The Paris Agreement as a Catalyst for International Investment Law : A relationship of potential conflict or harmony?

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The Paris Agreement

as a catalyst for international investment law

A relationship of potential conflict or harmony?

LL.M. Thesis

in partial fulfilment of the LL.M. program International and European Law: International Trade and Investment Law

by Lilian Meinen [e-mail] [studentnumber] under supervision of Prof. dr. S.W.B. Schill 26 July 2018

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Abstract

Climate change is a common concern of humankind and one of the greatest challenges of our times. Therefore, it is one of the contemporary topics on the international agenda. In 2015, the United Nations Framework Convention on Climate Change (‘UNFCCC’) adopted a second protocol to strengthen the global response to the threat of climate change: the Paris Agreement.

This thesis explores the Paris Agreement from an investment perspective, and poses the question whether the relationship between this international treaty and international investment law is one of potential conflict or one of harmony. It does so with a main focus on domestic mitigation measures that States shall take under Article 4 (2) of the Paris Agreement in fulfilling their Nationally Determined Contributions (‘NDCs’). In pursuit of these NDCs, States can adjust their measures according to their own preferences. This thesis distinguishes between a ‘brown’ or ‘green’ approach in addressing investment implications from the Paris Agreement. Under the ‘brown’ approach, States ‘go after the brown economy’, thereby making life difficult for investors in fossil fuels. Pursuing a ‘green’ approach, States incentivize investments in renewable energy. In identifying measures taken under both approaches, this thesis does not aim to provide a comprehensive overview of State conduct, but rather aims to identify types of measures that are available to States to fulfil their mitigation pledges. Besides the area of mitigation, this thesis pays attention to adaptation, albeit to a lesser extent. Adaptation focuses on adapting society to the effects of climate change, and comes with many opportunities for foreign investment, for example in infrastructure.

After addressing the areas of mitigation and adaptation, this thesis concludes with the position that the relationship between the Paris Agreement and international investment law is of a harmonious nature, but can occasionally conflict.

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List of Abbreviations

BITs bilateral investment treaties

CBDR common but differentiated responsibilities

CIF Climate Investment Funds

CIL customary international law

COP Conference of the Parties

CTF Clean Technology Fund

ECT Energy Charter Treaty

EU European Union

FET fair and equitable treatment

FITs feed-in tariffs

GDP Gross Domestic Product

GHGs greenhouse gases

IRENA International Renewable Energy Agency

IIAs international investment agreements

MBTE methyl tertiary-butyl ether

MMT methylcyclopentadienyl manganese tricarbonyl

NDCs Nationally Determined Contributions

OECD Organization for Economic Cooperation and Development

STF Strategic Climate Fund

RPSs renewable portfolio standards

TEC Technology Executive Committee

UNFCCC United Nations Framework Convention on Climate Change UNCTAD United Nations Conference on Trade and Development

UNGA United Nations General Assembly

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Chapter 1 Introduction

If there is one contemporary issue that is a common concern of humankind1_{and ‘one of the greatest}

challenges of our times’,2_{it is climate change. In 1988, the United Nations General Assembly (‘UNGA’)}

recognized the necessity to take action within a global framework,3_{which led to the adoption of the}

UNFCCC.4_{The UNFCCC defines climate change as ‘a change of climate which is attributed directly}

or indirectly to human activity that alters the composition of the global atmosphere and which is in addition to natural climate variability observed over comparable time periods’.5_{This human activity}

poses the greatest threat to the climate by the production and use of energy, which results in the emission of greenhouse gases (‘GHGs’) causing global warming.6_{To strengthen the global response to}

the threat of climate change, the UNFCCC adopted a second protocol to the Convention in 2015, the Paris Agreement,7_{thereby again placing climate change at the forefront of the international stage.}

This thesis explores the Paris Agreement from an investment perspective. International investment law has an economic rationale and aims to protect foreign investors operating abroad by means of international investment agreements (‘IIAs’). These IIAs seek to promote predictability and stability in the host State’s legal framework, while efforts to reduce the adverse effects of climate change necessarily involve changes in States’ legal frameworks.8_{Therefore, this thesis aims}

to gain deeper insight into the relationship between the Paris Agreement and international investment law, and poses the following research question:

‘How does the Paris Agreement interact with international investment law, and is that relationship potentially one of conflict or one of harmony?’

1_{UNFCCC Preamble, first recital.}

2_{Cinnamon Carlarne et al.,}_{The Oxford Handbook of International Climate Change Law}_{(OUP 2016) vi.} 3_{UNGA Res 45/53 (6 December 1988) UN Doc A/RES/45/53, para. 2.}

4_{United Nations Framework Convention on Climate Change (adopted 9 May 1992, entered into force 21 March 1994)}

1771 UNTS 107 (‘UNFCCC’).

5_Ibid._{, Article 1 (2).} 6_{Carlarne et al. [2016] vi.}

7_{UNFCCC ‘Adoption of the Paris Agreement’ (29 January 2016) Decision 1/CP.21 UN Doc FCCC/CP/2015/10/Add.1,}

Annex (‘Paris Agreement’).

8_{Anthony van Duzer, ‘The Complex Relationship between International Investment Law and Climate Change Initiatives:}

Exploring the Tension’ in Panagiotis Delimatsis (ed), Research Handbook on Climate Change and Trade Law (Edward Elgar Publishing 2016) 434.

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In order to answer this question, this thesis proceeds with five further chapters. The second chapter provides understanding of the Paris Agreement’s adoption within the UNFCCC and its legal architecture. This legal architecture centers on Articles 2 and 3, which define the Paris Agreement’s object and purpose and manner of implementation. Then, the third chapter addresses mitigation. As mitigation has most interaction with international investment law, this thesis devotes most attention to this area. In this regard, it identifies two approaches that States can follow in pursuing their domestic mitigation actions under Article 4 (2) of the Paris Agreement. The first is the ‘brown’ approach, wherein State measures restrict the brown economy. The second is the ‘green’ approach, addressing the situation wherein States incentivize investments in low-carbon emissions, such as renewable energy. After exploring possible measures and incentives, this thesis proceeds to investment implications. Thereafter, the fourth chapter addresses adaptation. This concerns conduct aimed at adapting society to the effects of climate change. Also within this area, there are investment implications that this thesis addresses accordingly. Finally, the fifth chapter will draw a conclusion to the research question.

The main position in that this thesis defends is that the Paris Agreement works as a catalyst for international investment law. By placing climate change so firmly on the international agenda, investors see that investments in the brown economy do not have such a bright future. In this regard, the relationship between the two is of harmony: the one accelerates the other. However, host States have to take account of their other international commitments under investor protection treaties. If they do not do so in a proper manner, the relationship can become one of potential conflict, leading to claims under arbitral investment tribunals.

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Chapter 2 The Paris Agreement: Adoption and Legal Architecture

‘The time is past when humankind

thought it could selfishly draw on exhaustible natural resources.

We know now the world is not a commodity’

- François Hollande, President of the French Republic9

Before diving into the interaction between the Paris Agreement and international investment law, it is useful first to have some understanding of the treaty that forms the legal backbone of this thesis. Therefore, this chapter aims to provide more insight into (i) the Paris Agreement’s adoption within the framework of the UNFCCC, and (ii) its legal architecture, which centers on Articles 2 and 3 defining the Paris Agreement’s object and purpose and manner of implementation.

2.1 Adoption under the UNFCCC

The UNFCCC is the primary system to protect the climate for present and future generations.10_{As a}

so-called framework convention, the UNFCCC sets out broader commitments and general obligations for its States Parties but leaves the adoption of specific targets to either protocols or national legislation.11_{This competence follows from Article 17 (1) of the UNFCCC, which provides that the}

Conference of the Parties (‘COP’) may adopt protocols to the Convention at an ordinary session. In 2011, during the COP’s seventeenth session in Durban, South Africa, the Parties had the intention to create a legally binding instrument to further implement the aims of the UNFCCC. They decided ‘to launch a process to develop a protocol, another legal instrument or a legal outcome under the Convention applicable to all Parties’.12_{Despite this broad formulation, the proposal reflected the}

intention to develop a legally binding instrument under international law, in other words, a treaty.13_A

9 _{Speech at the World Economic Forum’s Annual Meeting in Davos (Switzerland), 23 January 2015}

<https://www.weforum.org/agenda/2015/01/13-quotes-from-francois-hollande-at-davos-2015/> accessed 31 May 2018.

10_{UNFCCC Preamble, twenty-third recital.}

11_{Economic Commission for Europe, ‘Note by the Secretariat on Framework Convention Concept’ [2011] 1.}

12_{UNFCCC (Proposal by the President), ‘Establishment of an Ad Hoc Working Group on the Durban Platform for}

Enhanced Action’ (10 December 2011) UN Doc FCCC/CP/2011/L.10, para. 2.

13_{Daniel Bodansky, ‘Legally Binding versus Non-Legally Binding Instruments’ in Scott Barett et al.,}_{Towards a Workable}

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normal COP decision under Article 7 (2) of the UNFCCC would not have sufficed the Durban Mandate, as these decisions generally do not have legal force under the UNFCCC, unless otherwise provided.14

Four years later, at the twenty-first session in Paris, France, the COP successfully concluded the Durban Mandate with the adoption of the Paris Agreement. The Paris Agreement is the second protocol adopted under the auspices of the UNFCCC,15_{and has been viewed as a ‘landmark agreement’}16_{and a}

‘major leap for mankind’.17_{Its perceived importance is evidenced by the fact that only after ten months}

the Paris Agreement reached its threshold to enter into force,18_{while the initial intention or expectation}

was an entry into force in 2020.19_{Currently, 179 out of the 197 UNFCCC States Parties have ratified}

the Paris Agreement.20

2.2 Legal architecture

The Paris Agreement ‘aims to strengthen the global response to the threat of climate change, in the context of sustainable development and efforts to eradicate poverty’.21_{Thus, while the UNFCCC}

encourages States to protect the climate system, the Paris Agreement legally binds the Parties to do so. Hence, from a legal point of view, the Paris Agreement constitutes a treaty within the meaning of the 1969 Vienna Convention on the Law of Treaties22_{(‘VCLT’). An indication in this regard is the opening}

phrase in the Paris Agreement’s preamble, ‘The Parties to this Agreement’.23_{As a treaty, the Paris}

Agreement is governed by the principle of pacta sunt servanda, which provides that treaties are binding

14_Ibid._{, 157.}

15_{The first protocol to the UNFCCC is the Kyoto Protocol (Kyoto Protocol to the United Nations Framework Convention}

on Climate Change (adopted 11 December 1997, entered into force 16 February 2005) 2302 UNTS 162), but its examination is outside the scope of this thesis.

16_{UNFCCC ‘What is the Paris Agreement’}

<https://unfccc.int/process/the-paris-agreement/what-is-the-paris-agreement-0> accessed 20 April 2018.

17_{John Vidal et al., ‘World Leaders Hail Paris Climate Deal as ‘Major Leap for Mankind’’}_{The Guardian}_{(London, 12}

December 2015) <https://www.theguardian.com/environment/2015/dec/13/world-leaders-hail-paris-climate-deal> accessed 20 April 2018.

18_Ibid._{; Article 21 (1) reads that entry into force would be ‘on the thirtieth day after the date on which at least fifty-five}

Parties to the [UNFCCC] Convention accounting in total for at least an estimated fifty-five percent of the global GHG emissions have deposited their instruments of ratification, acceptance, approval or accession’.

19_{Sophie Yeo, ‘Explainer: Paris Agreement on Climate Change to ‘Enter into Force’ (}_{Carbon Brief}_{, 6 October 2016)}

<https://www.carbonbrief.org/explainer-paris-agreement-to-enter-into-force> accessed 31 May 2018.

20_{United Nations Treaty Collection Depository – Chapter XXVII 7.d}

<https://treaties.un.org/pages/viewdetails.aspx?src=treaty&mtdsg_no=xxvii-7-d&chapter=27&clang=_en> accessed 26 July 2018.

21_{Paris Agreement Article 2 (1).}

22_{Vienna Convention on the Law of Treaties (adopted 23 May 1969, entered into force 27 January 1980) 8 ILM 679}

(‘VCLT’). Article 2 (a) provides that a ‘treaty’ means ‘an international agreement concluded between States in written form and governed by international law, whether embodied in a single instrument and whatever its particular designation’. By virtue of Article 1, the VCLT applies to treaties between States.

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upon the Parties and must be performed by them in good faith.24_{Hence, the Paris Agreement is legally}

binding as a whole and not merely a statement of good intentions, as Slaughter contends.25_Although

part of the provisions are worded in a voluntary manner, Elver and Falk point out that the language of the Paris Agreement is formulated in a way to allow multiple interpretations.26_{The interpretation of}

the United Nations is that the Paris Agreement constitutes a hybrid legal instrument embodying both binding and non-binding obligations to the Parties.27_{It depends on the language of each individual}

provision whether it reflects a binding obligation, and to whom it is applicable. Having established that the Paris Agreement constitutes a treaty under international law, it is useful to define its object and purpose in Article 2 followed by the manner of implementation in Article 3.

2.2.1 Article 2: Object and purpose

The object of the Paris Agreement follows the broader objective of the UNFCCC, which is ‘to achieve … stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system. Such a level should be achieved within a timeframe sufficient to allow ecosystems to adapt naturally to climate change, to ensure food production is not threatened and to enable economic development to proceed in a sustainable manner’.28_{In a way, the goals of the Paris Agreement are a reiteration of the UNFCCC objective, which}

makes sense as the Agreement ‘enhances the implementation of the Convention’.29_{Article 2 of the}

Paris Agreement enshrines its purpose and provides, inter alia, a non-exhaustive30_{list on how to}

implement this purpose by means of (a) mitigation, (b) adaptation, and (c) finance flows:

‘1. … aims to strengthen the global response to the threat of climate change, in the context of sustainable development and efforts to eradicate poverty, including by:

(a) Holding the increase in the global average temperature well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C

24_{VCLT Article 26.}

25_{Anne-Marie Slaughter, ‘The Paris Approach to Global Governance’ (}_{Project-Syndicate}_{, 28 December 2015)}

<https://www.project-syndicate.org/commentary/paris-agreement-model-for-global-governance-by-anne-marie-slaughter-2015-12> accessed 23 April 2018. According to Slaughter, the Paris Agreement cannot be enforced by courts and arbitral tribunals, comprises not more than expressions of intent, does not contain codified, enforceable rules, and sanctions for non-compliance. Therefore, she contends that the Paris Agreement is ‘essentially a statement of good intentions, setting forth aspirational goals’.

26_{Hilal Elver and Richard Falk, ‘Climate Change: Post-Paris Challenges and Concerns’ (}_{Global Justice in the 21}st_Century_,

26 January 2016) <https://richardfalk.wordpress.com/2016/01/26/climate-change-post-paris-challenges-and-concerns/> accessed 2 May 2018.

27 _{UN ‘Climate Change Conference Paris 2015 – The Paris Agreement: Frequently Asked Questions’}

<https://www.un.org/sustainabledevelopment/blog/2016/09/the-paris-agreement-faqs/> accessed 20 April 2018.

28_{UNFCCC Article 2.}

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above pre-industrial levels, recognizing that this would significantly reduce the risks and impacts of climate change;

(b) Increasing the ability to adapt to the adverse impacts of climate change and foster climate resilience and low greenhouse gas emissions development, in a manner that does not threaten food production; and

(c) Making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.

2. This Agreement will be implemented to reflect equity and the principle of common but differentiated responsibilities, in the light of different national circumstances.’

2.2.2 Article 3: Implementation

This subsection addresses two phrases from Article 3, namely ‘nationally determined contributions to the global response to climate change’ and ‘ambitious efforts as defined in Articles 9, 10, 11 and 13’. It omits Articles 4 and 7, respectively on mitigation and adaptation, as these will be explored in more detail in the third and fourth chapter. Furthermore, regarding NDCs, this subsection also identifies the approach of implementation, which is ‘bottom-up’ instead of the often-used ‘top-down’ approach in environmental treaties. Article 3 reads:

‘As nationally determined contributions to the global response to climate change, all Parties are to undertake and communicate ambitious efforts as defined in Articles 4, 7, 9, 10, 11 and 13 with the view to achieving the purpose of this Agreement as set out in Article 2. The efforts of all Parties will represent a progression over time, while recognizing the need to support developing country Parties for the effective implementation of this Agreement.’

2.2.2.1 Nationally Determined Contributions to the global response to climate change Article 3 identifies the means to achieve the object and purpose of Article 2, which are Nationally Determined Contributions. These form the heart of the Paris Agreement.31_{NDCs are every States’}

climate actions, which they identify domestically instead of at the international level. Addressing NDCs from an investment perspective, they are an expression of the host State’s right to regulate its domestic affairs. Thereby, ‘climate change is now firmly founded on national action’.32_{However, the fact that}

the Paris Agreement allows States to set their own goals is not equivalent to having a carte blanche. National ambitions are subject to two requirements: (i) an obligation to communicate a NDC every

31_{UNFCCC ‘Paris Agreement – Nationally Determined Contributions (NDCs)’}

<https://unfccc.int/process-and-meetings/the-paris-agreement/nationally-determined-contributions-ndcs> accessed 30 April 2018.

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five years,33_{and (ii) an obligation of progression.}34_{With regard to the latter, the NDC has to ‘reflect the}

State’s highest possible ambition taking into account the principle of common but differentiated responsibilities (‘CBDR’) and respective capabilities, in light of different national circumstances’.35

According to Viñuales, the inclusion of CBDR and respective capabilities follows a soft structure that was needed to ‘bring high emitting developing countries under a regulatory system’.36_{However, it also}

comes with the risk that these countries start by setting unambitious NDCs because of the obligation of non-regression under Article 4 (3).37_{Article 4 (11) further elaborates the obligation of progression,}

allowing a Party to adjust its NDCs at any time if they do so ‘with a view to enhancing its level of ambition’. The Secretariat maintains the submitted NDCs and accords them in a public registry.38_This

is in line with the need of NDCs to be clear, transparent and understandable.39

2.2.2.2 Bottom-up approach to achieve Nationally Determined Contributions

Achieving the object and purpose of Article 2 by means of NDCs is distinct from the approach taken in the first protocol to the UNFCCC. The Kyoto Protocol made an explicit distinction between developed and developing States with regard to different obligations, depending on their inclusion in Annex I, Non-Annex I or Annex II.40_{It is an example of an ‘old generation’ environmental treaty,}

pursuing the ‘top-down’ approach. This is a vertical approach where States undertake treaty obligations and adopt these by means of domestic laws or regulations.41_{Hence, the highest level of}

decision-making develops these ‘top-down’ regulations and passes them down without substantial input from decision-making authorities at lower levels.42_{Apparently, this approach is not the best}

suitable to combat climate change as the international community regards the Kyoto Protocol as a ‘failed instrument’.43_{Therefore, the Paris Agreement is different and part of a ‘new generation’ of}

environmental treaties. Instead of making an explicit distinction between developed and developing States, the Agreement recognizes the principle of CBDR. It does so by means of the ‘bottom-up’ approach. This horizontal approach divides proposed action more broadly, taking into account other

33_{Paris Agreement Article 4 (9). This is a binding obligation as the provision uses the word}_shall_. 34_Ibid._{, Article 4 (3).}

35_Ibid.

36_{Jorge Viñuales, ‘The Paris Climate Agreement: An Initial Examination’ [2015] Cambridge Centre for Environment,}

Energy and Natural Resource Governance Working Paper No. 6, 5.

37_Ibid.

38_{Paris Agreement Article 4 (12).} 39_Ibid._{, Article 4 (8).}

40_{UNFCCC ‘Parties and Observers’ <https://unfccc.int/parties-observers> accessed 31 May 2018.} 41_{Pierre-Marie Dupuy and Jorge Viñuales,}_{International Environmental Law}_{(CUP 2015) 173.}

42_{Yohannes Mariam, ‘Environmental Sustainability and Regulation: Top-Down Versus Bottom-Up Regulation’ [2001]}

MPRA Paper No. 413, 7.

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actors, such as the business community and civil society.44_{This ‘bottom-up’ approach offers}

substantial flexibility in States’ NDCs, allowing States ‘to prioritize their efforts based upon their own unique economic, political, and geographic considerations and ensures that all Parties begin the transition towards a low-carbon economy at their own pace and in a cost-efficient and predictable manner’.45_{Therefore, the ‘bottom-up’ approach can be favorable to ensure effective climate change}

action.

2.2.2.3 Ambitious efforts as defined in Articles 9, 10, 11 and 13

Besides identifying NDCs as the means to achieve the Paris Agreement’s goals, Article 3 also works as a connecting provision by referring to ‘ambitious efforts as defined in Articles 4, 7, 9, 10, 11 and 13’. These provisions cover the traditional themes of the UNFCCC, which are (i) mitigation, (ii) adaptation, (iii) finance, (iv) technology, (v) capacity-building, and (vi) transparency.46_{For a more comprehensive}

understanding of the Paris Agreement, the last four themes will be shortly examined whereas the third and fourth chapter cover mitigation (Article 4) and adaptation (Article 7) in more detail.

2.2.2.3.1 Article 9: Finance

Financial assistance is one of the main goals in Article 2 of the Paris Agreement.47_{Based on Article 9}

(1), developed country Parties shall provide financial resources to developing countries regarding mitigation and adaptation. Other Parties are encouraged to provide financial assistance.48_The

Agreement itself does not set any amount but only notes the significant role of public funds.49

Developing States have been mainly in favor of public funds from developed States,50_{while developed}

States rather have insisted on the inclusion of private funding, including foreign investment.51

Furthermore, Article 9 (3) mentions that climate finance must come ‘from a wide variety of sources, through a wide variety of actions’. This hints to the fact that ‘mobilization is not only financial

44_{An example is the 1994 UN Convention to Combat Desertification, which ‘focuses on a participatory approach, the key}

element of which is the development of regional, sub-regional and national action programs’. These programs integrate stakeholder groups and are seen as a solution for ‘localized management of the problem’ (Dupuy and Viñuales [2015] 185-186).

45_{Luke Grunbaum, ‘From Kyoto to Paris: How Bottom-Up Regulation Could Revitalize the UNFCCC’ (}_{Environmental}

Law Review Syndicate, 28 November 2018) <https://jelpblog.wordpress.com/2015/11/28/from-kyoto-to-paris/> accessed 2 July 2018.

46_{Ralph Bodle and Sebastian Oberthür, ‘Legal Form of the Paris Agreement and Nature of its Obligations’ in: Daniel Klein}

et al. (eds), The Paris Agreement on Climate Change: Analysis and Commentary (OUP 2017) 96.

47_{Paris Agreement Article 2 (1) (c).} 48_Ibid._{, Article 9 (2).}

49_Ibid._{, Article 9 (3).}

50_{Decision 1/CP.21 sets a new collective quantified goal of at least USD 100 billion per year regarding public funding}

(UNFCCC ‘Adoption of the Paris Agreement’ (29 January 2016) Decision 1/CP.21, UN Doc FCCC/CP/2015/10/Add.1, para. 54 (‘Decision 1/CP.21’)).

51_{T. Jayaraman, ‘The Paris Agreement on Climate Change: Background, Analysis, and Implications’ [2015] Review of}

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resources per se but also public policies and strategies to shift public investments and/or leverage private investments’.52_{Thus, one can read along the lines of Article 9 (3) that the shift and mobilization}

of investments is necessary to achieve the long-term goals of the Paris Agreement.53

2.2.2.3.2 Article 10: Technology

Article 10 of the Paris Agreement concerns technology development and transfer, which are important for improving climate change resilience and reducing GHG emissions.54_{Thereby, it relates to both}

adaptation and mitigation.55_{However, whereas Article 9 on finance includes strong language, Article}

10 is more prescriptive in nature and contains obligations of conduct rather than result.56_{Article 10 (5)}

recognizes that ‘innovation is critical for an effective, long-term global response to climate change and promoting economic growth and sustainable development’. According to the UNFCCC Technology Executive Committee (‘TEC’), safeguarding technical innovation is a prerequisite for States to implement their NDCs smoothly.57_{Foreign investment is of help in this regard, as it often comes with}

innovations and new technologies.58_{An example is the Off-Grid Electric business model for Africa,}

which provides rural Africa with solar home systems through an innovative financial product.59_This

company developed a ‘modular pay-as-you-go solar photovoltaic product’ that is now used in Côte d’Ivoire, Rwanda and Tanzania.60

2.2.2.3.3 Article 11: Capacity-building

Article 11 of the Paris Agreement concerns capacity-building, the general purpose of which is ‘to enhance the ability of developing countries to take effective climate change action in fulfilment of the objective of the Convention, and of the purpose and obligations of the Agreement’.61_{In this regard,}

developed States have to take the lead. Based on Article 11 (2), capacity-building needs to be country-driven, based on, and responsive to national needs, recognizing that there is no ‘one size fits all-solution’ to developing States. D’Auvergne and Nummelin note that ‘the country-driven nature will necessitate cooperation to ensure confluence between national needs and the support provided’.62_{It is likely that}

the number and scale of capacity-building activities will increase, leading to cooperation between

52_{Jorge Gastelumendi and Inka Gnittke, ‘Climate Finance (Article 9)’ in: Klein et al. [2017] 245-246.} 53_Ibid._{, 246.}

55_{UNFCCC ‘Cancun Agreements’ (15 March 2011) Decision 1/CP.16, UN Doc FCCC/CP/2010/7/Add.1, para. 121 (a).} 56_{Heleen de Coninck and Ambuj Sagar, ‘Technology Development and Transfer (Article 10)’ in: Klein et al. [2017] 267.} 57_{Technology Executive Committee, ‘Technological Innovation for the Paris Agreement’ [2017] TEC Brief #10, 5.} 58_{Carol Newman et al., ‘Technology Transfers, Foreign Investment and Productivity Spillovers’ [2015] European}

Economic Review 168-187, 168.

59_{TEC [2017] 19.} 60_Ibid.

61_{Chrispin d’Auvergne and Matti Nummelin, ‘Capacity-building (Article 11)’ in: Klein et al. [2017] 287.} 62_Ibid._{, 289.}

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various actors.63_{In this regard, foreign investors could support developing States by installing}

investments that are based on and responsive to national needs. 2.2.2.3.4 Article 13: Transparency

The ‘enhanced transparency framework for action and support’ in Article 13 of the Paris Agreement is one of its main outcomes, according to Viñuales.64_{Article 13 (1) addresses the necessity of this}

framework for ‘mutual trust and confidence’ between the Parties, and recognizes a certain flexibility taking into account their different capacities. This flexibility is mainly for developing countries,65

reflecting the special circumstances of least developed States and small island developing States.66_The

transparency mechanism focuses on action and support. With regard to action, it tracks the progress of individual Parties’ NDCs under Article 4, Parties’ adaptation actions under Article 7, and informs the global stocktake under Article 14.67_{With regard to support, there must be clarity on individual}

Parties’ climate change actions on a range of issues.68_{These are (i) mitigation, (ii) adaptation, (iii)}

finance, (iv) technology transfer, (v) capacity-building, and (vi) the global stocktake. Information that each Party has to provide includes ‘a national inventory report of anthropogenic emissions by sources and removals by sinks of greenhouse gases’ and ‘information necessary to track progress shall be made in implementing and achieving the NDCs’.69_{The language in Article 13 (7) (shall) comprises a binding}

obligation for each Party. Where developed States support developing States, this information has to be provided as well with regard to finance, technology transfer and capacity-building.70_{All submitted}

information is subject to review by technical experts.71_{Transparency is not only beneficial within the}

UNFCCC system, but also regarding investors. Investors might be able to base their decisions on whether to invest on additional information concerning progress made by host States in pursuit of their NDCs.

2.3 Interim conclusion

This chapter has given an overview of the Paris Agreement with the aim to introduce the reader to the legal instrument that forms the backbone of this thesis. Therefore, it has given attention to its adoption under the UNFCCC and its legal architecture. In conclusion, the Paris Agreement definitely has the

63_Ibid.

64_{Viñuales [2015] 8.}

65_{Paris Agreement Article 13 (2).} 66_Ibid._{, Article 13 (3).}

67_Ibid._{, Article 13 (5).} 68_Ibid._{, Article 13 (6).} 69_Ibid._{, Article 13 (7).} 70_Ibid._{, Article 7 (9).}

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potential to contribute significantly to strengthening the global response to the threat of climate change. The ‘bottom-up’ approach defines action broadly and considers other actors, making all levels of society part of this global response. NDCs have the potential to be achieved not by States alone, but also investor activities can significantly contribute to the substance of the NDCs.

Now these preliminary matters have been set out, the subsequent chapters concentrate in more detail on the interaction between the Paris Agreement and international investment law. It does so within the realm of the other two traditional themes that have not been addressed in this chapter: (i) mitigation, and to a lesser extent (ii) adaptation.

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Chapter 3 Mitigation: ‘Brown’ and ‘Green’ Approaches

‘Governments must now put word into actions,

in particular by implementing policies that make effective progress

on the mitigation pledges they have made’

- Christine Lagarde, Chief of the International Monetary Fund72

This chapter addresses the area of mitigation, and does so by means of identifying two approaches, ‘brown’ and ‘green’, that States can follow to abide by their mitigation pledges. Under Article 4 (2) of the Paris Agreement, States shall pursue domestic mitigation measures in order to contribute to the objectives of their NDCs. As it is practically impossible to define all kinds of measures that States have taken in the fight against climate change, this thesis aims to identify what type of domestic mitigation measures are available to States to (i) restrict the ‘brown economy’, or (ii) incentivize renewable energy. After setting out these types of measures or incentives along with some real or hypothetical examples, their investment implications will follow. These implications are assessed from a twofold perspective. On the one hand, domestic mitigation measures significantly contribute to investment opportunities. On the other hand, as their implementation will involve changes in host States’ legal frameworks, there is a potential of conflict with model provisions appearing in IIAs. In every section, one model provision is chosen in order to explore this potential conflict.73_{It is necessary to note that these model provisions}

can be used interchangeably, and are not necessarily connected only to the approach in which they appear.

3.1 Mitigation within the Paris Agreement

Mitigation concerns conduct aimed at preventing climate change. This area is of particular importance for the question how the Paris Agreement interacts with international investment law, as the

72_{Alister Doyle, ‘16 Quotes from World Leaders on the Paris Climate Agreement’ (}_{World Economic Forum}_{, 12 December}

2015) <https://www.weforum.org/agenda/2015/12/16-quotes-from-world-leaders-on-the-paris-climate-agreement/> accessed 31 May 2018.

73_{This thesis does not take the approach that all State measures definitely will result in a breach, but rather explores the}

possibility. It always depends on the facts of the particular case whether an arbitral tribunal will find a violation of the IIA in question.

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production and use of energy resulting in GHG emissions significantly contributes to global warming and there are many investments in the energy sector. When taking measures that aim at mitigating greenhouse gas emissions, each State can take different strategies to tailor those measures. This thesis distinguishes between two approaches:

Firstly, the ‘brown’ approach, concerning the situation wherein States choose to take measures that ‘go after the brown economy’.

Secondly, ‘green’ approach, addressing the situation wherein States incentivize investments in low-carbon emissions, such as renewable energy.

Within the Paris Agreement, Article 4 concerns mitigation and its first paragraph informs the rest of the Article as a preamble, by referring to the long-term temperature goal in Article 2, equity, the context of sustainable development and efforts to eradicate poverty. Hence, ‘the long-term goal on mitigation is framed in long-terms of development and climate’.74_{Article 4 (2) concerns a}

twofold obligation. The first one is of a procedural nature, obliging Parties to ‘prepare, communicate and maintain successive NDCs’.75_{The second one is an obligation of conduct, and forms the basis on}

which Parties shall pursue domestic mitigation efforts aiming at achieving the objectives of their NDCs.76_{The last part of the sentence suggests that ‘it is sufficient to meet this obligation if States take}

action aimed at the objective of the NDC, rather than a more explicit and binding obligation to meet the requirement of the NDC’.77_{The relevance of the second sentence of Article 4 (2) lies in that}

domestic mitigation efforts taken in pursuit of obligations under the Paris Agreement will necessarily involve changes in States’ legal frameworks.78_{However, IIAs protect investors by seeking to promote}

predictability and stability in the host State’s legal framework.79_{To date, there are 2.363 bilateral}

investment treaties (‘BITs’) and 309 treaties with investment provisions in force.80_{This considerable}

amount is a confirmation that international investment law is a branch of law that States cannot ignore when abiding by Article 4 (2) of the Paris Agreement. Therefore, the following sections shall address the pursuit of domestic mitigation efforts for the ‘brown’ and ‘green’ approaches, taking into account their interaction with international investment law.

74_{Harold Winkler, ‘Mitigation (Article 7)’ in: Klein et al. [2017] 146.} 75_{Paris Agreement Article 4 (2), first sentence.}

76_Ibid._{, second sentence.}

77_{Peter Lawrence and Daryl Wong, ‘Soft Law in the Paris Climate Agreement: Strength or Weakness?’ [2017] RECIEL}

276-286, 280.

78_{Van Duzer [2016[ 434.} 79_Ibid.

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3.2 The ‘brown’ approach

This section concerns the first approach, in other words, the situation wherein States choose to take measures that have an adverse effect on the brown economy in order to abide by their commitments under the Paris Agreement. For the purposes of this thesis, the ‘brown economy’ refers to investments in any sector with heavily reliance on fossil fuels, such as coal, oil and natural gas.81_{According to the}

March 2018 Carbon Tracker-report, there is a ‘yawning gap’82_{between the long-term temperature goal}

in the Paris Agreement (‘well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels’)83_{and current governmental policies. The}

latter have been aligned with a global warming of 2.7°C.84_{This becomes even clearer when reading a}

study conducted in 2015, which has shown that the amount of global reserves in fossil fuels is enormous. It identified percentages of coal (82%), gas (49%) and oil (33%) that have to stay in the ground in order to meet the commitment of ‘2°C above pre-industrial levels’ in Article 2 (1) (a) of the Paris Agreement.85_{One solution for this is restricting the ‘brown economy’. What measures will States take}

to achieve this? In order to answer this question, the following subsections address (i) the types of measures, and (ii) their implications for foreign investment.

3.2.1 Types of measures 3.2.1.1 New emission standards

New emission standards lead to the imposition of more stringent regulations, thereby reducing GHG emissions. An example is the set of stricter regulations by the Dutch government on coal power plants. In case a power plant’s emissions are too high, the owners have to make changes to the power plant in order to ensure lower emissions.86_{The Netherlands acknowledges that these tougher standards will}

81_{This definition is partly derived from the definition that Uwe Deichmann (Senior Environmental Specialist at the World}

Bank) gives for ‘brown growth’, which is ‘economic development that relies heavily on fossil fuels and does not consider the negative side effects that economic production and consumption have on the environment’. See also: Uwe Deichmann and Fan Zhang, ‘From Brown Growth to Green: The Economic Benefits of Climate Action’ (World Bank, 25 June 2013) <http://www.worldbank.org/en/news/feature/2013/06/25/growing-green-europe-and-central-asia> accessed 2 July 2018.

82_{Mike Scott, ‘$1.6 Trillion of Investments at Risk If Fossil Fuel Firms Fail to Heed Climate Targets’ (}_Forbes_{, 8 March 2018)}

<https://www.forbes.com/sites/mikescott/2018/03/08/1-6-trillion-of-investments-at-risk-if-fossil-fuel-firms-fail-to-heed-climate-targets/#a4ae5b22a031> accessed 3 July 2018.

83_{Paris Agreement Article 2 (1) (a).}

84 _{Andrew Grant, ‘Mind the Gap: the $1.6 Trillion Energy Transition Risk’ [2018] Carbon Tracker}

<https://yoursri.com/2018-03-15_mind-the-gap.pdf> accessed 3 July 2018.

85_{Cristophe McGlade and Paul Ekins, ‘The Geographical Distribution of Fossil Fuels Unused When Limiting Global}

Warming to 2°C’ [2015] Nature 187-190. This study was conducted before the adoption of the Paris Agreement, but identified a temperature limit of 2°C, which now corresponds with Article 2 (1) (a) of the Paris Agreement.

86_{Government of the Netherlands ‘Renewable Energy’}

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definitely have an impact on the power plants built in the 1980s, as it is harder for those to abide by these stricter regulations.87

3.2.1.2 Banning certain substances from sale and use

The ban of certain substances that are harmful to the environment contributes to mitigation and environmental protection. Two examples come from disputes before investment tribunals. In Methanex v United States,88_{Californian legislation banned the sale and use of the fuel additive methyl}

tertiary-butyl ether (‘MBTE’). Methanex used MBTE in their products and due to this ban became unable to access the Californian market. Another case, Ethyl v Canada,89_{involved a Canadian ban of}

the toxic fuel additive methylcyclopentadienyl manganese tricarbonyl (‘MMT’) due to concerns for health and environment. Eventually, this case came to a settlement and nowadays the presence of MMT in gas is voluntary restricted by companies in Canada.90

3.2.1.3 Carbon taxes

Carbon taxes are able to restrict emissions from the brown economy, as it becomes more expensive to use fossil fuels in products or production processes. A carbon tax is ‘a fee imposed on the burning of carbon-based fuels (coal, oil and gas)’.91_{When such a tax is set high enough, it becomes ‘a powerful}

monetary disincentive’ for companies so that they will eventually shift to renewable energy.92_Carbon

taxes are an elaboration of the Polluter-Pays-Principle, a principle with deep roots in international environmental law and first introduced at the international level at the 1972 Stockholm Conference on the Human Environment, although not included in the Stockholm Declaration.93_{According to this}

principle, ‘the polluter should bear the cost of measures to reduce pollution according to the extent of either the damage done to society or the exceeding of an acceptable level (standard) of pollution’.94

Article 3 (1) of the UNFCCC recognizes this principle, albeit implicitly through the principle of CBDR.95_{Decision 1/CP.21 adopting the Paris Agreement recognizes the important role of carbon}

87_Ibid.

88_{Methanex Corporation v United States}_{, UNCITRAL IIC 167, Final Award on Jurisdiction and Merits (19 August 2005)}

(‘Methanex v United States’).

89_{Ethyl Corporation v Canada}_{, UNCITRAL, Award on Jurisdiction (24 June 1998) (‘}_{Ethyl v Canada}_’).

90 _{Ray Minjares, ‘Update: MMT’ (}_{The International Council on Clean Transportation}_{, 16 February 2012)}

<https://www.theicct.org/blog/staff/update-mmt > accessed 6 July 2018.

91_{Carbon Tax Center ‘What is a Carbon Tax?’ <https://www.carbontax.org/whats-a-carbon-tax/> accessed 5 July 2018.} 92_Ibid.

93_{Muhammad Munir, ‘History and Development of the Polluter Pays Principle: How an Economic Idea Became a Legal}

Principle?’ [2013] SSRN 1-25, 7.

94_{OECD Glossary of Statistical Terms ‘Polluter Pays Principle’}

<https://stats.oecd.org/glossary/detail.asp?ID=2074> accessed 5 July 2018.

95_{Article 3 (1) UNFCCC reads in relevant part: ‘The developed country Parties should take the lead in combating climate}

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pricing as an incentive for emission reduction.96_{Carbon taxes are effective to cut GHG emissions from}

the use of energy, but not enough to fight climate change as such.97

3.2.1.4 Shutting down power plants

Closing power plants that significantly contribute to GHG emissions is another option at States’ disposal in restricting the ‘brown economy’. Many States have announced the intention to close coal-fired power plants in this regard.98_{An example comes from a study by Climate Analytics, focused upon}

the European Union (‘EU’). It has defined that ‘the EU will exceed its Paris Agreement-compatible emissions budget for coal-based electricity by 85% in 2050 if all existing coal-fired power plants continue operating to the end of their full life span’.99_{Taking the example of the Netherlands again, the}

Dutch government has announced the intention to close five out of ten coal power plants by 1 July 2017.100_{Not all power plants are ready for an immediate closure, as alternatives for generating energy}

need to become more developed first. For now, these five Dutch power plants at least belong to the ‘most modern coal power plants in Europe’ and have low carbon emissions as they are co-fired with biomass.101_{Despite these low emissions, the intention is to close these power plants by 2030 as well.}102

3.2.2 Implications for foreign investment

On the one hand, stricter emission standards, carbon taxes and shutting down power plants that significantly contribute to GHG emissions create incentives for the investor to shift to renewable energy, thereby helping States to achieve their NDCs. The banning of certain substances from their sale and use creates an incentive for investors to shift their investments into low-polluting products or environmentally-friendly production processes. All this opens up huge potentials for new investments. In this regard, the International Finance Corporation identified nearly USD 23 trillion in opportunities for climate-smart investments between 2016 and 2030.103

96_{Decision 1/CP.21 [2015] para. 137.}

97_{UN Climate Change News, ‘Governments Must Tax Dirty Energy – OECD’ (}_UNFCCC_{, 14 February 2018)}

<https://unfccc.int/index.php/news/governments-must-tax-dirty-energy-oecd> accessed 5 July 2018.

98_{Climate Analytics ‘Coal Phase out in the European Union’ <http://climateanalytics.org/briefings/eu-coal-phase-out.html>}

accessed 5 July 2018.

99_Ibid.

100_{Government of the Netherlands ‘Renewable Energy’}

<https://www.government.nl/topics/renewable-energy/the-future-of-fossil-fuels> accessed 5 July 2018.

101_Ibid.

102_{Regeerakkoord 2017-2021 (VVD, CDA, D66 and ChristenUnie), ‘Vertrouwen in de Toekomst’ (10 October 2018) 38}

<https://www.kabinetsformatie2017.nl/documenten/publicaties/2017/10/10/regeerakkoord-vertrouwen-in-de-toekomst> accessed 5 July 2018.

103_{International Finance Corporation, ‘Climate Investment Opportunities in Emerging Markets: An IFC Analysis’ [2016]}

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On the other hand, measures that ‘go after the brown economy’ are able to decrease the value of an investment because it becomes less profitable, due to higher tax obligations, restrictions aimed at leaving the necessary percentages of fossil fuels in the ground in order to prevent global warming, or an inability to access a market. An investor who sees his profits decrease because of domestic mitigation measures can argue expropriation before an arbitral tribunal.

International law does not prohibit expropriation if it meets certain requirements.104

These requirements are contained in most investment treaties and encompass that the measure: (i) must serve a public purpose, (ii) must not be arbitrary and discriminatory, (iii) follows the principles of due process, and (iv) must be accompanied by prompt, adequate and effective compensation.105_In

this regard, a State that physically seizes a power plant for the public purpose of preventing climate change and compensates the investor is still in conformity with international investment law. However, States taking domestic mitigation measures will often not directly expropriate when the formal title of the investment remains with the investor.106_{Nevertheless, such actions by the host State can make it}

difficult for the investor to keep operating his investment in a profitable manner,107_{especially when the}

State does not offer any compensation to the investor. Therefore, IIAs often include a reference to indirect expropriation or measures tantamount to expropriation as well.108_{If a tribunal finds that a}

State has indirectly expropriated the investor’s property, it requires the State to compensate the investor for his loss.109_{However, not all measures that interfere with the investor’s property amount to}

expropriation. According to Brownlie, ‘State measures, prima facie a lawful exercise of powers of governments, may affect foreign interests considerably without amounting to expropriation. Thus, foreign assets and their use may be subjected to taxation, trade restrictions involving licenses and quotas, or measures of devaluation. While special facts may alter cases, in principle such measures are not unlawful and do not constitute expropriation’.110_{Non-discriminatory measures for environmental}

protection constitute non-compensable takings as they are seen as crucial to the State’s efficient functioning.111_{Following this, the adoption of domestic mitigation measures in pursuit of the Paris}

Agreement’s goals would not per se be in violation of host State obligations under IIAs.

104_{Rudolf Dolzer and Christoph Schreuer,}_{Principles of International Investment Law}_{(OUP 2012) 98-99.} 105_Ibid._{, 99.}

106_{Van Duzer [2016] 438.}

107_{Dolzer and Schreuer [2012] 102.} 108_Ibid.

109_{For example, in}_{Bear Creek Mining v Peru}_{, ICSID Case No. ARB/14/21, Award (30 November 2017), para. 688, the}

Tribunal found that measures taken by Peru amounted to an indirect expropriation and awarded the investor USD 18.2 million in damages for the Santa Ana mining project.

110_{Ian Brownlie,}_{Public International Law}_{(OUP 2003) 509.}

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As the majority of IIAs providing for indirect expropriation stay silent on the treatment of non-compensable regulatory measures,112_{arbitral tribunals have taken different approaches to}

determine whether a measure constitutes indirect expropriation, taking the effect or the intention as the decisive factor. On the one hand, the Tribunal in Tecmed v Mexico found that ‘the government’s intention is less important than the effects of the measures on the owner of the assets or on the benefits arising from such assets affected by the measure; and the form of the deprivation measure is less important than its actual effects’.113_{This line of reasoning is called the ‘sole effects doctrine’.}114_{On the}

other hand, the Tribunal in LG&E v Argentina held that ‘there must be a balance in the analysis both of the causes and effects of a measure in order that one may qualify a measure as being of an expropriatory nature. It is important not to confound the State’s right to adopt policies with its power to take an expropriatory measure’.115_{This latter approach is called the ‘police powers doctrine’,}

adopted by the ‘vast majority of investment tribunals’.116_{Once an alleged indirect expropriation falls}

within the police powers of the State, it is non-compensable.117_{Thus, as Schill puts it, ‘the concept of}

indirect expropriation leaves broad leeway to host States to regulate production processes, to raise emission standards, and even to impose production bans on products that contribute specifically to GHG emissions’.118

In conclusion, domestic mitigation measures under Article 4 (2) of the Paris Agreement pursuing a ‘brown’ approach work in a twofold manner. On the one hand, they significantly contribute to the goals in Article 2. On the other hand, following the police powers doctrine, an investor is likely to find himself with an investment of decreased value and no prompt, adequate or effective compensation because the State restricted the ‘brown economy’ in pursuing its right to regulate in fulfilment of its NDCs. An intention of continued operation of the investment would require changing it in such a way as to comply with the taken domestic mitigation measures, which will not always be easy for investors in the ‘brown economy’. However, a 2018 study identified that investors are already aware of such changes in host States’ legal frameworks and start pulling out

112_{OECD, ‘Indirect Expropriation and the Right to Regulate in International Investment Law’ [2004] OECD Working}

Paper on International Investment 2004/04, 6.

113_{Técnicas Medioambientales Tecmed S.A. v the United Mexican States, ICSID Case No. ARB(AF)/00/2, Award (29 May}

2003) para. 116 (‘Tecmed v Mexico’).

114_{Van Duzer [2016] 439.}

115_{LG&E Energy Corp., LG&E Capital Corp., and LG&E International, Inc. v Argentine}_{, ICSID Case No. ARB/02/1,}

Decision on Liability (3 October 2006) para. 194 (‘LG&E v Argentina’).

116_{Stephan Schill, ‘Do Investment Treaties Chill Unilateral State Regulation to Mitigate Climate Change?’ [2007] Journal}

of International Arbitration 469-477, 472.

117_{Saluka Investments BV (The Netherlands) v Czech Republic}_{, UNCITRAL Partial Award (17 March 2006) para. 263}

(‘Saluka v Czech Republic’).

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the ‘brown economy’ themselves.119_{According to Bauer, the co-author of the study, investors ‘shy}

away from investing in fossil fueled power plants as they realize that the lifetime during which these plants will make money will be curtailed by future climate policy. We find this divestment reduces emissions by between five to twenty percent, depending on the strength of the climate policy, already in the time before the climate policy gets implemented’.120_{In practice, whether all of this will work}

depends partly upon State incentives into renewable energy, in other words, the ‘green’ approach.

3.3 The ‘green’ approach

This section concerns the second approach, or, the situation wherein States create incentives to attract investors in renewable energy, which help States to abide by their mitigation commitments under the Paris Agreement. Although the term ‘renewable energy’ nowhere appears in the agreement, there is a clear signal that a shift from a ‘brown’ to a ‘green’ economy is of utmost importance in order to abide by the objective in Article 2. According to a report by the International Renewable Energy Agency (‘IRENA’),121_{‘clean energy could achieve 90% of the energy-related CO emission reduction required}

to meet the central goals of the Paris Agreement’.122_{In order to make this shift, international}

investment flows are indispensable. Within the Paris Agreement, this becomes clear when one reads along the lines. The Paris Agreement increasingly refers to participation not only of States but also of, i.e., the private sector. As investments in the energy sector are capital-intensive, involve an immobile infrastructure and have a long period of payback,123_{it is important for States to provide investors with}

incentives to invest in renewable energy. What kind of incentives do host States create to attract foreign investment in renewable energy? In order to answer this question, the following subsections address (i) the types of incentives, and (ii) their implications for foreign investment.

119_{Nico Bauer et al., ‘Divestment Prevails Over the Green Paradox When Anticipating Strong Future Climate Policies’}

[2018] Nature Climate Change 130-134.

120 _{UNFCCC, ‘Paris Agreement Triggers Divestment from Coal – Study’ (}_UNFCCC_{, 30 January 2018)}

<https://unfccc.int/news/paris-agreement-triggers-divestment-from-coal-study> accessed 10 July 2018.

121 121_{IRENA, ‘Perspectives for the Energy Transition: Investment Needs for a Low-Carbon Energy System’ [2017]}

<http://www.irena.org/-/media/Files/IRENA/Agency/Publication/2017/Mar/Perspectives_for_the_Energy_Transition_2017.pdf?la=en&hash=56 436956B74DBD22A9C6309ED76E3924A879D0C7> accessed 7 July 2018.

122 _{UNFCCC, ‘Clean Energy Can Meet 90% of Paris Energy-Related Goals’ (}_UNFCCC_{, 5 July 2017)}

<https://unfccc.int/news/clean-energy-can-meet-90-of-paris-energy-related-goals> accessed 7 July 2018.

123_{Edna Sussman, ‘The Energy Charter Treaty’s Investor Protection Provisions: Potential to Foster Solutions to Global}

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3.3.1 Types of incentives 3.3.1.1 Green certificates

Green certificates are designed in such a manner that regulatory authorities provide tradable certificates for a certain amount of renewable energy.124_{Non-compliance with the system often results}

in a penalty ‘to ensure that obligated parties meet their renewable energy purchase obligations’.125_In

this regard, green certificates help investors comply with these obligations, and as they have to submit these certificates to the regulatory authorities, their value is created.126_{This monetary value creates an}

incentive for producers to produce green certifications,127_{thus changing production methods from}

‘brown’ to ‘green’.

3.3.1.2 Feed-in tariffs

Feed-in tariffs (‘FITs’) ensure that renewable energy produced by means of this scheme is paid at a fixed minimum price, which is generally higher than the price on the market and guaranteed for a certain amount of time.128_{Thus, FITs set a price whereas green certificates set a quantity.}129_{A price that}

is high enough can lead to ‘sustained and sizeable growth in renewable energy generation’.130_However,

as a main criticism, a price that is too high may lead to a system wherein producers receive profits in excess at the expense of consumers.131_{Nevertheless, FITs create certainty for the investor as they reduce}

the price and market risk,132_{and the United Nations Conference on Trade and Development}

(‘UNCTAD’) defined FITs as an easier and more attractive option as compared to green certificates.133

124_{Anatole Boute, ‘Combating Climate Change Through Investment Arbitration’ [2012] Fordham International Law}

Journal 613-664, 622

125_{Van der Linden et al., ‘Review of International Experience with Renewable Energy Obligation Support Mechanisms’}

[2005] Energieonderzoek Centrum Nederland, 10.

126_Ibid. 127_Ibid._{, 11.}

128_{Boute [2012] 622-623.}

129_{Van der Linden et al. [2005] 11.} 130_Ibid.

131_Ibid.

132_{Joan Canton and Åsa Johannesson Lindèn, ‘Support Schemes for Renewable Electricity in the EU’ [2010] European}

Economy Economic Papers, 7.

133_{United Nations Conference on Trade and Development (‘UNCTAD’),}_{World Investment Report 2010: Investing in a}

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3.3.1.3 Renewable portfolio standards

The adoption of renewable portfolio standards (‘RPSs’) is another policy tool to promote the generation of renewable energy.134_{‘A RPS ensures that a minimum amount of renewable energy is}

included in the State’s portfolio of electric generating resources, and – by increasing the required amount over time – the RPS can put the electricity industry on a path towards increasing sustainability’.135_{This policy tool creates certainty for investors about the size and time dimensions of}

the State’s renewable energy market.136_{For example, Chile adopted a Renewable Energy Law in 2008}

that requires at least five percent of electricity to come from renewable energy sources in 2010, and this percentage increases by 0.5% every year.137_{According to Chile’s NDC, twenty percent of the energy}

under supply contracts subject to this law has to come from renewable energy resources by 2025.138

3.3.1.4 Public procurement of low-carbon products and technologies

Public procurement of low-carbon products and technologies provides another incentive for investment.139_{In 2013, public procurement constituted thirteen percent of the Gross Domestic Product}

(‘GDP’) in OECD140_countries.141_{When this is aligned with the State’s broad policy objectives,}

governments can use public procurement as a tool to address sustainability needs.142_{UNCTAD lists}

examples for investment potentials herein, such as requiring governmental buildings to use highly insulated windows or a certain percentage of public administration fleets to consist of electric vehicles.143_{Furthermore, it provides investors ‘with the security of having a buyer for their products’.}144

3.3.2 Implications for foreign investment

Incentivizing renewable energy is a consequence from the Paris Agreement and will have implications on investment flows into the area of mitigation. What are these investment implications?

134_{Thomas Lyon and Haitao Yin, ‘Why Do States Adopt Renewable Portfolio Standards?: An Empirical Investigation’}

[2010] The Energy Journal 131-156, 131.

135_Ibid.

136_{UNCTAD [2010] 127.} 137_Ibid.

138_{Chile First NDC (10 February 2017) 8}

<http://www4.unfccc.int/ndcregistry/PublishedDocuments/Chile%20First/INDC%20Chile%20english%20version.pdf> accessed 9 July 2018.

139_{UNCTAD [2010] 128.}

140_{Organization for Economic Cooperation and Development.}

141_{Richard Baron, ‘The Role of Public Procurement in Low-Carbon Innovation’ [2016] OECD Background Paper for the}

33rd_{Round Table on Sustainable Development, para. 7.} 142_Ibid._{, para. 11.}

143_{UNCTAD [2010] 128.} 144_Ibid.

The Paris Agreement as a Catalyst for International Investment Law : A relationship of potential conflict or harmony?