A Climate Change Carve-Out for Investment Treaties

Journal of International Economic Law, 2023, 26, 285–304 DOI: https://doi.org/10.1093/jiel/jgad011 Advance Access Publication Date: 7 March 2023 Original Article A Climate Change Carve-Out for Investment Treaties * and Elizabeth Sheargold ** ABSTR ACT This article responds to the growing risk of Investor–State Dispute Settlement (ISDS) claims arising from states’ measures to mitigate climate change, such as fossil fuel phase-outs. It proposes a carveout that would cover measures that are adopted in good faith and have a reasonable causal nexus with reducing and stabilizing greenhouse gas emissions (e.g. measures ‘related to’ this aim). Depending on states’ preferences, the carve-out could be designed as a treaty-wide exclusion from international investment agreements (IIAs) or as a carve-out that only removes such measures from ISDS procedures. Importantly, we propose a process to govern the application of the carve-out that prevents this issue being determined by ISDS tribunals. We argue that questions concerning the carve-out’s application to specific investor claims should initially be subject to joint determination by the treaty parties’ environmental authorities. Where these authorities cannot agree, we propose that this issue should be referred to a State–State tribunal that includes members with climate-related expertise. This article advances the specific debate about a climate carve-out for IIAs and wider debates about strategies for protecting regulatory space under IIAs through its detailed examination of carve-outs, drawing on examples from a range of subject areas. I. IN TRODUCTION In its April 2022 report, Working Group III of the Intergovernmental Panel on Climate Change highlighted the risks posed by Investor–State Dispute Settlement (ISDS) to climate change mitigation efforts, such as states’ phase-outs of fossil fuel energy sources.1 Also during 2022, some of the first procedural developments occurred in two ISDS cases against the Netherlands arising * Senior Lecturer in Law, University of Bristol, UK. Email: ** Senior Lecturer, Faculty of Law, Monash University, Australia. Email: For thoughtful comments on prior drafts of this article, we thank two anonymous reviewers, participants at the 2022 American Society of International Law International Economic Law Interest Group Biennial Conference, the Journal of International Economic Law’s Second Annual Junior Faculty Forum, and a workshop at the UCL School of Public Policy, and in particular Wolfgang Alschner, Lorand Bartels, David Gaukrodger, Oliver Hailes, Caroline Henckels, and Lauge Poulsen. Working separately, both authors made submissions in March 2022 to the Organisation for Economic Co-operation and Development (OECD)’s public consultation on Investment Treaties and Climate Change and this article draws on certain aspects of our individual submissions. This article also draws on some aspects of written evidence that Joshua Paine submitted to the Commons International Trade Committee inquiry on trade and the environment in February 2022. Work on this article was largely undertaken while Elizabeth Sheargold was a Vice-Chancellor’s Postdoctoral Research Fellow at the University of Wollongong, Australia. The views expressed and any errors are those of the authors. 1 IPCC, ‘Climate Change 2022: Mitigation of Climate Change’, Working Group III Contribution to the IPCC Sixth Assessment Report (AR6) (2022), ch 14, at 81. © The Author(s) 2023. Published by Oxford University Press. This is an Open Access article distributed under the terms of the Creative Commons Attribution License (https:// creativecommons.org/licenses/by/4.0/), which permits unrestricted reuse, distribution, and reproduction in any medium, provided the original work is properly cited. Joshua Paine 286 • A Climate Change Carve-Out for Investment Treaties 2 RWE AG v the Netherlands, ICSID Case No. ARB/21/4; Uniper SE v the Netherlands, ICSID Case No. ARB/21/22. Both arbitrations are currently suspended and it appears the latter will be withdrawn. See Lisa Bohmer, ‘Uniper Is Required to Withdraw Its Intra-EU ECT Claim against the Netherlands as Part of German Bailout Package’, IA Reporter, 22 July 2022, https:// www.iareporter.com/articles/uniper-is-required-to-withdraw-its-intra-eu-ect-claim-against-the-netherlands-as-part-of-germanbailout-package/ (visited 12 February 2023); Lisa Bohmer, ‘RWE v. Netherlands Arbitration Is Suspended, Pending Appeal Against German Anti-Arbitration Declaration’, IA Reporter, 15 November 2022, https://www.iareporter.com/articles/rwe-vnetherlands-arbitration-is-suspended-pending-appeal-against-german-anti-arbitration-declaration/ (visited 12 February 2023). 3 Rockhopper Italia S.p.A. v Italy, ICSID Case No. ARB/17/14, Award (23 August 2022), esp. paras 191–99. Italy was ordered to pay some €190 million in compensation: para 335(2)–(3). An application for annulment is pending. 4 See generally Kyla Tienhaara et al., ‘Investor-State Disputes Threaten the Global Green Energy Transition’, 376 (6594) Science 701 (2022); Kyla Tienhaara et al., ‘Investor-State Dispute Settlement: Obstructing a Just Energy Transition’, forthcoming, Climate Policy, https://doi.org/10.1080/14693062.2022.2153102 (visited 12 February 2023); Kyla Tienhaara and Lorenzo Cotula, Raising the Cost of Climate Action? Investor-State Dispute Settlement and Compensation for Stranded Fossil Fuel Assets, IIED Land, Investment and Rights Series (2020) https://pubs.iied.org/17660iied (visited 12 February 2023). 5 Elizabeth Meager, ‘Cop26 Targets Pushed Back Under Threat of Being Sued’, Capital Monitor, 14 January 2022, https:// capitalmonitor.ai/institution/government/cop26-ambitions-at-risk-from-energy-charter-treaty-lawsuits/ (visited 12 February 2023). 6 We use the terms ‘IIAs’ and ‘investment treaties’ to include both Bilateral Investment Treaties (BITs) and Preferential Trade Agreements (PTAs) with investment chapters. 7 For example, Caroline Henckels, ‘Protecting Regulatory Autonomy through Greater Precision in Investment Treaties: The TPP, CETA, and TTIP’, 19 Journal of International Economic Law 27 (2016); Freya Baetens, ‘Protecting Foreign Investment and Public Health Through Arbitral Balancing and Treaty Design’, 71 International & Comparative Law Quarterly 139 (2022); Aikaterini Titi, The Right to Regulate in International Investment Law (London: Nomos/Hart, 2014); Wolfgang Alschner and Kun Hui, ‘Missing in Action: General Public Policy Exceptions in Investment Treaties’, in Lisa Sachs, Lise Johnson, and Jesse Coleman (eds), Yearbook on International Investment Law & Policy 2018 (Oxford, NY: Oxford University Press, 2019) 363–93. from its decision to phase out coal-fired power by 2030.2 Additionally, Italy was found to have violated the Energy Charter Treaty (ECT) through its application of a legislative ban on offshore oil and gas exploitation activities to a pre-existing project that, at the time of the legislative chan (...truncated)