THE AUTHOR:
Ajla Serdarević, Bosnia and Herzegovina Qualified Lawyer
Both Investor-State Dispute Settlement (“ISDS”) and environmental protection have been evolving in tandem. In recent years, states have made clear steps towards climate mitigation. However, many factors affect the nature and scope of the measures and policies that strive to achieve such goals. Thus, these measures that states adopt regarding climate mitigation differ depending on other relevant interests and measures. In general, international law has undergone a significant shift, clearly emphasizing states’ obligations with respect to climate change mitigation. The landmark advisory opinions, such as one of the International Tribunal for the Law of the Sea (“ITLOS”) and the International Court of Justice (“ICJ”) on how states must act or be held responsible with respect to climate change, played an important role in the progress of climate change awareness and the responsibilities of states. Such measures are, and are likely to continue, forming the basis for climate change defenses in ISDS.
In light of these developments, this article addresses the need to establish measurable and harmonized standards for State climate change defenses, to ensure a proper balance and assessment of investor and State obligations in this respect.
The past decade has seen the evolution of niche renewable energy disputes against European States, most notably Spain. The numerous claims, such as Charanne v Spain that were brought against Spain stemmed from the changes to and termination of its incentive scheme for renewable energy producers, adding to the jurisprudence related to fossil fuel phase out measures. What followed were State defenses to legitimate expectation claims and diverging tribunal decisions. The outcome and viability of such defenses depended on the genuine scientific backing of the adopted measures and their connection to the climate change mitigation public policies. The renewable energy saga against Spain does not necessarily constitute an environmental dispute more an economic one, but it does show that in pursuit of technologies that are climate change friendly disputes can also arise. It is clear that for both renewable and fossil fuel foreign investors, the stability of climate change measures and incentives plays an important role. Examples such as RWE v. the Netherlands and Uniper v. the Netherlands show the risk of investors not having adequate climate mitigating technology and that state measures enjoy a margin of appreciation in pursuit of climate change goals. However, a State measure needs to satisfy a degree of foreseeability and proportionality. In the Rockhopper v. Italy this was shown as even when a state regulatory response to environmental concerns is justified it can not go to the detriment of investor rights. Despite the decision later being annulled, this case was important to show the growing concern in the approach states have both to the environment and its investors. The measure does not necessarily have to be effective, but the tribunal should only evaluate whether a measure was arbitrary, not its effectiveness or the motives of the State.
Stemming from existing cases that tribunals are facing in regard to climate change, the new claims in the future are set to be complex. This complexity brings into question the role of tribunals which are on one side faced with States’ obligation to climate change policies but on the other hand the investors rights might be violated. In the past cases, tribunals provided deference to the regulatory power of States. The discussion that sparked polarization in ISDS was what happens when States’ measures derogate the expectations of investors. In the absence of clear obligations for investors in the agreements or the legislation, cases still depend on the standards in the investment agreement. The newer models are yet to show how, in the future, clear obligations for investors will reflect in the ISDS context.
The question here is whether tribunals judge motives and whether deference should always be given to State actions under the right to regulate. The question of the standard of review that the tribunal would apply to assess the State measures in such scenarios is yet to be answered. Possible ambiguities exist as to whether such measures are self-judging or do tribunals have the authority to pass decisions on these measures. There have been instances of measures that lacked policy and scientific backing supportive of a purported climate change public policy defense.
One important takeaway is that climate mitigation measures are not carte blanche, and States need to pursue such policies in good faith. The role tribunals will have will be assessing whether states are not justifying arbitrary or purely economic measures by reference to climate change policies. There are no universal standards that tribunals can apply, leading to ambiguity in tribunal approaches in addressing complexities. In the future, investment arbitrations may increasingly scrutinize not only the legitimacy of States’ environmental regulations but also true goals, transparency, and potential misuse, such as disguised protectionism. These developments are complex since the interplay is between climate change measures and international investment law. This will also encourage states to consider whether particular measures should be excluded from the scope of international investment agreements.
The standard of assessing whether a measure is arbitrary is of vital importance. If in pursuit of climate mitigation and protection of the environment a measure that a State adopts only affects the foreign investors, then such a measure should be reviewed. However, deference should be given to States especially in the pursuit of climate change goals. The possible way to end the ambiguity is to take lessons learned from the previous era of climate related cases. The clear international law standards relating to State obligation for climate change are the relevant standard tribunals should strive to uphold in giving deference to climate mitigating policies by States. The climate mitigation measure must be adopted in good faith, scientifically backed, and proportional to the environmental goal the State aims to pursue. That is a relevant point that tribunals can consider when preventing the misuse of climate mitigation policies. In conclusion, the State approach to policy design and implementation will heavily shape the standard of deference given by investment arbitration tribunals in the era of climate related disputes. The tribunals will be tasked with establishing a harmonized approach in this new era of disputes. This also entails that they will be the forerunners of the increasingly climate-oriented international legal order.
ABOUT THE AUTHOR
Ajla Serdarević has successfully completed her LL.M. in International Dispute Settlement (“MIDS“) at the Université de Genève and the Graduate Institute of International and Development Studies. Ajla previously earned law degrees from the University of Sarajevo and the International University of Sarajevo. She is currently working at a law firm in Sarajevo. She was actively engaged in arbitration moots and research competitions. Ajla has published on topics such as investment protection, investor-state dispute resolution, the Energy Charter Treaty, and ESG-related disputes.
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