Published 22 August 2023
Given the recognition that the current Nationally Determined Commitments (NDCs) are insufficient to hold the rise of global average temperature to less than 1.5°C, states face increasing pressure to take more stringent climate mitigation measures. At the G7 Ministers’ Meeting on Climate, Energy and Environment in April 2023, G7 countries, for the first time, expressed their commitment to ‘accelerate the phase-out of unabated fossil fuels’ (including not only coal but also gas and oil). At the same time, the phasing out of fossil fuels such as the termination of extraction and pipeline projects directly impacts the legal and business environment. This may impact the interests of foreign investors, and if there is an applicable international investment agreement (IIA), they might challenge the phase-out through investor-state arbitration, arguing that, for example, it constitutes indirect expropriation and thus violates the relevant IIA.
In this situation, a central question is who should bear the burden of decarbonisation and to what extent. In this regard, there is the concern that IIAs and investor-state arbitration may distort the distribution of the burden. Bonnitcha identifies the possibility that IIAs may affect ‘the distribution of costs and risks under negotiated transitional arrangements’ between investors and the host states. In extreme cases, if full compensation results from investors’ claims challenging the host state’s climate change measures, it effectively means that the cost of decarbonisation is imposed largely on the taxpayers of the defendant state.
Public attention has been drawn towards investor-state arbitration cases arising out of climate mitigation measures. The observation that ‘the carbon majors are amongst the most litigious companies in ISDS [Investor-State Dispute Settlement]’ exacerbates the concern.
This concern has impacted the recent IIA-making practice. An increasing number of IIAs have started to include provisions specifically on climate action. Notably, dissatisfaction with the soft opt-in-rather than total-exclusion of fossil fuel investments from the modernised Energy Charter Treaty has resulted in the proposals of a coordinated withdrawal of EU, Euratom and Member States from the treaty.
Footnotes omitted from this introduction.
This paper will be part of the second TDM Special Issue on "International Investment Arbitration - Environmental Protection and Climate Change Issues". More information here www.transnational-dispute-management.com/news.asp?key=1893