden Journal of International Law 30.1 (2017): 71–91, page 76.

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economic cooperation and stimulate the flow of private capital and the economic development of the parties.’24

For the analysis of the object and purpose IIA’s, the methodology proposed by Buffard and Zemanek25_{appears to be most suitable. Buffard and Zemanek make a distinction}

between object and purpose of investment treaties. The ‘object’ of a treaty is the substantial content included in the treaty like provisions, rights, and obligations, while ‘purpose’ is the reason for establishing the substantial content of the treaty. This distinction is important, because most ‘treaties have no single, undiluted object and purpose but rather a variety of different, and possible conflicting, objects and purposes.’26_{Anne van Aaken and Tobias Lehmann suggest that while the object of IIAs}

may be investor protection, ‘the underlying purpose is (sustainable) development.’27

‘Sustainable development, then, is not merely a potential by-product of investment protection but also one of the desired aims of the IIL system itself.’28_{This opinion on}

the object and purpose of IIA’s is well received by academia. 29

When applying this theory to the ECT, it is not hard to find evidence of multiple objects and purposes. The main purpose of the Treaty is establishing ’a legal framework in order to promote long-term cooperation in the energy field… in accordance with the objectives and principles of the Charter’30_{and ‘to catalyse economic growth by means}

of measures to liberalise investment and trade in energy.’31_{The signatories had the}

intention to promote the West-East cooperation after the Soviet Union’s collapse.32

Nevertheless, environmental protection and renewable energy sources are clearly recognized in the treaty. The ECT preamble contains clear references to the importance of environmental protection, sustainable development, and energy efficiency.

24_{LG&E v the Argentine Republic, Decision on Liability, 3 October 2006, para. 124}

25_{I. Buffard and K. Zemanek, ‘The ‘Object and Purpose’ of a Treaty: An Enigma?’, (1998) 3 Austrian Review of International} and European Law 311, page 326.

26_{United States Import Prohibition of Certain Shrimp and Shrimp Products, Appellate Body Report, WT/DS58/AB/R, 12} October 1998, award, para. 17.

27_{Anne van Aaken and Tobias Lehmann, ‘Sustainable Development and International Investment Law: An Harmonious View} from Economics’ in Roberto Echandi and Pierre Sauve ́ (eds), Prospects in International Investment Law and Policy (CUP 2013) pages 317 and 329.

28_{Schill and Djanic, ‘Wherefore Art Thou?’, page 40.}

29_{Ortino, F., ‘Investment Treaties, Sustainable Development and Reasonableness Review.’: Schill and Djanic, Wherefore Art} Thou?’: Anne van Aaken and Tobias Lehmann, ‘Sustainable Development and International Investment Law.

30_{Energy Charter treaty, Article 2. This article refers to the European Energy Charter, concluded 4 years earlier as a step towards} reaching the ECT.

31_{Energy Charter Treaty, preamble in The international energy charter consolidated energy charter treaty with related documents,} available at: https://www.energycharter.org/process/energy-charter-treaty-1994/energy-charter-treaty/ [Accessed 30 December 2019], page 37.

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Signatories ‘[r]ecognise the necessity for the most efficient… production… and use of energy’33_{and recall ‘the United Nations Framework Convention on Climate Change,}

the Convention on Long-Range Transboundary Air pollution and other international environmental agreements with energy related aspects.’34_{Most importantly, states}

recognise the ‘increasingly urgent need for measures to protect the environment.’35

Signatories have stated to be ‘willing to do more to attain the objective of security of supply and efficient management and use of resources, and to utilise fully the potential for environmental improvement in moving towards sustainable development,’36_while

‘[r]ecognising State sovereignty.’37_{The ECT also provides that the treaty will not}

prevent states from taking measures necessary to maintain public order.38

One of the EEC objectives concludes that signatories will take action in ‘energy efficiency and environmental protection, which will imply promotion of an energy mix designed to minimise negative environmental consequences… through:… use of new and renewable energies and clean technologies.’39_{Among the areas of cooperation are}

‘energy efficiency, including environmental protection’ and ‘development of renewable energy sources.’40

The signatory parties dedicated Article 19 ECT specifically to environmental aspects. This article expressly highlights the obligation of contracting parties to ‘have particular regard to improving energy efficiency, to developing and using renewable energy sources, to promoting use of cleaner fuels and to employing technologies and technological means that reduce pollution’ with ‘due regard to the public interest.’41

Although obligations in article 19 ECT are not mandatory and deliberately based on imprecise criteria,42_{signatories have clearly paid attention to the protection of the}

environment and the development of renewable energy sources. When applying Buffard and Zemanek approach, the ECT’s object is to integrate the energy markets of the parties. The underlying purpose of the ECT is stimulating economic growth of

33_{Energy Charter Treaty, preamble, page 39.} 34_{Energy Charter Treaty, preamble, page 39.} 35_{Energy Charter Treaty, preamble, page 39.} 36_{European Energy Charter, preamble, page 28.} 37_{European Energy Charter, preamble, page 28.} 38_{Energy Charter Treaty, Article 24 (3c).}

39_{European Energy Charter, Title I: objectives, pages 29-30.} 40_{European Energy Charter, Title III: Specific agreements, page 35.} 41_{Energy Charter Treaty, Article 19.}

42_{T., Waelde, & A., Kolo, ‘Environmental Regulation, Investment Protection and ‘Regulatory Taking’ in International Law.’} International and Comparative Law Quarterly, 50(4) (2001), 811-848, page 817

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signatory parties, not at the cost of the environment, but towards sustainable development.

1.3 Integrating sustainable development in ISDS

When analysing the concept of sustainable development, it contains three vital interrelated elements.43_{First, it is to ensure that all people within the current generation}

can meet their basic needs. Second, intra-generational preservation of natural resources for future generations.44_{Third, integrating economic growth, environmental protection}

and social development at all levels of decision-making. Combining these three elements the World Bank notes that ‘“Sustainable” development could probably be otherwise called “equitable and balanced”.’45

For this thesis, the third element, ‘integrative decision-making’, is the most important. The integration process of sustainable development refers to two kinds of policies.46

First, the three development objectives (economic growth, environmental protection and social development) can be mutually supportive, which will require to link those objectives in a policy. On the other hand, the three objectives may be conflicting, as is more often to be the case. With conflicting elements, a compromise should be found. In essence, there is no hierarchy between the three elements. It is rather a balancing act of policymakers who give relevance to all three elements in a specific situation. In this ‘determination of the appropriate balance between economic growth, environmental protection and social development is not found in the concept of sustainable development but is left to the relevant decision maker.’47_{Thus, a high degree of}

freedom is left to the decision maker in finding this compromise.

It is understandable that this balancing will cause friction in ISDS arbitration. When a dispute comes before a tribunal, arbitrators will have to decide if the compromise made by state authorities is the right one. To tackle this issue, scholars have been discussing the means for tribunals to use in these cases.

43_{Ortino, ‘Investment Treaties, Sustainable Development and Reasonableness Review’, page 84.}

44_{World Commission on Environment and Development, Our Common Future, UN Doc GA/42/427 (1987) page 34.} 45_{See the definition of sustainable development provided by the Development Education Program (DEP) of} the World Bank Institute (WBI), available at www.worldbank.org/depweb/english/sd.html.

46_{Ortino, ‘Investment Treaties, Sustainable Development and Reasonableness Review’, page 84.} 47_{Ortino, ‘Investment Treaties, Sustainable Development and Reasonableness Review’, page 87.}

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An empirical study by Langford and Behn suggests that the criticizing public debate itself may already influence the behaviour of arbitrators.48_{Another study shows that}

balancing of interests depends on the identity of arbitrators and their attitude towards expansive and restrictive IIA interpretation.49

Empirical research is nevertheless scarce and only contains modest and suggestive evidence. Most of the research is from a theoretical perspective. This academic debate led to three main methods available for tribunals to balance between conflicting interests: Systemic integration, proportionality analysis, and differential standard of

review.

1.3.1 Systemic integration

IIL is a complex system containing over 3000 IIAs and includes multiple institutions to resolve disputes.50_{Most states, if not all, participate in this vast network of BITs and}

MLAs. While not all scholars agree, it is generally accepted that that IIL is not a self-contained system but is part of the international law system.51_{As a consequence, IIAs}

should be interpreted according to the principle of ‘systemic integration.’52_Enshrined

in Article 31 (3c) of the VCLT, this principle aims to view the international rules from the perspective of the shared ‘system.’53_{Although, it ‘goes further than merely restate}

the applicability of general international law in the operation of particular treaties, [but also] a need to take into account the normative environment [‘the system’] more widely.’54

The Buffard and Zemanek approach in interpreting object and purpose of investment treaties contributes to systemic integration. A similar reasoning allowed the Al-Warraq

v Indonesia Tribunal to include several human rights treaties in their analysis of the

48_{Malcolm Langford and Daniel Behn, ‘Managing Backlash: The Evolving Investment Treaty Arbitrator?’, European Journal of} International Law, Volume 29, Issue 2, May 2018, Pages 551–580. Although the study passed on 2001 to 2014 data and only contains modest and suggestive evidence.

49_{Gus Van Harten, ‘Leaders in the Expansive and Restrictive Interpretation of Investment Treaties: A Descriptive Study of ISDS} Awards to 2010’, European Journal of International Law, Volume 29, Issue 2, May 2018, Pages 507–549

50_{Most important examples: International Centre of Investment Disputes (ICSID), Stockholm Chamber of Commerce (SCC),} Permanent Court of Arbitration (PCA), Singapore International Arbitration Centre (SIAC)

51_{Campbell McLachlan, ‘Investment Treaties and General International Law’ (2008) 57 ICLQ 361, 369. Asian Agricultural} Products Limited v Democratic Socialist Republic of Sri Lanka, ICSID Case No ARB/87/3, Award (27 June 1990) para. 21. 52_{Schill and Djanic, ‘Wherefore Art Thou?’, page 44.}

53_{J. Viñuales, (2012). Foreign Investment and the Environment in International Law (Cambridge Studies in International and} Comparative Law). Cambridge: Cambridge University Press.

54_{VCLT (n 81) art 31(3)(c); International Law Commission (ILC), ‘Fragmentation of International Law: Difficulties Arising} from the Diversification and Expansion of International Law: Report of the Study Group of the International Law Commission’ UN Doc A/CN.4/L682 (13 April 2006) para. 415.

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FET provisions in the UK-Indonesia BIT and Organisation of Islamic Cooperation Investment (IOC) Agreement.55

Although the Al-Warraq Tribunal used Systemic integration, it is nevertheless an infrequently used method. While scholars are more willing to extend IIA interpretation to a broader system, ISDS tribunals have been reluctant to include other international agreements or obligations besides in IIL.56

1.3.2 Proportionality analysis

Like most other international investment treaties, the ECT expressly prohibits host states from adopting ‘unreasonable or discriminatory measures [affecting] the management, maintenance, use, enjoyment or disposal [of the investment].’57_And

requires the host state to ‘create stable, equitable, favourable and transparent conditions for Investors of other Contracting Parties to make Investments in its Area.’58

In general, the term reasonableness entails ‘a sufficient causal link between the legitimate objective sought and the behaviour that one seeks to establish as reasonable.’59_{In relation to governmental regulation, reasonableness may require that}

‘the conduct under review, be at least potentially capable of positively contributing to the public policy objective at issue.’60_{The principle of proportionality entails that}

‘public measures must be appropriate for attaining the legitimate objectives pursued in the sense of not going beyond what is necessary to achieve these.’61_{Applying this to}

international investment law, the questions is whether the impact of the conduct on the investor is proportional to the legitimate aim.

In international law, a standard based on ‘reasonableness’ consists of three pillars; legitimacy, suitability, and necessity.62_{Based on these pillars, international tribunals} 55_{Hesham TM Al Warraq v Republic of Indonesia, UNCITRAL, Final Award (15 December 2014) paras.556 – 648. The} Tribunal relied extensively on the obligations under human rights law, including the International Covenant on Civil and Political Rights (ICCPR) concretize the meaning of fair and equitable treatment (FET) under the applicable UK-Indonesia BIT and OIC Agreement.

56_{Schill and Djanic, Wherefore Art Thou?’: J. Viñuales, Foreign Investment and the Environment (2012): Giovanni Zarra, ‘The} Issue of Incoherence in Investment Arbitration: Is There Need for a Systemic Reform?’ Chinese Journal of International Law 17.1 (2018): 137–185. Tarcisio Gazzini, ‘Bilateral Investment Treaties and Sustainable Development.’ The Journal of World Investment & Trade 15.5-6 (2014): 929–963.

57_{ECT, Article 10, emphasis added} 58_{ECT, Article 10}

59_{O. Corten, ‘The notion of ‘reasonable’ in international law: legal discourse, reason and contradictions’, (1999) 48 International} and Comparative Law Quarterly 613, page 623.

60_{Ortino, ‘Investment Treaties, Sustainable Development and Reasonableness Review’, page 72.}

61_{Jacob, M., Schill. S. W., ‘Fair and Equitable Treatment: Content, Practice, Method’ in Bungenberg, Griebel, Hobe, Reinisch} (Ed), International Investment Law (2015), Beck, Hart, Nomos, 700-789.

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have developed several tests to analyse government policy. The legitimacy test will question if the measure serves a legitimate purpose. The suitability test will question if the taken policy effectively contributes to the aim of policy. The necessity test will analyse if there are alternatives to the policy which achieve the same objective at a lesser cost. To find a balance between these three pillars, there is a fourth analytical step: proportionality stricto sensu. This test will balance the cost and benefit of the public policy and whether the level of interference is disproportionate to the obtaining the public goal.63

The proportionality analysis included in the fair and equitable treatment (FET) standard, imposed several reasonable requirements on host states. 64_{The Tribunal in Saluka v}

Chezch Republic stated that the FET standard in the Netherlands-Czech BIT includes the prohibition for host states to act unrelated to some rational policy (unreasonable) or based on unjustifiable distinctions (discriminatory).65_{Other interpretations included a}

due diligence obligation that ‘requires undertaking all possible measures that could be reasonably expected to prevent the eventual occurrence of killings and property destructions.’66_{The Tribunal in Glamis Gold. v USA interpreted FET, as codified in}

Article 1105 North American Free Trade Agreement (NAFTA), to prohibit host states from acting without ‘a complete lack of reasons.’67_{States should ‘compromise between}

interests of competing parties and if they were bound to please every constituent… with each piece of legislation, they would be bound and useless.’ 68_{The relevant test focuses}

on the reasoning of a state.In Pope & Talbot v Canada, the Tribunal found that the approach of the host state ‘was a reasonable response to the difficulty with which it had to deal and cannot be-characterized as unfair and inequitable.’69_{In another award, the}

Tribunal concluded that Canada took measures within the mandate, in non-discriminatory manner, motivated by the increasing awareness of the dangers presented by lindane of human health and the environment.’70

63_{Laura Isotalo, ‘Climate Compatible Investment Treaty Law’, page 25.}

64_{Fair and Equitable Treatment (United Nations publication, Sales No. E.11.II.D.15).} 65_{Saluka v Czech Republic, Award, 17 March 2006, para. 309.}

66_{AAPL v Sri Lanka, Award, 27 June 1990, para. 85(B).} 67_{Glamis Gold v USA, Award, 8 June 2009, para. 627.} 68_{Glamis Gold v USA, Award, 8 June 2009, paras. 803, 805.}

69_{Pope & Talbot v Canada, Award on the Merits of Phase 2, 10 April 2001, paras. 123, 125 and 128} 70_{Chemtura v Canada, Award, 2 August 2010, para. 266.}

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The proportionality analysis is a widely accepted tool by investment tribunals.71_{It can}

be used by tribunals to weigh the interests between the investor and the public interest represented by the state, i.e. combatting climate change.

1.3.3 Deferential standard of review

The ECT does not stipulate how the investment protection standards and the power of the host state to act in public interests are related. The ECT neither addresses the standard of review. Tribunals, therefore, need to rely on their inherent powers to determine the appropriate standard of review in disputes involving sustainable development. In reviewing the state regulation affecting foreign investments, tribunals can adopt a de novo or strict standard of review, meaning the tribunal does not place weight on the host states decision. It allows a tribunal to substitute its own decision without deference. The opposite of the de novo review is the deferential standard of review where a tribunal leaves more regulatory autonomy to the state and respecting the states reasoning.

Although, a coherent methodological approach to the standard of review has yet to be developed, 72_{the deferential standard of review is applied by several NAFTA}

tribunals.73_{These NAFTA tribunals have explicitly affirmed to regulatory authority of}

states and the urgency for tribunals to avoid second-guessing of public policy.74

Tribunals ‘must bear in mind the deference which NAFTA Chapter 11 tribunals owe a state when it comes to assessing how to regulate and manage its affairs.’75

According to Caroline Henckels, the standard of review in ISDS disputes can depend on the type of legal instrument. 76_{‘If an investment [protection] chapter is situated}

within a broader project of regional economic integration’ it is more likely that a more strategic approach to the standard of review is being used with the long-term effects in mind.77

71_{Schill and Djanic, ‘Wherefore Art Thou?’, page 46.} 72_{Schill and Djanic, ‘Wherefore Art Thou?’, page 47}

73_{Caroline Henckels, ‘Balancing Investment Protection and the Public Interest: The Role of the Standard of Review and the} Importance of Deference in Investor State Arbitration’, Journal of International Dispute Settlement, 2013, Vol. 4(1), 197-215, page 201. See also; Alessandra Asteriti, ‘Metalclad, Methanex and Chemtura: 10 Years of Environmental Issues in NAFTA Investment Arbitrations’ Transnational Dispute Management 9(3) (2012), 11–15.

74_{Caroline Henckels, ‘Balancing Investment Protection and the Public Interest’, page 202.} 75_{Mesa Power Group v Canada, PCA Case No.2012-17, 24 March 2016, para. 553.} 76_{Caroline Henckels, ‘Balancing Investment Protection and the Public Interest’, page 201.}

77 _{Glamis v US tribunal emphasized that the contracting states ‘indefinite commitment to the deepening of their economic} relations’ and remarked that ‘the long-term maintenance of this commitment requires both governmental and public faith in the integrity of the process of arbitration’ In Loewen v US a similar reasoning was used as the tribunal accepted that support from states was crucial in maintaining the regime. Glamis v USA, Award, 8 June 2009, para. 8. Loewen Group and Raymond L. Loewen v United States of America, ICSID Case No ARB(AF)/98/3, Award, 26 June 2003, para. 242

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However, the opposite, de novo or strict the standard of review is more frequently adopted by tribunals. Most notable awards are the investor claims against Argentina in relation to its economic crisis of 1999-2001.78_{The CMS, Enron and Sempra tribunals}

have taken a strict approach by deciding in favour of the investor because the taken emergency measure did not serve Argentina’s ‘essential security interests.’ These awards have demonstrated the crucial connection between state liability and the standard of review chosen by the arbitrators.

Besides the Argentina cases, other tribunals have also maintained a strict standard of review on sovereign powers and pleas by respondent states exercising regulatory autonomy.79_{In Temced case, the Mexican authorities had refrained from granting}

permits to construct and operate hazardous waste felicities due to public concerns and community opposition. Even though the Tecmed Tribunal declared it was ‘undisputable’ that states could exercise their sovereign powers, the public interest did not outweigh the impact on the investors’ interest.80_{It looks like the Tribunal has tried to apply ‘due}

deference’ in their standard of review, but its conclusion is clearly a strict standard of review.81

One reason for tribunals to provide sufficient deference is the embedment of policymakers in the state’s public debate and sentiment. Tribunals may not fully appreciate the public sentiments or policy priority. However, a review of the democratic legitimacy of policymakers, also called ‘normative epistemic discretion,’82_{has been}

under criticism.83_{It is argued that evaluation of the democratic quality of states is not a}

competence of the tribunals. To some scholars it is a concern that arbitrators would have to decide on whether the policymaker has made the right decision.84_Balancing

78_{CMS Gas Transmission Company v Argentine Republic, ICSID Case No ARB/01/08, Decision on Jurisdiction, 17 July 2003;} Enron Corporation Ponderosa Assets LP v Argentine Republic, ICSID Case No ARB/01/3, Award, 22 May 2007; Sempra Energy International v Argentina, ICSID Case No ARB/02/16, Award, 18 September 2007.

79_{Metalclad Corporation v United Mexican States, ICSID Case No ARB(AF)/97/1, Award, 30 August 2000, paras.48, 90–98;} Técnicas Medioambientales Tecmed SA v Mexico, ICSID Case No ARB(AF)/00/2, Award, 29 May 2003, paras.154, 157–58, 164, 166, 172–73.

80_{Tecmed v Mexico, Award, paras.133-149.}

81_{Especially the definition of legitimate expectations defined by the Tecmed Tribunal is an often-cited by tribunals resembling} the strict standard of review. Tecmed v Mexico, Award, para. 15.

82_{Robert Alexy, A Theory of Constitutional Rights (OUP Julian Rivers, trans, 2003) 415; Andreas von Staden, ‘The Democratic} Legitimacy of Judicial Review Beyond the State: Normative Subsidiarity and Judicial Standards of Review’ (2012) 10 ICON, pages 1023 and 1046.

83_{Stephan W Schill, ‘Deference in Investment Treaty Arbitration, page 600.} 84_{Stephan W Schill, ‘Deference in Investment Treaty Arbitration, page 607.}

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whether a measure is reasonable, contains a high risk of subjective opinions by arbitrations.

Outside of IIL, deference is a more common principle. Tribunals of the World Trade Organisation (WTO) have been willing to show deference involving polycentric issues or matters concerning risk to health or the environment.85_{The reason for this}

willingness is the inclusion of provisions in the WTO agreements, which set out the permissible basis for regulation.86_{However, most investment treaties do not include}

such a lawful basis of state autonomy to regulate.87

Besides regulatory autonomy, the relative institutional competence and expertise are when showing deference. Compared to as the normative undertone of the regulatory autonomy factor, the institutional competence factor has a more practical approach.88

The capabilities of a tribunal should be considered relative to national authorities in the regulatory analysis. For instance, relative competence and expertise play a crucial role in the necessity test. In analysing alternative measures impacting less on investor’s interests, tribunals will have to assess the case’s specific facts and local context. National authorities will, in most cases, have more information, data, and (bureaucratic) capability to assess all different scenarios before implementing a measure. This does not mean that national authorities always prevail over tribunal expertise. Tribunals should have the upper hand in determining the legality of the regulation, controlling national legislative procedures, such as a risk assessment or identifying discrimination.

1.4 Interim conclusion

It is generally accepted that IIL is part of international law and does not form a discipline in itself. The ECT is only a small piece in this system, but as a consequence is to be interpreted in accordance with the VCLT. In theory, this enables tribunals to incorporate sustainable development, including climate change goals, into the interpretation of the ECT by using systemic integration, proportionality analysis, and

deferential standard of review. In the next chapters, the practical impact of the ECT on

the energy transition will be analysed.

85_{Korea - Measures Affecting Imports of Fresh, Chilled and Frozen Beef, v Republic of Korea, Appellate Body Report,} WT/DS161/AB/R, 11th December 2000, para. 176; European Communities – Measures Affecting Asbestos and Asbestos-Containing Products, WT/DS135/AB/R, 12 March 2001, paras.168, 178; Panel Report, United States – Measures Affecting the Cross Border Supply of Gambling and Betting Services, WT/DS285/R, 10 November 2004, para. 6.461.

86_{General agreement on Tariffs and Trade 1994 (GATT), Article XX}

87_{Caroline Henckels, ‘Balancing Investment Protection and the Public Interest’, page 206.} 88_{Caroline Henckels, ‘Balancing Investment Protection and the Public Interest’, page 210.}

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2 Polluting energy sources

2.1 Introduction

This chapter will analyse how the ECT affects policy measures impacting polluting energy sources. These polluting energy sources include coal, crude oil, and natural gas. By burning these fuels, carbon dioxide is released in the atmosphere which cause global warming.89

Global warming, together with oil spills, the oil crisis in the ‘70s, and growing concerns about (air) pollution have convinced the public that action is needed to protect the public interest.90_{However, the world heavily depends on fossil fuels and is likely to}

depend on it in the future.91_{The oil and gas sector is one of the most powerful industries}

in the world, with an extensive lobby network and metaphorical ‘unlimited’ funds to push their agenda.92

Over the past few years, governments made several attempts to reduce the dependency on fossil fuel by taking regulatory measures. Germany decided to restrict pollution originated from energy production and Italy prohibited exploration and extraction of oil and gas in coastal waters. This led to several ECT based investor claims of which this chapter will analyse the Vattenfall I v Germany and Mamidoil v Albania cases.93 2.2 Vattenfall’s coal plant and regulatory chill

In 2004, the Swedish utility company Vattenfall announced its plan to build a coal-fuelled powerplant along the banks of the Elbe River in Germany.94_{The announcement}

was met with stir resistance from environmentalists and political groups. The protests led to a petition in 2007, which was signed by over twelve thousand citizens objecting to the powerplant.95

89_{See United nations webiste, global issues section, climate change. Available at:} https://www.un.org/en/sections/issues-depth/climate-change/ [Accessed 8 January 2020].

90_{According to a new CBS News poll, 70% of American 18- to 29-year-olds say climate change is a problem. Available at:} https://www.cbsnews.com/news/cbs-news-poll-most-americans-say-climate-change-should-be-addressed-now-2019-09-15/ [Accessed 24 December 2019]

91_{Anjli Raval and Leslie Hook, Renewable energy push barely dents fossil fuel dependence: Coal, oil and gas still expected to} contribute 85% of primary power supply by 2040 (August, 2 2019), Financial Times, available at:

https://www.ft.com/content/4c77a13a-b50b-11e9-8cb2-799a3a8cf37b, last visited December 8, 2019

92_{Jon Birger Skjærseth & Tora Skodvin, Climate change and the oil industry: common problem, varying strategies (2018),} Manchester University Press

93_{Vattenfall v Germany, ICSID Case No. ARB/09/6: Mamidoil Jetoil Greek Petroleum Products Societe Anonyme S.A. v} Republic of Albania (ICSID Case No. ARB/11/24),

94_{‘Kraftwerk Moorburg: Eine Chronologie.’ NDR, December 19, 2014. Available at:} https://www.ndr.de/nachrichten/info/dossiers/ [Accessed 10 January 2020]

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Despite public objections, on 14 November 2007, the Hamburg authorities provided a provisional contract to Vattenfall.96_{This provisional contract included a pre-liminary}

building approval but did not include the two permits. Vattenfall was promised to receive these permits in January 2008. After Vattenfall’s Board was informed about the provisional contract, it approved a budget for the construction of the plant and the district heating pipelines of ad 2.2 billion euros.97

The Moosburg powerplant became subject to the political campaign for the Hamburg state parliament elections of February 2008. The ‘Grün-Alternative-Liste’ (Green Party), promised to stop the construction of the power plant.98_{As a result of the election,}

the ruling CDU party lost its absolute majority and entered into coalition talks with the Green Party. During the coalition talks, the new power plant was a hot topic as the CDU was a supporter of the new powerplant and the Green party opposed it.99

In September 2008, the final permits were eventually granted. However, the limits were stricter as initially discussed during the pre-liminary approval. First of all, the cooling water to be used by the power plant was made depended on the Elbe’s water level heavily influenced by the tide. According to, Vattenfall these limits would lead to a week’s long shutdown of the power plant during the summertime.

In April 2009, Vattenfall brought a claim to the International Centre for the Settlement of Investment Disputes (ICSID).100_{According to Vattenfall, the FET obligation was}

not met by the German government by imposing restrictions under the water use permit. Second, Vattenfall accused Germany of expropriation by delaying the permits and politically motivated decision to monitor the fish stairs for a period of one to two years. Vattenfall requested the Tribunal to order Germany to pay 1.6 billion euros compensation for the estimated loss of contract value.101

In February 2011, the parties informed the Tribunal that all conditions set out in the agreement had been fulfilled and the claims existing under the ECT had ceased to exist.102_{The German state has not disclosed any information on the proceedings.}

Consequently, it is not publicly known why the German government decided to settle

96_{Bernasconi, Background paper on Vattenfall, page 1.}

97_{Vattenfall v Germany, Request for Arbitration, page 9, para. 25.} 98_{Vattenfall v Germany, Request for Arbitration, page 10, para. 30.}

99_{Spiegel, ‘Umstrittenes Kraftwerk Moorburg: Vattenfall verklagt Hamburg’, 14.04.2008. Available at:}

https://www.spiegel.de/wirtschaft/umstrittenes-kraftwerk-moorburg-vattenfall-verklagt-hamburg-a-547349.html [Accessed 15 November 2019]

100_{Vattenfall v Germany, Request for Arbitration, April 2, 2009.} 101_{Vattenfall v Germany, Request for Arbitration, page 27, para. 68.}

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the dispute and under what exact conditions the settlement has been agreed upon. Nevertheless, several reasons for a settlement can be provided.

It is evident that parties worrying about their chances before a Tribunal, prefer to settle the dispute. Settlement is considered the most safe and efficient mode of dispute resolution.103_{Main reason to settle is the predictability of the outcome. Before an award}

is rendered, it is hard for parties to estimate the outcome, especially to the amount of compensation. Legal cost savings is the adherent second reason for choosing settlemet. Arbitration cases are costly, and claimants most likely request the respondent to compensate these costs.

A third reason could be the high amount of confidentiality. Some disputes can be regarded as sensitive by the ‘losing’ party. For states, this could be sensitive public information. If the dispute is politicly sensitive, governments would want to keep it out of the public and behind ‘curtains.’ Awards can lead to reputational harm for politicians. Although, this could be a possible reason for the German politicians to settle, such insinuation would be speculative.

Another argument to settle a dispute is the finality of an agreed settlement. Most settlements include a clause which refrains parties to file a new claim in the future on the same subject. Such a clause is also included in the Vattenfall settlement:

‘This Agreement is intended to resolve finally the rights and liabilities of the Parties in connection with the Dispute and the Proceedings and neither of the Parties shall

seek to reopen this Agreement.’104

It is argued that settling could have negative consequences.105_{In case of settlement, the}

reasoning of the tribunal is never known. This makes it hard to estimate what amount the actual compensation would have been paid and if the settlement has been successful. It is difficult to advise what the chances are when accepting arbitration.

Although the above reasons sound fair, the exact reasons why the German government preferred to settle by agreement are unknown. Most likely Germany considered a

103_{Sergey A. Voitovich, ‘Agreed Settlement v Unfavourable Award in Investment Arbitration.’ The Journal of World Investment} & Trade 13.5 (2012): 718–728, page 718.

104 _{Vattenfall AB, Vattenfall Europe AG, Vattenfall Europe Generation AG v Federal Republic of Germany, ICSID Case No.} ARB/09/6, Settlement Award, page 8.

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combination of the above reasons. Nevertheless, looking at the facts, settlement looks counterintuitive.

First of all, the construction and exploitation permits required for Vattenfall to operate the coal plant are regulated according to German law based on European law.106

Germany has an obligation to comply to EU law, otherwise this could lead to sanctions of the EU Commission. It thereby has obligation under international climate treaties such as the Paris Agreement. Secondly, the Green Party was democratically elected by the Hamburg people and was part in the coalition to be formed. The Green Party has been given its voters trust to act on their behalf. If the Green Party considers it necessary to act strict on environmental protection, it is free to do so as long as they do not breach the law. As discussed in Chapter 1, the balance between economic growth, environmental protection and social development is subject to national authority. The Vattenfall I settlement by the German government looks like an example of regulatory chill;107_{a phenomenon in which states ‘refrain from enacting strict}

environmental standards in response to fears of losing a competitive edge against other countries’108_{or in case of ISDS, ‘prospect of investor-state arbitration arising out of}

alleged regulatory takings,109_{and potential liability. ‘Potential liability is seen as likely}

to harm the quality of administration by (I) leading public bodies and their employees to take an unduly defensive approach to their work; (II) diverting scarce resources away from the primary functions of public bodies and towards efforts to avoid litigation and defensive measures; and (iii) potentially leading to a great number of lawsuits and vexatious claims, further reducing the available resources for public bodies.’110

The fact that Germany eventually agreed upon much less strict environmental criteria in a settlement, can partly be attributed to its fear of liability. The regulatory chill effect can directly be linked to the governments prejudice on the standard of review of tribunals.111_{Investment arbitration is regarded as biased}112_{and states assume tribunals} 106 _{Directive 2000/60/EC of the European Parliament and of the Council establishing a framework for the Community action in} the field of water policy, adopted 23 October 2000. And specifically the Groundwater Directive 2006/118/EC and Directive to protect surface water from pollution (COM(2006)0397).

107_{Kyla Tienhaara, ‘Regulatory Chill in a Warming World’}

108_{Kevin R. Gray, ‘Foreign Direct Investment and Environmental Impacts – Is the Debate Over?’, RECIEL 11 (2002) 310} 109_{UNCTAD/ITE/IIA/2007/3, ‘Investor–State Dispute Settlement and Impact on Investment Rulemaking’, page 75.} 110_{David Gaukrodger & Kathryn Gordon, ‘Investor-State Dispute Settlement: A Scoping Paper for the Investment Policy} Community’, OECD Working Papers on International Investment, 2012/03, pages 81- 82.

111_{Although, some scholars question the causal correlation between implementation of (environmental) regulation and the} system of international investment arbitration. See: Stephan W. Schill. ‘Do Investment Treaties Chill Unilateral State Regulation to Mitigate Climate Change?’ Journal of International Arbitration 24.5 (2007): 469–477, page 469.

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do not (appropriately) apply; systemic integration, proportionality analysis or deferential standard of review. Vattenfall v Germany clearly shows that investors in polluting industries are willing to challenge unfavourable climate regulation by invoking the ECT protection standards.

The regulatory chill argument will get another uplift if the current pending Rockhopper v Italy case will have a similar outcome.113_{Rockhopper, a U.K. based investor, has a}

100% working interest in the Ombrina Mare oil and gas discovery project and a permit for offshore exploration in Italy. The claim arose in 2016 from a decision taken by the Ministry of Economic Development to reintroduce a general ban on oil and gas exploration and production activity within the 12-mile limit of the coastline. The Italian parliament approved the new regulation, and as a consequence the licenses for the Ombrina Mare oil and gas field were revoked. Rockhopper claims a breach of FET under Article 10 ECT.

The Rockhopper claim comes after Italy decided to withdrawal from the ECT in January 2015, which is made possible under the ‘sunset’ clause in the ECT allowing pre-withdrawal qualifying investments to enjoy protection for a period of 20 years after withdrawal.114_{The Italian government justified the withdrawal with desire to avoid the}

annual membership fee in the Energy Charter Conference.115_{However it is more likely}

that the government’s decision has to do with the mounting investor claims faced by Italy regarding the solar power support schemes.116

Most recent threat to file an ISDS arbitration request comes from the German energy company Uniper. Uniper announced it would start arbitration procedings if the Dutch senate approves the ban on coal-fuelled electricity production.117_{Another clear}

example of an investor showing willingness to use the ECT as a weapon against restrictive measure and governments efforts to stimulate the energy transition.

113_{Rockhopper Italia S.p.A., Rockhopper Mediterranean Ltd, and Rockhopper Exploration Plc v Italian Republic, ICSID Case} No. ARB/17/14.

114_{Article 47(3) ECT.}

115_{European Energy Charter secreteriat. Available at:} https://www.energycharter.org/who-we-are/members-observers/countries/italy/ [Accessed 5 January 2020].

116_{Discussed in Chapter 3.}

117_{Yamina Saheb, Europe’s Green Deal is under threat from Energy Charter Treaty, September 20, 2019, Euractiv, available at:} https://www.euractiv.com/section/climate-environment/opinion/europes-green-deal-is-under-threat-from-energy-charter-treaty/. Last visited December 11, 2019.

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2.3 Mamidoil’s oil jetty’s and environmental protection

While the above cases clearly show the conflict between regulatory autonomy, the ECT, and climate change, the following paragraphs will discuss how the three methods (systemic integration, proportionality analysis and deferential standard of review) are used by the Mamidoil v Albania Tribunal to incorporated international climate change obligations in their analysis of policy measures limiting polluting energy sources. In Mamidoil v Albania, the Albanian authorities wanted to relocate the oil-importing and distribution activities from the port of Durres to Porta Romana for environmental reasons. However, the Greek investor Mamidoil, constructing and operating an oil terminal, claimed a breach of the FET standard under Article 10.1 of the ECT by failing: to provide a stable legal framework; to respect the legitimate expectations; and to abstain exerting pressure.118_{Climate change obligations did not pay a direct role in this}

case, but the environmental goals of the Albanian government did reflect their right to regulate in their public interest.

2.3.1 Systemic integration

As in chapter one discussed chapter 1, systemic integration offers tribunals a tool to incorporate climate obligations into the objective and purpose of the ECT. The Albanian government’s decision to relocate the oil jetties was based on environmental objectives protecting ‘water ecosystems, atmosphere, soil ecosystems.’119_{However, the}

Mamidoil Tribunal did not refer to international environmental treaties, such as the UNFCCC or United Nations Convention on Biological Diversity (UNCBD). This is definitely a missed opportunity.

However, the Tribunal’s reasoning of the ECT objective and purpose does show clear signs of systematic integration. The Tribunal reasoned treaty interpretation is guided by the Vienna convention on Law of Treaties.120_{In considering the object and purpose of}

the that the goal of the ECT is to ‘stimulate cross-border investment in order to foster economic relations between treaty partners and economic development in the partner countries.’121_{The state is responsible to provide ‘long-term physical and social}

infrastructure’122_{This reflects an more expansive interpretation of the ECT’s objectives}

118_{Mamidoil, award, paras. 584.}

119_{Mamidoil, award, paras. 324-338. Respondents position on legality of the investment.} 120_{Mamidoil, award, paras. 602 and 611.}

121_{Mamidoil, award, para. 611.} 122_{Mamidoil, award, para. 612.}

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as proposed in Chapter 1. With this approach the Mamidoil Tribunal opened the door for future ECT tribunals to include the international climate obligations and treaties in their awards.

2.3.1.1 Climate treaties as defence

It can be argued that the above Mamidoil reasoning, could make it possible for States to include climate obligations in their justification of new measures that stimulate the energy transition. By referring to environmental obligations, States can legitimize their right to regulate and implementation of certain measures that affect foreign investment.123

Some non-ECT arbitration tribunals already shown their willingness accept such arguments of the respondent. In Methanex Corp v United States,124_{the Respondent}

state argued that the taken measures, i.e. California’s ban to the sale and use of gasoline additive MTBE125_{, were legitimate because of their purpose to protect the environment}

and public health.126_{The Methanex Tribunal concluded that ‘the California ban was a}

lawful regulation and not an expropriation.’127

The next step would be the usage of climate treaties in counterclaims by a Host State as a defensive tool. Host States are becoming more assertive to counterclaim investors breach of environmental treaties. The shortcomings of this defence weapon is that ISDS lacks the recourse for host states to effectively counterclaim. In practice, bringing counterclaims against an investor will cause jurisdictional issues. The ECT, like many other IIA’s, does not include the right for the Host State to bring counterclaims against an investor. Therefore, the host state should rely on the ICSID Convention rules, which provide some guidance on the matter. Under Article 46 ICSID, a Host state can bring a counterclaim if three requirements are satisfied: consent is needed from both the Host State and the investor; the counterclaim must have arisen directly out of the subject-matter of the dispute; and, the counterclaim is within jurisdiction of ICSID.128

123_{J. Sullivan & V. Kirsey, ‘Environmental Policies’, 100-130.} 124_{Methanex Corporation v United States of America, UNCITRAL.} 125_{Methanex, Award, part II – Chapter D, para. 2.}

126_{Methanex, Award, part IV – Chapter D, para. 15.} 127_{Methanex, Award, part II – Chapter D, para. 15.}

128_{Article 46 ICSID convention. See also: Atanasova, Dafina, Benoit, Adrián Martínez, and Ostřanský, Josef. ‘The Legal} Framework for Counterclaims in Investment Treaty Arbitration.’ Journal of International Arbitration 31.3 (2014): 357–391.

The Energy Charter Treaty and its role in the energy transition