International investment law and climate change

In the previous class we saw that the UNFCCC is not the only international legal regime relevant for climate change; legal obligations of states to mitigate emissions might arise also from other international treaties of a “general” scope, such as the UN Convention on the Law of the Seas (UNCLOS) or from general international law. Treaties with a more “specialized” scope are or could be of relevance as well, namely to the extent that they can be mobilized by state- or non-state actors to further or to stall climate action. In this class, we look at one “specialized” international legal regime, namely international investment law.

What is “international investment law”?

International investment law is a term used for international agreements that aim to protect foreign investors against abusive practices of the country where they invest.

• Most of these agreements are concluded bilaterally (i.e., between two countries), and are called “Bilateral Investment Treaties” (BITs). More than 3000 BITs are currently in place.
• Since the 1990s, investment protection provisions have also been included in both bi- and multilateral agreements that regulate economic relations more broadly (e.g. NAFTA, the North Atlantic Free Trade Agreement between Canada, the US and Mexico). Most recently, such investment provisions were included in the TPP, TTIP and CETA agreements, and have become a main point of criticism.

The graph shows the number of investment agreements concluded each year (red columns) and the cumulative number of agreements (black line). (BIT=bilateral investment treaty, IIA=international investment agreement; IIAs are BITs+other agreements with an investment component, such as NAFTA)

Common elements of international investment agreements

While each agreement is different, most investment agreements share a number of common elements:

• They grant certain rights to investors from country A who invest in country B. They usually include a) the right to be treated equally to domestic investors (=“national treatment” ); b) the right to “fair and equitable treatment” and c) the right not to be expropriated. We will look in detail at these rights during class.
• They allow the investor to sue the host state at an arbitration tribunal for breach of these rights, in circumvention of the national judicial system. This system is called Investor-State Dispute Settlement (ISDS). Such tribunals are often composed of three members, one nominated by the company and one by the state that is being sued. These two arbitrators then nominate the third.

This graphic shows the rise of ISDS cases over the past two decades. It also shows that complaints are mostly lodged by companies from rich states against the governments of poorer states.

Criticism of international investment law

International investment law in general, and ISDS in particular, has come under intense criticism over the past decades, for the following reasons:

• The ISDS system is structurally biased in favor of large companies. While investors can sue states for breach of their obligations, this is not true the other way around, e.g. in situations when investors engage in corruption or tax evasion, damage the environment or breach social, labor or human rights. Similarly, consumers, small- and medium-sized companies, workers, indigenous groups or other individuals adversely affected by the activities of an investor have no recourse to ISDS. Multinational companies can even file lawsuits even against their own home state by employing a subsidiary established in another country (see e.g. Lone Pine v Canada, discussed below).
• Investor rights under investment treaties are notoriously broad and ambiguous (what precisely is “fair and equitable treatment”? If a state changes a law in order to prescribe or prohibit a certain behavior e.g. on grounds of environmental protection, does this constitute “expropriation”?) These rights have increasingly been interpreted as being violated already when a national regulation lowers the return to investment.
• Moreover, damages sought and awarded in arbitration are often punitively high. Even though states can, in principle, successfully defend their measures at an arbitration tribunal, they potential costs of losing a case might force a prudent government (especially those of poorer countries) to abandon their regulatory objectives before they implement them (this is often described as the “chilling effect” on regulation). Moreover, states may be incentivized to settle with the plaintiff or to water down the challenged regulation in order to prevent a potentially highly costly arbitration.
• Arbitrators are a small circle of individuals, often lawyers, who benefit from the system as they earn income when cases that are lodged. Moreover, they are not accountable as judges are. There is no requirement of independence, they are subject only to a limited extent to standards of procedural fairness, the proceedings are intransparent because they take place under strict confidentiality, and arbitration awards are only partly published.
• Finally, no judicial appeal against an arbitration award is possible.

International investment law and climate change

International investment law has been mobilized by large companies against climate change-related measures. Two recent examples illustrate this threat (more can be found in this report):

• TransCanada v US. The KeystoneXL pipeline was planned by the Canadian company TransCanada to deliver oil from Canadian tar sands — the most polluting source of petroleum — across the US to the refineries in Texas. This would have greatly facilitated the exploitation of Canadian tar sands — in itself an environmentally highly damaging practice — , with predictably catastrophic consequences for the climate. For this reason, and because pipelines are prone to spills, the pipeline was rejected by a massive protest movement, consisting of indigenous groups and environmentalists alike. Ultimately, President Obama rejected the pipeline. In response, TransCanada filed for arbitration, seeking 15 billion US dollars in damages in June 2016 (the case is ongoing).
• Lone Pine v Canada. The Canadian region Quebec revoked permits for fracking (a technique of gas exploration liable to cause earthquakes) over concerns over water pollution. Lone Pine, a Canadian fracking company, filed arbitration against Canada, seeking 110 million US dollars in damages. While the company is Canadian, it used its subsidiary established in the US for the lawsuit.

In order to exploit tar sands, huge areas in Canada’s Alberta region are stripped bare of their surface, leaving apocalyptic landscapes behind.

However, governments can also successfully defend their sustainable policies under international investment law. A recent example is Mesa Energy v Canada, where the complaints against Ontario’s Feed-In Tariff Program, which supported renewable energy, were dismissed last year.

International investment law can also be mobilized by investors against states which cut down on climate change-related policies, as illustrated by the award Eisner v Spain. In the wake of the economic crisis, the Spanish government cut down public expenses; this also included a reduction of the subsidies paid to producers of solar energy. Eisner, a company invested in solar energy, brought this case before an arbitration board, and was awarded the gigantic amount of 128 million Euro. We will look at this decision, and the criticism voiced against it, in detail during class.

Opposition to international investment agreements and possible reform paths

Maybe surprisingly, the biased structure of international investment law became a core issue of political debate a couple of years ago; at that time, both the US and the EU sought to conclude far-reaching, bi- and multilateral trade and investment agreements. Most notably, the US and the EU negotiated the “Transatlantic Trade and Investment Partnership” (TTIP), the US negotiated the “Trans-Pacific Partnership” (TPP) with a large group of American and Asian countries, and the EU negotiated the “Comprehensive Economic and Trade Agreement” (CETA) with Canada. The openly stated objective was to deepen international economic integration, by further reducing tariffs between the member countries, and by facilitating regulatory harmonization (i.e., achieve similar regulations for goods and services in order to facilitate cross-border trade).

This objective was always questionable: unless tariff cuts and regulatory harmonization happens globally (via the WTO), agreements between but a few countries in fact create new distortions to international trade (e.g., if the US and the EU cut tariffs among themselves, producers from all other countries of the world are excluded). However, the WTO process has essentially been blocked already for over a decade, as developing and developed countries had pursued different objectives; most notably, developing countries consider the EU’s and the US’s protection and subsidization of their agricultural sectors highly damaging, and demand reforms. As the US and the EU are unwilling to concede on this and other points, they pursued economic integration outside the WTO, for the following reasons: firstly, when negotiating with small groups of countries rather than with all countries at the same time, they can benefit from the disparity of power, essentially pushing them to accept an agreement without having to grant overly painful concessions themselves; secondly, even more importantly, once the US and the EU develop workable regulatory solutions among themselves, other countries have to follow, whether they like it or not.

The negotiation of trade agreements such as TPP, TTIP and CETA led to significant protests. Somewhat surprisingly, the ISDS system became the main focal point of protests. (The sign a this German protest reads: “parallel justice — no thank you”, thereby criticizing that companies can circumvent the national judicial systems by directly accessing an international arbitration tribunal.)

TTIP, TPP and CETA also included investment chapters and ISDS. Opposition against the agreements focused particularly on ISDS. In the EU, the citizens’ initiative “Stop TTIP” collected more than three million signatures. The US under Donald Trump withdrew from TPP and ended negotiations on TTIP, leaving both agreements defunct. By contrast, CETA was successfully concluded. However, as a concession to the considerable opposition to the agreement, the EU and Canada decided to replace the arbitration tribunals with a “permanent dispute settlement tribunal”, which is subject to higher transparency and independence requirements. The EU Commission describes this as a “move towards establishing a permanent multilateral investment court.”

Another observable reform development is the inclusion of language about environmental regulation in many newly drafted investment agreements, such as the Dutch Model BIT. Whether such provisions are of actual legal significance or mere window-dressing will be discussed in class. According to a recent submission made by the NGO ClientEarth to the UN Commission on International Trade Law (UNCITRAL), the following reforms are necessary:

— Exempt all measures taken in pursuit of international obligations under the Paris agreement on climate change from challenge under ISDS;
— Require exhaustion of local remedies before recourse to ISDS;
— Allow counterclaims and ensure full participation for affected third parties;
— Ban third party funding of cases;
— Include climate change considerations in the calculation method for compensation. (ClientEarth, 17 July 2019)

Summary

In substantive terms, international investment law is open to different interpretations (i.e., either as benefitting fossil fuel companies, or protecting the environmental objectives of states). However, as it operates today, the system appears to be heavily tilted in favor of the interests of fossil fuel companies.

International investment law is a prime example for transnational law: multinational companies can choose to mobilize investment protection rules against national and regional regulation. While non-state actors — such as NGOs or individuals — do not have access to this legal regime, a transnational law perspective suggests that their role should not be ignored. Over the past years, resistance against the new generation of trade and investment agreements — TPP, TTIP and CETA — particularly targeted ISDS, and had a certain impact.