Risky Business? The Energy Charter Treaty, Renewable Energy, and Investor-State Disputes.

Author:Tienhaara, Kyla

GLOBAL ENERGY GOVERNANCE HAS RECEIVED GROWING ATTENTION IN INTERNAtional affairs, and there is now widespread recognition among scholars and policymakers that the existing institutional architecture is inadequate. International relations scholars have pointed to institutional failures such as the lack of coordination between existing international energy organizations, while those in the public policy tradition have pointed to market failures such as imperfect competition and environmental externalities in global energy markets. (1) Both have argued for global energy governance reform, including in the pages of this journal where scholars have highlighted various governance challenges such as promoting renewable energy in developing countries and reforming the International Energy Agency (IEA). (2) Policymakers have responded and a spate of recent announcements has put the issue on the international agenda. For example, at the 2014 Group of 20 (G-20) summit, world leaders for the first time discussed reform of the international energy architecture, including the IEA. (3)

One of the main challenges for global energy governance is how to achieve a dramatic transformation of our energy system. The IEA has long argued that current global trends in energy markets "are patently unsustainable" and that "what is needed is nothing short of an energy revolution." (4) In the context of climate change and ever more dire predictions from scientists, (5) an energy revolution will not be achieved without transition to clean energy sources that can drastically curtail the rising greenhouse gas emissions from the energy sector. While the plunging cost of wind and solar power has meant that renewables now account for more than 20 percent of the global electricity supply, the IEA projects that an additional US$44 trillion in investment is required to decarbonize the energy system. (6)

However, in the literature on global energy governance, little attention has been given to the capacity of the existing institutional architecture to promote investment in clean energy technologies. In particular, there has been little discussion of institutions that protect investors in the clean energy sector. Accordingly, in this article we consider the potential of the Energy Charter Treaty (ECT), the most developed trade and investment treaty in the global energy architecture, and its investor-state dispute settlement (ISDS) mechanism, to do just that--that is, to expedite the transition to clean energy sources by facilitating the flow of investment into the renewable energy sector.

ISDS allows multinational corporations to sue states in an international forum. Disputes are presided over by panels of three arbitrators--one chosen by the state, one chosen by the investor, and the third mutually agreed on or appointed by an arbitral institution such as the International Centre for the Settlement of Investment Disputes (ICSID) or International Chamber of Commerce (ICC). While originally devised to deal with issues such as government seizure of property in the context of the postcolonial period, ISDS cases now frequently revolve around the impacts of public policies on investments.

There is considerable concern that incumbent energy producers in the fossil fuel industries will use ISDS provisions to try to stall action on climate change. (7) ISDS cases have arisen in response to: a moratorium on oil and gas operations along the Italian coastline; a ban by the Canadian province of Quebec on hydraulic fracturing ("tracking"); and the Barack Obama administration's rejection of a proposal by TransCanada Corporation to build the Keystone XL pipeline to transport oil produced from Alberta's tar sands to various refineries in the United States. The case in Quebec had not concluded at the time of this writing, and the Italian case was only in the very early stages. TransCanada withdrew its claim against the United States following President Donald Trump's executive order on 24 January 2017, allowing construction of the Keystone XL pipeline to move ahead.

The mere threat of such cases may deter governments from taking action on climate change, and this is an area of inquiry worth further investigation. (8) However, in this article we address the reverse proposition--that ISDS might aid the transition to renewable energy and, thereby, the mitigation of climate change. We do so in response to a growing number of commentators who are making this argument, the most prominent being David Rivkin, president of the International Bar Association. In a side event at the Paris climate conference in 2015, Rivkin devoted the majority of his speech to a vigorous defense of ISDS and argued that "it is vital that a neutral, effective mechanism exist for resolving disputes between investors and states, particularly in order to incentivize foreign investment in renewable energy." (9) International arbitrator Edna Sussman has also made this argument with specific reference to the ECT. (10)

Drawing on scholarship in global governance, law, and economics and an analysis of recent investor claims in ISDS, we argue that there is currently no evidence that the investment provisions of the ECT facilitate investment into clean energy technologies. The analysis we present suggests that the three key (interrelated) assumptions that underpin the arguments of proponents of ISDS are misplaced, in particular that: (1) political risk is a significant impediment to renewable energy investment; (2) ISDS is an effective countermeasure to political risk; and (3) if states agree to ISDS under the ECT, it will increase flows of foreign direct investment (FDI) in renewable energy. While more research is warranted, the burden of proof lies with the ECT's proponents. In the absence of evidence that the ECT's investment regime will contribute to improved global energy governance, states should be cautious about its further expansion.

This article is organized as follows. First, we consider the existing international energy architecture and the transformations taking place in global energy markets. Next, we introduce the ECT and its ISDS provisions. Then, we provide a critical examination of the three key assumptions that support the use of ISDS. We conclude with a discussion of the current uncertainty around the future of ISDS in Europe and beyond, and consideration of some of the other mechanisms that states are exploring to reduce risk for renewable energy investors.

Governing Global Energy

At the G-20 summit in 2014, world leaders for the first time acknowledged that the "international energy architecture needs to reflect better the changing realities of the world energy landscape." (11) The changing reality reflects two trends. First, the rise of Brazil, Russia, India, and China (BRIC) is transforming global energy markets. China has now overtaken the United States as the world's largest energy consumer and India will be the principal driver of energy consumption within Asia from 2020 on. By the mid-2030s, it is expected that Brazil will be the world's sixth-largest oil producer and China will become the largest oil-consuming country in the world overtaking the United States. (12) Second, rising energy consumption in the BRIC countries is driving an increase in greenhouse gas emissions including from the energy sector, which is the source of two-thirds of the world's greenhouse gas emissions. (13) The IEA expects that even with policy changes and market developments that drastically reduce fossil fuel consumption, the world is "on a path consistent with a long-term global average temperature increase of 3.6 [degrees]C." (14) As the UN Intergovernmental Panel on Climate Change has made clear, the results of such a trajectory would be catastrophic, rendering parts of the globe uninhabitable. (15)

In this context, governing global energy is more important than ever. Yet it is widely agreed that the global system has not adapted to the changing reality wrought by the rise of the BRICs and climate change. (16) For example, today the majority of global energy consumption takes place in countries that are not members of the IEA, the principal international energy organization. Indeed, not one member of the BRICs is a member of the IEA despite the fact that China is the world's largest energy consumer. (17) It is perhaps an understatement to conclude, as the previous executive director of the IEA, Nobuo Tanaka, did in 2010, that the IEA's "relevance is under question." (18) Of course, the IEA represents only part of the patchwork of organizations that govern global energy. There is no shortage of organizations and most scholars would agree that there are "too many." (19) However, it is not just the number of organizations that is the problem, or that there is little cooperation between them, though this is improving. Rather, it is that the existing organizations tend to preserve the divide between developed and developing countries, as epitomized by the IEA and its perceived adversarial relationship with the Organization of Petroleum Exporting Countries (OPEC). Further, many of these organizations remain overly focused on oil and gas markets and not the challenges posed by rising greenhouse gas emissions in the energy sector. The creation of the International Renewable Energy Agency (IRENA) in 2009, led by the German government, is the latest attempt to rectify the global governance gap generated by an institutional architecture unduly focused on the energy challenges of the past century, and not this one. (20)

The Energy Charter Treaty

Since 2010, the Energy Charter has been undergoing a process of reform and modernization in an attempt to carve out a central governing role in the new energy landscape. The Energy Charter encompasses the European Energy Charter of 1991, the ECT of 1994, and the International Energy Charter (IEC) of 2015. The Energy Charter was originally designed to...

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