Beyond known worlds: climate change governance by arbitral tribunals?

Author:Vadi, Valentina
Position:Continuation of VII. Beyond Known Worlds: Climate Change Governance by Arbitral Tribunals? through X. Conclusion, with footnotes, p. 1319-1351
  1. Renewable Energy Investors as Claimants

    Renewable energy-related disputes have emerged as the new frontier of confrontation between investors and states. A number of countries have adopted incentives to attract investments in the renewable energy sector and to increase the production of clean energy. The rationales for public support of renewable energy are multifold. In general terms, public support of renewables is needed because energy production from renewables is more expensive than (and not yet competitive with) energy generated from fossil fuels. Moreover, energy security calls for the diversification of energy sources away from traditional sources. In response to the current global financial crisis, however, states have implemented unprecedented emergency measures to prevent systemic collapse and return to economic stability. (191) These emergency measures include measures affecting the renewable energy sector. Such measures have triggered a wave of investment disputes against states for potential breaches of investment treaty provisions due to the negative impact of such measures on foreign investments. (192) These investor-state arbitration claims expose the state to potential liability. Investor and host state priorities tend to diverge in times of a financial crisis. Investors are concerned with the protection of their investments. The renewable energy sector is "capital intensive," and "government subsidies are still necessary to make them economically viable." (193) A sovereign's priority, however, is working out a prompt and effective resolution of the crisis. Therefore, finding a balance between the right of a sovereign to respond to a debt crisis and the protection of investors' rights under BITs is a source of international tension.

    Many of the pending disputes have arisen out of the same set of facts. A number of EU countries--including Bulgaria, the Czech Republic, Spain, Italy, and Greece--have adopted incentives to attract investments in the renewable energy sector and to increase the production of clean energy. (194) Among these incentives was a "feed-in tariff' (FIT) (i.e., a fixed electricity purchase price set higher than market rates and of guaranteed duration). (195) This and other incentives made the renewable energy market particularly attractive to investors since they reduced financing costs. (196)

    After the advent of the global financial crisis, however, a number of governments realized that rapid rates of growth in the renewable energy sector could create an "unsustainable social burden" (197) and began to change their renewable energy policies, repealing some of these incentives, eventually reducing the FITs. (198) In fact, as a policy, FITs cost governments a lot, potentially contributing to the escalation of their deficits. (199) In a number of arbitrations, foreign investors are contending that these regulatory changes amount to a violation of the relevant investment treaties' provisions. This section examines a number of case studies.

    Consider, for example, Bulgaria. After adopting the 2007 Renewable and Alternative Energy Sources and Biofuels Act (RAESBA), (200) a new regulation governing investments in renewable energy sources, Bulgaria soon "reached its targets and the governmental authorities took measures to restrict the available incentives." (201) As a result, the 2011 Energy from Renewable Sources Act (ERSA) replaced the RAESBA. (202) A 20 percent tax was imposed on the income of solar energy producers, many of which are foreign owned, and the preferential rates for electricity generated by wind and solar power plants were substantially reduced. Several multinational companies considered the possibility "to protect their rights before an international arbitral tribunal." (203) In 2013 EVN, an Austrian company, which had invested in the energy sector, filed an investment treaty arbitration against Bulgaria. (204) EVN based its claim on the Energy Charter Treaty and the Austria-Bulgaria BIT. EVN acquired the privatized grid operation and electricity supply companies in the southern part of Bulgaria in the 2000s. (205) The dispute was sparked by the reform in the renewable energy sector. EVN was under an obligation to pay a preferential tariff to the solar energy producers but, allegedly, Bulgarian authorities failed to do so. (206) This led EVN to bring a claim against the country after a three-month "cooling-off' negotiation period provided for by the Energy Charter Treaty. (207) While the notice of arbitration is not publicly available, potential breaches, which may be alleged by the foreign investors, include breach of fair and equitable treatment due to lack of a predictable and stable legal framework, breach of legitimate expectations, and indirect expropriation of the investor's asset value. In parallel, reportedly, more than fifty solar companies have lodged a complaint against the state's measures at the European Court of Human Rights, alleging violations of the right to property in breach of Article 1 Protocol 1 of the European Convention on Human Rights. (208)

    The Czech Republic is also facing several claims in relation to its repealing favorable treatment of solar-generated energy. (209) In 2005, it had adopted a generous FIT payable to "solar generators who fed electricity into the grid." (210) In 2010, however, the FIT was reduced. (211) A bloc of ten foreign investors filed a joint request for arbitration in May 2013, complaining of various measures allegedly affecting their investments in the Czech Republic's photovoltaic (pv) sector. (212) The claimants relied on a number of treaties in their joint request, including the Energy Charter Treaty and Czech BITs with the Netherlands, Germany, Cyprus, Luxembourg, and the United Kingdom. (213) The claimants contended that these rollbacks constitute an indirect expropriation of their investments and a breach of the fair and equitable treatment standard. (214) The Czech Republic, however, objected to the claimants' efforts to join in a single arbitration. (215) It treated the arbitration request as a request to consolidate all of the claims and indicated which claims it would consent to arbitrate together--"because certain claimants were alleged affiliates and/or invested in a common investment in the Czech Republic." (216) Therefore, six arbitral tribunals have been constituted out of the joint claim. (217) In addition, some German investors have filed an investor-state arbitration under the United Nations Commission on International Trade Law (UNCITRAL) Rules and the Germany-Czech Republic BIT. (218) The latter claim differs from the previous claims because it does not rely on the Energy Charter Treaty. (219) The reasons for the failure to invoke the protections of the treaty are not clear. However, "one explanation could lie in the ECT's Article 21, which places important limits on the claims that can be raised in relation to taxation measures." (220)

    Spain is facing a steadily lengthening number of investment treaty claims in relation to its own reductions of incentives that it offered previously to investors in renewable energy production. (221) Reportedly, Spain reduced these incentives which constituted "a significant drag on the Spanish economy." (222) In InfraRed Environmental Infrastructure GP Limited and others v. Spain, (223) the claimant, a UK-based investment fund, which had acquired equity participation in solar projects in Spain, alleges that legal reforms affecting the renewable energy sector constitute violations of the Energy Charter Treaty. (224) A number of companies have brought analogous cases against Spain before the International Center for the Settlement of Investment Disputes (ICSID), (225) the Arbitration Institute of the Stockholm Chamber of Commerce, (226) or ad hoc arbitral tribunals pursuant to the UNCITRAL rules. (227)

    Other member states of the European Union are facing similar challenges. On February 21, 2014, the ICSID registered the first known claim filed against Italy for alleged violations of the ECT. (228) The claimants are investors in a photovoltaic energy generation project. (229) The claim is related to the notorious "spalmaincentivi," the decision taken by the government to decrease incentives granted in the past to renewable energy producers. Italy has recently withdrawn from the ECT because of cost-cutting efforts. (230) Under Article 47 of the ECT, the withdrawal will take effect one year after the date of notification. (231) However, the ECT will continue to apply to investments made before such date for a period of further twenty years. (232) Greece has also reduced the supposedly guaranteed prices. (233)

    Analogous investment disputes are arising under Chapter 11 of the North American Free Trade Agreement (NAFTA). (234) In Mesa Power v. Canada, (235) a Texas-based energy company has brought an arbitral claim against Canada in relation to the province of Ontario's renewable energy program. (236) The investor, which owns four wind farms in Ontario, contends that the province changed the rules by which renewable energy producers can obtain power purchase agreements, favoring other investors. Ontario's 2009 Green Energy Act is a climate change-related measure aimed at promoting renewable energy production and economic growth. Under the Act's Feed-In Tariff Program (FIT Program), the Ontario Power Authority secures renewable energy through long-term purchase contracts with producers of this energy. Under the program, companies benefit from a preferential tariff rate fixed for twenty years. In Ontario, the Green Energy Act has been controversial because of the preferential treatment granted to renewable energy producers vis-a-vis producers of non-renewable energy. When the relevant authorities introduced some changes to the rules for awarding FIT program contracts, the investor filed a notice of arbitration, contending that these regulatory...

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