Energy Transition and Climate Change Treaties
As climate change and energy transition play an increasingly important role in the decision-making of private and government entities, one issue is bound to become the focus of attention: Is there a potential conflict between States' international environmental law obligations and investment treaty protections granted by the same States to foreign investors?
International Environmental Law Obligations. In recent years, countries have signed numerous international climate change treaties. Thus, in 1992, the United Nations Framework Convention on Climate Change ("UNFCCC") was adopted and has been ratified by nearly all countries worldwide. Pursuant thereto, signatory states agreed to aim to stabilize greenhouse gas emissions but set no obligations or specific targets to do so. In 2015, the Paris Agreement was adopted by roughly the same countries, representing more than 98% of the world's emissions. It was the first agreement to set a specific goal, limiting global warming to below 2 degrees Celsius compared to pre-industrial levels, and to require countries to implement measures to that effect. In 2021, the COP26 Glasgow Climate Pact was adopted and ratified by the same countries. The signatories committed to accelerate efforts toward the "phasedown" of unabated coal power and phaseout of inefficient fossil fuel subsidies and revisit emission reduction plans in 2022 to keep the Paris Agreement target achievable.
Investment Treaty Protections. In parallel, more than 3,000 investment treaties concluded by these same States provide foreign investors with investment protections under international law. These protections include fair and equitable treatment, full protection and security, and protection against direct and regulatory expropriation without payment of compensation. As such, in some situations there may be potential for conflict, at least on its face, between States' obligations under the Paris Agreement to reduce greenhouse gas emissions and their obligations under investment treaties to protect the legitimate expectations of investors, including fossil-fuel investors, and to provide compensation upon expropriation.
The Energy Charter Treaty. While certain recently adopted investment treaties have arguably preempted the issue by specifically addressing the regulation of the environment in the context of investment treaty protection (e.g., Chapter 14 of the United States–Mexico–Canada Agreement), other treaties do not specifically make such provision. For example, the Energy Charter Treaty ("ECT") was ratified by the signatories of the Paris Agreement and members of the UNFCCC. Its signatories are faced with potentially competing obligations. On the one hand, they are required, under the ECT, to protect "all" investments in the energy sector, including coal, oil, and natural gas investments. Whereas, on the other hand, they are obliged to implement measures under the Paris Agreement to cut emissions significantly by 2030 and achieve climate neutrality or "net zero" carbon emissions by 2050. Reaching these targets will require steep reductions in greenhouse gas emissions and an unprecedented overhaul of energy systems, including the phasing out of fossil-based energy sources.
No provision in the ECT, the Paris Agreement, or the UNFCCC sets out how these climate neutrality obligations need to be introduced. Further, none of the more than 60 available ECT awards has yet involved an investor claim challenging state action taken for purposes of climate action, decarbonization, or energy transition. However, the first such claims have now been filed under the ECT, against the Netherlands, by German utility companies RWE and Uniper. They are challenging a 2019 law which phases out all coal plants by 2030. This law was enacted to meet the Netherlands' commitments under the Paris Agreement after the government was found to be taking insufficient action by the courts. Both investors claim that this law does not include adequate compensation to phase out or transition their fossil fuel-reliant plants, which amounts, they say, to an expropriation of their investments. The Netherlands has raised defenses based on climate law, including the Paris Agreement.
A tribunal deciding a dispute under the ECT could take into consideration other international environmental law obligations. Article 26 of the ECT requires tribunals to decide investor-state disputes in accordance with the ECT and applicable rules and principles of international law. These rules and principles may include state obligations under international climate and environmental treaties and customary international law. Such interpretation is, however, limited by Article 16 of the ECT, which provides that, where there is a conflict between an ECT provision and a provision of another treaty, the treaty provision more favorable to the investor will prevail.
Numerous investment treaties, however, may not contain provisions similar to Article 16 of the ECT. As such, a real question is likely to arise as to whether national environmental measures implemented under, inter alia, the Paris Agreement can trump investment protections contained in other treaties.
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Treaties will undoubtedly have an increasing impact on industries affected by climate change and energy transition (e.g., oil and gas, mining, etc.). Companies in those industries should seek specialist advice in relation to this fast-evolving and complex area of law.
