Ariq Hatibie*
Introduction
The international system of investor-state dispute settlement (“ISDS”) is increasingly scrutinized for the challenges it poses to climate change mitigation efforts. Policies such as carbon taxes, fossil fuel bans, and nationalization are vulnerable to expropriation claims by investors, raising the costs and risks of the energy transition. I evaluate a proposed solution to make ISDS greener: the climate carveout. This treaty provision preserves regulatory capacity by stating that certain investments are not protected or that states can lawfully take specific measures based on the purpose of protecting the environment.
I argue that the literature overestimates the benefits of this reform. Even if states can include such carveouts in their international investment agreements (“IIAs”), investors possess procedural and substantive doctrinal tools to circumvent them. First, tribunals have used interpretive doctrines to hold that, while the measure is not per se illegal, states must still compensate the investor. Second, investors can exploit most-favored-nation (“MFN”) clauses to import more favorable treatment from other treaties to diminish the carveout’s effect. Finally, investors can forum shop to leverage other more favorable IIAs. The doctrinal and systemic features of ISDS combine to stymie the benefits of climate carveouts.
I. Introducing Climate Carveouts: Two Types
Climate carveouts come in two forms. First, they could exclude investments (e.g., in fossil fuels) from protection. Past examples in tobacco control include provisions that say, “[n]o claim may be brought under [this section] in respect of a tobacco control measure of a Party.” Hence, an investment-based carveout excises the investments from a tribunal’s jurisdiction ratione materiae. In contrast, a purpose-based carveout preserves a state’s right to take certain measures that protect the environment, enabling a merits-based defense. Such a provision could affirm the “right to regulate … to achieve legitimate policy objectives, such as the protection of … the environment …”
Climate carveouts have seen some success. Al-Tamimi v. Oman concerned revoking a mining company’s license for failing to get operational permits and other environmental violations. The U.S.-Oman Free Trade Agreement contained a clause the tribunal interpreted to “reserve a significant margin of discretion to themselves in the application and enforcement of their respective environmental laws.” Not only did the provision articulate the “right” to enforce environmental laws, but Article 17.2.1(a) provided that “neither party shall fail to enforce its environmental laws” (emphasis added), indicating a duty to protect the environment despite the agreement’s focus on free trade. The tribunal used this provision to interpret whether Oman had violated the treaty obligation to accord investors a minimum standard of treatment. Using Article 17.2.1 to inform its reading, the tribunal acknowledged that it must be “guided by the forceful defence of environmental regulation and protection provided in the express language of the treaty.” Al Tamimi demonstrates that inserting environmental clauses in IIAs can empower greener regulations.
II. Critiquing Climate Carveouts: An Optimistic Over-Estimation
Despite the above success, three features of the ISDS system mitigate the impact of climate carveouts: [A] interpretive clear statement rules that enshrine a duty to compensate, [B] MFN provisions that allow investors to import stronger investor protection provisions from other investment treaties, and [C] leveraging the flexibility of the global investment system to forum shop.
A. Circumventing the Carveout through Clear Statement Rules
One challenge to carveouts is articulating clear statement rules, as exemplified by Eco Oro v. Colombia. There, Colombia deprived an investor’s mining rights by declaring the relevant area an environmental zone. The Canada-Colombia IIA provided a carveout saying, “nothing in this Agreement shall be construed to prevent a Party from adopting or enforcing … environmental measures necessary to protect human, animal or plant life and health,” and “the conservation of living or non-living exhaustible natural resources.” Although both Colombia and Canada confirmed that this carveout intended to protect environmental measures, and although the language stated that “nothing” would prevent a party from regulating to protect the environment, the tribunal nevertheless stated that “there is no provision in Article 2201(3) permitting such action to be taken without the payment of compensation.” (emphases added). The investors prevailed because the treaty failed to explicitly deny the investor compensation: states can regulate to protect the environment—they just have to pay for it. In other words, the tribunal elucidated a clear statement rule, a presumption of the duty to compensate. As commentators have noted, tribunals “are well capable of creating interpretive deadlocks by convenient or erroneous readings of relevant provisions.” The tribunal’s clear statement rule imposes negotiating costs on states. Indeed, the judgment itself will likely place similarly worded agreements in investor crosshairs, and given that such language is common in, e.g., all of Canada’s newer trade agreements, one wonders whether negotiating those carveouts was worth the trouble.
Given that international investment law, and international law generally, does not contain rules of binding precedent, investors can try their luck even if precedents like Al-Tamimi v. Oman exist. Investors will likely take the risk because of the gargantuan monetary awards available. In Eco Oro, the investors sought a USD $350 million judgment, although the tribunal postponed actual quantification for a later date. Even if investor success is unlikely, the enormous potential reward renders the expected payoff worth it. This risk of arbitration continues to deter states from enacting environmental protections.
B. Using MFN Provisions to Import Looser Environmental Protections
Eco Oro demonstrates a circumvention method internal to the IIA. Another move is to use an MFN clause, which enables the investor to import more favorable treatment from other treaties into the one currently being applied (known as the “basic” treaty). A clause could read, “[n]either Contracting State shall subject investments in its territory … to treatment less favourable than it accords … to investments of investors of any third State.” MFN clauses are justified on the basis that investors from one country should not receive worse treatment than those of other countries. Using an MFN clause involves identifying another treaty with weaker environmental provisions and importing them to the present dispute. So far, investors have failed to use MFN to expand jurisdiction over the types of protected investments within a treaty. Hence, investment-based carveouts that remove fossil fuels from investment protection will likely not be affected. Rather, MFN clauses apply to the substantive treatment accorded to investments, which may affect carveouts that preserve the right to impose environmental regulations.
Indeed, investors have invoked MFN clauses to bypass carveouts in other subject areas. In CMS v. Argentina, the investors sought to avoid a clause providing that “[t]his Treaty shall not preclude the application … of measures necessary for … the protection of its own essential security interests,” under Article IX of the Treaty. They argued that because other treaties do not contain a similar “essential security interests” clause, the tribunal should treat the immediate Treaty as also lacking a clause. The tribunal rejected this reasoning, but only because an absence of carveouts in other treaties does not trigger the applicability of the MFN. If a similar clause does exist but with better treatment, the tribunal was open to considering its importation.
Consider a carveout in Treaty A, modeled on CETA, that preserves “right to regulate … to achieve legitimate policy objectives, such as the protection of public health, safety, the environment or public morals . . . ,” including a clarification specifically protecting the withdrawal of subsidies. Treaty B contains a similar “legitimate policy objectives” provision for public health and morals but without the environment. An investor could argue that both clauses deal with the same question: what counts as a “legitimate policy objective”? The absence of “environment” in Treaty B’s clause would suggest that for some nationals, the environment is not a legitimate objective, but for the other nationals affected by Treaty A, the environment is. Arguably, investors in similar circumstances are treated differently simply by virtue of a different nationality, potentially violating the MFN principle.
MFN clauses can account for more precise variations in protection: another treaty may specify that some environmental measures (e.g., withdrawal of subsidies) are protected but not others (e.g., expropriation of fuel investments). Another treaty might emphasize the duty to compensate. When negotiating carveouts, states may have to re-negotiate MFN clauses or pay attention to their entire inventory of treaties to minimize the importation of investment-protective clauses.
C. Finding Favorable Forums
Another investor strategy is exploiting the ISDS regime’s slipperiness to shop for a forum with more favorable protections. The tobacco carveouts provide a salient example. During negotiations of multilateral agreements, civil society organizations pressed governments to include carveouts for tobacco control, such as in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. However, states still belonged to other bilateral agreements, all of which could be used to forum shop. For example, while an Australian investor in Vietnam could not exploit the multilateral treaty to take Vietnam to arbitration, a bilateral treaty could still give them a cause of action. Pendas and Mathison observe that tobacco investors could use forty other investment agreements between the states parties to keep the arbitration door open.
In addition, investors can use an IIA with another country as long as they fulfill the personal jurisdiction requirements. If the corporation has a subsidiary or co-shareholder with a different nationality, it can launch a parallel claim to get another shot at the goal. If it cannot find another IIA, it can even restructure to find a country with more favorable investment protections, such as when the investor in Pac Rim v. El Salvador changed their seat of incorporation from the Cayman Islands to the United States to avail themselves of the Central American Free Trade Agreement. In practice, the “abuse of process” doctrine limits egregious instances of this forum shopping, particularly when the company restructures immediately before a foreseeable regulatory change. However, the strategic pathways for movement make corporations, especially transnational ones, difficult to tame. Thus, investors can forum shop in three ways: moving from the multilateral to the bilateral (or vice versa), across treaties, and across jurisdictions. The suppleness of the ISDS regime mitigates the impact of climate carveouts.
Conclusion
Despite the attraction of bolstering the treaty language to defend against arbitration claims, the above features diminish the effect of climate carveouts. First, investors can persuade the tribunal to interpret the treaty text through clear statement rules, as Eco Oro v. Colombia demonstrates. Second, investors can exploit MFN provisions to import more favorable rules from other treaties. Finally, investors can shop for the ideal forum by moving from the multilateral to the bilateral plane or restructuring to take advantage of other IIAs. Even if states can renegotiate treaty provisions to buttress against doctrinal moves, systematic features of the ISDS system will continue to grant protection. If investors can slip and slide through that system, the effect of carveouts, or the cost of making them effective, is not so rosy.
*Ariq Hatibie is a 3L at Harvard Law School broadly interested in public international law, including investment law and human rights. He holds an M.Sc. in Global Governance and Diplomacy from the University of Oxford and a B.A. in Global Affairs from Yale University.