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International Investment and Climate Change Measures

A variety of climate change measures may be subject to IIAs, provided that they relate to foreign investments or foreign investors and that the substance or procedural aspects of the measures violate the obligations owed to foreign investors according to the terms of the specific IIA. These measures can be for mitigation (carbon taxes, emissions trading schemes, border tax adjustments, carbon labels, standards, clean energy subsidies, and other infrastructure projects) or for adaptation (zoning bylaws and infrastructure projects such as flood barriers).

The majority of IIAs do not contain references to environmental concerns. This highlights the importance of determining the extent to which environmental regulation is subject to the disciplines contained in these agreements. NAFTA Article 1101 establishes that Chapter 11 only applies to measures “relating to” foreign “investors” and “investments.” This in turn raised three issues. What categories of climate change “measures” might be the subject of claims under IIAs? What types of “investments” are covered by this term? To what extent can environmental regulation that affects foreign investors be considered a measure

“relating to” foreign investments or foreign investors? This analysis determines whether the obligations in an 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 climate change regulation. This analysis is important to ensure that climate change regulations are designed and applied so as to avoid triggering obligations to compensate foreign investors.

Changes to land-use zoning have served as a basis for an investment claim. When rezoning affects an international investor, it may provide the basis for a claim of compensation, depending on the facts of each case. For example, in the Metalclad case, the area in which a hazardous waste disposal facility was located was changed to an ecological zone, which in turn prevented the hazardous waste plant from operating. The tribunal concluded that this rezoning constituted a measure “tantamount to expropriation” under NAFTA Article 1110 and ordered Mexico to pay compensation. Since the Mexican government had assured Metalclad that it had complied with all the relevant environmental laws prior to making its investment, Mexico could not rely on the exception in Article 1114, which permits host States to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns. While the state government made the change in zoning, the federal government was liable under NAFTA. Hurricane Sandy prompted proposed changes to zoning bylaws in New York, to take into account the expanded flood zone. This type of rezoning is likely to become more frequent as climate change causes more flooding. While it is not possible to anticipate all of the factors that might engender a claim for compensation under IIAs, there is a risk that such claims will occur.

Infrastructure projects—whether related to mitigation or adaptation—may also be the subject offoreign investor claims. The nature ofthe claims, and their chances of success, will depend on the facts of each case. There are three general categories of climate change mitigation measures that might be subject to IIAs: (1) subsidies that induce investment in clean energy projects or carbon mitigation projects;

(2) carbon taxes; and (3) regulations that set specific standards or prohibit specific activities. These categories are not mutually exclusive. For example, there are cases proceeding under NAFTA Chapter 11 that involve clean energy infrastructure projects in Ontario, which combine elements of infrastructure, subsidies, and standards.

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