The State’s Right to Regulate Climate Change Mitigation under International Investment Law
Name: Allard Kool
Student number: 10777687
Email address: allardkool@icloud.com Supervisor: prof. dr. S.W.B. Schill
Master Track: International Trade & Investment Law
Date: 1 July 2022
Table of Content
List of Abbreviations ... iii
Abstract ... v
Chapter 1 Introduction ... 1
1.1. Problem Statement ... 1
1.2. Research Questions ... 2
1.3. Overview ... 3
Chapter 2 The Potential Threat of Coal Power Phase Outs to the State’s Regulatory Freedom 4 2.1. The Practical Relevance of Coal Power Phase Outs ... 4
2.2. The Coal Power Phase Out’s Potential for Causing Expropriation Claims ... 6
2.2.1. The Threshold for Indirect Expropriation ... 6
2.2.2. The Design of Coal Power Phase Out Regulations ... 7
2.2.3. Coal Power Phase Out Regulations Cause Substantial Deprivations ... 8
2.3. Conclusion ... 9
Chapter 3 The State’s Right to Regulate in International Investment Law ... 10
3.1. The Right to Regulate in Arbitral Practice ... 10
3.1.1. The Police Powers Doctrine ... 11
3.1.2. The Proportionality Analysis ... 12
3.2. The Right to Regulate in Treaties ... 14
3.2.1. Contextualised Expropriation Clauses ... 15
3.2.2. General Exception Clauses ... 16
3.2.3. Carve-outs or Exclusion Clauses ... 18
3.3. Conclusion ... 19
Chapter 4 Coal Power Phase Out Regulations and Regulatory Expropriation? ... 21
4.1. Coal Power Phase Out Regulations as Non-compensable Regulation in Arbitral Practice .. 21
4.1.1. Coal Power Phase Outs Under the Police Powers Doctrine ... 21
4.1.2. Coal Power Phase Outs Under a Proportionality Analysis ... 23
4.2. Coal Power Phase Out Regulations as Non-compensable Regulation under New IIAs ... 26
4.2.1. Coal Power Phase Outs and Contextualised Expropriation Clauses ... 26
4.2.2. Coal Power Phase Outs and General Exception Clauses ... 27
4.2.3. Coal Power Phase Outs and Carve-outs or Exclusion Clauses ... 28
4.3. The State’s Policy Space to Adopt Climate Change Regulation as Non-compensable
Regulation ... 29
4.4. Conclusion ... 30
Chapter 5 Conclusion ... 32
Bibliography ... 33
Table of Cases ... 38
List of Abbreviations
ActScandJurisGent Nordic Journal of International Law AIAJ Asian International Arbitration Journal ASEAN Association of Southeast Asian Nations
CETA Comprehensive Economic and Trade Agreement
COP Conference of the Parties
CUP Cambridge University Press
ECHR Convention for the Protection of Human Rights and Fundamental Freedoms
ECtHR European Court of Human Rights ed/eds editor/editors
EU European Union
FTA free trade agreement
GATT General Agreement on Tariffs and Trade
GHG greenhouse gas
HarvIntlLJ Harvard International Law Journal
ICSID International Centre for Settlement of Investment Disputes
IEA International Energy Agency
IIA International Investment Agreement
IJAL Indian Journal of Arbitration Law IntlLaw The International Lawyer
TIPCC Intergovernmental Panel on Climate Change IRENA International Renewable Energy Agency JIDS Journal of International Dispute Settlement JIEL Journal of International Economic Law JIntlArb Journal of International Arbitration JWIT Journal of World Investment & Trade
KLI Kluwer Law International
MJIEL Manchester Journal of International Economic Law
n footnote
NAFTA North American Free Trade Agreement
No. number
OECD Organisation for Economic Co-operation and Development
OUP Oxford University Press
TEL Transnational Environmental Law
UN United Nations
UNCTAD United Nations Conference on Trade and Development UNFCCC United Nations Framework Convention on Climate Change
USMCA Agreement between the United States of America, the United Mexican States, and Canada
v. versus
VCLT Vienna Convention on the Law of Treaties
Abstract
Although, climate change is one of the greatest challenges society is facing, States have been slow with taking measures that should mitigate the effects of climate change. In order to have a chance to still be able to prevent irreversible harm, drastic action has to be taken. Fortunately, States have started this process by increasingly adopting measures that are aimed at mitigating climate change. However, the question is how those measures will hold up under international investment law. Some scholars are warning against adverse influence of the obligation to provide compensation for indirect expropriation, on the State’s regulatory freedom. Against this background, this thesis will examine the extent to which States are able to adopt climate change regulations as non-compensable regulation under international investment law. It will be argued that, in general, States have the ability to adopt their legitimate climate change regulations without being liable for regulatory expropriation. In order to so, this thesis will make use of the recently introduced regulations that phase out coal fired power plants, because these measures have a practical relevance for the context of indirect expropriation.
Subsequently, this thesis will provide an overview of the State’s right to regulate as developed in arbitral practice and newly drafted provisions in IIAs. This provides a framework that allows for an evaluation of the coal power plant phase out regulations. Although the current state of the law is not always clear, arbitral practice has equipped international investment law with sufficient tools to deal with climate change related measures.
Chapter 1 Introduction 1.1. Problem Statement
In recent years, climate change has been called one of the greatest threats to humanity.1 In order to combat this threat, States have legally bound themselves in various agreements signed under the UNFCCC. With the 2015 Paris Agreement, States committed themselves to reducing global warming below 2 degrees Celsius.2 However, despite these good intentions, States are far away from reaching these goals. In the words of the IPCC: “[w]ithout immediate and deep emissions reductions across all sectors, limiting global warming to 1.5°C is beyond reach.”3 Consequently, States will have to start adopting new policies, laws and regulations in order to reach the goals set out by the Paris Agreement.
Although these new climate change related measures are necessary, they will inevitably have consequences for foreign investors. Particularly, in carbon-intensive industries it is likely that new regulations will interfere with the rights of foreign investors.4 Thus, new climate change regulations have the potential of triggering investment treaty provisions or customary international law standards of protection. A 2022 study predicts that the global green energy transition could generate USD 340 billion in legal claims from investors.5 Moreover, there are signs that the beginning of this process has already started. In 2021, the Netherlands were faced with two investment claims by German energy producers RWE6 and Uniper7 over the phase out of coal power plants.
1 See e.g., António Guterres, ‘Secretary-General's remarks on Climate Change’ (New York, 10 September 2018)
<https://www.un.org/sg/en/content/sg/statement/2018-09-10/secretary-generals-remarks-climate-change- delivered> accessed 13 January 2022.
2 UNFCCC ‘Report of the Conference of the Parties on its twenty-first session, held in Paris from 30 November to 13 December 2015’ (29 January 2016) UN Doc FCCC/CP/2015/10/Add.1, Art. II.
3 IPCC, ‘The evidence is clear: the time for action is now. We can halve emissions by 2030’ (IPCC Press Release, 4 April 2022) <https://www.ipcc.ch/site/assets/uploads/2022/04/IPCC_AR6_WGIII_PressRelease_English.pdf>
accessed 11 May 2022.
4 David Khachvani, ‘Non-Compensable Regulation versus Regulatory Expropriation: Are Climate Change Regulations Compensable?’ [2020] ICSID Review 154.
5 Kyla Tienhaara and others, ‘Investor-state disputes threaten the global green energy transition’ [2022] Science
<https://www.science.org/doi/epdf/10.1126/science.abo4637> accessed 11 May 2022.
6 Lisa Bohmer, ‘The Netherlands is facing its first ICSID arbitration, as German energy giant RWE makes good on earlier threats’, (IA Reporter, 3 February 2021) <https://www.iareporter.com/articles/the-netherlands-is-facing- its-first-icsid-arbitration-as-german-energy-giant-rwe-makes-good-on-earlier-threats/> accessed 25 February 2022.
7 Lisa Bohmer, ‘Uniper lodges treaty-based claim against the Netherlands’ (IA Reporter, 27 April 2021)
<https://www.iareporter.com/articles/uniper-lodges-treaty-based-claim-against-the-netherlands/> accessed 25 February 2022.
The question that arises in this context is whether international investment law is properly equipped to deal with tensions between environmental interests and investors’ interests.
Commentators have noted that the international investment law system has favoured the interests of foreign investors over those of the State to regulate in the public interest in general, and the environment in particular.8 Some even go as far to say that this tension has led to a so called ‘regulatory chill’; States are failing to regulate in the public interest because of the fear of facing investment claims and the potentially large amounts of compensation awarded to investors.9 On the other hand, others have argued that the risks of a regulatory chill are overstated and that international investment law already has the necessary tools to deal with these issues.10
Although, most investment treaties are silent regarding the State’s right to regulate the environment or climate change,11 some progress has been made in the realm of regulatory expropriation. Arbitral tribunals have used interpretation techniques to deal with the caveats found in treaties. In general, tribunals have acknowledged the State’s right to regulate:
“legitimate regulatory action in the public interest does not constitute indirect expropriation and thus does not give rise to claims of compensation.”12 However, it still remains difficult to distinguish between non-compensable legitimate regulation and regulatory expropriation,13 because arbitral tribunals do not offer sufficient guidance for drawing a clear line between non- compensable regulation and expropriation.14
1.2. Research Questions
The prior issue gives rise to the following research question:
8 Camille Martini, ‘Balancing Investors’ Rights with Environmental Protection in International Investment Arbitration: An Assessment of Recent Trends in Investment Treaty Drafting’ [2017] IntlLaw 529, 531.
9 Freya Baetens, ‘The Kyoto Protocol in Investor-State Arbitration: Reconciling Climate Change and investment Protection Objectives’, in Marie-Claire Cordonier Segger, Markus W. Gehring and Andrew Newcombe (eds), Sustainable Development in World Investment Law (KLI 2011) 396-367; Kyla Tienhaara, ‘Regulatory Chill in a Warming World: The Threat to Climate Policy Posed by Investor-State Dispute Settlement’ [2018] TEL 229, 232.
10 Stephan W. Schill, ‘Do Investment Treaties Chill Unilateral State Regulation to Mitigate Climate Change?’
[2007] JIntlArb 469, 477.
11 Christina L. Beharry and Melinda E. Kuritzky, ‘Going Green: Managing the Environment Through International Investment Arbitration’ [2015] AmUIntlLRev 383, 395.
12 August Reinisch and Christoph Schreuer, International Protection of Investments: The Substantive Standards (CUP 2020) 85.
13 Ibid 86.
14 Khachvani (n 4) 155.
To what extent are States able to adopt non-compensable climate change regulation in international investment law?
In order to answer the central research question, the following sub-questions will be answered:
How can climate change regulations challenge the State’s regulatory freedom in international investment law?
When do States’ measures qualify as non-compensable regulation in international investment law?
To what extent does the right to regulate grant States the ability to adopt non- compensable climate change regulation?
1.3. Overview
In the foregoing, the question was raised whether the current distinction made between non- compensable regulation and regulatory expropriation forms an obstacle for States to enact climate change related regulation. In the following it will be examined to what extent States can enact climate change regulation as non-compensable regulation. Although the distinction between non-compensable regulation and regulatory expropriation will remain difficult to draw, it will be shown that States will be able to adopt climate change mitigation measures as non-compensable regulation. Accordingly, international investment law may be better equipped for newly introduced climate change regulations than previously considered.
In order to reach this conclusion, first, the scope of this enquiry will be limited by focussing on a specific type of climate change regulations. It will be argued that this should be the coal power phase out regulations and that they have a potential for triggering indirect expropriation claims (Chapter 2). Subsequently, the current state of the State’s right to regulate will be discussed by providing an overview of arbitral case law and treaty provisions on this matter (Chapter 3).
Afterwards, the coal power phase out regulations will be applied and evaluated under the framework of the State’s right to regulate. Here it will be shown that these measures will likely qualify as non-compensable regulation (Chapter 4). Finally, a conclusion of all findings will be provided (Chapter 5).
Chapter 2 The Potential Threat of Coal Power Phase Outs to the State’s Regulatory Freedom
Due to the limited size of this enquiry, not all measures that address climate change can be examined on their impact on the law of expropriation. Thus, it is important to select a specific measure that can serve as an example of how this type of regulation could interfere with international investment law. As a first step, a choice must be made between the two strategies that a State can adopt to combat climate change: mitigation or adaptation.15 Under climate change mitigation falls all action that mitigates the effects of climate change by reducing sources of GHG emissions or removing them from the atmosphere.16 Under climate change adaptation falls the adjustment to the climate and to moderate its harm.17 In a recent report the IPCC has stated that adaptation strategies will near its limits soon,18 thus its effectiveness is limited and States will have to put an emphasis on climate change mitigation. Therefore, the focus will be on climate change mitigation measures.
As a second step, climate change mitigation measure must hold practical relevance for the context of indirect expropriation. Thus, the measure must have the potential of triggering claims for indirect expropriation and, as a consequence, it must be likely that States actually will adopt such a regulation in practice. In the following, it will be argued that coal power phase out regulations fit these requirements. First, the phase out of coal power plants is of practical relevance as they are necessary to achieve climate goals and they are on the regulatory agenda of States (par. 2.1). Second, coal power phase out regulations are likely to cause interference with investors’ property rights and pass the threshold for indirect expropriation, making them fertile ground for potential claims (par. 2.2).
2.1. The Practical Relevance of Coal Power Phase Outs
The essence of mitigating climate change is simple, the emissions of GHGs must be reduced.
Consequently, the UNFCCC’s objective was to achieve “stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic
15 Benoit Mayer, The International Law on Climate Change (CUP 2018) 10.
16 Ibid; IPCC, ‘Climate Change 2022: Mitigation of Climate Change’ (2022)
<https://report.ipcc.ch/ar6wg3/pdf/IPCC_AR6_WGIII_FinalDraft_FullReport.pdf> accessed 25 April 2022, I-30.
17 Mayer (n 15) 11; IPCC (n 16) I-2.
18 IPCC, ‘Climate Change 2022: Impacts, Adaptation and Vulnerability’ (2022)
<https://www.ipcc.ch/report/ar6/wg2/downloads/report/IPCC_AR6_WGII_FinalDraft_FullReport.pdf> accessed 25 April 2022, SPM-28.
interference with the climate system.”19 In order to reach such a level, most wins could be gained in the energy sector, which is currently the sector with the highest GHG emissions.20 There is a causal connection between climate change, GHG emissions and fossil fuel consumption.21 Of those fossil fuels, coal was the largest contributor to the energy sector’s emissions with 44% of the sector’s total emissions.22 Thus, States may make most gains by introducing an energy transition by phasing out fossil fuels, in particular coal-based energy production. Moreover, the importance of phasing out coal powered energy production with priority has been stressed by various institutions and actors on the international plane, such as the IPCC,23 IEA,24 the UN Secretary-General.25 Therefore, by targeting coal fired power plants, States can make most impact to meet their climate goals under the Paris Agreement.
A coal power phase out is not only necessary for States to meet their climate goals, but it also holds practical relevance because it is on the regulatory agenda of States. Various States have adopted policies with the intention to phase out coal fired power plants within a certain timeframe. At COP 26, over 40 States pledged to phase out coal power between 2030 and 2060 of which 28 States had not previously done so.26 Similarly, the EU has included the complete phase out of coal power in its European Green Deal27 and required its members to submit National Energy and Climate Plans to monitor intended compliance with the EU’s Green Deal.28 Although these plans sometimes merely entail intentions and some of these intentions are not sufficiently ambitious, it shows that climate change policy is moving towards an energy transition that abolishes coal as a fuel for energy generation. At some point States will have to
19 Article 2 UNFCCC.
20 IPCC (n 16) SPM-7.
21 Justin Gundlach and Michael B. Gerrard, ‘Climate Change and Energy Transition Policies’ in Emma Lees and Jorge E. Viñuales (eds), The Oxford Handbook of Comparative Environmental Law (OUP 2019) 532.
22 IPCC (n 16) SPM-6-9.
23 IPCC (n 16) SPM-32.
24 IEA, ‘World Energy Outlook 2021’ (2021) <https://iea.blob.core.windows.net/assets/ed3b983c-e2c9-401c- 8633-749c3fefb375/WorldEnergyOutlook2021.pdf> accessed 26 April 2022, 17.
25 António Guterres, ‘Special Address by António Guterres, Secretary-General, United Nations’ (World Economic Forum, 17 January 2022) <https://www.weforum.org/events/the-davos-agenda-2022/sessions/special-address-by- antonio-guterres-secretary-general-united-nations> accessed 26 April 2022.
26 ‘New PPCA members tip the scales towards ‘consigning coal to history’ at COP26’ (PPCA, 3 November 2021)
<https://www.poweringpastcoal.org/news/press-release/new-ppca-members-tip-the-scales-towards-consigning- coal-to-history-at-cop26> accessed 13 June 2022; ‘Global Coal to Clean Power Transition Statement’ (UN Climate Change Conference UK 2021, 4 November 2021) <https://ukcop26.org/global-coal-to-clean-power-transition- statement/> accessed 13 June 2022.
27 Commission, ‘The European Green Deal’ (Communication) COM(2019) 640 final, 6.
28 Commission, ‘An EU-wide assessment of National Energy and Climate Plans’ (Communication) COM(2020) 564 final, 1.
turn these intentions into actual laws in regulations. Additionally, various European States are planning to phase out of coal fired power plants by setting a date in or before 2030.29 Finally, some States have already adopted laws or regulations that will phase out coal fired power plants, which will be discussed below.
2.2. The Coal Power Phase Out’s Potential for Causing Expropriation Claims
As discussed in Chapter 1, some authors fear that States will refrain from adopting legitimate regulation because of the fear of facing investment claims and having to pay compensation. In this context, the key question is the determination of the scope of measures that constitute expropriation; if no expropriation occurred then there is no obligation to pay compensation.30 Thus, in order to trigger indirect expropriation claims, the coal power phase out regulations have to meet the minimum substantial threshold for indirect expropriation. First, it will be discussed what this threshold entails for coal power phase out regulations to at least enter the realm of indirect expropriation (par. 2.2.1). Subsequently, the design of coal power plant regulations will be discussed (par. 2.2.2) and how they will likely fulfil the threshold requirement for indirect expropriation (par. 2.2.3).
2.2.1. The Threshold for Indirect Expropriation
The determination of what constitutes indirect expropriation is not a straightforward exercise.
Most IIAs stipulate that indirect expropriation consists of measures ‘tantamount to’ or
‘equivalent to’ expropriation, but they do not explicitly provide a definition of it.31 Nonetheless, the concept of indirect expropriation has been recognised by arbitral tribunals, albeit without identifying the factual elements that that constitute indirect expropriation.32 Generally, indirect expropriations do not affect the title of property but are governmental measures that result in the effective loss of management, use or control, or entail a significant or near-total depreciation
29 COM(2020) 564 final, 15.
30 Ursula Kriebaum, ‘Regulatory Takings: Balancing the Interests of the Investor and the State’ [2007] JWIT 717, 719; Ursula Kriebaum, ‘Expropriation’ in Marc Bungenberg and others (eds), International Investment Law (C.H.
Beck 2015) 963; Katia Yannaca-Small, ‘Indirect Expropriation and the Right to Regulate: Has the Line Been Drawn?’ in Katia Yannaca-Small (ed), Arbitration Under International Investment Agreements: A Guide to the Key Principles (2nd edn, OUP 2018) 565; Khachvani (n 4) 154-155; Jeswald W. Salacuse, The Law of Investment Treaties (3rd edn, OUP 2021) 385.
31 August Reinisch, ‘Expropriation’ in Peter T. Muchlinski, Federico Ortino and Christoph Schreuer (eds), The Oxford Handbook of International Investment Law (OUP 2008) 422; Campbell McLachlan, Laurence Shore and Matthew Weiniger, International Investment Arbitration: Substantive Principles (2nd edn, OUP 2017) par. 8.75.
32 Reinisch (n 31) 426; McLachlan, Shore and Weiniger (n 31) par. 8.94.
in the value of the assets of the investor.33 When States use their regulatory powers to reduce the benefits of an investor’s investment, it can be difficult to distinguish whether the adverse effects are caused by a legitimate regulatory measure or an expropriatory measure.34
Against this background, tribunals have long relied on the effects of a governmental measure on the investment as the main and, sometimes, only factor. The State’s intention behind it is not weighed into the determination.35 This approach has been called the ‘sole effect doctrine’.
Under the sole effect doctrine, the severity of the impact of the measure is determinative for the establishment of indirect expropriation. A substantial deprivation of the investor’s investment is necessary; the use of the investment in economic sense must be destroyed.36 Therefore, at the minimum, the tribunal has to determine that the coal power phase out regulation substantially deprives the investor of its investment in the coal power plant. If no substantial deprivation has occurred, no expropriation could have occurred.
2.2.2. The Design of Coal Power Phase Out Regulations
When it comes to the implementation of climate change mitigation measures, there are few obligations imposed on States how they achieve the desired result.37 As a result, there is a variety of measures currently adopted of which some major categories can be identified. First, there is command and control regulation which imposes obligations on polluters. These can include standards for certain technologies to be used or the production method.38 Second, a State can impose quantitative emission targets.39 Third, States can use price-based mechanisms which put a price on the emission of GHGs instead of a prohibition. This can be achieved through imposing taxes or introducing market-based mechanisms which allow for emission
33 UNCTAD, ‘Expropriation: A Sequel’ (2012) UNCTAD/DIAE/IA/2011/7, 7; Johanne M. Cox, Expropriation in Investment Treaty Arbitration (OUP 2019) 53-54; Reinisch and Schreuer (n 12) 47.
34 Salacuse (n 30) 395-396; See also, Aniruddah Rajput, Regulatory Freedom and Indirect Expropriation in Investment Arbitration (KLI 2018) 24.
35 Reinisch (n 31) 444-446; UNCTAD (n 33) 70-71; Salacuse (n 30) 396; Catharine Titi, ‘Police Powers Doctrine and International Investment Law’ in Andrea Gattini, Attila Tanzi and Filippo Fontanelli (eds), General Principles of Law and International Investment Law (Brill 2018) 329-330; Rudolf Dolzer, Ursula Kriebaum and Christoph Schreuer, Principles of International Investment Law (3rd edn, OUP 2022)169-170.
36 Kriebaum (n 30) 982-983.
37 Mayer (n 15) 124.
38 Mayer (n 15) 124-126; Gundlach and Gerrard (n 21) 548.
39 Gundlach and Gerrard (n 21) 544.
trading.40 Finally, climate change mitigation can be achieved through promotion by the government.41
The coal power plant phase out regulations currently adopted by States entail mostly some form of command and control regulation, quantitative targets or a mix of both. The regulations mainly aim at phasing out coal as a fuel for energy generation by a certain date. Some States have simply set an ultimate date by which coal cannot be used as fuel for the generation of electricity, such as Finland which has set this at 1 May 2029.42 Additionally, other States have used a transition period or put certain conditions on the phase out. For instance, the Netherlands bans all coal fired power plants from 1 January 2025 but plants with a 44% energy conversion efficiency are exempted until 1 January 2030.43 In Germany, coal fired power plants will be prohibited by the end of 2038 but a transition period that gradually phases out the production will be provided for. Currently, that will be a reduction to 15 Gigawatts of hard coal and lignite in 2022 and 8 Gigawatts of hard coal and 9 Gigawatts of lignite in 2030.44 In deviation of these approaches, France relies on an emission cap to render the operation of the plants unprofitable in order to cause a phase out from 1 January 2022 onwards.45
2.2.3. Coal Power Phase Out Regulations Cause Substantial Deprivations
It is submitted that coal power phase out regulations have a potential to pass the threshold requirement of causing a substantial deprivation. Regulations that set an ultimate date for the prohibition of the use of coal, will render the investment unusable for its intended use from that date onwards. As a consequence, the investor will lose the possibility to make future profits unless the coal power plant can be transformed for other uses, which will likely entail a significant additional investment. Furthermore, these measures could cause coal power plants to retire one to three decades earlier than has historically been the case.46 If the coal fired power plant is retired before the operator can make any return on investment, the regulation will be
40 Mayer (n 15) 126-128; Gundlach and Gerrard (n 21) 547.
41 Mayer (n 15) 129.
42 Article 5 Law 416/2019 banning the use of energy from coal (Laki hiilen energiakäytön kieltämisestä).
43 Article 3 Law prohibiting coal in electricity production (Wet verbod op kolen bij elektriciteitsproductie).
44 Article 2 Law on the reduction and termination of coal-fired power generation and the amendment of further laws (Gesetz zur Reduzierung und zur Beendigung der Kohleverstromung und zur Änderung weiterer Gesetze (Kohleausstiegsgesetz)).
45 Article 12 Law no. 2019-1147 on Energy and the climate (Loi no. 2019-1147 du 8 novembre 2019 relative à l’énergie et au climat).
46 Robert Fofrich and others, ‘Early retirement of power plants in climate mitigation scenarios’ [2020]
Environmental Research Letters 1.
accompanied with significant losses. Accordingly, various studies estimate significant amounts of costs for the owner of the coal power plant due to stranded assets, resulting from the early retirement of the power plant.47 Similarly, a GHG emission cap can have the effect of rendering the exploitation of the coal power plant commercially insensible. Even though the coal power plant can still operate, it may become impossible to make any profits and it is unlikely that investors will operate the plant under those circumstances. Therefore, these measures will likely have an impact on the investment by either fully or significantly reducing their commercial use.48 From the perspective of the sole effect doctrine, the analysis will stop at the economic impact of the challenged measures. As the nature of the measure is not examined, this means that coal power phase out regulations have a potential to trigger the State’s obligation to pay compensation for regulatory or indirect expropriation.
2.3. Conclusion
The importance of climate change mitigation cannot be underestimated. An important contribution to this goal can be made by phasing out coal fired power plants as they are a major contributor to GHG emissions. In recent year, States have seen the necessity of a coal power phase out too and put them on the regulatory agenda. Regardless of the ambitions of these regulatory responses, it is likely that they will lead to more concrete laws and regulations in the future by prohibiting the use of coal as a fuel for energy production. However, it is likely that these measures have a potential to trigger claims for indirect expropriation. In order to enter into the realm of regulatory or indirect expropriation, the measures at least have to cause a substantial deprivation. The design of the coal power phase out regulations and their economic impact on investments leads to the conclusion that they likely will substantially deprive an investor. Therefore, coal power phase out regulations have the potential to trigger claims for indirect expropriation.
47 IRENA, ‘Stranded Assets and Renewables: How the energy transition affects the value of energy reserves,
buildings and capital stock’ (2017) <https://www.irena.org/-
/media/Files/IRENA/Agency/Publication/2017/Jul/IRENA_REmap_Stranded_assets_and_renewables_2017.pdf
> accessed 26 April 2022, 8; Benjamin K. Kefford and others, ‘The early retirement challenge for fossil fuel power plants in deep decarbonisation scenarios’ [2018] Energy Policy 294; IEA (n 24) 59.
48 Kyla Tienhaara and Lorenzo Cotula, ‘Raising the cost of climate action? Investor-state dispute settlement and compensation for stranded fossil fuel assets’ (IIED 2020) 8.
Chapter 3 The State’s Right to Regulate in International Investment Law As has been set out above, the coal power phase out regulations challenge the State’s right to regulate by potentially triggering the State’s obligation to pay compensation. Although this situation puts the State’s regulation under a sword of Damocles, the State’s right to regulate has been acknowledged in international investment law. Regulations that fall within the State’s right to regulate do not entail a breach of IIAs and do not require the State to pay compensation.49 However, it is not possible to draw a clear line where legitimate regulation ends and regulatory expropriation begins. In this context, there are two relevant developments.
First, increasingly, arbitral tribunals have started to interpret IIAs in light of the State’s customary right to regulate (par. 3.1). Second, in response to an increase in indirect expropriation claims by investors, States have responded by including its right to regulate in a new generation of IIAs (par. 3.2).
3.1. The Right to Regulate in Arbitral Practice
Currently, tribunals distinguish between non-compensable regulation and regulatory expropriation on a case-by-case basis and the specific facts of the case at hand.50 Various authors have identified these criteria used by tribunals although they are non-exhaustive and not always applied consistently. The criteria include: (i) the degree of interference with the property rights of the investor,51 (ii) the character or purpose of the measure,52 (iii) the legitimate expectations of the investor,53 (iv) due process related factors,54 and (v) the proportionality or reasonableness of the measure.55
To provide more clarity, it is possible to distinguish two approaches on a more general level.
On the basis of Article 31(3)(c) VCLT, arbitral tribunals can take into account any relevant
49 Aikaterini Titi, The Right to Regulate in International Investment Law (Nomos 2014) 32-33. See also, Rajput (n 34) 8; Kriebaum (n 30) 1000.
50 Yannaca-Small (n 30) 572; Cox (n 33) 154.
51 L. Yves Fortier and Stephen L. Drymer, ‘Indirect Expropriation in the Law of International Investment: I Know It When I See It, or Caveat Investor’ [2004] ICSID Review 293, 300-306; OECD, International Investment Law:
A Changing Landscape (OECD Publishing 2005) 55; UNCTAD (n 33) 62-65; Yannaca-Small (n 30) 576-583;
Cox (n 33) 169; Salacuse (n 30) 408.
52 Fortier and Drymer (n 51) 313; OECD (n 51) 64; Yannaca-Small (n 30) 585; Cox (n 33) 180-181; Salacuse (n 30) 418-421.
53 Jan Paulsson and Zachary Douglas, ‘Indirect Expropriation in Investment Treaty Arbitrations’ in Norbert Horn (ed), Arbitrating Foreign Investment Disputes: Procedural and Substantive Legal Aspects (KLI 2004) 157. Fortier and Drymer (n 51) 306-308; UNCTAD (n 33) 75; OECD (n 51) 68; Yannaca-Small (n 30) 590-592; Cox (n 33) 182-187; Salacuse (n 30) 412-415.
54 Cox (n 33) 169; Salacuse (n 30) 417-418.
55 Yannaca-Small (n 30) 588-590; Cox (n 33) 181-182, 187-188; Salacuse (n 30) 415-416.
rules of international law applicable in the relations between the parties. This provision opens the door for interpretation doctrines that could assist the tribunal in balancing the investor’s rights under the applicable IIA and the State’s right to regulate.56 Accordingly, in deviation of the sole effect doctrine, tribunals have used the police powers doctrine (par. 3.1.1) and a proportionality analysis (par. 3.1.2) to balance investment protection obligations with legitimate public policy objectives.
3.1.1. The Police Powers Doctrine
Historically, the police powers doctrine has been understood as the power of the State to cause harm for the protection of public interests.57 In a modern context, the police powers doctrine is essentially a justification for “[S]tate action that would otherwise amount to a compensable deprivation or appropriation of property.”58 At the core of the concept is the lack of liability for expropriation in the event of adopting a regulatory measure.59 This offers tribunals the possibility to reconcile the sovereign right of the State to regulate economic activities with its obligations under international investment law.60
In this context, two decisions can be considered as landmarks for the early recognition of the police powers doctrine in international investment law. In Methanex v. United States, a NAFTA tribunal had to decide over a Canadian methanol producer’s claim that California’s ban on the sale and use of the gasoline additive MTBE constituted expropriation.61 Methanex claimed that its market share in methanol production went to the domestic production of ethanol, which constituted a significant deprivation.62 However, the tribunal denied the existence of indirect expropriation and held that the measures were considered non-compensable regulation as they were: (i) non-discriminatory, (ii) for a public purpose, (iii) enacted in accordance with due process, (iv) not contrary to specific commitments made to the investor.63 In Saluka v. Czech Republic, the tribunal built upon the Methanex award when deciding over an expropriation
56 Noam Zamir, ‘The Police Powers Doctrine in International Investment Law’ [2017] MJIEL 318, 334; Flavia Marisi, Environmental Interests in Investment Arbitration: Challenges and Directions (KLI 2020) 161-162.
57 Rajput (n 34) 10.
58 Andrew Newcombe, ‘The Boundaries of Regulatory Expropriation in International Law’ [2005] ICSID Review 1, 26.
59 Titi (n 35) 323; Marisi (n 56) 193.
60 Alain Pellet, ‘Police Powers or the State’s Right to Regulate’ in Meg Kinnear and others (eds), Building International Investment Law: The First 50 Years of ICSID (KLI 2015) 447.
61 Methanex Corporation v. United States of America, UNCITRAL, Final Award of the Tribunal on Jurisdiction and Merits (3 August 2005), Part I [1]-[2].
62 Ibid Part IV – Chapter D [5].
63 Ibid [7].
claim arising out of a forced administration and eventual bankruptcy of a Czech bank. Although the applicable Netherlands-Czech Republic BIT did not contain any exception for the exercise of regulatory power, it was held that States are not liable for compensation when “in the normal exercise of their regulatory powers, they adopt in a non-discriminatory manner bona fide regulations that are aimed at the general welfare.”64
A more recent landmark was issued by the tribunal in Philip Morris v. Uruguay, which dealt with an expropriation claim resulting from Uruguay’s measures to restrict tobacco packaging.65 The tribunal first considered the economic impact of the measures on the investment after which it held that, in any case, the State has the right to regulate public order, public health, the environment and morality under customary international law.66 As to the limits of the police powers doctrine, it held that the measure must be (i) bona fide, (ii) for protecting public welfare, (iii) non-discriminatory, and (iv) proportionate.67 Various awards have followed Methanex, Saluka and Philip Morris by reaffirming the general proposition that the State is not liable for regulation that falls within its police powers, often with reference to these decisions and with criteria reminiscent of them.68
3.1.2. The Proportionality Analysis
Although the tribunal in Philip Morris v. Uruguay mentioned proportionality as a factor for the legitimate exercise of the State’s police powers, a proportionality analysis is also applied as a stand-alone approach.69 The proportionality analysis finds its origin in European administrative and criminal law, particularly in the context of the ECHR and is now applied in the context of
64 Saluka Investments v. Czech Republic, PCA Case No 2001-04, Partial Award (17 March 2006) [254]-[255].
65 Philip Morris Brands, Philip Morris Products and Abal Hermanos v. Uruguay, ICSID Case No. ARB/10/7, Award (8 July 2016) [9].
66 Ibid [284]-[286], [291], [295], [300].
67 Ibid [305].
68 Suez, Sociedad General de Aguas de Barcelona, and Vivendi Universal v. Argentina, ICSID Case No.
ARB/03/19, Decision on Liability (30 July 2010) [139]; AWG Group v. Argentina, UNCITRAL, Decision on Liability (30 July 2010) [139]; Chemtura Corporation v. Canada, UNCITRAL, Award (2 August 2010) [266];
Les Laboratoires Servier, Biofarma and Arts et Techniques du Progres v. Poland, PCA, Final Award (14 February 2012) [276]; Renée Levy de Levi v. Peru, ICSID Case No. ARB/10/17, Award (26 February 2014) [475]; Quiborax and Non Metallic Minerals v. Bolivia, ICSID Case No. ARB/06/2, Award (16 September 2015) [202]; Copper Mesa Mining v. Ecuador, PCA Case No. 2012-2, Award (15 March 2016) [6.60]; Naturgy Energy Group and Naturgy Electricidad Colombia v. Colombia, ICSID Case No. UNCT/18/1, Award (12 March 2021) [523]-[527];
Eco Oro Minerals v. Colombia, ICSID Case No. ARB/16/41, Decision on Jurisdiction, Liability and Directions on Quantum (9 September 2021) [646]-[698]; Bank Melli Iran and Bank Saderat Iran v. Bahrain, PCA Case No.
2017-25, Award (9 November 2021) [631]-[633].
69 Titi (n 35) 333-334.
international investment law.70 Increasingly, tribunals have sought a way to address the tension between investors’ rights in IIAs and the regulatory powers of States, in order to balance both interests. In this context, the principle of proportionality provides a solution for colliding rights.71 It determines where the border is between legitimate governmental regulation and excessive interference with the State’s other obligations such as investors’ rights.72
As to its content, a proportionality analysis employs rational criteria to prevent decision-making in an arbitrary way.73 It addresses the relationship between the purpose of a measure and the means used to achieve this end.74 Generally, this involves the use of a tiered test that consists of three components. First, the measure should be suitable to achieve the objective or purpose of the measure. Second, the measure should be necessary; there is no other less intrusive measure available. Third, the measure should be proportional stricto sensu. This entails a balancing of the effects of the measure and the importance of the pursued purpose.75 However, because international investment law is not a centralised system, there is no uniform test of proportionality. In practice, tribunals have adopted different approaches and those cannot always be equated with those adopted in the human rights context.76
One of the first tribunals to introduce a proportionality analysis, was the tribunal in Tecmed v.
Mexico. While referring to the ECtHR and its case law, the tribunal held that it must be examined whether these measures are proportional to the public interest pursued and the protection granted to investments. There must be a reasonable relationship of proportionality between the impact on the foreign investor and the aim sought to be realised by the measure.77
70 Benedict Kingsbury and Stephan W. Schill, ‘Public Law Concepts to Balance Investors’ Rights with State Regulatory Actions in the Public Interest – The Concept of Proportionality’ in Stephan W. Schill (ed), International Investment Law and Comparative Public Law (OUP 2010) 80-85; Marisi (n 56) 162. See for a general overview of proportionality in international law: Thomas Cottier and others, ‘The Principle of Proportionality in International Law: Foundations and Variations’ [2017] JWIT 628.
71 Kingsbury and Schill (n 70) 78-79; Cottier and others (n 70) 655; Marisi (n 56) 162.
72 Jasper Krommendijk and John Morijn, ‘Proportional’ by What Measure(s)? Balancing Investor Interests and Human Rights by Way of Applying the Proportionality Principle in Investor-State Arbitration’ in Pierre-Marie Dupuy, Ernst-Ulrich Petersmann, and Francesco Francioni (eds), Human Rights in International Investment Law and Arbitration (OUP 2009) 438.
73 Eric de Brabandere and Paula Baldini Miranda da Cruz, 'The Role of Proportionality in International Investment Law and Arbitration: A System-Specific Perspective' [2020] ActScandJurisGent 471, 475.
74 Kingsbury and Schill (n 70) 85.
75 Kingsbury and Schill (n 70) 86-87; Krommendijk and Morijn (n 72) 438; De Brabandere and Baldini Miranda da Cruz (n 73) 475.
76 Krommendijk and Morijn (n 72) 439, 443; Gebhard Bücheler, Proportionality in Investor-State Arbitration (OUP 2015) 122; De Brabandere and Baldini Miranda da Cruz (n 73) 487-488.
77 Tecnicas Medioambientales Tecmed v. Mexico, ICSID Case No. ARB(AF)/00/2, Award (29 May 2003) [122].
Thus, the proportionality analysis requires a balancing of economic impact and public purpose, rather than only considering the measure’s purpose or intention. Shortly after the award in Tecmed, tribunals in Azurix v. Argentina and LG&E v. Argentina adopted similar approaches.
In Azurix, the tribunal held that there must be a reasonable relationship of proportionality between the measure and the public purpose; an investor may not bear an individual and excessive burden.78 In LG&E, the tribunal held that it must balance two competing interests when deciding on expropriation: “the degree of the measure’s interference with the right of ownership and the power of the State to adopt its policies.”79 In principle, States can adopt measures for social or general welfare purposes without liability, except if they are obviously disproportionate.80 In subsequent awards, tribunals have acknowledged the principle of proportionality as set out in Tecmed, Azurix, and LG&E and then applied some form of a proportionality analysis.81
3.2. The Right to Regulate in Treaties
As described above, there is no universal approach adopted by arbitral tribunals to distinguish between non-compensable expropriation and regulatory expropriation. In order to achieve more clarity and certainty, State’s themselves can shape the outlines of their regulatory space in international investment law; IIAs define the balance between investor protection and public policy concerns.82 Accordingly, to reduce the risk that legitimate regulations will be considered as expropriatory, States have responded by drafting a new generation of IIAs that addresses their regulatory concerns.83 To realise their regulatory freedom, States can employ a variety of
78 Azurix Corp. v. Argentina, ICSID Case No. ARB/01/12, Award (14 July 2006) [311]-[312].
79 LG&E Energy, LG&E Capital and LG&E International v. Argentina, ICSID Case No. ARB/02/1, Decision on Liability (3 October 2006) [189].
80 Ibid [195].
81 Fireman's Fund Insurance Company v. Mexico, ICSID Case No. ARB(AF)/02/01, Award (17 July 2006) [176(j)]; Continental Casualty Company v. Argentina, ICSID Case No. ARB/03/9, Award (5 September 2008) [276]; El Paso Energy International v. Argentina, ICSID Case No. ARB/03/15, Award (31 October 2011) [241]- [243]; Deutsche Bank v. Sri Lanka, ICSID Case No. ARB/09/02, Award (31 October 2012) [522]; Mobil Exploration and Development Argentina and Mobil Argentina v. Argentina, ICSID Case No. ARB/04/16, Decision on Jurisdiction and Liability (10 April 2013) [818]; PL Holdings v. Poland, SCC Arbitration No. V 2014/163, Partial Award (28 June 2017) [355]; Marfin Investment Group Holding and others v. Cyprus, ICSID Case No.
ARB/13/27, Award (26 July 2018) [826]; Olympic Entertainment Group v. Ukraine, PCA Case No. 2019-18, Award (15 April 2021) [90]; Casinos Austria International and Casinos Austria v. Argentina, ICSID Case No.
ARB/14/32, Award (5 November 2021) [336], [351].
82 Kathryn Gordon and Joachim Pohl, ‘Environmental Concerns in International Investment Agreements: A Survey’ (OECD Working Papers on International Investment 2011/01, OECD Publishing 2011)
<https://www.oecd.org/investment/investment-policy/WP-2011_1.pdf> accessed 15 June 2022, 7.
83 Taejoon Ahn, ‘The Utility of Carve-Out Clauses in Addressing Regulatory Concerns in Investment Treaty Arbitration’ [2016] AIAJ 66, 69; Marisi (n 56) 112, 117.
provisions. However, the qualification of these clauses is not always consistent and a comprehensive survey is beyond the scope of this enquiry. Therefore, the following section will discuss provisions that affirm the State’s right to regulate environmental matters.84 Generally, these provisions are: contextualised indirect expropriation clauses (par. 3.2.1), general exception clauses (par. 3.2.2), and carve-outs or exclusion clauses (par. 3.2.3).
3.2.1. Contextualised Expropriation Clauses
The first approach is to draft new indirect expropriation provisions in IIAs by including the factors that should be taken into account in the tribunal’s determination. One author has called this model of treaty drafting the ‘contextualisation’ model of indirect expropriation clauses.85 Although there is a variety of factors these IIAs stipulate, States have included: the economic impact, the character of the measures, the expectations of the investor, the proportionality of the measure or reasonableness.86 An example of a contextualised expropriation clause can be found in CETA:
“The determination of whether a measure or series of measures of a Party, in a specific fact situation, constitutes an indirect expropriation requires a case-by-case, fact-based inquiry that takes into consideration, among other factors:
(a) the economic impact of the measure or series of measures, although the sole fact that a measure or series of measures of a Party has an adverse effect on the economic value of an investment does not establish that an indirect expropriation has occurred;
(b) the duration of the measure or series of measures of a Party;
(c) the extent to which the measure or series of measures interferes with distinct, reasonable investment-backed expectations; and
84 Other options that could be considered but only indirectly deal with the State’s right to regulate are: including a reference to environmental concerns in preambles, provisions that entail not weakening environmental regulation, provisions regarding essential security interests, excluding environmental disputes from ISDS. See e.g., Gordon and Pohl (n 82) 11; Marisi (n 56) 104-142.
85 Ying Zhu, ‘Do Clarified Indirect Expropriation Clauses in International Investment Treaties Preserve Environmental Regulatory Space?’ [2019] HarvIntlLJ 377, 404.
86 Ibid 406-409.
(d) the character of the measure or series of measures, notably their object, context and intent.”87
Indirect expropriation clauses like the one found in CETA will provide the tribunal more guidance for their determination of indirect expropriation than the older style IIAs. However, these clauses do not provide detailed definitions of regulatory measures that would not qualify as indirect expropriation.88
3.2.2. General Exception Clauses
Exception clauses have the goal to relieve the State from the performance of its investment protection obligations under the IIA, when compliance with investment protection would be incompatible with public policy objectives.89 In the course of their inclusion in IIAs, they have increasingly been modelled after the general exception clause in Article XX GATT.90 Thus, these clauses usually show a strong resemblance to this provision and stipulate which policy objectives allow for an exception. For instance:
“For the purposes of Chapter Eight (Investment), subject to the requirement that such measures are not applied in a manner that constitute arbitrary or unjustifiable discrimination between investment or between investors, or a disguised restriction on international trade or investment, nothing in this Agreement shall be construed to prevent a Party from adopting or enforcing measures necessary:
a. To protect human, animal or plant life or health, which the Parties understand to include environmental measures necessary to protect human, animal or plant life and health;
b. To ensure compliance with laws and regulations that are not inconsistent with this Agreement; or
87 Annex 8-A CETA.
88 María Beatriz Burghetto and Pascale Accaoui Lorfing, ‘The Evolution and Current Status of the Concept of Indirect Expropriation in Investment Arbitration and Investment Treaties’ [2017] IJAL 98, 111.
89 Suzanne A. Spears, ‘The Quest for Policy Space in a New Generation of International Investment Agreements’
[2010] JIEL 1037, 1059; Alessandra Asteriti, ‘Waiting for the Environmentalists: Environmental Language in Investment Treaties’ in Rainer Hofman and Christian J. Tams (eds), International Investment Law and Its Others (Nomos 2012) <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2028405> accessed 24 June 2022, 15.
90 Asteriti (n 89) 16-17.
c. For the conservation of living or non-living exhaustible natural resources.”91
The effectiveness of exception clauses has not been undisputed. Investment tribunals may be tempted to transpose WTO elements into international investment law without sufficiently taking into account their differences.92 Furthermore, it is questioned whether these exception clauses will give States more policy space than accorded under the substantive standards of the IIA. Some authors note that these clauses can impose more stringent requirements than required under the substantive standards in IIAs.93
Furthermore, there is an indication that tribunals generally interpret exceptions narrowly or restrictively in international investment law.94 In the context of general exception clauses, this contention is supported by the decisions in Bear Creek Mining v. Peru and Eco Oro v.
Colombia. In Bear Creek Mining, the tribunal held that the policy objectives listed in the general exception clause in the Canada-Peru FTA should be interpreted as an exclusive list of exceptions. Additionally, due to the detailed provisions on expropriation contained in the FTA next to the inclusion of the general exception clause, the tribunal concluded that no other exceptions from general international law were applicable. Thus, the tribunal disregarded the parties’ submissions on the police powers doctrine.95 Similarly, the tribunal in Eco Oro held that the general exception clause in the Canada-Colombia FTA does not have the effect of relieving the host State of its obligation to pay compensation. The parties to the FTA had included a carve-out for indirect expropriation which stipulated that under certain circumstances no compensation is due. However, a similar qualification lacked in the general exception clause and the tribunal determined that the parties to the FTA had not intended to
91 Article 2201 Canada-Colombia FTA.
92 Asteriti (n 89) 20.
93 Nicholas DiMascio and Joost Pauwelyn, ‘Nondiscrimination in Trade and Investment Treaties: Worlds Apart or Two Sides of the Same Coin?’ [2008] AJIL 48, 82-83; Spears (n 89) 1063; Andrew Newcombe, ‘General Exceptions in International Investment Agreements’ in in Marie-Claire Cordonier Segger, Markus W. Gehring and Andrew Newcombe (eds), Sustainable Development in World Investment Law (KLI 2011) 357-358.
94 DiMascio and Pauwelyn (n 93) 362-363. See e.g., Noble Ventures v. Romania, ICSID Case No. ARB/01/11, Award (12 October 2005) [55]; Canfor Corporation v. United States of America and Terminal Forest Products v.
United States of America, UNCITRAL, Decision on Preliminary Question (6 June 2006) [187]; Enron Corporation and Ponderosa Assets v. Argentina, ICSID Case No. ARB/01/03, Award (22 May 2007) [331]; Sempra Energy v.
Argentina, ICSID Case No. ARB/02/16, Award (28 September 2007) [373]. See contrarily, Aguas del Tunari v.
Bolivia, ICSID Case No. ARB/02/3, Award (21 October 2005) [91]; Continental Casualty v. Argentina (n 81) [181].
95 Bear Creek Mining v. Peru, ICSID Case No. ARB/14/21, Award (30 November 2017) [473]-[474].
relieve the host State from the payment of compensation in case an exception is applicable.96 Therefore, it can be questioned whether general exception clauses will always have the desired effect of shielding the host State against the payment of compensation. Rather, they may limit the host State’s defences under general international law.
3.2.3. Carve-outs or Exclusion Clauses
States can use carve-outs or exclusion clauses to determine certain subjects that they want to carve out from their obligations under the applicable IIA;97 they limit the scope of the IIA by limiting the scope of consent to the issues the IIA should cover.98 Contrarily to exception clauses, carve-outs do not provide an excuse for non-performance of the investment obligation, but exclude certain measures from the IIA’s coverage.99 The effects of carve-outs depend on the wording of the particular clause because some carve-outs are drafted in more absolute language than others. Generally, there are two types of carve-out clauses.100 The first category stipulates that non-discriminatory measures which are designed and applied for a public purpose do not establish indirect expropriation, but it does allow for an exception in case the impact of the measure is excessive. An example of this type of provision can be found in CETA:
“For greater certainty, except in the rare circumstance when the impact of a measure or series of measures is so severe in light of its purpose that it appears manifestly excessive, non-discriminatory measures of a Party that are designed and applied to protect legitimate public welfare objectives, such as health, safety and the environment, do not constitute indirect expropriations.”101
The second category only stipulates that legitimate regulations do not establish expropriation.
An example of this type of provision can be found in the 2009 ASEAN Comprehensive Investment Agreement:
96 Eco Oro v. Colombia (n 68) [828]-[836].
97 Marisi (n 56) 114.
98 Ahn (n 83) 73.
99 Asteriti (n 89) 25. See also, Gordon and Pohl (n 82) 20.
100 Zhu (n 85) 403.
101 Annex 8-A CETA.
“Non-discriminatory measures of a Member State that are designed and applied to protect legitimate public welfare objectives, such as public health, safety and the environment, do not constitute an expropriation”102
Thus, the latter type of carve-out clauses will have a more absolute effect on the exclusion of indirect expropriation claims from the scope of investment protection in the IIA. Claims for indirect expropriation can only be based on measures that are discriminatory or not applied and designed to protect the environment. Conversely, the first category of carve-outs allows for an argument by the investor that the measure is a rare circumstance in which the measure’s impact is excessive. Thus, the first category of carve-out clauses may allow for a broader array of measures to be subjected to a claim for indirect expropriation.
In practice, however, the distinction between these types of carve-out clauses and their effects is not always straightforward. For instance, Article 1114(1) NAFTA stipulates:
“Nothing in this Chapter shall be construed to prevent a Party from adopting, maintaining or enforcing any measure otherwise consistent with this Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns.”103
The prior clause has brought forward questions as to the effects it has on the regulations taken to protect the environment. One interpretation entails that the fact that the measure must be
“otherwise consistent with this Chapter” means that the environmental measure must also pass the test of indirect expropriation set forth in NAFTA. This would render this provision circular and limit its effectiveness as a carve-out.104 Accordingly, the tribunal in Infinito Gold v. Costa Rica held that a similar provision in the Canada-Costa Rica BIT cannot be qualified as a carve- out but merely is a reaffirmation of the State’s right to regulate.105 Therefore, the effects of the carve-out will vary as to the particular wording.
3.3. Conclusion
Increasingly, tribunals have recognised the State’s right to regulate in international investment law. However, it is not always clear when a State’s measure qualifies as a non-compensable
102 Annex 2 ASEAN Comprehensive Investment Agreement.
103 A similar provision is included in Article 14.16 USMCA.
104 Andrea K. Bjorklund, ‘NAFTA Chapter 11’ in Chester Brown (ed), Commentaries on Selected Model Investment Treaties (OUP 2013) 498.
105 Infinito Gold v. Costa Rica, ICSID Case No. ARB/14/5, Award (3 June 2021) [770]-[777].
regulation or as regulatory expropriation. Tribunals have relied on a variety of factors when deciding on that distinction and it is, thus, difficult to draw general conclusions. Nonetheless, more clarity can be achieved by dividing the arbitral decisions on an abstract level into three approaches. Next to the sole effect doctrine – which was discussed in Chapter 2 – the State’s right to regulate has been acknowledged by tribunals employing the police powers doctrine or a proportionality analysis. Furthermore, the right to regulate is currently being developed in treaty practice too. States are drafting a new generation of IIAs in which they include provisions that should secure them their desired policy space. However, it can be questioned whether these provisions are adding clarity or certainty to the already existing interpretations methods employed by tribunals. Rather, there are some indications that these provisions can impose limits on the State’s right to regulate or add extra hurdles that have to be overcome.
