Part II: Indirect Expropriation
THE AUTHOR:
Lika Turmanauli, Legal Counsel at Spribe
Introduction
Part I of this two-part series examined how the International Court of Justice’s Advisory Opinion on the Obligations of States in respect of Climate Change of 23 July 2025 (“Opinion”) bears on the tension between State regulation and investor protection under the fair and equitable treatment (“FET”) standard. Part II examines the tension through the lens of indirect expropriation.
Notably, while FET focuses on the State’s conduct toward investors, indirect expropriation concerns the effect of State measures on investments – the challenge being to identify the point at which regulation ceases to be a legitimate exercise of public authority and becomes a compensable taking. This matters in the climate context, where measures such as fossil fuel phase-outs, drilling bans, and permit cancellations may significantly affect the value of investments. Investors increasingly frame such measures as indirect expropriation; States defend them as necessary and legitimate climate regulation.
By clarifying the content of States’ climate obligations under both treaty and customary international law, the Opinion provides additional legal tools on which States may rely in support of their right to regulate: when adopting and implementing measures responsive to climate obligations and, if such measures are later challenged by investors, when defending them in investment arbitration. The significance of the Opinion in either respect, however, may depend largely on the applicable treaty. This piece argues that the Opinion operates differently across investment treaty generations: under newer treaties, which expressly carve environmental measures out of indirect expropriation, it reinforces States’ regulatory powers; whereas under older treaties, where no such express carve-out exists, it supports the interpretive integration of States’ climate obligations.
Indirect Expropriation and the State’s Right to Regulate
Indirect expropriation traditionally describes situations in which a State does not formally seize property or transfer title but nevertheless substantially deprives an investor of the use, control, enjoyment, or economic value of its investment. The central challenge has been distinguishing compensable takings from legitimate regulation. Some tribunals have taken an “effects-oriented” approach (Metalclad v. Mexico, Tecmed v. Mexico), under which the severity of the measure’s impact on the investment occupies a central place in the analysis. Other tribunals have relied on the “police powers” doctrine, according to which bona fide, non-discriminatory, and proportionate regulation adopted for legitimate public purposes does not constitute expropriation even where it significantly affects an investment (Methanex v. United States, Saluka v. Czech Republic, Chemtura v. Canada, Philip Morris v. Uruguay). Many modern tribunals adopt a more integrated approach, examining both the severity of the deprivation and the character, purpose, and proportionality of the measure. Substantial deprivation remains a central element of the inquiry, but it is increasingly assessed alongside broader considerations relating to the legitimacy of the regulatory measure.
Two Treaty Regimes, Two Starting Points
Many modern treaties incorporate police-powers-style language (includingAnnex 8-A of the Comprehensive Economic and Trade Agreement (“CETA”), Annex 14-B of the United States-Mexico-Canada Agreement, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, and the model bilateral investment treaties of Canada and the Netherlands), providing that non-discriminatory measures adopted in good faith to pursue legitimate public-welfare objectives do not constitute indirect expropriation, except in “rare circumstances.” The balance between investor protection and regulatory autonomy is embedded in the text itself, with certain non-discriminatory public-welfare measures presumptively falling outside the scope of indirect expropriation protection.
Older treaties often contain no equivalent carve-out, leaving tribunals to determine the relationship between investment protection and regulatory authority through interpretation. This is particularly significant because many of the most prominent climate-related disputes (including RWE v. Netherlands, Uniper v. Netherlands, and Rockhopper v. Italy) arose under the Energy Charter Treaty (“ECT”), which does not contain such a carve-out. The distinction is therefore not merely textual: the newer treaties structure the regulatory balance ex ante, while the older ones give tribunals more space for interpretive discretion. The Opinion consequently has a different impact in each context.
The Opinion’s Impact Under New-Generation Treaties
At first sight, the Opinion appears unlikely to substantially transform the analysis under modern treaties which carve out measures legitimately adopted by States in exercise of their regulatory powers. Environmental protection was a recognized public-welfare objective before the Opinion, and many treaty annexes expressly identify health, safety, and the environment as public purposes that can justify regulatory action.
The Opinion, however, may become relevant with respect to the determination of whether a measure constitutes an indirect expropriation. Under CETA-style annexes, this determination requires a case-by-case, fact-based inquiry that takes into account, among other factors, the economic impact of the measure, its duration, the extent of its interference with distinct, reasonable investment-backed expectations, and its character, notably its object, context, and intent (CETA Annex 8-A(2)). Yet States’ climate obligations are not owed to investors as such, and the Opinion does not displace investment treaty protections. Why, then, should compliance matter in an investor’s claim? Because the annexes make the character of the measure and the reasonableness of investment-backed expectations part of the determination itself. A measure adopted in good faith as part of a State’s efforts to meet its international obligations may be viewed differently from a purely discretionary policy choice. Likewise, an investor in a carbon-intensive sector may find it harder to say it reasonably expected the regulatory framework to remain unchanged, though the timing of the investment and any specific assurances still count. The economic impact, however, does not change: a severe deprivation remains severe.
The Opinion may also become relevant with respect to the “rare circumstances” exception. Non-discriminatory measures designed and applied to protect legitimate public-welfare objectives do not constitute indirect expropriation “except in the rare circumstance when the impact of a measure or series of measures is so severe in light of its purpose that it appears manifestly excessive” [CETA Annex 8-A(3)]. For purposes of this exception, the severity of a measure’s impact is thus not assessed in isolation, but in light of the objective pursued. Even before the Opinion, a State restricting fossil fuel activities could already defend the measure as pursuing an important environmental objective, which the annexes expressly recognize as a legitimate public-welfare purpose. The Opinion did not create that argument, but it strengthens it by clarifying the content of States’ climate obligations. The objective is not merely a policy preference, but may be framed as part of the State’s performance of international obligations. To that extent, the Opinion may narrow the circumstances in which even severe measures appear excessive relative to the purpose they pursue. It does not redefine the exception; it gives States stronger arguments that their measures fall outside it.
Compliance, however, cannot by itself shield the State from liability; tribunals may still find that particular measures go further than necessary, distribute burdens unfairly, or impose disproportionate costs on individual investors.
Eco Oro v. Colombia illustrates both the significance and the limits of this approach (Eco Oro v. Colombia, Decision on Jurisdiction, Liability and Directions on Quantum, paras. 634, 699, and 821). The tribunal found that Colombia’s environmental measures had substantially deprived the investor of its mining rights, yet treated those measures as a legitimate exercise of police powers under the treaty’s expropriation annex – the carve-out operated as intended. But the dispute also showed that claims may migrate: although the expropriation claim failed, the State was found to be in breach of the minimum standard of treatment (though no damages were ultimately awarded).
The Opinion’s Impact Under Older Treaties and the ECT
The Opinion’s significance is potentially greater where treaty text provides less guidance. Under older treaties and the ECT, where expropriation clauses often lack an express public-welfare carve-out, tribunals must usually address the relationship between investment protection and regulatory authority through interpretation. Here, the Opinion does not reinforce an express carve-out – it provides additional legal context through which tribunals may interpret existing treaty protections.
The most conventional doctrinal route is systemic integration under Article 31(3)(c) of the Vienna Convention on the Law of Treaties, which directs interpreters to take into account relevant rules of international law applicable between the parties. Climate obligations may therefore inform the interpretation of expropriation provisions without becoming independent standards in their own right. As Judge Cleveland’s declaration emphasizes, investment treaties should not be read in isolation from the broader body of international law (Declaration of Judge Cleveland, appended to the Advisory Opinion of 23 July 2025, para. 22).
More broadly, the Opinion reveals a deeper symmetry. The “police powers” doctrine is frequently, though not uncontroversially, described as reflecting customary international law. The Opinion, in turn, grounds key climate obligations not only in treaty law but also in customary international law. A tribunal confronted with a climate-related expropriation claim may therefore no longer be reading environmental policy against investment protection. It may, at least where customary obligations are engaged, be required to read one body of customary international law alongside another.
Alternatively, and more modestly, the Opinion may operate less as an interpretive rule and more as evidence of the legal and regulatory context in which the State acted. This was effectively the approach adopted in Philip Morris v. Uruguay, where the tribunal treated the WHO tobacco-control framework as relevant to the reasonableness and good-faith public-health character of Uruguay’s measures. A tribunal does not need to conclude that climate obligations govern the interpretation of the treaty in order to treat the Opinion as evidence that a State’s conduct was reasonable, foreseeable, and responsive to recognized international concerns.
The implications become clearer when viewed through Rockhopper v. Italy. The tribunal concluded that Italy had unlawfully expropriated the investor’s right to receive a production concession after an environmental compatibility decree had already been granted. The tribunal treated Italy’s prior approval as significantly constraining its ability to invoke environmental concerns at a later stage. The Opinion does not change the legal test applicable to such disputes. What it changes is the legal context in which that test is applied.
One of the Opinion’s more significant observations is that State responsibility may arise not only from emissions themselves, but also from failures to regulate activities that contribute to climate harm, including decisions concerning fossil fuel production, licensing, and support. Viewed through that lens, a prior approval may no longer appear solely as a commitment on which an investor was entitled to rely. It may also appear as conduct that international law requires the State to revisit or correct. The approval may form part of the very conduct for which responsibility is alleged. The point is not that Rockhopper would necessarily be decided differently today. Rather, the Opinion makes it harder to frame the dispute as a simple conflict between investor reliance and changing political preferences. A State may now argue that its conduct responds not merely to policy choices, but to obligations affirmed under international law.
The Opinion’s discussion of State responsibility raises a further question that investment tribunals may increasingly confront. If international law requires a State to cease conduct that contributes to climate harm, and if that conduct includes the continuation of particular fossil fuel projects or authorizations, what follows when an expropriation award requires compensation precisely because the State complied with that obligation? Put differently, can international investment law impose compensation for regulatory conduct undertaken to comply with climate obligations, and if so, does that compensation obligation undermine the effectiveness of those obligations?
The Continuing Constraints: Proportionality and Non-Discrimination
None of this means that climate regulation becomes immune from expropriation scrutiny. The Opinion strengthens the legal significance of climate objectives, but it leaves many of the constraints that have traditionally limited the exercise of regulatory power intact. Among these, proportionality and non-discrimination are likely to assume particular importance. A measure that selectively disadvantages particular investors, favors domestic competitors, or imposes burdens that are excessive or disproportionate in relation to its objectives may still give rise to liability.
Indeed, as the legitimacy of climate objectives becomes increasingly difficult to contest, future disputes may focus less on whether States were entitled to pursue climate goals and more on how they chose to pursue them. These questions are therefore likely to become the main battlegrounds of climate-related expropriation claims. The Opinion shifts the center of gravity of the analysis, but it does not eliminate the need for scrutiny.
Conclusion
The Opinion does not affect indirect expropriation in a uniform manner. Its significance depends largely on the treaty framework governing the dispute. Under newer investment treaties, the Opinion primarily reinforces an existing balance by strengthening the legal weight of the objectives that climate measures pursue. Under older treaties and the ECT, it performs a different function. There, it provides tribunals with interpretive, customary, and evidentiary material through which investment protections may be read alongside States’ climate obligations.
The Opinion offers no new rule on expropriation, and it leaves the familiar safeguards standing. Proportionality, non-discrimination, and investor reliance continue to matter. Yet the Opinion contributes to a gradual shift in the legal landscape by strengthening the position of States seeking to justify climate regulation within the framework of international investment law.
ABOUT THE AUTHOR
Lika Turmanauli is a Legal Counsel at Spribe, an international gaming and technology company, where she focuses on dispute resolution and commercial matters, including preparation and negotiation of contracts and cross-border transactions. Her background includes experience at Gvinadze & Partners, where she assisted in arbitration and litigation and contributed to the launch of the ICC Arbitration and Mediation Rules in Georgian. Lika holds an LL.B. from the Free University of Tbilisi and is actively involved in international arbitration initiatives, including the Vis and FDI Moots.
*The views and opinions expressed by authors are theirs and do not necessarily reflect those of their organizations, employers, or Daily Jus, Jus Mundi, or Jus Connect.
