Originally from the American Review of International Arbitration (ARIA)

ABSTRACT

The emergence of international investment agreements (“IIAs”) has been featured as a breakthrough and a game changer in fostering the protection of foreign direct investment (“FDI”). Iconic multilateral and bilateral treaties such as ICSID, the New York Convention, the ECT, and a network of thousands of BITs have created actionable grounds that have enabled foreign investors to hold sovereign states’ conduct and treatment of foreign investments in violation of IIAs accountable before international investment adjudication fora.

Further to determining that fossil fuels’ burning is the main source of CO2 emissions, being principally responsible for the global warming phenomenon, the transition to sustainable, low-carbon, or even zero-carbon energy has surfaced as a crucial need and imminent objective.

A number of non-investment international instruments such as the Kyoto Protocol and the Paris Climate Agreement have placed obligations upon signatory states to take measures encouraging energy efficiency, achieving a swift energy transition, and reducing carbon emission globally. Within this perspective, the sustainable development goals, set under the auspices of the United Nations, and largely adhered to by a majority of the world states, include the goal to ensure access to affordable, reliable, sustainable and modern energy for all (SDG 7) and the need to take urgent action to combat climate change and its impacts (SDG 13).

The targeted energy transition has placed FDI protection at the heart of conflicting currents. On the one hand, host states’ energy transition-related policies, ending or phasing out fossil-centered investments, would give rise to treaty claims over violation of FDI protection standards under relevant IIAs. This very likelihood of being held liable over pro-energy transition policies would deter host states from rolling out policies envisioned to comply with their international obligations under non-investment international agreements (e.g., furtherance of sustainable development, combating climate change). On the other hand, attracting FDI is crucial to provide the requisite funding for investments in sustainable energy and clean energy technology. The attraction of FDI is a corollary to host states’ ability to assure foreign investors that they will comply with IIAs-based FDI protection standards. Furthermore, while energy transition-related disputes may well be expected to be brought by fossil-centered investments adversely affected by policies furthering cutting carbon emissions, the involvement of FDI in carbon emission reduction projects may well be an additional source of treaty claims invoked by foreign investors against host states, in the event of the latter violation of the IIA standards of treatment. 

This article sheds light on the role of FDI in the energy sector as a contributor to global warming as well as a climate change solution provider. The article advocates for a balance between ensuring FDI protection and the need for a swift and efficient energy transition at the adjudication of investment treaty claims. Calls to overhaul the international investment regime substantively and structurally are gaining popularity. Suggestions in this regard have been as various as revising the IIAs in force, creating an appellate instance, establishing an international permanent investment court and so forth. While this article does not contest the identified need for reform, it attempts rather to demonstrate that, under existing international investment law and adjudicatory fora, ISDS adjudicators are equipped with a panoply of legal devices to strike the advocated balance.

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It is the contention of this article that there is a panoply of legal devices available to international adjudicators to strike a balance between ensuring smooth energy transition and preserving FDI protection. Affirming the availability of these legal devices does not mean that they are presently put to use in a systematic and consistent manner when disputes triggered by energy transition policies are resolved. This article presents an analytical and empirical study of the current state of play, exploring the obstacles and pathways facing international adjudicators in urging the aimed energy transition.  The first section addresses the relationship linking FDI to energy transition. The second section lays down the obstacles facing the desired energy transition. Last, the third section demonstrates that there are pathways for international adjudicators to systematically and consistently further the achievement of the energy transition.