Rethinking the ‘Full Reparation’ standard in energy investment arbitration: how to take climate change into account

Yawen Zheng, Postdoctoral Fellow, Centre for International Law, National University of Singapore, 469A Bukit Timah Road, Tower Block, #09-01 259770, Singapore. Tel: +65 6516 4101; Fax: +65 6469 2312; Email: [email protected]; Associate Member, Centre for Commercial Law, University of Aberdeen, King’s College, Aberdeen, Aberdeen AB24 3FX, United Kingdom. Tel: +44 1224272000; Email: [email protected]. The author thanks sincerely to the anonymous reviewers of this paper for their valuable suggestions. A special thanks to Dr Charalampos Giannakopoulos and Mr Joel Ong for their helpful comments. This paper has been presented at the Centre for International Law of the National University of Singapore, the University of Sydney, the University of Copenhagen, and the National and Kapodistrian University of Athens. The author is grateful to Prof. Stacie Strong, Dr Can Ekan, Dr Leonid Shmatenko, and other participants of the presentations for their insightful comments. The author also thanks Prof. Anatole Boute for inspiring the research idea behind this paper.

Author Notes

Abstract

One crucial measure to curb global warming is the phasing out of fossil fuel production, but doing so can deprive the value of foreign investments in fossil fuels and amount to breaches of investment treaties. Normally, investment treaties are silent about the standards of compensation when treaty violations are established. Tribunals mostly refer to the ‘full reparation’ standard in general international law, potentially resulting in high amounts of compensation that place a significant burden on States implementing climate actions. This paper argues that the amount of compensation under the ‘full reparation’ standard can be reduced on four grounds: (i) depressed energy price in the peak demand era, (ii) unviability of fossil fuel projects, (iii) international environmental obligations, and (iv) international environmental principles. An interpretation document entered into by States can clarify the application of the ‘full reparation’ standard and ensure that these factors are taken into account in quantifying compensation.

Introduction

An immediate and steep decline of fossil fuel production and usage is necessary to limit global warming to meet the goals of the Paris Agreement.¹ To mitigate climate change and reduce anthropogenic greenhouse gases, countries have begun implementing fossil fuel phase-out measures,² including direct restrictions or bans on the industry, and removals of incentives, such as subsidies and tax preferences.³ These measures can deprive fossil fuel investments of their value and thus trigger investment claims, potentially resulting in significant amounts of compensation payable to investors. For instance, Italy’s ban on oil and gas exploration and production within 12 miles of the coastline was found in violation of the Energy Charter Treaty (ECT) in the Rockhopper case, which held that Italy must pay over 250 million euros in compensation far in excess of the initial investment made by Rockhopper which only amounted to 29.2 million euros.⁴ Moreover, the USA’s cancellation of Keystone pipeline project has triggered two claims totalling over USD 16 billion.⁵ One claim was dismissed on jurisdictional grounds, while the other is still pending.⁶

Against this backdrop, some States have acted to reform investment treaties to ensure sufficient regulatory space for the implementation of public policy measures and to reduce their exposure to investment claims or risks of violating investment protection obligations. A typical example is the ECT modernization process.⁷ However, the process of reforming each treaty tends to be lengthy, and there are thousands of existing, unreformed investment treaties. Given the urgent need for States to mitigate climate change, this approach is unlikely to meet climate change mitigation goals on time. Further, it is practically impossible to eliminate all legal risks faced by States from existing investment treaties. Even where States have chosen to take the most drastic mitigation action by leaving such treaties entirely, the widely adopted ‘survival clause’ that allows investors to bring claims after the termination of the treaties can undermine the effectiveness of this approach to climate change mitigation.⁸ Accordingly, it is essential to also take steps to address the standards of compensation in cases where States adopting fossil fuel phase-out measures are found in breach of investment treaties.

This paper focuses solely on the issue of compensation in cases where fossil fuel phase-out measures are found to be in violation of investment treaties, without discussing whether such measures themselves constitute violations of these treaties. The next part Standard of compensation in energy investment arbitration and its implications reviews the current standard of compensation and its implications in energy investment arbitration cases. Then the section Grounds to reduce amount of compensation awarded in investment arbitration triggered by fossil fuel phase-out measures proposes grounds to reduce the amount of compensation awarded to investors: depressed energy prices in the peak demand era, the unviability of fossil fuel projects, and compliance with international environmental obligations and principles. The following section on Possible interpretation document regarding the meaning of ‘full reparation’ standard in investment arbitration triggered by fossil fuel phase-out policies suggests an interpretation note that can standardize tribunals’ interpretation and application of the compensation standard. Finally, the paper draws conclusions.

Standard of compensation in energy investment arbitration and its implications

Depending on specific investment disputes and treaty formulations, investors can claim that fossil fuel phase-out policies violate substantive investment protection standards generally included in investment treaties.⁹ In particular, due to their potential impact on the economic interests of the investments, such policies can violate the fair and equitable treatment (FET) standard or constitute an indirect expropriation which requires compensation.¹⁰ However, typical investment treaties only specify the substantive principles of compensation for lawful expropriation, but leave out rules on the standard of compensation for the abovementioned treaty violations.¹¹ Accordingly, the latter are governed by customary international law (CIL), which is widely understood by tribunals to mandate a ‘full reparation standard’.¹²

The meaning of the full reparation standard as adopted today originates from the seminal case Factory at Chorzów dating back to the 1920s.¹³ The Permanent Court of International Justice (PCIJ) considered that the standard of reparation should be able to ‘wipe out all the consequences of the illegal act and re-establish the situation which would, in all probability, have existed if that act had not been committed’.¹⁴ This is known as the but-for scenario.¹⁵ The formulation is codified in Article 31 of the Draft Articles on the Responsibility of States for Internationally Wrongful Acts (ARSIWA), which requires States to ‘make full reparation for the injury caused by the internationally wrongful acts’. According to Article 34, one form of reparation is compensation. Article 36 specifies that ‘compensation shall cover any financially assessable damage including loss of profits’. The Chorzów case was referred to in the commentary to Articles 31 and 36.¹⁶

In contemporary investment arbitration practice, tribunals tend to consider the assessment of compensation under the full reparation standard as a fact-finding operation, primarily focused on quantifying the losses suffered by investors.¹⁷ Accordingly, compensation awarded in the investment arbitration takes on an ‘all or nothing’ character: if no treaty violation is found, no compensation is awarded to investors; otherwise, all losses are compensated according to the ‘full reparation’ principle.¹⁸ Meanwhile, tribunals tend to overlook the legal judgements that enter into determining the amount of compensable harm, such as causation and certainty of the harm, as well as the level of wrongfulness of the harmful action.¹⁹ Moreover, turning the quantum assessment into a purely factual inquiry also hinders any discretionary appreciation of contextual factors, such as public interests and the respondent State’s financial situation, which may reduce awarded amounts.²⁰

To calculate the capital value of damages, the generally adopted basis is the ‘fair market value’ (FMV),²¹ which is considered as the price that a willing and able buyer would pay a willing and able seller in an arm’s-length transaction for the property.²² According to the full reparation principle, States are under an obligation to restore the full FMV of investments. In other words, States need to compensate for the reduction in FMV resulting from their treaty violations.²³

The adoption of FMV overlooks duress, threat, or special economic circumstances, which real-life investors do consider in transactions.²⁴ The reason is that tribunals commonly understand the notion of FMV as the value of investments in an open and unrestricted market—a fictional market with certain idealized characteristics, where investments are given unimpeded marketability. Consequently, the resulting value can be higher than what investors would be able to realize in the actual market.²⁵

To estimate the price a hypothetical investor is willing to pay, current arbitration practice follows the practice of real-life investors, among whom the most widely used method to value assets or enterprises is discounted cash flow (DCF).²⁶ In this method, predicted cash flows (expected revenue minus expected costs) for a certain period of time into the future are discounted by a ‘discount rate’ (decided based on relevant risks of the business and the allowances for the time value of money) back to the present value.²⁷ The method is premised on the financial theory that the value of an asset is decided by the cash flows that is expected to generate in the future.²⁸

The DCF method is also widely used in energy investment arbitration cases.²⁹ Expected revenue of investment projects is normally decided from contractual terms, output price forecasts, and production capabilities or the size and nature of resources, which is converted into the present value with a discount rate.³⁰ ConocoPhillips v Venezuela illustrates a typical approach of applying the DCF method under the ‘full reparation’ standard by tribunals. For instance, on the evaluation of Petrozuata, the tribunal determined that the projected average production is 36,200,000 million barrels per year between 2009 and 2023, and decline dramatically after that to 19,000,000 million barrels per year in 2026.³¹ Turning to the future oil price, the tribunal’s forecast assumes a general increase to USD 77.22 per barrel in 2036.³² The future revenues of the project resulted from multiplying the oil price forecast with the annual production, amounting to USD 44,212,022,105.³³ After deducting royalties, tax and cost, etc., then applying 17.35% discount rate, a total compensation of USD 3,386,079,057 was awarded for the project.³⁴

Like the ConocoPhillips case, due to the normally long-term nature of the contracts at issue and the prediction of an overall increase trend in future oil prices, the inflation of compensation awarded in cases brought by fossil fuel investors can be substantially exacerbated. The average amount awarded in known fossil fuel cases exceeds USD 600 million, which is more than five times the amount in non-fossil fuel cases.³⁵ Indeed, according to data provided by the United Nations Conference on Trade and Development (UNCTAD), eight out of the ten largest awards in investment treaty arbitration are related to the oil and gas sector.³⁶

The massive amount of compensation awarded in energy investment arbitration has raised the concern about its chilling effect on States. Despite that not many of these cases are triggered by States’ environmental measures, their approach to calculating compensation is likely to be followed in cases triggered by climate actions. Fossil fuel investors also have strong motivation and capabilities to reinforce the chilling effect,³⁷ which is also exacerbated by existing investment arbitration cases. About 20% of the total known investment arbitration cases are related to the fossil fuel industry, making it the most litigious industry across all sectors, while 76% of these cases are decided in favour of investors.³⁸ Some States like Germany may be able to mitigate such substantial legal risks by paying billions of dollars of compensation to fossil fuel investors who are required to close down their investment projects pursuant to their domestic law.³⁹ Conversely, more States may refrain from enacting or enforcing bona fide regulatory measures due to the concern of significant costs incurred by investment arbitration.⁴⁰ Indeed, Denmark and New Zealand have admitted that the prospect of investor–State lawsuits has impeded the implementation of more ambitious climate policies.⁴¹ Moreover, it is believed that France’s retreating from its new law aimed at discontinuing fossil fuel extraction was influenced by the threat posed by a Canadian oil and gas giant to initiate an investment claim.⁴² These cases demonstrate that the concern about regulatory chill is not unfounded.

Besides, substantial amounts of compensation can divert millions of dollars from government budgets, and thus exacerbate the budgetary constraints faced by many States seeking to achieve net zero,⁴³ including the budget for providing incentives to facilitate Paris-aligned investments.⁴⁴ Indeed, paying fossil fuel investors large amounts of compensation arguably violates the Paris Agreement, which requires States to make financial flows ‘consistent with a pathway towards low green house gas emissions and climate-resilient development’.⁴⁵

Furthermore, such damages can impose crippling burdens on countries’ economies and populations. For instance, in ConocoPhillips v Venezuela, the tribunal rendered an award requiring Venezuela to pay the claimants around USD 8.7 billion in 2019,⁴⁶ which was more than Venezuela’s government revenue that year.⁴⁷ The issue would be more salient for States of the Global South, which tend to have more limited sources to defend investment claims and younger fossil fuel investments that will suffer more substantial financial losses from phase-out measures.⁴⁸ Therefore, these countries may delay their climate actions to avoid such severe risks.

It is therefore essential to limit the amount of possible compensation awarded in investment arbitration triggered by climate change mitigation measures, so as to reduce the chilling effect on States and make it less costly to achieve net zero. The next section will discuss possible grounds to reduce the amount of compensation awarded in these arbitration cases.

Grounds to reduce amount of compensation awarded in investment arbitration triggered by fossil fuel phase-out measures

The analysis in the previous section reveals that compensation in investment arbitration triggered by fossil fuel phase-out policies can be substantially heightened using the most widely adopted approach, due to its insufficient consideration of legal judgements and contextual factors. To prevent massive compensation from hindering States’ climate actions, and to more accurately reflect what investors in real markets can recover, more elements must be considered when using the DCF method to determine compensation under the ‘full reparation’ standard. Specifically, depressed energy prices during the peak demand era should be considered to exclude speculative losses. Moreover, unviability of fossil fuel projects can serve as the ground to exclude losses that are not caused by States’ unlawful actions or beyond the legitimate expectations of investors. Additionally, to incorporate the consideration of contextual factors, the amount of compensation should be deducted based on States’ international environmental obligations, while environmental law principles can also be adopted to account for fossil fuel investors’ responsibility for causing harm to the environment. This section will analyse the applicability of these factors in fossil fuel investment arbitration.

Depressed energy prices in the peak demand era

As mentioned above, forecast of future energy prices is an essential parameter in any DCF analysis applied to energy investment arbitration. However, future energy prices are difficult to predict due to their high volatility.⁴⁹ Like other commodities, the price instability of oil is produced mainly by temporary supply–demand imbalances, and thus are normally of a short- or medium-term nature.⁵⁰ An anticipation of increased future demand for oil and supply shortage triggers more oil inventories, thus leading to a hike in oil prices.⁵¹ High prices, among other factors like global financial crises,⁵² can cause market shrinkage and substantial reduction in demand,⁵³ which will then draw down prices due to more intense competition among suppliers.⁵⁴ Conversely, in the long run, an overall increase in the trend of oil prices is expected due to the following reasons. First, the rapid growth of oil demand due to the development of emerging market economies.⁵⁵ Second, the surplus profit produced by the ‘scarcity rent’, which reflects the expectation of rising values with the increasing scarcity of oil, a non-renewable resource, and a downshift in oil supply trends.⁵⁶

Based on such anticipation, arbitral tribunals generally assume an increase in the oil price over the lifetime of investments when calculating expected revenue. For instance, in ConocoPhillips v Venezuela, a 1.2% increase per year was used to determine future oil prices until the end of the projects, which resulted in a total compensation with an amount of over USD 8 billion.⁵⁷ Other tribunals adopted much more complicated approaches based on the price forecast of main global oil benchmarks like the West Texas Intermediate (WTI).⁵⁸ Nevertheless, a similar increase can still be found in the price forecast that leads to similar substantial amounts of compensation awarded to investors.⁵⁹

However, such an approach can be problematic. The depletion of fossil fuel resources produces a theory known as ‘peak oil’, which refers to a hypothetical point when the production of oil reaches a maximum (peak), and then declines gradually to zero. Various predictions regarding the timing of peak production and demand have been made based on such a traditional understanding.⁶⁰ However, amid efforts to mitigate climate change, more factors need to be taken into account, including the effectiveness of climate policies and the advancement of low carbon technologies, which can stop the increase of oil demand, and eventually result in the inextricable decline in oil prices.⁶¹ According to the International Energy Agency (IEA), if net-zero emissions will be achieved by 2050, oil demand will never reach its historic peak in 2019 again.⁶² Under such a scenario, the loss of profits based on the forecast of increasing oil prices become speculative, and the reparation awarded for such losses is likely to result in significant windfalls for investors in most energy investment arbitration cases.

The principle of non-compensability of speculative losses is considered as one of the most settled rules in the law of international responsibility of States.⁶³ Various investment arbitration tribunals have upheld this principle in their awards. For instance, in Burlington v Ecuador, the tribunal dismissed the damages claim for the lost opportunity because it was too speculative.⁶⁴ Similarly, in Wena Hotels v Egypt, the tribunal considered Wena’s claims for lost profits, lost opportunities and reinstatement costs inappropriate because they were speculative.⁶⁵

To avoid compensating for speculative losses, reasonable certainty has been adopted as one requirement for the assessment of damages.⁶⁶ Various tribunals have upheld this standard of certainty when the claimed compensation includes lost future gains. For instance, in Autopista v Venezuela, the tribunal noted that only lost profits established with sufficient certainty can be compensated.⁶⁷ In Vivendi v Argentina, the tribunal declined to evaluate the concession based on lost profits because the claimants had failed to prove with a sufficient degree of certainty that the investment was profitable.⁶⁸ The requirement corresponds to the full reparation principle elucidated in the Chorzów case as mentioned in previous section, which requires reparation to re-establish the situation which would have existed in all probability.

States such as Kazakhstan did raise concerns in investment arbitration about oil price drops. However, these concerns stem from oil price volatility rather than the new climate change mitigation developments.⁶⁹ Rarely, if ever, do States raise the latter argument in arbitration. Although it remains uncertain whether the abovementioned decarbonization roadmap proposed by the IEA will be realized and, if so, how it will impact the price of oil, anticipated depressed energy prices have been widely discussed and modelled by financial regulators, central banks, and academics.⁷⁰ These should not be disregarded by tribunals. Therefore, to avoid overcompensating investors where fossil fuel phase-out policies are found to be in violation of investment treaties, tribunals can either include the concern of depressed oil prices in the determination of the oil price forecast or adopt a higher discount rate to factor in the risk. Consequently, a lower amount of compensation can be determined based on the grounds of oil price plunges.

Unviability of fossil fuel projects

To achieve the global climate goal of achieving net-zero emissions, fossil fuel production in most regions must peak soon, which would cause many operational and planned fossil fuel projects to become economically unviable. This sunset process is driven by various new developments in the context of climate change mitigation, including the advancement of low-carbon technologies, such as zero-emission vehicles and renewable energy, reduced demand for fossil fuel production and fossil fuel-based products, imposition of carbon pricing and carbon taxes, and the removal of fossil fuel subsidies.⁷¹ These developments may depreciate the market price of fossil fuels to an extent that it falls even below the production cost,⁷² and therefore make fossil fuel projects unprofitable. Under such circumstances, the amount of compensation awarded by tribunals can be limited based on the principles of causation, contributory fault, and legitimate expectations.

Causation

Causation is a general principle of law included in Article 31 of ARSIWA and has been widely adopted by international courts and tribunals to determine whether damage is compensable.⁷³ As explained in the commentaries on ARSIWA, the causal link between injury and internationally wrongful acts is a necessary condition for reparation.⁷⁴ In general, the determination of causation involves both ‘factual’ and ‘legal’ aspects.⁷⁵ The former is known as the ‘but for’ test: would the loss have occurred but for the unlawful conduct? With a negative answer, the conduct counts as a factual cause of the damage.⁷⁶ Conversely, the legal aspects of the causation question seek to filter out damage that was not directly, proximately, or foreseeably caused by the wrongful conduct.⁷⁷ Failure to pass either the factual or legal causation test can result in a finding of violation of law without the awarding of compensation. For instance, in the Elettronica Sicula (ELSI) case, the International Court of Justice (ICJ) found that Italy’s requisition of ELSI’s plant and assets was unlawful and could be one of the causes that led to the disaster to ELSI. However, since the underlying cause of the failure of ELSI (an under-capitalized and consistently loss-making company) was its headlong course towards insolvency, the claim for reparation was rejected.⁷⁸

Investment arbitration tribunals have also adopted the abovementioned tests to limit the amount of recoverable damages. For instance, in Biwater v Tanzania, the tribunal first held that the establishment of causation comprises, both, a factual link and legal requirements of directness and proximity for the link.⁷⁹ After reviewing the facts and evidence, the tribunal found that the actual, proximate, or direct causes of the damage were not Tanzania’s treaty violations, as the investment had no economic value before being expropriated by Tanzania.⁸⁰ Accordingly, no compensation was awarded despite the finding of violations.⁸¹

As mentioned above, existing market conditions for fossil fuel projects have significantly changed in the era of climate change mitigation. Consequently, these projects can become unprofitable even without the implementation of direct restrictions or bans on fossil fuels.⁸² Therefore, it can be argued that the factual link between the deprivation of the value of fossil fuel investments and States’ phase-out measures is weak. Hence, no compensation should be awarded even when the measures are found to be unlawful.

Yet, the issue of causation can be more complicated when the phase-out measures involve the removal of fossil fuel subsidies that artificially keep otherwise unprofitable projects viable.⁸³ These subsidies are directed at either energy consumption (to charge consumers at a price below the cost of supply) or production (to keep the price on the supply side lower than the market price).⁸⁴ The phase-out of fossil fuels will likely involve the cancellation of such subsidies,⁸⁵ which can force relevant investments which survive solely on such subsidies to exit the market. In renewable energy arbitration cases, tribunals have considered the issue of causation between the unlawful cancellation of subsidies and damage. For instance, in Eskosol v Italy, Professor Tawil, in his Separate Opinion, reasoned that no further examination of Italy’s measures was required because the claimant failed to prove that the reduction of tariff incentives for solar power projects was the ‘operative cause’ to the company’s bankruptcy.⁸⁶ However, other tribunals have considered the loss of cash flows and the reduction of FMV caused by the unlawful withdrawal of host States’ financial incentives as compensable harm.⁸⁷ It is worth noting that the claimants in these cases are in renewable energy sectors where their investments can still be profitable after the removal of financial support if they are managed properly.⁸⁸ Conversely, the phase-out of fossil fuel subsidies will probably render relevant projects unviable, and thus, the causal link between treaty violations and the unviability of investments can be easier to establish.

Nevertheless, these fossil fuel projects still face climate-related risks, particularly transition risks from shifts in market preferences and technology, reputational harm, etc.⁸⁹ These risks should be considered in determining compensation under the full reparation standard. One approach could be factoring these risks into a higher discount rate. Additionally, despite the controversy over whether States’ own value-destroying measures should be included as part of the country risk in the discount rate,⁹⁰ the risks of legal change for climate change mitigation should be considered due to their high foreseeability given States’ urgent imperatives. These risks are rarely, if ever, considered in existing fossil fuel investment arbitration cases.

Contributory fault

Contributory fault is recognized under international law as a principle that could reduce the amount of compensation due. According to Article 39 of the ARSIWA, the determination of reparation should take into account any ‘wilful or negligent action or omission’ of the injured party that contributed to the injury.⁹¹ This principle is saturated with causation.⁹² Since the full reparation standard only requires States to compensate for the injury caused by their wrongful acts—and nothing more, injuries caused by the injured party should be excluded.⁹³ Except for causation, the contributory fault principle also requires wilfulness and negligence (which is often described as ‘manifest a lack of due care’) of the injured parties’ actions or omissions.⁹⁴

The principle has been recognized and applied in investment arbitration, typically when investors have made poor business judgements or acted in a reckless manner.⁹⁵ The key concept within recklessness is foresight—whether an investor can foresee the occurrence of relevant consequences when it performs acts that contribute to its loss.⁹⁶ Therefore, investment decisions made in the presence of known political risks pertaining to that investment, which then materialize as relevant treaty violations, can be deemed fault-worthy, and thus the investment should not be accorded full protection.⁹⁷ For instance, in MTD v Chile, the tribunal agreed with Chile that the investors should have been aware of the prohibition on urban development concerning the land that they purchased for a real estate project at the time of their investment decision.⁹⁸ Therefore, despite finding that Chile’s refusal to grant necessary permits and approvals for the project amounted to treaty violations,⁹⁹ the compensation awarded to the investor was reduced by 50% to exclude damages caused by its business judgements.¹⁰⁰

Likewise, in investment arbitration cases triggered by the implementation of fossil fuel phase-out policies, it would appear plausible to argue that fossil fuel investors bear some level of contributory fault for the harm inflicted on their investments. This is because, given the readily available knowledge about the adverse effects of carbon dioxide emissions on climate change, the imperative to mitigate and adapt to it, and the substantial emissions generated by the fossil fuel industry,¹⁰¹ relevant investors should have foreseen the increasing climate and decarbonization regulations that affect their investments when making the investment decisions, particularly when the host State is under the obligation arising from international environmental law to reduce carbon emissions.¹⁰² Therefore, according to the principle of contributory fault, the amount of compensation should be reduced to exclude the damages caused by investors’ business judgements in such a context.

However, it is uncertain whether the application of this principle can lead to compensation in amounts that are acceptable for States due to the following two issues. The first issue concerns the apportionment of liability between the disputing parties. As noted by the MTD v Chile annulment committee, the contribution of the parties to the loss can vary significantly and be difficult to measure in a comparable manner. Therefore, tribunals have a wide margin of discretion in apportioning fault.¹⁰³ Some tribunals still award large amounts of compensation even after the deduction according to contributory fault.¹⁰⁴ This issue can be addressed to some extent by the approach proposed by Jarrett—restitutionary apportionment. Instead of fault, this approach is guided by the undeserved gain obtained by the host State from investors’ poor business judgements. According to restitutionary apportionment, host States should be fully liable for the direct contributions that investors have made to their economy, such as capital transferred directly to the State. For indirect contributions, such as payments for goods and services supplied by local entities within the host State’s economy, as well as the loss of profits (which are more of a contribution to the investors than to the State), the degree of the host State’s liability should be determined by the level of political risk. This risk assessment can be based on two criteria: the transparency of the information that makes the host State’s treaty violations foreseeable, and the probability of the host State engaging in that specific conduct. The greater the transparency of the information or the higher the likelihood of the State’s engagement in that conduct, the greater the political risks, and the larger the percentage of liability the investor must bear.¹⁰⁵ As mentioned earlier, the necessity for States to phase out fossil fuels has been clearly signalled, and thus the political risks faced by fossil fuel investors are high. According to restitutionary apportionment, except for the minimal direct contributions investors have made to the host States (such as licensing fees and tax payments), investors should bear a large percentage of the compensation due to their contributory fault.

The other issue relates to the influence of contributory fault on tribunal decisions at the merit phase. Some commentators have expressed concerns that the application of the principle to the calculation of quantum may encourage tribunals to consider the investor’s conduct as an issue relevant to the determination of compensation rather than to the claim’s merits, thus making tribunals more likely to find treaty violations in the first place.¹⁰⁶ Admittedly, it is true that investors’ conducts can be relevant to the determination of violations of certain investment treaty provisions such as FET.¹⁰⁷ Nonetheless, they are not mutually exclusive—there is no rule barring the consideration of investors’ conduct at the merit stage when it is to be examined at the quantum stage. Further, the investors’ conduct is considered under different rules at these two stages: the former being substantive treaty provisions, while the latter being the contributory fault principle. Therefore, this issue can be addressed by a more careful framing of States’ pleadings and arbitration strategies that emphasize the difference between the applicable rules and the necessity to address the issue at both stages.

Legitimate expectations

As demonstrated in Section II, the coverage of loss of future profits has substantially inflated the amount of compensation awarded in investment arbitrations related to fossil fuel investments. Therefore, limiting the recoverability of such losses can significantly reduce the overall compensation awarded. In addition to excluding speculative losses as mentioned in the previous section, Marzal suggests that the notion of legitimate expectations can also be relevant in this regard.

Legitimate expectation has been widely invoked at the merits stage in investment arbitration to assess the legality of States’ conducts. Pursuant to this doctrine, investors’ expectations that are legitimate or reasonable in light of the circumstances should be protected, while violation of such expectations will incur States’ liability and duty to compensate for any harm caused.¹⁰⁸ Following the traditional maxim that remedies precede rights, when tribunals decide on the method of calculating the amount of compensation, they configure the precise degree of investors’ entitlements. Accordingly, Marzal argues that determining the extent of compensable harm and the corresponding monetary compensation to which investors are entitled should be based on the doctrine of legitimate expectation. In other words, tribunals need to determine whether investors’ expectation of future profits is legitimate and therefore under the protection of investment treaties. Compensation should only be awarded for the loss of profits that are legitimately expected by investors.¹⁰⁹ Here, legitimacy refers to the same criteria as that of substantive provisions of investment treaties: it requires the expectation to be based on guarantees of some quality, such as specific representations by the State.¹¹⁰ Therefore, unless States have made specific commitments either through domestic law or other legal documents regarding future profitability, any expectation that the projected income generated by investments would be free from the interference of the State is illegitimate and unreasonable.¹¹¹

According to the handbook published by the International Energy Charter,¹¹² contracts widely used in the fossil fuel sector between host States and investors can arguably serve as the basis for investors’ legitimate expectation of future profits due to various guarantees such as maintaining legal status quo to a certain extent. Fossil fuel phase-out measures are likely to breach such expectations and establish treaty violations.¹¹³ Following these violations, the ‘full reparation’ standard requires restoring the but-for situation, commonly understood in current arbitral practice as ‘no legal changes at all’. However, given the imperative for States to mitigate climate change, it is unreasonable for fossil fuel investors to expect that future profits from their investments will remain unaffected by increasing climate change-related legislations. Rather, tribunals should assume that some intervention for the public’s benefit would have occurred to the maximum extent allowable under international investment law.¹¹⁴ In the words of the PCIJ, the ‘re-establish[ment]’ of the ‘but-for’ situation should assume the existence of climate change-related legal restrictions by the State, rather than no restrictions at all, as it is the most probable but-for scenario. Accordingly, the realization of future profits ultimately remains subject to host States’ discretionary powers.¹¹⁵

Likewise, with the lack of a specific guarantee, investors cannot legitimately expect that their investments are in a completely fictional market with diminished risks. Rather, reasonable fossil fuel investors should have expected that future profits from their investments will be depreciated or even rendered unviable by various developments towards climate change mitigation. Therefore, these developments should be accounted for in the determination of the loss of future profits.

Overall, these investors should not be entitled to compensation for the full stream of profits expected from their investments at any given time in the future. Compensation should instead be limited to the loss of future incomes that can still be generated with the implementation of permitted restrictive measures under international investment law and other changes in market conditions due to climate change mitigation. In this way, tribunals can avoid awarding reparation that exceeds the harm effectively suffered,¹¹⁶ which also echoes the ruling by various tribunals that investors are only entitled to ‘a reasonable rate of return’ on their investments.¹¹⁷ Taking into account the various developments that can limit the profitability of fossil fuel projects as mentioned above, the future profits that can be legitimately expected from fossil fuel investments may indeed be minimal.

International environmental obligations

The rapid development of international environmental law in terms of quantity and quality inevitably triggers the increase of investment disputes involving environmental aspects, which requires proper consideration of the interface between international investment law and environmental law.¹¹⁸ Article 31 of the Vienna Convention on the Law of Treaties¹¹⁹ mandates that treaty interpretation takes into account relevant international rules applicable to the State parties. Recent investment treaties increasingly reference international environmental instruments, including Paris Agreement, to incorporate these instruments into the interpretation of investment treaties.¹²⁰ Moreover, some investment treaties refer to applicable rules of international law as one of the sources of applicable law in investment arbitration.¹²¹ In the absence of such clauses in investment treaties, the arbitration rules of International Centre for Settlement of Investment Disputes (ICSID) provide tribunals with similar instructions,¹²² while the rules of both the United Nations Commission on International Trade Law (UNCITRAL) and the International Chamber of Commerce (ICC) direct tribunals to apply the law that it deems appropriate.¹²³ Accordingly, it is reasonable for investment tribunals to consider States’ international environmental obligations.

Nevertheless, arbitral jurisprudence is inconsistent regarding whether international law obligations can be the ground to adjust the amount of compensation downwards. In Santa Elena v Costa Rica, the tribunal considered the obligation arising from environmental treaties irrelevant to the calculation of compensation due to the investor.¹²⁴ Conversely, in SPP v Egypt, the tribunal deducted the predicted profits resulting from the investor’s activities that were in conflict with Egypt’s international obligation from the amount of compensation because they were illegal and not compensable.¹²⁵

Comparatively, in the human rights context, it is well established that the environmental justification of a measure can be a ground for reducing the amount of compensation. For instance, in the Turgut v Turkey case, the European Court of Human Rights reasoned that economic imperatives and fundamental rights like the right to property should not prevail over the consideration of environmental protection. Therefore, regarding the measure that deprived the applicants of the property for the purpose of protecting nature and forest, despite the establishment of the violation, the principle of restitutio in integrum is not applicable in the calculation of compensation.¹²⁶ A similar reduction in compensation was adopted in Theodoraki v Greece, where EUR 3.7 million was considered as adequate just satisfaction for the damage instead of the requested EUR 47 million, as the property was deprived for the protection of endangered loggerhead turtles in accordance with the Bern Convention.¹²⁷ Despite the differences between human rights and investment disputes in the context of the underlying treaties, focus of the complaints, and political constraints, it is not unprecedented for investment arbitral tribunals to refer to human rights cases as an interpretive guide of investment treaty rules.¹²⁸ Accordingly, it is also possible for investment arbitration to follow the approach of adopting environmental justification in the calculation of compensation, so as to avoid overemphasizing the rights of investors under investment treaties and giving insufficient weight to the rights and obligations of States to act in the public interest.

One main obstacle to reducing the amount of compensation based on States’ international environmental obligations in investment arbitration triggered by fossil fuel phase-out policies lies in the establishment of a sufficient link between the measures and relevant instruments, like the UNFCCC and the Paris Agreement. Despite the requirements for States to reduce their emissions of greenhouse gases,¹²⁹ there is no binding obligation to phase-out fossil fuels.¹³⁰ Therefore, it is unclear whether the broadly formulated terms in relevant provisions require or fully authorize the phase-out measures, especially with the existence of other comparable sources of carbon emissions. However, it is well established that without reducing fossil fuel production and usage, it is impossible for States to fulfil the obligations of limiting carbon emissions and achieving the global climate goal as required in these treaties. Accordingly, relevant regulatory actions are clearly signalled in the agreements, and thus the link between the actions and States’ climate change mitigation obligations can be proved.

Moreover, States’ environmental obligations have only rarely been considered in investment arbitrations relating to the energy sector¹³¹ due to the reluctance of tribunals to rely on non-investment obligations. This can be caused by various reasons, like tribunals’ lack of familiarity with non-investment instruments and awareness of public interest, and concerns about going beyond the tribunals’ jurisdictional mandate.¹³² Moreover, the inclusion of a non-derogation clause providing that treaty provisions more favourable to the investor prevail over other treaties in the event of a conflict can also bar tribunals’ consideration of States’ other treaty obligations.¹³³ The first issue could be improved by procedural changes like enhanced transparency of the proceeding and public participation in investment arbitration.¹³⁴ As for the jurisdictional concern and non-derogation clauses, at the merit stage, they can bar the consideration of States’ non-investment treaties and contribute to the establishment of violations. Conversely, after finding the violation, they should not be the reason for ignoring States’ non-investment obligations at the remedy stage for the following reason. The determination of damage is in essence a distribution scheme that allocates financial risks and benefits between host States and investors.¹³⁵ Therefore, host States’ ability to pay compensation and fulfil other treaty obligations should be considered, while it is also unreasonable for investors to reap the benefits from investments that are at odds with States’ international obligations without sharing the burden to fulfil them. Accordingly, similar to the approach adopted by the SPP tribunal, compensation should be determined based on the value of investments after States have implemented measures to fulfil their other competing obligations.

Polluter pays and precautionary principles

Besides the abovementioned tendency to overlook States’ non-investment obligations in investment arbitration, the imbalance of international investment law is also starkly reflected in its focus on investment protection rather than other public concerns like environmental protection. Consequently, a gap is left in the law of holding investors accountable for the impact of their activities on the environment of host States.¹³⁶ This injustice can be addressed by the obvious contender—the polluter pays principle, according to which those who pollute must make their best effort to restore the precedent equilibrium and pay for the damage caused.¹³⁷ The principle seeks to modify the behaviours of polluters by way of internalizing environmental costs that previously weighed on the community.¹³⁸ In so doing, it implements a principle of market economy, namely, that economic players should bear the cost generated by themselves, and thus exemplifies the employment of market mechanisms to address environmental problems.¹³⁹

The polluter pays principle has been included in various international instruments, such as the Rio Declaration on Environment and Development,¹⁴⁰ and has been recognized as a principle of international law.¹⁴¹ Therefore, it can be applied to the settlement of international investment disputes. The principle can be factored into the calculation of compensation in either of the following two ways. First, by holding that fossil fuel investors’ losses due to phase-out policies are not compensable. According to the principle, polluters should bear the costs of measures aimed at pollution control and prevention. Otherwise, subsidies to polluters affected by these measures can distort competition in international trade and investment.¹⁴² Likewise, compensation for increased costs incurred by changing environmental regulations can frustrate the polluter pays principle since polluters are supposed to bear these costs.¹⁴³ Moreover, it would arguably be contrary to the principle if an investor were compensated for the lost opportunity to carry out environmentally harmful activities.¹⁴⁴ Some tribunals have followed this rationale in determining compensation despite the lack of explicit reference to the polluter pays principle. For instance, In Unglaube v Costa Rica, the tribunal incorporated the limitation on the usage of the property due to environmental concerns in the valuation process instead of adopting the anticipated revenue generated by the highest and best use of this property.¹⁴⁵

The second, and smoother, approach is to deduct the environmental damage from the compensation payable by States. This approach has also been adopted by some tribunals without explicitly invoking the principle. For instance, in Metalclad v Mexico, the amount of compensation was deducted to compensate the sum paid by the government for site remediation.¹⁴⁶ In Tecmed v Mexico, the cost of relocating the landfill for public concern was taken into account in the calculation of compensation, as the responsibility was assumed by the investor.¹⁴⁷

However, despite the consensus that carbon dioxide emissions from fossil fuel projects can damage the climatic conditions that life on Earth relies on, it can still be difficult to determine what constitutes degradation and identify the costs, especially when considering the cumulative effects on environment.¹⁴⁸ Scholars have recognized these challenges, although for some a precise and exhaustive accounting of damage and culpability is not the point of the polluter pays principle. Rather, according to Mayer, the principle intends to dissuade polluters from polluting simply by charging some fee instead of requiring them to ‘pay all the costs in every circumstance’.¹⁴⁹ Besides, some approaches have been developed to establish a quantum value of environmental impact that an arbitral tribunal could apply to reduce compensation in a given case. One typical example is the social cost of carbon, which represents the economic cost related to climate change resulting from an additional tonner of carbon dioxide emission. A number of parameters are used to compute the price, including economic growth, climate sensitivity, and social discount rate. These parameters vary in different regions, while those at the country-level are also different from the global one, so as to reflect different extent of impacts of climate change.¹⁵⁰ The metric has already been adopted by some governments and domestic courts of the USA,¹⁵¹ and thus it has a relatively solid basis for being accepted in investment arbitration. In order to better understand domestic impacts that are essential for adaptation and compensation measures, country-level estimates of social cost of carbon should be used instead of the global value.¹⁵²

Another general principle of CIL, the precautionary principle,¹⁵³ can also be used in investment arbitration to incorporate environmental concerns. The principle counsels that the lack of conclusive evidence of harm should not be considered as a sufficient reason for postponing the adoption of environmental measures.¹⁵⁴ Operationally, this means that it is not the State’s burden of proof to demonstrate the certainty of environmental harm, but rather it is the burden of the person intending to carry out an activity to show that the activity will be harmless to the environment.¹⁵⁵ Accordingly, potential polluters should share the burden caused by the risk of future environmental degradation, which includes precautionary measures adopted by the host State to avoid or reduce such risk.¹⁵⁶

The award in Bilcon v Canada provides a suggestion of how this principle might be applied to determine the compensation in investor–State disputes. There, the tribunal rejected the investors’ claim for lost profits due to their failure to show that those profits would have been materialized given environmental concerns about the project and the possibility that there would be further tightening of environmental regulations in the future.¹⁵⁷ The tribunal’s approach thus reduced the valuation of the investment by requiring the investors (ie the potential polluters) to bear the risk that the State would take precautionary measures in order to avoid or reduce future environmental harm. In the context of fossil fuel phase-out policies and the pursuit of net zero, a similar approach might be taken. No matter whether carbon reduction measures can be reasonably foreseen by fossil fuel investors when they make the investment decisions, the possibility of regulatory change can be treated as one of the general, fundamental risk factors in the valuation of an asset, which can lead to a significant reduction in compensation.¹⁵⁸

Possible interpretation document regarding the meaning of ‘full reparation’ standard in investment arbitration triggered by fossil fuel phase-out policies

As noted at the outset, the most pressing concern faced by States with respect to investment treaties and fossil fuel phase-out programs is the potential for claims and exorbitant awards under the thousands of pre-existing investment treaties. Due to the lack of specific language addressing compensation in these treaties, the determination of compensation awarded in investment arbitration is subject to arbitral tribunals’ wide discretion, which can be inconsistent and incoherent. This issue has drawn the attention of States and has been considered and discussed in the UNCITRAL Working Group III.¹⁵⁹ Meanwhile, some States seek to address the concerns about large awards through new treaty languages. For instance, the bilateral investment treaty between Belarus and India requires the calculation of damages to consider various contextual factors, such as the harm caused by investors to the environment;¹⁶⁰ the Southern African Development Community (SADC) proposes to include in the model bilateral investment treaty that compensation should reflect ‘an equitable balance between the public interest and interest of those affected’.¹⁶¹ Moreover, some commentators have proposed other options for investment treaty reform to limit the amount of damage, like capping compensation at the total expenditure actually incurred by the investor,¹⁶² and choosing the lesser between the loss suffered by the investor and the gain the host State has obtained from the investment.¹⁶³ Besides the uncertainty regarding the feasibility and effectiveness of these proposals, their realization necessitates the conclusion of new investment treaties, or the amendment or replacement of existing ones, both of which will be prolonged and tortuous processes.¹⁶⁴ However, the need for effective climate action is urgent,¹⁶⁵ which means that fossil fuel phase-out measures need to be implemented as soon as possible, and the risk of subsequent investment claims challenging such measures is imminent. Therefore, the above time-consuming proposals may not be capable of addressing the concern.

Conversely, State parties to investment treaties can jointly issue instruments to clarify the meaning of the compensation standard in investment treaties.¹⁶⁶ Such instruments can ensure tribunals’ proper consideration and incorporation of the abovementioned grounds at the remedy stage, and thus reduce the amount of compensation. However, two main obstacles may bar the usage of this approach. First, the significant number of investment treaties and other agreements containing investment provisions. Formulating instruments to interpret all treaties with all parties can still be a prolonged and burdensome process, involving numerous complicated consultations and negotiations. The other obstacle is the lack of relevant wording regarding compensation standards in investment treaties. An interpretative statement is intended to select among the possible meanings that an existing treaty norm may have. Thus, interpretative notes that do not specifically attach to a treaty norm can be considered as amendments rather than interpretation.¹⁶⁷ Accordingly, it may only bind investment arbitration cases initiated after its entry into force.

Alternatively, States can formulate instruments to interpret the ‘full reparation’ standard in CIL. Despite the scant State practice, there are neither international norms nor theories that can bar customary rules from being interpreted, which is also an important process to revitalize and maintain the relevance of rules throughout extensive periods of time.¹⁶⁸ When the customary rules on State responsibility were codified in ARSIWA in 2001, it would be difficult to foresee that crippling compensation awarded according to its compensation standard would be commonplace in investment arbitrations more than a decade later.¹⁶⁹ Such changes have raised the concern regarding whether the standard can still guide the investment arbitration system to deliver its asserted fairness, legality, and justice.¹⁷⁰ Interpretation can address the concern by articulating the most suitable meaning of the ‘full reparation’ standard under the current circumstances, and thus ensure the proper functioning of the international dispute settlement mechanism.

To formulate the interpretation instrument, two approaches can be considered. One approach is to tailor it specifically to investment arbitration cases involving the fossil fuel sector. This approach could specify that the award of compensation should take into account the aforementioned relevant circumstances and contextual factors, and caution tribunals against awarding investors windfall compensation. The other approach is to formulate an interpretation instrument applicable to more general investment arbitration cases. This approach could further elaborate on the application of relevant legal principles in quantifying compensation, such as causation and States’ other international obligations, and specify preferred approaches for applying these legal principles, such as those for apportioning fault. The aforementioned circumstances can serve as one example in elaborating on these legal principles.

It can be seen that the contents of the interpretation instrument formulated through both approaches are derived from public international norms and existing arbitration practices, which can help to decide a fairer amount of compensation that fulfils the requirement of the ‘full reparation’ standard, rather than forming an alternative standard. Accordingly, it complies with the rule that the interpretation of CIL, like the interpretation of treaties, cannot fall outside the outer limits of possible meanings of the norm and thus become an impermissible revision/modification.¹⁷¹

The instrument can be initiated as a multilateral convention intending to clarify the meaning of the customary norm¹⁷² by international organizations actively participating in the reform of international investment law, such as the Organization for Economic Cooperation and Development (OECD)¹⁷³ and UNCITRAL.¹⁷⁴ After the adoption, the convention can be open to States for signatures. Upon entry into force, it would apply when parties to the relevant investment treaties agree to its application. Otherwise, the ILA, which aims to codify CIL and has codified customary rules on State responsibility, can update the Commentary on the ARSIWA to unify the application of the ‘full reparation’ standard in investment arbitration. Given the need for an urgent solution, instead of formulating a comprehensive instrument, a pragmatic approach could be to initially include the most widely accepted interpretation of the ‘full reparation’ standard and consider further supplements later.

Lastly, the General Assembly and the Economic and Social Council can request the ICJ to issue advisory opinions to clarify the meaning of the ‘full reparation’ standard in investment arbitration, pursuant to Article 96 of the Charter of the United Nations.¹⁷⁵ Although ICJ advisory opinions are not binding,¹⁷⁶ they have significantly influenced the understanding of CIL¹⁷⁷ and can provide important support for States raising the abovementioned defences in investment arbitrations.

The proposal to interpret the ‘full reparation’ standard does not preclude other treaty reform efforts; instead, it aims to provide a potentially quicker solution to the problem. Additionally, it is important to note that States can always raise the proposed grounds in their defence during investment arbitration, even if the abovementioned efforts have not yet been successful, because these grounds are derived from existing international law rules.

Conclusion

The application of the ‘full reparation’ standard in investment arbitration is supposed to resume a fair situation between the host State that violates its treaty obligations, and the investors that have incurred loss due to the treaty violation. However, the recent instances of crippling compensation awarded pursuant to this standard have raised the concern about the fairness of the standard, especially when considering the possibility of resulting in windfall or unjust enrichment for the investors. The concern is especially true in energy investment arbitrations, where most of the largest compensation hitherto is awarded. Such substantial legal risks can dissuade States from adopting fossil fuel phase-out policies, which are necessary for decarbonization and climate change mitigation, as such policies may be found to violate investment treaties and trigger States’ liability.

After reviewing public international law norms and existing arbitration practices, this paper argues that there are four legal grounds under which the amount of compensation awarded in investment arbitrations triggered by fossil fuel phase-out policies can be reduced: depressed energy prices, unviability of fossil fuel projects, international environmental obligations, as well as the polluter pays and the precautionary principles. The application of these grounds can reach a fairer result in tribunals’ calculation of compensation while complying with the requirements of the ‘full reparation’ standard. Moreover, these grounds can also help to strike a better balance between investment protection and the consideration of public interest at the remedy stage of investment dispute settlement.

Currently, the application of these grounds in investment arbitration is inconsistent. An approach to solving the issue is the formulation of an interpretation instrument that can specify the meaning and the application of the ‘full reparation’ standard in investment arbitration in the fossil fuel sector. The issuance and application of this instrument can enhance the consistency of arbitral awards and even push the development of CIL. Accordingly, the chilling effect imposed by energy investment arbitration on host States can be softened through the mitigation of the substantial legal risks of taking climate actions. The implementation of this proposal requires further research on the specific formulation of the instrument and more technical issues regarding the percentage or amount of damage that can be reduced based on each ground.

Footnotes

4 November 2016, UN Doc FCCC/CP/2015/10/Add.1 Decision 1/CP.21, art 2(1.)

Ivetta Gerasimchuk and others, ‘Fossil Fuel Phase-Out and a Just Transition: Learning from Stories of Coal Phase-Outs’ (2018) <https://unfccc.int/sites/default/files/resource/69_IISD%20Fossil%20fuel%20phase%20out%20and%20just%20transition%2C%20stories%20for%20success.pdf> accessed 14 July 2024.

Eg Denmark cancelled all new permits for oil and gas exploration and production, and decided to end existing production by 2050. Greenpeace International, ‘Denmark Cancels New Oil and Gas Permits and Sets Date to End Existing Production’ (Copenhagen, 4 December 2020) <https://www.greenpeace.org/international/press-release/45831/denmark-cancels-new-oil-and-gas-permits-and-sets-date-to-end-existing-production/> accessed 4 August 2024; moreover, Canada cancelled eight tax preferences for the fossil fuel sector and pledged to eliminate insufficient fossil fuel subsidies by 2025 to 2023. Alexandra Mae Jones, ‘“We’re still on the bunny slopes”: As 2023 kicks off, is Canada’s Climate Change Plan Aggressive Enough?’ (CTV News, 15 January 2023) <https://www.ctvnews.ca/climate-and-environment/we-re-still-on-the-bunny-slopes-as-2023-kicks-off-is-canada-s-climate-change-plan-aggressive-enough-1.6229253> accessed 10 August 2024.

Climate Action Network Europe, ‘Outrage as Italy Ordered to Pay Out Millions to Oil Investor Over Energy Charter Treaty Claim’ (24 August 2022) <https://caneurope.org/outrage-as-italy-ordered-to-pay-out-millions-to-oil-investor-over-energy-charter-treaty-claim/> accessed 10 August 2023.

TC Energy Corporation and TransCanada Pipelines Limited v USA (II), ICSID Case No ARB/21/63, Request for Arbitration (22 November 2021) para 99; Alberta Petroleum Marketing Commission v USA, ICase No UNCT/23/4, Notice of Dispute (9 February 2022) para 40.

Damien Charlotin, ‘Breaking: Keystone XL Arbitration Concludes Amid Tribunal’s Review of USA’s Bifurcated Jurisdictional Objection’ (IA Reporter, 13 July 2024) <https://www.iareporter.com/articles/breaking-keystone-xl-arbitration-concludes-amid-tribunals-review-of-usas-bifurcated-jurisdictional-objection/> accessed 15 July 2024.

European Commission, ‘Agreement in principle reached on Modernised Energy Charter Treaty’ (Brussels, 24 June 2022) <https://policy.trade.ec.europa.eu/news/agreement-principle-reached-modernised-energy-charter-treaty-2022-06-24_en> accessed 15 July 2024.

Eg Rockhopper’s claim against Italy was initiated under the ECT after Italy withdrew from the treaty. Climate Action (n 4).

Kyla Tienhaara and Lorenzo Cotula, Raising the Cost of Climate Action? Investor-State Dispute Settlement and Compensation for Stranded Fossil Fuel Assets (International Institute for Environment and Development 2020) 17–8.

Stephan W Schill, ‘Do Investment Treaties Chill Unilateral State Regulation to Mitigate Climate Change?’ (2007) 24 Journal of International Arbitration 469, at 471–6.

Sergey Ripinsky and Kevin Williams, Damages in International Investment Law (British Institute of International and Comparative Law 2015) 278.

Jonathan Bonnitcha and Sarah Brewin, ‘Compensation Under Investment Treaties’ (November 2020) <https://www.iisd.org/system/files/publications/compensation-treaties-best-practicies-en.pdf> accessed 16 January 2023. Eg Rockhopper Italia SpA, Rockhopper Mediterranean Ltd, and Rockhopper Exploration Plc v Italian Republic, ICSID Case No ARB/17/14, Final Award (23 August 2022) paras 204–08.

Herfried Wöss and Adriana San Román Rivera, ‘Damages in Investment Treaty Arbitration’ in José R. Mata Dona and Nikos Lavranos (eds), International Arbitration and EU Law (Edward Elgar, Cheltenham, UK 2021) 394, 391–425.

Case Concerning the Factory at Chorzów (Germany v Poland) (Merits) PCIJ Rep Series A No 17, 47.

Toni Marzal, ‘Quantum (In)Justice: Rethinking the Calculation of Compensation and Damages in ISDS’ (2021) 22 Journal of World Investment & Trade 249, 291.

International Law Commission (ILC), ‘Draft articles on Responsibility of States for Internationally Wrongful Acts, with commentaries (2001) Yearbook of the International Law Commission, vol II, Part II, art 34.

Marzal (n 15) 267.

Bonnitcha and Brewin (n 12).

Marzal (n 15) 282–5.

ibid 265–7.

ILC (n 16) art 35 (22). Eg Rockhopper (n 12) para 210.

National Association of Certified Valuators and Analysts, ‘International Glossary of Business Valuation Terms’ (8 June 2001) <https://www.nacva.com/glossary> accessed 24 November 2021.

Herfried Wöss and Adriana San Román, ‘Full Compensation, Full Reparation and the But-For Premise’ in John A Trenor (ed), Damages in International Arbitration Guide (5th edn, Law Business Research, London, UK 2022).

ibid.

Wöss and Román, ibid; Marzal (n 15) 294.

Marzal, ibid 271.

World Bank, ‘Legal Framework for the Treatment of Foreign Investment’ (1992) Volume II: Guidelines, Report No 11415 <https://documents1.worldbank.org/curated/en/955221468766167766/pdf/multi-page.pdf> accessed 19 January 2023.

Ripinsky and Williams (n 11) 195.

Eg Rockhopper (n 12) para 283–4.

Carla Chavich, ‘Valuation of Energy Assets in International Investment Arbitration’ (2018) 7 Transnational Dispute Management, at 3–4, 11. Eg, Murphy Exploration & Production Company International v Republic of Ecuador, PCA Case No 2012–16, Partial Final Award (6 March 2016) para 494.

ConocoPhillips Petrozuata BV, ConocoPhillips Hamaca BV and ConocoPhillips Gulf of Paria BV v Bolivarian Republic of Venezuela, ICSID Case No ARB/07/30, Award of the Tribunal (8 March 2019) paras 516–18.

ibid paras 706–08.

ibid para 710.

ibid paras 953 and 1010.

Lea Di Salvatore, ‘Investor–State Disputes in the Fossil Fuel Industry’ (November 2021) <https://www.iisd.org/system/files/2022-01/investor%E2%80%93state-disputes-fossil-fuel-industry.pdf> accessed 20 January 2023.

UNCTAD Investment Policy Hub, ‘Investment Dispute Settlement Navigator’ <https://investmentpolicy.unctad.org/investment-dispute-settlement> accessed 20 July 2024.

Kyla Tienhaara, ‘Regulatory Chill in a Warming World: The Threat to Climate Policy Posed by Investor-State Dispute Settlement’ (2018) 7 Transnational Environmental Law 229, 239–41.

Salvatore (n 35).

Geir Moulson and Frank Jordans, ‘Germany Agrees Timeline, Compensation for Coal Phase-Out’ (Associated Press News, Berlin, 16 January 2020) <https://apnews.com/article/4c57e9577f5aee6db189f91a17ee1272> accessed 20 July 2024; Benjamin Wehrmann, ‘German govt Adopts Coal Exit, Fixes Hard Coal Compensation’ (Clean Energy Wire, 29 January 2020) <https://www.cleanenergywire.org/news/german-govt-adopts-coal-exit-fixes-hard-coal-compensation> accessed 1 July 2024.

Kyla Tienhaara, ‘Regulatory Chill and the Threat of Arbitration: A View from Political Science’ in Chester Brown and Kate Miles (eds), Evolution in Investment Treaty Law and Arbitration (CUP, New York, USA 2011) 610, 606–28.

Elizabeth Meager, ‘Cop26 Targets Pushed Back under Threat of being Sued’ Capital Monitor (14 January 2022) <https://capitalmonitor.ai/institution/government/cop26-ambitions-at-risk-from-energy-charter-treaty-lawsuits/> accessed 25 July 2024.

Red Carpet Courts, ‘Blocking Climate Change Laws with ISDS Threats: Vermilion vs France’ <https://10isdsstories.org/cases/case5/#_edn2> accessed 25 July 2024.

The World Bank estimates that developing countries have to spend about 4.5 per cent of gross domestic product to achieve the global climate goal. Şebnem Erol Madan, ‘How can Developing Countries get to Net Zero in a Financeable and Affordable Way?’ (World Bank Blogs, 9 February 2022) <https://blogs.worldbank.org/ppps/how-can-developing-countries-get-net-zero-financeable-and-affordable-way> accessed 15 July 2024.

A typical example is the feed-in tariff implemented to accelerate investments in renewable energy. Despite its efficiency, the very costly regime has imposed heavy burdens on government budget, which eventually led to its collapse in Europe. See Andri Pyrgou, Angeliki Kylili, and Paris A Fokaides, ‘The Future of the Feed-In Tariff (FiT) Scheme in Europe: The Case of Photovoltaics’ (2016) 95 Energy Policy 94, 94–5.

Paris Agreement (n 1).

ConocoPhillips (n 31) para 1010.

In 2019, Venezuela’s gross domestic product was USD 73 billion. Statista, ‘Venezuela: Gross Domestic Product (GDP) in Current Prices from 1986 to 2024 (in billion U.S. dollars)’ <https://www.statista.com/statistics/370937/gross-domestic-product-gdp-in-venezuela/> accessed 30 June 2024; While the ratio of government revenue to GDP was 8.72 in that year. Statista, ‘Ratio of Government Revenue to Gross Domestic Product (GDP) in Venezuela from 2000 to 2022’ <https://www.statista.com/statistics/1392621/ratio-of-government-revenue-to-gross-domestic-product-gdp-venezuela/> accessed 30 June 2024.

Salvatore (n 35).

David W Rivkin and Floriane Lavaud, ‘Determining Compensation for Expropriation in Treaty-based Oil and Gas Arbitrations’ in James M Gaitis (ed), Leading Practitioners’ Guide to International Oil & Gas Arbitration (Jurisnet, LLC, New York, USA 2015) 242, 217–62.

Roberto F Aguilera and Marian Radetzki, The Price of Oil (CUP 2015) 11–22.

Lutz Kilian and Daniel P Murphy, ‘The Role of Inventories and Speculative Trading in the Global Market for Crude Oil’ (2014) 29 Journal of Applied Econometrics 454, 455.

Myung Suk Kim, ‘Impacts of Supply and Demand Factors on Declining Oil Prices’ (2018) 155 Energy 1059, 1064.

Aguilera and Radetzki (n 50).

Mark Jaccard, James Hoffele and Torsten Jaccard, ‘Global Carbon Budgets and the Viability of New Fossil Fuel Projects’ (2018) 150 Climate Change 15, 18.

International Monetary Fund, Tensions from the Two-Speed Recovery: Unemployment, Commodities, and Capital Flows (World Economic Outlook April 2011) 89–90.

Jaccard, Hoffele and Jaccard (n 54).

ConocoPhillips (n 31) paras 715 and 1010.

James Chen, ‘West Texas Intermediate (WTI): Definition and Use as a Benchmark’ (Investopedia, 13 June 2022) <https://www.investopedia.com/terms/w/wti.asp#:∼:text=West%20Texas%20Intermediate%20(WTI)%20is,the%20NYMEX’s%20oil%20futures%20contract> accessed 4 July 2024.

Eg in Venezuela Holdings v Venezuela, the tribunal adopted the price forecast submitted by the claimants’ expert, who used the WTI price forecast to determine expected price of the oil produced by the investors’ projects, which also increased year by year and resulted in a compensation amounted to more than USD 14 billion. Venezuela Holdings, BV, et al v Bolivarian Republic of Venezuela, ICSID Case No ARB/07/27, Award of the Tribunal (9 October 2014) paras 327–9, 404, Annex 1.

Ugo Bardi, ‘Peak Oil: The Four Stages of a New Idea’ (2009) 34 Energy 323, 323.

Spencer Dale and Bassam Fattouh, ‘Peak Oil Demand and Long-Run Oil Prices’ (2018) <https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/energy-economics/bp-peak-oil-demand-and-long-run-oil-prices.pdf> accessed 5 July 2024. IEA predicts that producers can be forced by the rapid fall of demand to increase production, aiming at capture larger share of the market. Consequently, oil price will be pushed even lower. IEA, ‘Net Zero by 2050: A Roadmap for the Global Energy Sector’ (October 2021) <https://iea.blob.core.windows.net/assets/deebef5d-0c34-4539-9d0c-10b13d840027/NetZeroby2050-ARoadmapfortheGlobalEnergySector_CORR.pdf> accessed 4 August 2024.

IEA ibid.

Amoco International Finance Corporation v Iran, IUSCT Case No 56, Partial Award (Award No 310–56-3) (14 July 1987) para 238.

Burlington Resources v Ecuador, ICSID Case No ARB/08/5, Decision on Reconsideration and Award (7 February 2017) paras 281–3.

ICSID Case No ARB/98/4, Award (8 December 2000) para 123.

See Clyde Eagleton, ‘Measure of Damages in International Law’ (1929) 39 The Yale Law Journal 52, 74.

Autopista Concesionada de Venezuela v Venezuela, ICSID Case No ARB/00/5, Award of the Tribunal (23 September 2023) para 351.

Compañiá de Aguas del Aconquija SA and Vivendi Universal SA v Argentina, ICSID Case No ARB/97/3, Award (20 August 2007) paras 8.3.4–8.3.11.

Anatolie Stati, Gabriel Stati, Ascom Group SA and Terra Raf Trans Traiding Ltd v Kazakhstan, SCC Case No V116/2010, Award (19 December 2013) paras 1482 and 1491.

Eg Aguilera and Radetzki (n 50) 2–3; Fitri Wulandari and Jekaterina Drozdovica, ‘Oil Price Forecast: Will WTI and Brent Regain Momentum in 2023’ (Capital.com, 18 January 2023) <https://capital.com/oil-price-forecast> accessed 5 July 2024.

Dan Welsby and others, ‘Unextractable Fossil Fuels in a 1.5 °C World’ (2021) 597 Nature 230, 231.

Jaccard, Hoffele and Jaccard (n 54) 25.

See Bin Cheng, General Principles of Law as Applied by International Courts and Tribunals (Grotius Publications, Cambridge 1987) 241–53.

ILC (n 16) Commentaries 9–10.

ILC ibid Commentaries 10; James Crawford, ‘Third report on State Responsibility’ (2000) UN Doc A/CN.4/507, para 27.

Martin Jarrett, Contributory Fault and Investor Misconduct in Investment Arbitration (CUP 2009) 44.

ILC (n 74).

Elettronica Sicula SpA (ELSI) (United States of America v Italy), Judgement (20 July 1989) ICJ Reports 1989, paras 75, 100–101.

Biwater Gauff (Tanzania) Ltd v Tanzania, ICSID Case No ARB/05/22, Award (24 July 2008) paras 785–7.

ibid paras 788–99.

ibid para 807.

Jaccard, Hoffele and Jaccard (n 72).

Ipek Gençsü and others, ‘G20 Coal Subsidies: Tracking Government Support to a Fading Industry’ (The Natural Resources Defense Council, The International Institute for Sustainable Development and Oil Change International, June 2019) <https://cdn.odi.org/media/documents/12744.pdf> accessed 25 July 2024.

Irene Monasterolo and Marco Raberto, ‘The Impact of Phasing out Fossil Fuel Subsidies on the Low-Carbon Transition’ (2019) 124 Energy Policy 355, 356.

Gençsü and others (n 83).

Eskosol SPA in Liquidazione v Italy, ICSID Case No ARB/15/50, Award of the Tribunal (4 September 2020) footnote 577.

Eg Antin Infrastructure Service Luxembourg and Antin Energia Termosolar v Spain, ICSDI Case No ARB/13/31, Award (15 June 2018) para 675; CEF Energia v Italy, SCC Arbitration (2015/158), Award (16 January 2019) para 266.

ibid CEF Energia.

Kyla Tienhaara, Lise Johnson and Michael Burger, ‘Valuating Fossil Fuel Assets in an Era of Climate Disruption’ (Investment Treaty News, 20 June 2020) <https://www.iisd.org/itn/en/2020/06/20/valuing-fossil-fuel-assets-in-an-era-of-climate-disruption/> accessed 20 July 2024.

Eg the ConocoPhillips tribunal excluded States’ unlawful act from the determination of the discount rate as States could not benefit from their wrongdoings. ConocoPhillips (n 31) para 906; conversely, the Venezuela Holdings tribunal incorporated country risk as a willing buyer would also do the same. Venezuela Holdings (n 59) para 365–8.

ILC (n 16).

Gaetano Arangio-Ruiz, ‘Second report on State responsibility’ (1989) DOCUMENT A/CN.4/425 and Add.1.

ILC (n 16) Commentaries 2–5.

ibid Commentaries 5.

Borzu Sabahi, Kabir Duggal and Nicholas Birch, ‘Principles Limiting the Amount of Compensation’ in Christina L. Beharry (ed), Contemporary and Emerging Issues on the Law of Damages and Valuation in International Investment Arbitration (Brill, Leiden, the Netherlands 2018) 323–46, 326–7.

Jarrett (n 76) 86.

ibid 92.

MTD Equity Sdn. Bhd. and MTD Chile SA v Chile, ICSID Case No ARB/01/7, Award (25 May 2004), paras 169 and 173.

ibid paras 188–9.

100

ibid paras 242–3.

101

According to the report produced by the Intergovernmental Panel on Climate Change (IPCC) in 1990, climate change mitigation necessitates phasing out fossil fuels. IPCC, Climate Change: The 1990 and 1992 IPCC Assessments (IPCC 1992) 61–2.

102

The United Nations Framework Convention on Climate Change (UNFCCC) entered into force in 1994, where States committed to formulate and implement climate change mitigation programmes by addressing anthropogenic emission. UNFCCC (entered into force 21 March 1994) 1771 UNTS 107 art 4(b); the majority of operating fossil fuel investments were made after that. See eg Global Energy Monitor, ‘Global Oil and Gas Extraction Tracker’ <https://globalenergymonitor.org/projects/global-oil-gas-extraction-tracker/tracker-map/> accessed 20 July 2024.

103

MTD (n 98) Decision on Annulment (21 March 2007) para 101; Occidental Petroleum Corporation and Occidental Exploration and Production Company v Ecuador, ICSID Case No ARB/06/11, Award (5 October 2012) para 670.

104

For example, the damage awarded in Hulley v Russia still amounted to USD 40 billion after a 25% reduction for the investor’s contributory negligence. Hulley Enterprises Limited (Cyprus) v Russia, UNCITRAL, PCA Case No 2005–03/AA226, Final Award (18 July 2014) para 7.32.

105

Jarrett (n 76) 95–8.

106

Bonnitcha and Brewin (n 12).

107

See Peter Muchlinski, ‘“Caveat Investor”? The Relevance of the Conduct of the Investor Under the Fair and Equitable Treatment Standard’ (2008) 55 International & Comparative Law Quarterly 527.

108

See generally, Teerawat Wongkaew, Protection of Legitimate Expectations in Investment Treaty Arbitration: A Theory of Detrimental Reliance (CUP 2019).

109

Marzal (n 15) 298–9.

110

ibid 299; see also Wongkaew (n 108) 64–103.

111

Marzal ibid 301–02.

112

International Energy Charter, ‘Handbook on General Provisions Applicable to Investment Agreements in the Energy Sector’ (2017) <https://www.energycharter.org/fileadmin/DocumentsMedia/Other_Publications/20171116-newHandbook.pdf> accessed 1 October 2021.

113

Moshe Hirsch, ‘Between Fair and Equitable Treatment and Stabilization Clause: Stable Legal Environment and Regulatory Change in International Investment Law’ (2011) 12 The Journal of World Investment & Trade 783, 791–2.

114

Sergey Ripinsky, ‘Damages Assessment in the Spanish Renewable Energy Arbitrations: First Awards and Alternative Compensation Approach Proposal’ (2020) 2 Transnational Dispute Management 2.

115

Marzal (n 15) 307.

116

Tribunals have upheld the principle that reparation cannot exceed the harm effectively suffered. Eg The PV Investors v Spain, PCA Case No 2012–14, Final Award (28 February 2020) para 792.

117

Tribunals have held that the only legitimate expectation investors could have had is that of a reasonable rate of return on their investments. See ibid, footnote 778.

118

Sandrine Maljean-Dubois and Vanessa Richard, ‘The Applicability of International Environmental Law to Private Enterprises’ in Pierre-Marie Dupuy and Jorge E Viñuales (eds), Harnessing Foreign Investment to Promote Environmental Protection: Incentives and Safeguards (CUP, New York, USA 2013) 80, 69–96.

119

Entered into force 27 January 1980, 1155 United Nations, Treaty Series (UNTS) 331.

120

See Electronic Database of Investment Treaties <https://edit.wti.org/document/investment-treaty/search> accessed 14 July 2024.

121

Eg Argentina–Italy Bilateral Investment Treaty (BIT) (entered into force 14 October 1993) art 8(7); see also Christoph Schreuer, ‘Jurisdiction and Applicable Law in Investment Treaty Arbitration’ (2014) 1 McGill Journal of Dispute Resolution 1, 11–3.

122

ICSID, ‘Convention on the Settlement of Investment Disputes Between States and Nationals of Other States’ (adopted 18 March 1965, entered into force 14 October 1966) 575 UNTS 159, art 42(1).

123

UNCITRAL Arbitration Rules (as revised in 2021), United Nations General Assembly (UNGA) Resolution 76/108 (9 December 2021) art 35(1); ICC Arbitration Rules (entered into force 1 January 2021) art 21(1).

124

Compañia del Desarrollo de Santa Elena v Costa Rica, ICSID Case No ARB/96/1, Award (17 February 2000) paras 71–72.

125

Southern Pacific Properties (Middle East) Limited v Egypt, ICSID Case No ARB/84/3, Award (20 May 1992) para 191.

126

Turgut and others v Turkey App no 1411/03 (ECtHR, 8 July 2008), para 90; Turgut and others v Turkey App no 1411/03 (ECtHR, 13 October 2009), para 14.

127

Theodoraki and others v Greece App no 9368/06 (ECtHR, 2 December 2010), paras 11–12.

128

Eg Técnicas Medioambientales Tecmed v Mexico, ICSID Case No ARB(AF)/00/2, Award (29 May 2003) para 116 & 122.

129

Eg Kyoto Protocol to the UNFCCC (adopted 11 December 1997, entered into force 16 February 2005) 2303 UNTS 148 art 3(1).

130

The UNFCCC decision concluded in 2023 explicitly urges governments, for the first time, to transition away from fossil fuels in their energy systems. However, this is not a binding obligation. UNFCCC, Conference of the Parties serving as the meeting of the Parties to the Paris Agreement Fifth session 30 November to 12 December 2023 ‘First global stocktake’ (13 December 2023) FCCC/PA/CMA/2023/L.17 II.A.28.(d).

131

Anja Ipp, Annette Magnusson and Andrina Kjellgren, ‘The Energy Charter Treaty, Climate Change and Clean Energy Transition: A Study of the Jurisprudence’ (2022) <https://www.climatechangecounsel.com/_files/ugd/f1e6f3_d184e02bff3d49ee8144328e6c45215f.pdf> accessed 2 July 2024.

132

Moshe Hirsch, ‘Conflicting Obligations in International Investment Law: Investment Tribunals’ Perspective’ in Tomer Broude and Yuval Shany (eds), The Shifting Allocation of Authority in International Law: Considering Sovereignty, Supremacy and Subsidiarity (Hart Publishing, Portland, USA 2008) 329, 323–44.

133

Ipp, Magnusson and Kjellgren (n 131).

134

Hirsch (n 132) 339.

135

Oliver Hailes, ‘Unjust Enrichment in Investor–State Arbitration: A Principled Limit on Compensation for Future Income from Fossil Fuels’ (2022) 32 Review of European, Comparative & International Environmental Law 358, 359.

136

Kate Miles, The Origins of International Investment Law: Empire, Environment and the Safeguarding of Capital (CUP 2013) 133–4.

137

Flavia Marisi, Environmental Interests in Investment Arbitration: Challenges and Directions (Kluwer Law International 2020) 59.

138

Mizan R Khan, ‘Polluter-Pays-Principle: The Cardinal Instrument for Addressing Climate Change’ (2015) 4 Laws 638, 640.

139

Thomas M Franck, Fairness in International Law and Institutions (OUP 1998) 361.

140

UNGA (12 August 1992) A/CONF.151/26 (Vol. I) Principle 16.

141

International Convention on Oil Pollution Preparedness, Response and Cooperation (Adopted 30 November 1990, entered into force 13 May 1995) 1891 UNTS 77 Preamble.

142

Marisi (n 137) 49–50.

143

David Hunter and Steve Porter, ‘International Environmental Law and Foreign Direct Investment’, in Daniel Bradlow and Alfred Escher (eds), Legal Aspects of Foreign Direct Investment (Kluwer Law International, the Hague, the Netherlands 1999) 161–204.

144

Ole Kristian Fauchald, ‘Property and Environmental Protection in Investor – State Arbitration’ in Gerd Winter (ed), Property and Environmental Protection in Europe (Europa Law Publishing, Zutphen, the Netherlands 2015) 76–93.

145

Marion Unglaube v Costa Rica, ICSID Case No ARB/08/1, Award (16 May 2012) para 309.

146

Metalclad Corporation v Mexico, ICSID Case No ARB(AF)/97/1, Award (30 August 2000) para 127.

147

Tecmed (n 128) para 193–5.

148

Nicolas de Sadeleer, Environmental Principles: From Political Slogans to Legal Rules (2nd edn, OUP 2020) 49–53.

149

Benoit Mayer, The International Law on Climate Change (CUP 2018) 74.

150

Katharine Ricke and others, ‘Country-Level Social Cost of Carbon’ (2018) 8 Nature Climate Change 895, at 895.

151

Tienhaara, Johnson and Burger (n 89) Despite acknowledging the limitations of social cost of carbon estimates, the court upheld its adoption in the judgement. Zero Zone, Inc, et al v United States Department of Energy, et al, 832 F.3d 654 (United States Court of Appeals, Seventh Circuit. 8 August 2016).

152

Ricke and others (n 150).

153

See Responsibilities and obligations of States with respect to activities in the Area, Advisory Opinion (1 February 2011) ITLOS Reports 2011, 10, para 135.

154

UNGA, ‘Rio Declaration on Environment and Development’ (12 August 1992) A/CONF.151/26 (Vol I) Principle 15.

155

Philippe Sands and others, Principles of International Environmental Law (4th edn, CUP 2018) 234.

156

Tomoko Ishikawa, ‘The Role of the Precautionary and Polluter Pays Principles in Assessing Compensation’ (September 2015) RIETI Discussion Paper Series 15-E-107 <https://www.rieti.go.jp/jp/publications/dp/15e107.pdf> accessed 21 July 2024.

157

Bilcon of Delaware v Canada, PCA Case No 2009–04, Award on Damages (10 January 2019) paras 276–9.

158

Ishikawa (n 156).

159

See UNCITRAL, ‘Possible reform of investor-State dispute settlement (ISDS): Assessment of damages and compensation’ (Forty-third session, Vienna, 5–16 September 2022) A/CN.9/WG.III/WP.220.

160

India–Belarus BIT (entered into force 5 March 2020) art 26.3.

161

SADC, ‘SADC Model Bilateral Investment Treaty Template with Commentary’ (July 12) <https://www.iisd.org/itn/wp-content/uploads/2012/10/sadc-model-bit-template-final.pdf> accessed 6 February 2023, art 6.

162

Bonnitcha and Brewin (n 12).

163

Emma Aisbett and Jonathan Bonnitcha, ‘A Pareto-Improving Compensation Rule for Investment Treaties’ (2021) 24 Journal of International Economic Law 181, 183.

164

Kathryn Gordon and Joachim Pohl, ‘Investment Treaties over Time – Treaty Practice and Interpretation in a Changing World’ (2015) OECD Working Papers on International Investment 2015/02 <https://www.oecd.org/investment/investment-policy/WP-2015-02.pdf> accessed 6 July 2024.

165

Nathan Cooper and Amy White, ‘IPCC Report: Urgent Climate Action Needed to Halve Emissions by 2030’ (World Economic Forum, 6 April 2022) <https://www.weforum.org/agenda/2022/04/ipcc-report-mitigation-climate-change/> accessed 6 July 2024.

166

Gordon and Pohl (n 164).

167

Eleni Methymaki and Antonios Tzanakopoulos, ‘Masters of Puppets? Reassertion of Control through Joint Investment Treaty Interpretation’ in Andreas Kulick (ed), Reassertion of Control over the Investment Treaty Regime (CUP, New York, USA 2017) 155–81, at 177–8.

168

Panos Merkouris, ‘Interpreting Customary International Law: You’ll Never Walk Alone’ in Panos Merkouris, Jörg Kammerhofer and Jörg Kammerhofer (eds), The Theory, Practice, and Interpretation of Customary International Law (CUP, Cambridge, UK 2022) 347–69, 347, 354–61.

169

Martins Paparinskis, ‘Crippling Compensation in the International Law Commission and Investor-State Arbitration’ (2022) 37 ICSID Review—Foreign Investment Law Journal 289, at 299–300.

170

Matteo Fermeglia, ‘Cashing-In on the Energy Transition? Assessing Damage Evaluation Practices in Renewable Energy Investment Disputes’ (2022) 23 The Journal of World Investment & Trade 982, at 1015.

171

Merkouris (n 168) 362–3.

172

Treaties can be used to define or interpret concepts and rules contained in CIL. Marina Fortuna, ‘Different Strings of the Same Harp: Interpretation of Rules of Customary International Law, Their Identification and Treaty Interpretation’ in Panos Merkouris, Jörg Kammerhofer and Jörg Kammerhofer (eds), The Theory, Practice, and Interpretation of Customary International Law (CUP, Cambridge, UK 2022) 393–413, 410–2.

173

One recent work programme of the OECD is The Future of Investment Treaties, which concerns various issues including investment treaties and climate change. OECD, ‘The Future of Investment Treaties’ <https://www.oecd.org/investment/investment-policy/investment-treaties.htm> accessed 1 July 2024.

174

UNCITRAL Working Group III has proposed provisions on procedural and cross-cutting issues, including provisions on assessment of damages and compensation. UNCITRAL, ‘Possible reform of investor-State dispute settlement (ISDS): Draft provisions on procedural and cross-cutting issues’ (Forty-sixth session, Vienna, 9–13 October 2023) A/CN.9/WG.III/WP.231.

175

Entered into force 24 October 1945, 1 UNTS XVI.

176

See Statute of the International Court of Justice, 59 Stat 1055 (1945) TS No 993 art 59.

177

For an overview of the influence of ICJ advisory opinions on CIL, see Teresa F Mayr and Jelka Mayr-Singer, ‘Keep the Wheels Spinning: The Contributions of Advisory Opinions of the International Court of Justice to the Development of International Law’ (2016) 76 Zeitschrift für ausländisches öffentliches Recht und Völkerrecht, at 443–446.

Author notes

This is an Open Access article distributed under the terms of the Creative Commons Attribution License (https://creativecommons.org/licenses/by/4.0/), which permits unrestricted reuse, distribution, and reproduction in any medium, provided the original work is properly cited.

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Article Contents

Rethinking the ‘Full Reparation’ standard in energy investment arbitration: how to take climate change into account

Abstract

Introduction

Standard of compensation in energy investment arbitration and its implications

Grounds to reduce amount of compensation awarded in investment arbitration triggered by fossil fuel phase-out measures

Depressed energy prices in the peak demand era

Unviability of fossil fuel projects

Causation

Contributory fault

Legitimate expectations

International environmental obligations

Polluter pays and precautionary principles

Possible interpretation document regarding the meaning of ‘full reparation’ standard in investment arbitration triggered by fossil fuel phase-out policies

Conclusion

Footnotes

Author notes

Citations

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Article Contents

Rethinking the ‘Full Reparation’ standard in energy investment arbitration: how to take climate change into account

Abstract

Introduction

Standard of compensation in energy investment arbitration and its implications

Grounds to reduce amount of compensation awarded in investment arbitration triggered by fossil fuel phase-out measures

Depressed energy prices in the peak demand era

Unviability of fossil fuel projects

Causation

Contributory fault

Legitimate expectations

International environmental obligations

Polluter pays and precautionary principles

Possible interpretation document regarding the meaning of ‘full reparation’ standard in investment arbitration triggered by fossil fuel phase-out policies

Conclusion

Footnotes

Author notes

Citations

Views

Altmetric

Email alerts

Citing articles via

Latest

Most Read

Most Cited

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