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International Investment Agreements

Introduction

International investment agreements (IIAs) generally take two forms: chapters in Free Trade Agreements (FTAs), such as Chapter 11 of the North American Free Trade Agreement (NAFTA), and Bilateral Investment Treaties (BITs). There are thousands of BITs in existence. Both types of treaty set out State obligations regarding foreign investors. When States violate their obligations regarding foreign investors, foreign investors can seek compensation through investor-State arbitration.

In an OECD working paper, Gordon and Pohl have surveyed environmental references in FTAs with investment chapters and in BITs. They found that references to environmental concerns are common in FTAs with investment chapters (100 percent of 30 FTAs surveyed) while they are rare in BITs (6.5 percent of 1,593 BITs surveyed).[1] These references are either general references to environmental concerns or specific references to sanitary and phytosanitary objectives and conservation objectives.[2] The latter are often expressed as human, animal, and plant life or health and conservation ofliving or non-living exhaustible natural resources,[3] using the language of paragraphs (b) and (g) of GATT Article XX (see Chapter 3). Gordon and Pohl suggest that this use of specific references may prove less versatile when it comes to adapting this language to regulation favoring biodiversity or attenuating climate change, but acknowledge that analysis on the effect of including any kind of environmental language in international investment agreements has yet to be done.[3]

The Gordon and Pohl study raises some important legal issues, including:

(1) whether the inclusion of references to environmental concerns in international investment agreements facilitates reconciling potential conflicts between foreign investment protection and environmental protection, and (2) which approach provides treaty parties with the most appropriate balance between predictability and flexibility with respect to the relationship between environmental and investment norms. We have argued in Chapter 3 that WTO jurisprudence indicates that the language of GATT Article XX is sufficiently flexible to accommodate a variety of climate change regulations. In this chapter, we will argue that the language of international investment agreements is sufficiently flexible to accommodate climate change regulation as well. However, many issues remain unresolved in both areas of international economic law.

This chapter will analyze the extent to which States may be obliged to pay compensation to foreign investors for climate change regulation. Our analysis will be based on specific provisions in NAFTA Chapter 11 and other IIAs and the relevant jurisprudence from international investment tribunals. While international investment tribunals do not create precedent that is binding upon other tribunals, this jurisprudence does influence other tribunals. However, the approach of different international investment arbitrators to similar issues can vary considerably, which creates a degree of uncertainty regarding the outcome of international investment litigation.

Governments must strike a balance between regulation that discourages foreign investment and foreign investment protection that discourages regulation. If countries implement international agreements or domestic climate change policies in a way that violates the rights of foreign investors, they may have to pay compensation to the foreign investors. This risk can create disincentives to regulation, particularly in countries where the responsible government officials are unsure of the scope of their obligations to foreign investors. It is thus very important to understand the scope of these obligations when designing and implementing climate change regulation.

At the same time, foreign investment is an important source of knowledge and technology diffusion, together with trade in goods and services.[5] Thus, it is important to create adequate incentives for foreign investors to transfer best practices and technologies that can address climate change adaptation and mitigation. This means that governments must provide adequate protection to foreign investors, through IIAs and intellectual property rights. If these rights of foreign investors are watered down, in an effort to enhance access to technology, the effect could be to create disincentives to transfer technology and best practices through foreign investment (although intellectual property policies do need to vary with the technology, as we shall see in Chapter 5). In addition, IIAs can lower regulatory and political risks for foreign investors, and thus lower the cost of and create incentives for foreign investment in clean energy or in carbon mitigation technologies.[6]

Traditionally, debates regarding climate change and financial and technology flows have been framed as North-South. However, this has changed, with the emergence of new low-carbon technology companies in developing countries, such as China and India, which could diffuse clean technology nationally and internationally. In addition, the financial crisis has limited the financial capacity of major developed countries, notably those in the European Union, the United States, and Japan. Moreover, investment banks can help to mobilize capital for low-carbon technology, making their own investments and structuring investments for classes of investors with different risk-reward profiles and return expectations. This paradigm shift in financial and technology flows should inform debates regarding both.7

The legal analysis in this chapter begins with an examination of the scope of IIAs and their relationship to WTO law. We will consider the extent to which WTO jurisprudence can be applied to interpret IIAs. This analysis is important in order to determine the extent of these obligations and how to design environmental regulations to avoid inconsistency with obligations in both international trade agreements and international investment agreements.

IIAs impose three principal types of obligations on governments with respect to their treatment of foreign investors: (1) nondiscrimination between domestic and foreign investors, and between foreign investors from different countries; (2) a minimum standard of fair and equitable treatment for foreign investors; and (3) an obligation to pay compensation for expropriation. However, not all government regulations are subject to these obligations. This chapter will consider how environmental measures can either escape the application of the foregoing obligations or be justified under exceptions. First, we analyze the extent to which environmental regulation that affects foreign investors can be considered as measures that “relate to” foreign investment and foreign investors. This analysis determines whether the obligations in the IIA apply in a specific case. If they do not, the host government will not have to compensate foreign investors for economic loss caused by environmental regulation. This analysis is important to ensure that environmental regulations are designed so as to avoid triggering obligations to compensate foreign investors.8 Next, this chapter will consider how the limited incorporation of

Carbon Economy (United Nations, Geneva 2010) (accessed November 2, 2012).

  • 7 Abyd Karmali, “Observations from the Carbon Emission Markets: Implications for Carbon Finance” in Cary Krosinsky and Nick Robins (eds.), Sustainable Investing: The Art of Long-Term Performance (Earthscan Publications, London 2008) 59, 71.
  • 8 Boute, “Combatting Climate Change”; Marie-Claire Cordonier Segger, Markus W. Gehring, and Andrew Newcombe (eds.), Sustainable Development in World Investment Law (Kluwer Law International, The Hague 2010); Marie-Claire Cordonier Segger and Markus Gehring, “Trade and Investment Implication of Carbon Trading for Sustainable Development”, The Center for International Sustainable Development Law and The International Development Law Organization, 2010 (accessed April 9, 2013); Lise Johnson, “International Investment Agreements and Climate Change: The Potential for Investor—State Conflicts and Possible Strategies for Minimizing It” (2009) 39 Environmental Law Reporter 11147; Stephan W. Schill, “Do Investment Treaties Chill Unilateral State Regulation to Mitigate Climate Change?” (2007) 24 Journal of International Arbitration 469; Jacob Werksman, Kevin A. Baumert, and Navroz K. Dubash, Will

environmental exceptions into IIAs affects their interpretation and application in cases involving environmental regulation. NAFTA Articles 1106 and 1114 are the relevant NAFTA provisions in this regard. This analysis will also inform the design of climate change measures.

Next, we will analyze the nondiscrimination obligations in light of the relevant jurisprudence and with climate change regulation in mind. We then consider whether the interpretation and application of the minimum standard of treatment for foreign investors can or should vary in cases involving environmental regulation. This standard comes from public international law. To what extent does this area of public international law need to be interpreted to avoid conflicts with international legal obligations related to climate change? NAFTA Article 1105 is the relevant NAFTA provision in this regard. This analysis will also inform the design of environmental measures to address climate change. Finally, we will analyze the obligations regarding compensation for expropriation and measures that are tantamount to expropriation. This analysis will also inform the design of environmental measures to address climate change.

  • [1] Kathryn Gordon and Joachim Pohl, “Environmental Concerns in International InvestmentAgreements: A Survey” (2011) OECD Working Papers on International Investment, No. 2011/1,OECD Investment Division (accessed November 24, 2012).
  • [2] Gordon and Pohl, “Environmental Concerns in International Investment Agreements” 25-6.
  • [3] Gordon and Pohl, “Environmental Concerns in International Investment Agreements” 27.
  • [4] Gordon and Pohl, “Environmental Concerns in International Investment Agreements” 27.
  • [5] Bernard Hoekman and Beata Smarzynska Javorcik (eds.), Global Integration and TechnologyTransfer (Palgrave Macmillan and the World Bank, Washington 2006); Keith E. Maskus and JeromeH. Reichman (eds), International Public Goods and Transfer of Technology under a Globalized Intellec-tualProperty Regime (Cambridge University Press, Cambridge 2005); Gill Wilkins, Technology Transferfor Renewable Energy (The Royal Institute of International Affairs and Earthscan Publications, Oxford2002); Stephen O. Andersen, K. Madhava Sarma, and Kristen N. Taddonio, Technology Transfer forthe Ozone Layer: Lessons for Climate Change (Global Environment Facility and Earthscan Publications,Oxford 2007).
  • [6] Anatole Boute, “Combating Climate Change through Investment Arbitration” (2012) 35 Ford-ham International Law Journal 613; UNCTAD, World Investment Report 2010: Investing in a Low-
 
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