How investment arbitration can help to protect the climate

On 6 December 2015, the world leaders will meet in Paris for the World Climate Summit to work on a legally binding global climate agreement. Given that a failure to stop climate change would have catastrophic results for the global economy due to spreading natural catastrophes and demographic change, significant steps must be taken now.

In anticipation of the summit the European Union has been taking the lead by imposing more ambitious targets for curbing carbon emissions on its Member States than contained in the original 2020 targets.

Recently, on 23 October, EU leaders agreed to reduce greenhouse gas emissions by at least 40%, and increase energy efficiency and the share of renewables by at least 27% by 2030.

Moreover, the EU has adopted the energy roadmap 2050 aiming to reduce emissions to 80–95% below 1990 levels by 2050.

In other words, the EU is committed to emissions, which will only be possible by substantially increasing the production of renewable energy in Europe.

However, and at the same time, the European Commission is actually doing the opposite by actively destroying renewable energy producers. Member states too are doing what they can to destabilise the economic environment in many countries, making investments in renewables extremely risky and not worthwhile.

As we have reported previously in our newsletters, many Member States are retroactively removing the agreed feed-in tariffs (FIT) for the production of renewable energy, or retrospectively introducing other damaging measures. This has resulted in more than 30 investment arbitration disputes, which have been initiated by affected renewable energy producers against for example Spain, Czech Republic and Italy. The European Commission is has been actively intervening in those investment arbitration disputes, siding with the Member States.

At the same time, as is highlighted by the situation in the Czech Republic, where the Energy Regulatory Office – lead by a personal vendetta against solar energy – is currently threatening to block the distribution of 1,5 billion EUR worth of renewable energy subsidies in 2016, which would destroy the renewable energy industry and causing significant problems for the financing banks.

Thus, on the one hand the EU is pushing for ambitious greenhouse gas emission cuts, while at the other hand, it destroys renewable energy producers. There is a clear contradiction here, which needs to be clarified.

Turning back to the upcoming climate conference, it is important to remain realistic. Whatever the outcome will be, any binding international agreement on reducing greenhouse emissions will most likely not include any effective enforcement mechanism.

Indeed, so far multilateral environmental agreements only contain some sort of monitoring system, but lack an enforcement system that enables others to make sure that the States which are parties to such agreements fulfil their obligations.

This is where bilateral investment treaties (BITs) and investor-state dispute settlement (ISDS) come in, by assisting in the enforcement of legally binding environmental obligations. The following case is a good illustration of the usefulness of ISDS for the protection of the environment.

Most BITs contain “full protection and security”-standard. Arguably, the “full protection and security”-standard encompasses the obligation that the host state exercises sufficient “due diligence” to protect the investor’s physical assets and persons. It is not difficult to argue that this obligation also includes that the host state takes all necessary measures to prevent or effectively mitigate damages caused by egregious pollution or greenhouse gas emissions.

In fact, this line of argument is currently tested in an ISDS case, which has been brought by Peter Allard. He is a Canadian owner of an eco-tourist facility in Barbados and brought the ISDS case against Barbados alleging a breach of the “full protection and security”-standard of the Canada-Barbados BIT. More specifically, Allard claims that Barbados breached its BIT obligations by failing to enforce its domestic environmental laws, which he alleges led to the environment being spoilt and thus a loss of tourist revenues at his eco-resort.

Another example in which ISDS could help to force States to take effective measures to protect the environment is the case of the massive fires that have been affecting the climate in Indonesia and several of its neighbouring countries. Millions of people are suffering from respiratory problems and many sectors of the economy cannot function anymore properly. The haze is caused by fires, which are set to burn forests in order to create land for palm oil crops. Reportedly, this practice, which takes place every year, seems to have been condoned by Indonesia and the respective provincial governments. It seems that Indonesia has neither prevented the fires and the resulting haze, nor has it responded to these fires in a promptly and effective manner with a view of minimising their negative effects. If that is indeed the case, this would constitute a breach of Indonesia’s international treaty obligations relating to both environmental protection and investment protection.

Since most of Indonesia’s BITs contain the “full protection and security”-standard, it would be possible that affected foreign investors could use the BITs for bringing ISDS claims against Indonesia.

More generally, it seems reasonable to apply this line of argument also in the case of greenhouse gas emissions. For example, if in Paris a treaty is signed which contains binding targets for the reduction of greenhouse gas emissions and a State party fails to implement them, which in turn causes damages to a foreign investor, that foreign investor could use the BIT and ISDS to bring a claim against that State. The possibility of facing ISDS claims, which could amount to hundreds of millions of dollars, could be an effective instrument to persuade States to actually implement their legally binding environmental protection obligations.

Considering the fact that – unfortunately – many States around the world fail to effectively implement applicable environmental legislation – be it international or domestic -, causing not only damages to the environment and the health of their citizens but also to the property of foreign investors, ISDS claims could turn out to be a very effective tool to compel States to take the necessary steps to prevent environmental damages.

In other words, the protection of investors goes hand in hand with the protection of the environment.

Accordingly, instead of actively dismantling investor protection in Europe, the European Commission should take measures against the Member States for violating their obligations towards renewable energy producers. Similarly, the European Commission should stop undermining the legal status of intra-EU BITs and the Energy Charter Treaty. This would be the best way in ensuring that the Member States meet the ever more ambitious cuts in greenhouse gas emissions.

In sum, the useful role which ISDS can play for the protection of the environment is yet another argument – next to the well-known and generally accepted – arguments that investment treaties and ISDS promote the Rule of Law, legal certainty and the flow of FDIs – for maintaining easily accessible, effective and fair ISDS rules in all trade and investment agreements.

The GIP team stands ready to advise you on the best available investment protection in Europe and beyond.