Arijit Sanyal* and Eshan A. Chaturvedi**
Introduction
Environmental and international investment law was a tale of two cities until the onset of climate change. However, the overlaps have visibly increased and conflicted ever since states and international organizations began to address climate change through reforms such as the Paris Agreement and the E.U.’s Green Deal. Notwithstanding the adoption of environmental reforms, implementation has not been smooth due to resistance from investors claiming to be affected by environmental reforms. This resistance has resulted in a rise of Investor-State Dispute Settlement (“ISDS”) claims against states, leading to regulatory chill (¶ 50). Among other measures to limit such claims, states have inserted environmental carve-outs (“carve-outs”) into their respective treaties, inspired by Article XX of the General Agreement on Tariff and Trade (“GATT”), which immunize certain environmental reforms from challenge.
However, GATT-inspired carve-outs have not been effective because ISDS tribunals have continued to hold states responsible for violation of treaty provisions and award compensation to investors—as in Infinito Gold v. Costa Rica and Eco Oro v. Colombia. The ineffectiveness of carve-outs may lead to concerns for countries like India, whose model bilateral investment treaties and free trade agreement investment chapters (“Investment Instruments”) contain similarly worded provisions. Further, India has been engaged in negotiating several new Investment Instruments. However, these developments come when India has undergone several environmental mishaps in the last few years alone.
Thus, the Government of India may contemplate stricter environmental reforms which could encroach upon investments in the energy sector. Against this backdrop, this article discusses why GATT-inspired carve-outs contained in Investment Instruments may no longer be viable. Further, the article proposes a model of carve-out based on Environmental Impact Assessments (“EIA”) which excludes certain claims from the scope of ISDS and makes provision for them to be referred to an alternative mechanism within the framework of the concerned Investment Instrument.
I. Lost Opportunities for GATT-Inspired Carve-Outs
GATT-inspired carve-outs have been put to test in Infinitio Gold and Eco Oro, where claims were initiated for breaches of the Fair and Equitable Treatment (“FET”) standard and other treaty commitments due to environmental measures adopted by Colombia and Costa Rica. Despite attempts by Colombia and Costa Rica, the tribunals did not preclude compensation and stated that the carve-out could not be allowed to operate in a way that overrides treaty provisions dealing with FET.
The carve-out contained under Article 2201(3) of the Canada-Colombia Free Trade Agreement (“Canada-Colombia FTA”) provides that:
“. . . [N]othing in this Agreement shall be construed to prevent a Party from adopting or enforcing any measure necessary: a) to protect human, animal or plant life…include environmental measures necessary to protect human, animal or plant life and health . . .” (emphasis added).
In Eco Oro, Colombia argued that Article 2201(3) of the Canada-Colombia FTA was meant to exclude measures adopted to address environmental concerns. Colombia therefore urged the tribunal to not grant compensation for measures covered by Article 2201(3). However, the Tribunal observed that the text of Article 2201(3) of the Canada-Colombia FTA did not preclude the payment of compensation for violation of treaty provisions (¶ 367). The Tribunal further observed that if the parties intended to exclude any liability from their actions, the provisions of the respective treaties should have been drafted to reflect this intent (¶¶ 368-369). Consequently, the Eco Oro tribunal concluded that Article 2201(3) was meant to shield environmental measures and that the investors could not ask for restitution. But the provision’s ordinary meaning did not preclude the award of compensation when environmental measures violated FET standards.
This view aligns with that expressed by the Infinitio Gold tribunal, which found that whilst Annex 1, Section III(1) of the Canada-Costa Rica Free Trade Agreement affirmed a state’s right to regulate, it could not be understood to override substantive treaty provisions. Further, the Infinitio Gold tribunal affirmed that exceptions had to be interpreted to balance investor and environmental protection. The abovementioned interpretations indicate that GATT-inspired carve-outs have not been interpreted to exclude compensation for breach of treaty provisions. On the contrary, the abovementioned awards may have created an impression that GATT-inspired carve-outs are meant to bail out states for breach of treaty provisions, whereas the provisions’ real purpose is to exclude certain actions from the scope of ISDS.
II. Have Carve-Outs Hit a Dead-End?
Eco Oro and Infinitio Gold indicate that GATT-inspired carve-outs may not be the most effective way to exclude environmental measures from being targeted by ISDS claims. Moreover, these tribunals have blurred the lines between the defense of necessity and GATT-style carve-outs which are meant to exist on different planes. While necessity as a defense is deployed after a breach has been found, a carve-out[1] aims at excluding ex ante certain actions from substantive treaty provisions. However, the aforementioned interpretation of GATT-inspired carve-outs in Infinitio Gold and Eco Oro has raised concerns about the suitability of carve-outs in new-generation treaties altogether.
Infinitio Gold and Eco Oro alone should not indicate that carve-outs as tools for safeguarding the state’s capacity to protect the environment have hit a dead-end. Rather, they serve to illustrate that GATT-inspired carve-outs such as those contained in Article 5.4 of the Model India Bilateral Investment Treaty (“India Model BIT”) and Article 6.4 of the Investment Cooperation and Facilitation Treaty between Brazil and India (“Brazil-India BIT”) may not be the best way to protect the policy space required for effective environmental reforms. Further, at the time of writing this article, India was negotiating Investment Instruments without much clarity on environment-related provisions therein. Against this backdrop, it may not be practical for the parties involved to continue with GATT-inspired carve-outs.
Considering the emphasis laid by the Infinitio Gold and Eco Oro tribunals on balancing environmental and investor rights, treaty parties should reorient their approach towards carve-outs. In this regard, they should consider carve-outs that exclude environmental measures from the scope of potential ISDS claims and allow investors to present such claims before a separate mechanism within the framework of the respective Investment Instruments.
III. India’s Investment Instruments
At the time of writing this post, India has been negotiating Investment Instruments with the European Union (“E.U.”), United Kingdom (“U.K.”), Sri Lanka, and other countries. Other Investment Instruments have recently been concluded with Brazil, Kyrgyzstan, and Japan. However, these treaties do not contain uniform and effective environmental protection provisions or carve-outs. For Instance, Article 5.4 of the India Model BIT and Article 6.4 of the Brazil-India BIT provide that non-discriminatory measures taken to protect the public interest and further objectives such as protection of environment protection shall not amount to expropriation.
Though differently worded than Article 2201(3) of the Canada-Colombia BIT, Article 5.4 of the India Model BIT and Article 6.4 of the Brazil-India BIT are inspired by Article XX of the GATT. Consequently, they leave room for arbitral tribunals to determine if a measure was non-discriminatory. For instance, Article 6.4 of Brazil-India BIT provides:
“Non-discriminatory regulatory measures by a Party or measures or awards by judicial bodies of a Party that are designated and applied to protect legitimate public interest or public purpose objectives such as public health, safety, and the environment shall not constitute expropriation under this Article” (emphasis added).
Similarly, Article 5.4, India Model BIT provides:
“. . . [N]on-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives such as public health, safety, and the environment shall not constitute expropriation” (emphasis added).
Though the two abovementioned provisions are similarly worded, Article 6.4 of the Brazil-India BIT has a broader scope and includes pronouncements of judicial bodies in the host states. This may be a cause of greater concern in India, as the higher judicial bodies have usually taken cognizance of environmental and public health-related issues. This increases the possibility of claims by investors in the event that a judicial pronouncement encroaches upon certain investments. Further, there being no express exclusion of liability, along the lines of what was expressed by the Eco Oro tribunal, such claims (if initiated) are likely to be decided in the favor of the investor.
Further, with tribunals having the power to determine if a measure is non-discriminatory, awards have the potential to restrain judicial, administrative, or legislative measures that impact public policies directed towards the environment (p. 344-45). For instance, many tribunals have adopted broad views in interpreting what actions violate non-discriminatory standards, and have even drawn parallels with different sectors to determine if non-discriminatory standards were violated.[2] In this regard, the tribunal in Occidental Exploration and Production v. Republic of Ecuador observed that while determining if a treatment was non-discriminatory, the analysis could not be limited to the circumstances in one exclusive sector. Thus, even if the government of India implements environmental reforms, it cannot be said that such reforms will be immune from the scrutiny of an ISDS tribunal, as the tribunal may end up drawing parallels between what is discriminatory in the environmental sector with discriminatory actions in other sectors have different thresholds.
Another possible concern with the carve-outs under Article 5.4 of the Model India BIT and Article 6.4 of the Brazil-India BIT is that an ISDS tribunal constituted thereunder will not necessarily be bound by domestic law.[3] Hence, measures taken in furtherance of new or existing domestic environmental legislation may be of little relevance to the tribunal. An overview of the awards discussed above and the subjective nature of investment protection norms demonstrate that their interpretation is largely left to ISDS tribunals, who end up interpreting them inconsistently.[4] In this regard, the risk of facing ISDS claims, and the possibility of having to pay the pecuniary obligations of the award, has the potential to prevent India from implementing ambitious environmental reforms and force it to join a long list of other states who have faced a similar fate.[5] Consequently, GATT-inspired carve-outs may not be the most effective way to deal with possible environmental claims at a time when India plans to roll out environmental reforms.
IV. EIA Carve-Outs
Considering the apprehensions of “regulatory chill”, Indian policymakers should consider broadly worded and strategic carve-outs which exclude certain claims from the ISDS mechanism and provide an alternative forum for a certain class of claims within the treaty framework. In this regard, India may consider adopting a broadly worded carve-out, which excludes certain claims from the scope of ISDS, and directs such claims to an alternative forum within the framework of the Investment Instruments. To promote inter-party collaboration in respect of environmental reforms, the proposed mechanism should consist of representatives nominated by state parties to the respective treaties. Such representatives shall be tasked with the examination of claims concerning environmental measures excluded from the traditional ISDS mechanism.
A possible way to achieve the abovementioned mechanism is by adopting an EIA-based carve-out. This approach balances the interests of states and investors. EIAs have primarily been used for screening investments to assess the potential impact of planned investments in the host state’s territory. However, ex-post EIAs can be deployed for assessing the ongoing impact of investments on the environment. This can aid the mechanism in its assessment of an investor’s claims based on scientific parameters. Additionally, the mechanism could allow claims from host states against certain investments, should the EIAs demonstrate adverse effects on the environment of the host state.
V. The Road Ahead
While the utility of EIA carve-outs can be determined once they are put to the test, their balanced approach makes them more likely to succeed than GATT-inspired carve-outs. First, EIA carve-outs can be brought to life by modifying existing Investment Instruments of India which have a relatively higher focus on environmental protection. For instance, the Comprehensive Economic Partnership Agreement between the Republic of India and Japan (“India-Japan CEPA”) could serve as a basis for the proposed carve-out. Article 8(1) of the India-Japan CEPA acknowledges the right of each state party to establish and regulate environmental policies domestically. Further, Article 99 provides that state parties shall not waive environmental measures for the promotion of investments.
The abovementioned provisions are broad enough to serve as a basis for further amendments to include EIA carve-outs. In this regard, the stakeholders may consider including the requirement for furnishing EIAs by investors. One of the possible ways to implement this can be to impose requirements mirroring environmental obligations contained under Articles 8(1) and 99 of the India-Japan CEPA. Consequentially, the envisioned provision would require state parties to consider EIAs by investors, to assess the viability of certain investments within their territory. Alternatively, EIAs could be mandated under the local environmental protection legislations, which will have to be complied with at the time of investing, and throughout the duration of the investment.
Further, stakeholders should deliberate on the structure of the proposed alternative forum. To ensure fairness and transparency, they may consider having representatives of all the state parties as adjudicators of the proposed forum. Eventually, when a claim captured by the carveout arises, the Investment Instrument shall require the aggrieved party to refer the claim to the proposed forum. Considering the nature of environmental reforms, it may also be of interest to the Government of India to negotiate a two-way mechanism with regard to the proposed forum. Given the involvement of EIAs, the Investment Instrument can provide for host states to refer infringement proceedings against investors before the proposed forum.
The proposed provision would impose greater environmental obligations on investors by requiring them to furnish EIAs concerning their investments. Additionally, should investors have concerns about certain environmental measures, their claims will be referred to the proposed forum. Further, the provision should allow host states to bring claims before the proposed forum based on the EIAs submitted by the investors themselves. Thus, apart from furthering the agenda of climate change, the EIA carve-outs will serve as an additional layer to further intra-governmental cooperation in the field of climate change, a step recently suggested under Recommendation 4 of the Draft Legislative Guide on Investment Dispute Prevention and Mitigation.[6]
Conclusion
Eco Oro and Infinitio Gold have demonstrated why GATT-inspired carve-outs may not be the ideal way to shield India from possible ISDS claims based on its environmental policies. Considering the recent environmental mishaps in India, it is likely that stricter environmental reforms are on the horizon. However, considering that India is negotiating several Investment Instruments at the same time, it may be the right opportunity to put such a provision to test and spearhead the ISDS reform movement in light of climate change.
The proposed carve-out reflects the desired balance required to address environmental issues, as it allows the involvement of all stakeholders under an Investment Instrument (states and investors) equally in the adjudicatory process. The involvement of state representatives in the proposed forum may raise concerns regarding the fairness of the entire process. However, this proposal must be understood in light of climate change—which requires states to meet various obligations to safeguard climate concerns. The success of the proposed mechanism can only be known if becomes a reality. However, given the balanced approach of the carve-outs, this approach has the potential to set the right tone for environmental reforms within ISDS in the global south and inspire similar reforms at a time when some countries have entered a state of regulatory chill.