Objectives:

This article seeks to suggest ways to strike a balance between two very different issues. Sustainable development and the protection of foreign investment have been two parallel and distinct issues. Only gradually have these two policy strands, each with its own perspectives and distinct socialization processes, started to take notice of each other. Therefore, mutual prejudices and barriers need to be reduced, ideologically-driven arguments need to be identified and avoided. Balanced approaches to examining the relationship between investment protection and the principles of sustainable development are in their very early stages and need to be cultivated.

Chapter 1: Introduction:

Climate change has arisen as the most pressing global challenge of our time. In the post- 1989 economic consensus based on market mechanisms and eschewing command and control regulation, the concerted global response to this problem has taken the form of flexibility mechanisms harnessing the market in order to steer development in the direction of a low-carbon economy. From this perspective, the flow of foreign investment towards developing countries – and in 2012 for the first time investment flows to developing countries surpassed those between developed countries¹ – can be one of the most effective tools to pursue an environmentally sustainable and climate-friendly economic development. The legal response to climate change, exemplified by the measures contained in the Kyoto Protocol – Clean Development Mechanism (CDM), Joint Implementation (JI) and International Emission Trading (IET) – is designed to harness foreign investment for sustainable development and emission reduction projects by providing economic incentives for the transition to a low-carbon economy.

On the downside, the mechanisms, when employed within global value chains for the production of consumption goods for developed countries’ markets, can be used to offshore emissions from developed to developing and least developed countries without achieving an overall reduction in carbon emissions. As these countries do not have emission reduction targets, any failure down the chain of production in projects started under the aegis of the CDM, for example, might result in a net increase of emissions (so-called ‘carbon leakage’).²

In the investment regime too, the position is equally mixed. Traditionally, the investment regime has been instrumental in reducing the regulatory risk for foreign investors; in the case of environmental measures this meant protection against the ratcheting up of standards to the detriment of investors engaged in highly polluting and/or carbon intensive sectors such as mining and extractive industries. In theory, host states retain control over the admission of foreign investors and investment, therefore being able to screen-out investors keen to pursuit non-climate-friendly investments; however, several countries adopt pre-admission rights in their model treaties (for example the United States), and it is an open question is those rights can be imported via the MFN clause into the basic treaty.

Numerous investment arbitrations have concerned environmental measures and this has been the case especially under the umbrella of the NAFTA.³ The rise of ‘environmental’ arbitrations has functioned as a catalyst for changes within the investment regime in the direction of its diversification, clarification and hybridisation. It has resulted in the introduction of clauses in IIAs that deal with non-investment matters, such as labour, human rights and environmental provisions. The clauses take the form of exceptions, carve-outs, balancing and soft-law obligations.

In fact, the latest UNCTAD Investment Report confirms the trend towards the inclusion of ‘sustainable-development-friendly provisions’ in International Investment Agreements (IIAs), via the insertion of clauses dealing with environmental, labour and human rights measures.⁴ Additionally, IIAs renegotiations and even renunciations have been triggered by the perceived lack of regulatory space for states tied by IIAs’ obligations.⁵ While this limitation of regulatory capability can impede the state’s ability to improve its environmental regulation, equally it can stifle the relaxation of the regulatory framework to reduce costly environmental and climate change commitments, especially in the post-2008 economic climate.

Chapter 2: Host states’ domestic law regime:

Host states’ domestic climate change measures might come into conflict with the international obligations in the investment regime. While climate change policies are often ultimately derived from an international source (including Article 2 Kyoto), nonetheless international law deals with mixed (international-domestic) conflicts differently. Their treatment is also reflective of the superior status of international obligations vis-à-vis domestic law, as expressed in Article 27 VCLT. However, the relationship between the two kinds of conflicts is more problematic than the straightforward application of Article 27 might imply. There are issues relating to the conflict rules governing the relationship between norms belonging to different legal regimes (international/domestic), the direct enforceability of international norms in monist systems versus the legal architecture of dualist systems and finally, the peculiarity of the investment regime, conferring locus standi to investors to vindicate a breach of an international treaty, with all the difficulties resulting by the classification of the investors as possessing rights or simply privileges.

Chapter 3: Synergies and Conflicts

From a legal perspective, investment arbitrations to protect green investments’ sunk costs from detrimental changes in the regulatory framework.

The flexible mechanisms contained in the Kyoto Protocol, and especially the CDM, have been compared to a ‘new generation IIA.’58 In effect, Article 12 provides for a mechanism geared towards the sustainable development of non-Annex I Parties via, amongst others, ‘private entities,’ i.e., foreign investors in low carbon industries. While it is certainly an exaggeration to liken the Kyoto Protocol to an IIA on the model, for example, of the Energy Charter Treaty, equally concerned with energy generation and consequently a potential tool in the fight against climate change, it can confidently be said that the flexibility mechanisms of the Kyoto Protocol concretise the ‘promotion of foreign investment’ which is often listed as a goal of IIAs.⁶ This enhanced role of the CDM in promoting foreign investment – a goal traditionally badly served by IIAs – is ultimately the outcome of the binding obligation on Annex A Parties to reduce their emissions via the flexibility mechanisms provided for in the Kyoto Protocol and it should not be forgotten that IIAs contain no comparable promotion obligations for contracting parties.

Conflicts

The tension between climate change objectives and investment protection can result in actual conflicts of international obligations. According to Pauwelyn’s classification, necessary or inherent conflicts – between obligations, rather than between obligations and rights – will always result in a breach.

· Limiting Regulation by Host state

The potential conflicts resulting from the interface between climate change policies and investment commitments can result in the phenomenon of ‘regulatory chill,’ whereby host states refrain from implementing environmental measures that might be successfully challenged in investment arbitration, resulting in costly awards and legal costs.

The assessment of the litigation risk resulting from the implementation of environment-friendly policies is in fact equally crucial to both parties. This assessment has to take into account the existence of an IIA between the interested parties (i.e. the host state and the home state of the investor) and the level of autonomy in decision-making for the climate-change regulatory framework. As already noted, regulation can take the form of domestic measures, Kyoto mechanisms with limited international involvement, such as JI Track I or with more robust international supervision, such as JI Track II and CDM projects. Conversely, the higher level of host states’ involvement in JI projects will not necessarily increase the risk of litigation out with the umbrella of the Energy Charter Treaty (ECT), as the Annex I countries participating in JI projects do not normally share IIAs amongst themselves (with the noted exception of the ECT).⁷

· Interpretation by Investment Tribunals

The first tool available to investment tribunals dealing with a potential conflict is interpretation. In investment disputes, if the home state of the investor and the host state (and third state parties, where these exist) agree to a particular interpretation, tribunals have to take this into account as an authoritative interpretation of the applicable treaty. Specifically, it is an open question to what extent due diligence by the potential investor will have to include an assessment of non-investment international treaties (e.g. environmental treaties, including on climate change) and their applicability in a potential investment dispute, which is heavily dependent on the interpretative approach of tribunals and the possibility of authoritative interpretations by states resulting in the incorporation of these non-investment instruments in the interpretative work of the tribunals.⁸

The argument for evolutionary interpretation of international law seems particularly apposite for regimes, such as environmental and climate change law, that are rapidly developing in response to changed technological and scientific knowledge and the demands posed on the environment by economic development and population growth. However, arguments in support of systemic integration as the default tool in treaty interpretation might jar with the function of treaties as lex specialis engendering expectations of stability. In other words, if amongst the functions of treaties is that of derogating from general international law, a fortiori the more the latter departs from the former, the more the former should be read in its original context.⁹

· Indirect Expropriation

The approach that international investment tribunals have taken towards non arbitrary regulatory intervention has not always been consistent, given the already mentioned difficulties in drawing the line between non-compensable regulation or exercise of police powers and compensable regulatory intervention; overall, two approaches have emerged, the ‘sole effect’ and the ‘effect and purpose.’¹⁰ The clearest articulation in investment case law of the sole effect doctrine is the often quoted statement of the Metalclad Tribunal, that ‘expropriation under NAFTA includes not only open, deliberate and acknowledged takings of property, such as outright seizure or formal or obligatory transfer of title in favour of the host State, but also covert or incidental interference with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use or reasonably-to-be expected economic benefit of property even if not necessarily to the obvious benefit of the host State.’¹¹

On the opposite side, the more holistic ‘effect and purpose’ doctrine is recognisable in the SD Myers Tribunal’s assertion that:

[...] a tribunal [should] look at the substance of what has occurred and not only at form. A tribunal should not be deterred by technical or facial considerations from reaching a conclusion that an expropriation or conduct tantamount to an expropriation has occurred. It must look at the real interests involved and the purpose and effect of the government measure” [emphasis added].¹²

The same approach was taken by the Methanex Tribunal¹³ and, out with the NAFTA, by the Saluka Tribunal, which gave probably the clearest definition of the police powers doctrine as applied to indirect or regulatory expropriation, with the effect of a carve-out of the measures from the purview of the expropriation clause.¹⁴

In conclusion, the most promising tool seems to be a clearly worded carve-out police powers provision, modelled on the 2012 US Model BIT clause, possibly including sustainable development and climate change as one of its objectives. This normative approach will have to take into account the possibility that carve-out clauses might be used by states to the detriment of green investors – in fact, any clause that excludes the application of the treaty to governmental measures carries this risk of shielding potentially detrimental measures from the reach of investment tribunals, i.e., the sort of measures impugned in climate change investment litigation so far. The risk might be mitigated either by way of an exception modelled on the Canadian Model BIT language in the expropriation Annex (basically, the ‘Except in rare circumstances’ provision)¹⁵ or through a robust application of the legitimate expectations doctrine to protect the investor from changes in a regulatory framework agreed under the relevant climate change domestic legislation or regional/international agreements.

Conclusion:

Troposphere, whatever. I told you before I’m not a scientist. That’s why I don’t want to have to deal with global warming, to tell you the truth.

In a seminal case in the United States Supreme Court, a group of cities and states petitioned the Environmental Protection Agency (EPA) to enforce climate change regulation to mitigate and prevent the effects of global warming.¹⁶ The Court remanded the issue to the EPA to justify its refusal to regulate. Justice Scalia’s robust dissent is encapsulated in his famous remark, which opens this section, answering Massachusetts’ Assistant Attorney General’s correction of his reference to the stratosphere – instead of the correct troposphere. I have noted throughout this chapter that there are several ways in which the investment regime, one substantiation of the law that Justice Scalia wants to be blind to the problematic of global warming, can foster, rather than hinder, climate change regulation. Amongst these, two can be listed here: 1) IIAs’ provisions can be amended in order to allow for better balancing of potentially conflicting commitments; 2) New dedicated provisions can be inserted, such as general exceptions clauses more clearly singling out environmental and climate change exceptions to the investment protection commitments, or carve-out/scoping clauses to exclude certain regulatory measures from the purview of the IIAs.

The analysis conducted in the chapter evidences the multiple functions that investment law can fulfil, acting in concert with climate change policies or providing a convenient shield for investors in more carbon-intensive industries. Systemic integration and interpretation, amendments and clarifications can steer investment law in the direction of a more climate-friendly framework. The choice, however, is political.

References

1. At 52% of the total; see United Nations Conference on Trade and Development (UNCTAD), World Investment Report 2013, United Nations Publications, New York, 2013, p. 12.

2. UNCTAD, 2013, p. 164. UNCTAD’s World Investment Report 2010 focussed on investment in a low-carbon economy.

3. Ethyl Corporation v Canada, NAFTA/UNCITRAL, Award on Jurisdiction, 24 June 1998; Metalclad Corporation v United Mexican States, ICSID Case ARB(AF)/97/1, Final Award, 30 August 2000; S.D. Meyers v Canada, NAFTA/UNCITRAL, Partial Award on the Merits, 13 November 2000; Pope and Talbot, Inc. v Canada, NAFTA/UNCITRAL, Damages Award, 31 May 2002; Tecmed, SA v The United Mexican States, ICSID Case No. ARB(AF)/00/2, Award, 29 May 2003. The awards issued from the mid-2000s reflect a more careful attitude towards public interest concerns; see Waste Management Inc. v The United Mexican States, ICSID Case No. ARB/00/3, Award, 30 April 2004; Methanex Corporation v United States of America, NAFTA/UNCITRAL, Final Award on Jurisdiction and Merits, 9 August 2005.

4. UNCTAD, 2013, p. 102

5. South Africa has renounced several of its IIAs, as have some Latin American countries, which have also denounced the ICSID Convention; Australia has eliminated the investor-state dispute clauses from its FTA with the United States.

6. See for example the Preamble of the ICSID Convention, “Considering the need of international cooperation for economic development [...].” The potential for inclusion of ‘sustainable development’ by progressive interpretation is patent.

7. Diepeveen, Rosalien, Yulia Levashova, and Tineke Lambooy. "“Bridging the Gap between International Investment Law and the Environment”, 4th and 5th November, The Hague, The Netherlands." Utrecht Journal of International and European Law [Online], 30.78 (2014): 145-160.

8. See European Commission, Investment Protection and Investor-to-State Dispute Settlement in EU Agreements, November 2013, available at

9. http://trade.ec.europa.eu/doclib/docs/2013/november/tradoc_151916.pdf

10. Supra note 29.

11. Rudolf Dolzer introduced the term ‘sole effects’ to describe this interpretation of indirect takings in investment law (also Starrett Housing Corporation v Islamic Republic of Iran (1983) Iran-USCTR 122, 154): R. Dolzer and F. Bloch, ‘Indirect Expropriation: Conceptual Realignments?’, International Law FORUM du Droit International, Vol. 5, No. 3, 2005, 155.

12. Metalclad Corporation v United Mexican States (ICSID Case No ARB(AF)/97/1) Award, 30 August 2000, para. 103.

13. S.D. Myers Inc. v Government of Canada, para. 285.

14. Methanex v The United States of America, NAFTA/UNCITRAL, Final Award, 3 August 2005, Part IV – Chapter D – para. 7.

15. Saluka Investments BV v The Czech Republic (UNCITRAL) Partial Award, 17 March 2006, para. 255: “It is now established in international law that States are not liable to pay compensation to a foreign investor 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.”

16. See the 2009 Canada-Jordan BIT’s Annex B.13(1)(c) – Expropriation: “[…] (c) Except in rare circumstances, such as when a measure or series of measures is so severe in the light of its purpose that it cannot be reasonably viewed as having been adopted and applied in good faith, 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 expropriation.”

17. Massachusetts et al v Environmental Protection Agency et al 549 U.S. 497 (2007).

Received on 09.03.2015 Modified on 26.03.2015

Int. J. Ad. Social Sciences 3(1): Jan. –Mar., 2015; Page 13-15