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Investment Law and Climate Change: Green Expectations in Grey Times



This Friday and Saturday I will be taking part in the ‘12th Annual ESIL Conference‘, organized by the European Society of International Law, Riga Graduate School of Law, and the Constitutional Court of the Republic of Latvia and which will take place in Riga (Latvia). On Saturday I will be presenting a paper titled ‘Investment Law and Climate Change: Green Expectations in Grey Times’.

Here is the abstract: The use of renewable sources of energy plays a pivotal role in addressing the predicaments caused by climate change. States, the industry, international organisations, and other stakeholders have been striving to develop and employ new solutions that allow a shift from the current model, based on fossil fuel production and consumption, to one based on low-carbon options, so as to ensure a sustainable future. This global quest for greener alternatives led to the emergence of an international market for renewable energy technologies and equipment. Foreign direct investment is particularly welcome as it can not only provide fresh funds but also induce the transfer of knowledge and technology. The financial viability of investments in renewable energies is frequently dependent upon public support. All over the world governments have designed and implemented renewable energy support mechanisms so as to encourage private investment, often in the form of subsidies and incentive tariffs. As originally intended, the introduction of support mechanisms led a substantial number of companies and individuals to invest in the renewable energy sector over the last decade. However, while economic incentives attracted significant amounts of investment, several countries – including Spain, the Czech Republic, Italy, and Bulgaria – have recently decided to reduce or eliminate them. Governments argue that support mechanisms have proven too popular (and therefore, expensive) than anticipated; that they became too generous because the production costs for the new technology have decreased significantly; or that they simply cannot afford these initiatives due to the ongoing financial crisis. This cast a cloud of uncertainty over the commitment of governments in tackling climate change and ensuring a more sustainable model of development.
These governmental decisions unleashed a wave of arbitration claims. As of 31 December 2015, there were 40 cases pending relating to changes in economic support programs in the renewable energy market. Foreign investors are challenging such measures claiming that they reduce the profitability of their investments in a way which is not consistent with the obligations borne by host states under international investment agreements, namely the Energy Charter Treaty. Investment canons such as the prohibition of expropriation and fair and equitable treatment have, in theory, the potential to adequately protect investors from the negative effects of such decisions. Modification or withdrawal of incentives can be qualified as ‘indirect expropriation’ or a violation of the fair and equitable treatment standard by frustrating an investor’s legitimate expectation to benefit from public support. If the impact on investors’ rights and legitimate, reasonable expectations is significant, states might find it difficult to justify their actions based on public policy considerations such as budgetary constraints or short-term economic harm. The anatomy of these cases is substantially different from the prototype of energy-related disputes submitted to arbitration in the past. For years, states have enacted regulations to protect the environment by limiting environmentally detrimental investments. Foreign investors have reacted by initiating arbitral proceedings challenging the validity of those measures. Such cases posed a risk that international investment agreements could impact on climate change mitigation measures and restrain the host-state’s policy space to a significant degree. Some authors expressed concern about the potential constraining effect (‘regulatory chill’) that investment standards might have on states intending to promote renewable energies. Differently, the new wave of disputes refers to cases were states are reducing or eliminating the economic incentives which they introduced years ago in order to lure investments into the renewable energy market. Investors are complaining that such regulatory changes diminish or exhaust the commercial viability of their investments. The crux of the question is whether investors can seek compensation under investment treaties when governments encourage investment via economic support schemes but decide to reduce or eliminate them after the investment has been made. Again, we may have a clash between energy-related policies and investment law.
These disputes raise a classic problem in investment arbitration: how to strike a balance
between foreign investors’ reliance on the regulations that underpin their long-term investments and the host state’s right to adapt regulations to new needs. The purpose of this paper is to discuss the role that International Law – namely, Investment Law – can play in promoting investments in the renewable energy market in times of financial crunch. Legal instruments, and in particular international investment law, can help to mobilise the huge investments required to transform the energy sector to cleaner forms of generation. The challenge is to devise legal frameworks that are flexible enough to adjust to ever-changing markets while reducing political risks that might illegitimately jeopardize investments. Investment Law needs, once again, to make use of the intrinsic ability of International Law to reinvent itself in times of crisis and of turning problems into opportunities.


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