International Investment Agreements and Climate Change: The Potential for Investor-State Conflicts and Possible Strategies for Minimizing It

• Date: 01 December 2009

12-2009 NEWS & ANALYSIS 39 ELR 11147

A R T I C L E S

International

Investment

Agreements and

Climate Change:

The Potential for

Investor-State

Conf‌licts and

Possible

Strategies for

Minimizing It

by Lise Johnson

Lise Johnson is currently a Law Teaching Program

Fellow at Columbia Law School.

Editors’ Summary

Much concern has been raised regarding the possibility

that measures governments take to mitigate and adapt

to the impacts of climate change will conict with their

obligations under the law of the World Trade Organiza-

tion. What has not yet received adequate attention, but

poses a potentially greater threat of government liabil-

ity under international law, is the possibility that the

climate change-related measures States implement will

be inconsistent with their obligations under the roughly

5,600 international investment agreements (IIAs) to

which they are currently part y. Although States do

likely face exposure to IIA-based claims for their actions

on climate change, there are strategies governments can

and should pursue to minimize their potential liability.

On April 7, 2009, t he Financial Times reported that

“Germany could be forced to pay more than €1bn

compensation to a state-owned Swedish power com-

pany after Green politicians slapped restrictions on a new

coal-red power plant in Hamburg.”1 e power company,

Vattenfall, is seeking compensation under a multilateral

agreement, the Energy Charter Treaty, a nd is pursuing its

claims through arbitration at the World Bank’s International

Centre for Settlement of Investment Disputes (ICSID).2

is investor-State dispute raises questions regarding

whether and to what extent governments may be liable when

their environmental regulations negatively impact investors’

bottom lines (or expectations about those bottom lines). To

date, however, these questions as they relate to the particular

area of climate change reg ulation have received only mini-

mal attention. Yet, as is suggested by Vattenfall’s claim that

Germany should be liable for more than one billion euros

as a result of t he State’s environmental regulation of a coal-

red power plant, the relationship between international

investment law and climate change regulation needs to be

addressed, as it has potentially signicant implications for,

on the one hand, States’ willingness and ability to implement

climate change mitigation and adaptation measures3; and, on

the other, the impacts of climate change regulations on mul-

tinational enterprises (MNEs).

ree issues are particularly ripe for discussion: (1) whether

and to what extent measures ta ken by States to respond to

challenges of climate change may be inconsistent with their

obligations to foreign investors; (2) whether, if State actions

are likely to violate their substantive obligations to foreign

investors, there are exceptions under international law to

excuse those violations; and (3) whether, if such exceptions

are not available, or if their coverage is uncertain, States can

and might want to identify other means of ensuring they

have sucient regulatory discretion to implement climate

change mitigation and adaptation measures without unnec-

essarily exposing t hemselves to the threat of signicant legal

action by foreign investors. ese issues are especially relevant

now due to the convergence of two main phenomena: rst,

over roughly the past decade, foreign investors have led an

1. Chris Bryant, Germany Faces Action Over Power Plant, F T, Apr.

7, 2009, http://www.ft.com/cms/s/0/b4188738-2398-11de-996a-00144feab-

dc0.html?nclick_check=1 (last visited Oct. 7, 2009).

2. Id.

3. Mitigation measures are those that “reduce the sources or enhance the sinks

of GHGs [greenhouse gases]. Examples include using fossil fuels more ef-

ciently for industrial processes or electricity generation, switching to solar

energy or wind power, improving the insulation of buildings, and expanding

forests and other ‘sinks’ to remove greater amounts of carbon dioxide from

the atmosphere.” United Nations Framework Convention on Climate Change

[UNFCCC], Glossary of Climate Change Acronyms, http://unfccc.int/essen-

tial_background/glossary/items/3666.php (last visited Oct. 1, 2009). Adapta-

tion measures are those that are designed to adjust “natural or human systems

in response to actual or expected climatic stimuli or their eects,” so as to

“moderate[] harm or exploit[] benecial opportunities.” Id.

Copyright © 2009 Environmental Law Institute®, Washington, DC. reprinted with permission from ELR®, http://www.eli.org, 1-800-433-5120.