A Multifaceted Approach to Trade Liberalisation and Investment Protection in the Energy Sector 9789004463486, 9789004463479

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A Multifaceted Approach to Trade Liberalisation and Investment Protection in the Energy Sector

Elena Cima and Makane Moïse Mbengue - 978-90-04-46348-6

International Environmental Law Series Editor Makane Moïse Mbengue

volume 15

The titles published in this series are listed at brill.com/​iel

Elena Cima and Makane Moïse Mbengue - 978-90-04-46348-6

A Multifaceted Approach to Trade Liberalisation and Investment Protection in the Energy Sector Edited by

Elena Cima and Makane Moïse Mbengue

LEIDEN | BOSTON

Elena Cima and Makane Moïse Mbengue - 978-90-04-46348-6

Library of Congress Cataloging-in-Publication Data Names: Cima, Elena, editor. | Mbengue, Makane Moïse, editor. Title: A multifaceted approach to trade liberalisation and investment protection in the energy sector / edited by Elena Cima and Makane Moïse Mbengue. Description: Leiden ; Boston : Brill, [2021] | Series: International environmental law, 1873-6599 ; volume 15 | Includes bibliographical references and index. | Summary: “This volume draws on a diverse range of international academic expertise and practical experience to enhance the reader’s understanding of the shortcomings of existing international trade and investment law disciplines in their application to the multi-faceted nature of energy, and to explore possible avenues to bridge the gap between different areas of international law, with the ultimate goal of paving the way to a multi-faceted and comprehensive approach to the subject matter”– Provided by publisher. Identifiers: lccn 2021024068 (print) | lccn 2021024069 (ebook) | isbn 9789004463479 (hardback) | isbn 9789004463486 (ebook) Subjects: lcsh: Power resources. | Energy industries. | Free trade. | International trade. Classification: lcc HD9502.A2 M843 2021 (print) | lcc HD9502.A2 (ebook) | ddc 333.79–dc23 lc record available at https://lccn.loc.gov/2021024068 lc ebook record available at https://lccn.loc.gov/2021024069

Typeface for the Latin, Greek, and Cyrillic scripts: “Brill”. See and download: brill.com/​brill-​typeface. issn 1873-​6 599 isbn 978-​9 0-​0 4-​4 6347-​9 (hardback) isbn 978-​9 0-​0 4-​4 6348-​6 (e-​book) Copyright 2021 by Koninklijke Brill nv, Leiden, The Netherlands. Koninklijke Brill nv incorporates the imprints Brill, Brill Nijhoff, Brill Hotei, Brill Schöningh, Brill Fink, Brill mentis, Vandenhoeck & Ruprecht, Böhlau Verlag and V&R Unipress. All rights reserved. No part of this publication may be reproduced, translated, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission from the publisher. Requests for re-​use and/​or translations must be addressed to Koninklijke Brill nv via brill.com or copyright.com. This book is printed on acid-​free paper and produced in a sustainable manner.

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Contents  List of Tables vii  Notes on Contributors viii 1  When Turning a Blind Eye Is No Longer an Option: The Importance of Tackling Energy Trade and Investment Law from Multiple Fronts 1 Elena Cima and Makane Moïse Mbengue 2  Dissecting the Green Component of 21st Century Industrial Policy in the Energy Sector: Implications for the wto System 16 Ilaria Espa 3  Stabilisation Clauses in Long-​Term Investment Contracts: Their Evolution and Their Application by Investment Tribunals 43 Athina Fouchard Papaefstratiou 4  The Implications of Sustainable Development Goals for Energy Trade and Investment 70 Jason Rudall 5  The International Governance of Fossil Fuel Subsidies as Testing Ground for the Fragmentation and Deformalisation of International Law? 92 Harro van Asselt and Cleo Verkuijl 6  Collective Entitlements over Energy 126 Ginevra Le Moli 7  Non-​Trade Concerns in International Economic Law: Can Trade Agreements Work for Renewable Energy? 148 Elena Cima 8  EU State Aid Law, wto Subsidies Disciplines and Renewable Energy Support Schemes: Disconnected Paradigms in Decarbonizing the Grid? 179 Anna-​Alexandra Marhold

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vi Contents 9  Greening International Investment Arbitration 218 Makane Moïse Mbengue and Elena Cima 10  Concluding Remarks 241 Elena Cima and Makane Moïse Mbengue Index 245

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Tables 2.1  w to disputes on trade remedies in renewable energy (as of June 2019) 33 5.1  International institutions addressing fossil fuel subsidies 98 5.2  Fossil fuel subsidy estimates by the iea, imf, and oecd 118 7.1  Free trade agreements signed by the EU 151 7.2  Free trade agreements signed by the US 152

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Notes on Contributors Elena Cima is a Lecturer in Energy Law at the University of Geneva (Institute for Environmental Sciences and Faculty of Law). She holds a PhD Degree in International Law (summa cum laude) from the Graduate Institute of International and Development Studies in Geneva, a Bachelor of Laws ll.b (Hons) from the University of Milan and an ll.m degree from Yale Law School, where she was editor of the Yale Journal of International Law. She has co-​edited the book China’s Influence on Non-​Trade Concerns in International Economic Law (Routledge 2016) and has published articles in peer-​reviewed journals on international trade law, energy law, and Chinese law and policy. She has taught trade and climate change law at Peking University and currently teaches courses on international energy law and international environmental law at the University of Geneva. Ilaria Espa is Assistant Professor of International Economic Law at usi, Senior Research Fellow at the World Trade Institute (wti) and Adjunct Professor at the Università Cattolica del Sacro Cuore. Formerly awarded a Marie Curie fellowship from the European Commission for her post-​doctoral studies (2013–​2015), Ilaria was a member of the wti-​based nccr Trade Regulation Programme until its expiration in 2017 in addition to acting as Scientific Coordinator of the wti Doctoral Programme (2015–​2017). Ilaria holds a PhD in International Law and Economics from the Department of Legal Studies of Bocconi University and was a visiting scholar at Columbia Law School in 2012. She also holds a ba in Political Science and an ma in International Relations from Luiss University. She has published extensively on issues at the intersection of trade and sustainability, mainly in the areas of climate change, energy and commodities, as well as on the law governing the sustainable management of natural resources, always from a multi-​layered governance perspective. In particular, she is the author of a monograph on Export Restrictions on Critical Minerals and Metals: Testing the Adequacy of wto Disciplines (Cambridge University Press, 2015) and the co-​editor of the volume on International Trade in Sustainable Electricity: Regulatory Challenges in International Economic Law (Cambridge University Press, 2017).

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Athina Fouchard Papaefstratiou Counsel at Eversheds Sutherland (Paris), is an arbitration practitioner with fifteen years’ experience in commercial and investment arbitrations in various sectors such as telecommunications, mining, international sale of goods and construction. She has significant experience in Africa-​related arbitrations and serves regularly as arbitrator. Recognised by her peers and clients as a market leader, Athina publishes, teaches and and speaks in conferences on issues of arbitration, international law and contract law. She is a founding member of AfricArb, an association of professionals focusing on Africa-​related arbitration, the Chair of the Steering Committee of CIArb ymg, a member of the icc Arbitration Commission and a Board member of the Arbitration Committee of icc Greece. She is registered with the Bar in Paris and in Athens and works in English, French, and Greek. Ginevra Le Moli is Assistant Professor of Public International Law at the Institute of Public Law and the Grotius Centre for International Legal Studies at Leiden University. She holds a PhD in international law (summa cum laude) and an ll.m. (cum laude) from The Graduate Institute, Geneva, a Diploma in International Law from the lse, and an ll.b. and a Masters in Law (cum laude) from the University of Roma Tre. From September 2020, she is conducting a full-​time 18-​month Swiss National Science Foundation-​funded research project on “Who Owns Natural Resources?” at the Universities of Cambridge and Geneva. Anna-​Alexandra Marhold is Assistant Professor at the Institute of Public Law and the Grotius Centre for International Legal Studies at Leiden University. Her specialization is international economic law, with a particular focus on international trade law at the intersection of energy and environmental regulation. Anna Marhold obtained her PhD in Law at the European University Institute (eui) in Florence (2016). In 2015, she was a Marie Curie Early Stage Research Fellow at the Graduate Institute in Geneva, Switzerland, in the framework of dissettle (Dispute Settlement in Trade: Training in Law and Economics). In 2013–​2014, Anna was a recipient of the EU-​US Fulbright-​Schuman Grant and a visiting scholar at nyu School of Law, USA. She is a graduate in Law (llb, llm), specializing in international trade and investment law, and in Russian (ba, ma) from the University of Amsterdam (UvA). Prior to joining Leiden in 2019, Anna was Assistant Professor at the Tilburg Law and Economics Centre (tilec).

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Makane Moïse Mbengue is Professor of International Law, as well as Director of the International Law Department, at the Faculty of Law of the University of Geneva. He is also a Visiting Professor at Sciences Po Paris (School of Law). He currently serves as a Visiting Faculty at the Gujarat National Law University (Gandhinagar, India), as well as a Professor and Expert of the United Nations Institute for Training and Research (unitar) and an Expert of the International Institute for Sustainable Development (iisd). He is the author of Essai sur une théorie du risque en droit international public. L’anticipation du risque environmental et sanitaire (Pedone 2009), Africa Within the International Organization (Pedone 2012), and, with Laurence Boisson de Chazournes, Richard Desgagne and Cesare Romano, of Protection internationale de l’environnement (Pedone 2005). He has recently co-​ edited The Gabcikovo Nagymaros Case and its Contribution to the Development of International Law (Brill, 2020) and he is one of the editors of the Journal of International Dispute Settlement. Jason Rudall is Assistant Professor of Public International Law at Leiden University. He has taught and published in the areas of public international law, international environmental law, international investment law, dispute settlement, human rights and legal theory. His two major monographs are Altruism in International Law (Cambridge University Press, forthcoming 2021) and Compensation for Environmental Damage under International Law (Routledge, 2020). In addition to his academic activities, he has worked with international organisations, ngo s and law firms, as well as being involved in several investor-​state arbitration cases. He holds a PhD and Master in International Law from the Graduate Institute, Geneva, and a law degree from Trinity College Dublin. Harro van Asselt is a Professor of Climate Law and Policy with the University of Eastern Finland (uef) Law School, Visiting Research Fellow with Utrecht University’s Copernicus Institute of Sustainable Development. He is an expert on interactions between international climate change governance and other fields of international governance. Van Asselt worked at the Stockholm Environment Institute, where he remains an affiliated researcher. He is the author of The Fragmentation of Global Climate Governance (Edward Elgar 2014), co-​editor of Governing Climate Change and The Politics of Fossil Fuel Subsidies and Their Reform (both Cambridge University Press 2018), and he has more than 80 publications in peer-​reviewed academic journals and books. He is also the Editor

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of the Review of European, Comparative & International Environmental Law (reciel). Cleo Verkuijl is a researcher at the Stockholm Environment Institute. Her research focuses on legal and political dimensions of international climate change governance, including ways to increase international ambition and action to address the supply of fossil fuels. She is a coordinating lead author of the Production Gap Report: first released in 2019 by leading research organizations and the UN, this is the first assessment of the gap between the targets of the Paris Agreement and countries’ planned production of coal, oil and gas. Cleo holds an ll.m in Global Environment and Climate Law from the University of Edinburgh.

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When Turning a Blind Eye Is No Longer an Option The Importance of Tackling Energy Trade and Investment Law from Multiple Fronts Elena Cima and Makane Moïse Mbengue 1

Introduction

“There is no substitute for energy,” Ernst Friedrich Schumacher wrote in 1964. “The whole edifice of modern life is built upon it. Although energy can be bought and sold like any other commodity, it is not ‘just another commodity’, but the precondition of all commodities, a basic factor equally with air, water and earth.”1 When he penned these words, having served as Economic Advisor to the British National Coal Board for nearly 20 years, Schumacher was concerned with many aspects of modern energy production and consumption, such as economic globalization, industrial practices, transport, and technological innovation.2 Moreover, during those years, energy trade had begun transcending national borders and had acquired an inherently international nature. This transformation necessarily had an impact on the regulatory models related to different portions of the energy value chain, from exploration and extraction, to storage, transport, distribution, and consumption.3 Separate national regimes were no longer sufficient to govern what had become an international energy market: “international markets call for international regulation”4 and the application of international law principles and norms in the context of energy has accordingly developed and consolidated rapidly.5 While specific international law instruments have been negotiated to regulate specific facets of the energy industry –​in particular in the context of nuclear 1 E.F. Schumacher, Energy International (1964). 2 Barrie Pittock and G. Dale Hess, ‘Sustainable Atmospheric Management’, in Kala Sravanamuthu (ed.), Extending Schumacher’s Concept of Total Accounting and Accountability into the 21st Century (Emerald Group Publishing, 2009), 194. 3 Kim Talus, ‘Internationalization of Energy Law’, in Kim Talus (ed.), Research Handbook of International Energy Law (Edward Elgar, 2015), 5. 4 Ibid. 5 Adrian Bradbrook, ‘Energy Law as an Academic Discipline’, 14 Journal of Energy and Natural Resources Law 193 (1996).

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energy –​many general rules of international law apply to energy, as they apply to all economic sectors alike. This is the case for the general rules of international law regulating trade among nations, as well as foreign investments, commonly known as ‘international economic law’. The peculiar nature of energy, however –​a commodity that is not ‘just another commodity’ –​presents international (economic) law with a significant set of challenges and often requires specific ad-​hoc rules. Besides world concern for the restriction of trade barriers, another reasons why international law has been playing an increasingly significant role in this domain relates to the potentially serious impacts of energy activities on the environment as well as on a number of human rights. While only half a century ago this was not the case, today, the international dimension not only of energy operations but of their environmental and human rights impacts is broadly recognized. This message has been brought home to the international community by a series of oil tanker disasters, nuclear accidents, as well as the emergence of global phenomena such as climate change, dumping of radioactive wastes, and acid rain.6 When it comes to environmental harm in particular, energy is part of both the problem and the solution: if, on the one hand, unsustainable practices in energy production and consumption can lead to a plethora of environmental problems, sustainable practices can be extremely beneficial to ensuring environmental protection and advancing sustainable development goals.7 In fact, a number of international environmental law instruments urge the transition from fossil fuels to renewable energy, the adoption of ‘green’ energy production and consumption patterns, and the regulation of many energy-​related activities to increase energy efficiency and the dissemination of ‘cleaner’ fuels.8 Against this backdrop, international trade and investment law face two significant sets of challenges when it comes to regulating the energy sector. First, although their mandate is not to regulate international energy trade and investment respectively –​but rather trade and investment more broadly –​ energy does often require a special discipline and the task of adapting general rules to specific industries is filled with obstacles and difficulties. Second, both

6 See Rosemary Lyster and Adrian Bradbrook, Energy Law and the Environment (Cambridge University Press, 2006), 36. 7 See e.g. Jorge E. Viñuales, Foreign Investment and the Environment in International Law (Cambridge University Press, 2012); Daniel C. Esty and Andrew S. Winston, Green to Gold (Yale University Press, 2006). 8 See e.g. 2030 Agenda for Sustainable Development, Goal 7. See Chapter 4 [Rudall] in this volume.

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regimes have been traditionally fairly oblivious of the impact of energy trade and investment on the environment and human rights, and the time has come for a change of course. This volume seeks to contribute exactly to this vital dialogue. It draws on a diverse range of international academic expertise and practical experience to enhance the reader’s understanding of the shortcomings of existing international trade and investment law disciplines in their application to the multi-​faceted nature of energy, and to explore possible avenues to bridge the gap between different areas of international law, with the ultimate goal of paving the way to a multi-​faceted and comprehensive approach to the subject matter. 2

International Economic Law and the Challenges of Capturing the Essence of Energy

Multilateral trade rules were not designed with energy in mind. When the General Agreement on Tariffs and Trade (gatt) was negotiated in the second half of the 1940s, the link with oil producing and exporting countries was especially weak. On the one hand, most oil-​exporting countries in Asia and Africa still had a colony status and their energy resources were exploited by foreign multinational corporations.9 On the other, Europe had nearly no domestic oil production while the United States had similarly become a net importer of oil after the Second World War, which had led to very low import tariffs.10 As the drafting of the gatt was led by European and U.S. negotiators and the agreement itself was initially dedicated to the gradual reduction of tariffs, it is no surprise that energy was not a topic of discussion, at least in the context of the first rounds of negotiations.11 The situation began to change after the 1973 oil crisis and the release of the first Intergovernmental Panel on Climate Change (ipcc) report in 1990: with the emergence of energy security and climate change as global, pressing issues, the topic of energy made its first appearance on the table of trade negotiators.12 Gradually, oil producing and

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Andrea Jiménez-​Guerra, ‘The World Trade Organization and Oil’, Oxford Institute for Energy Studies, SP12 (October 2001), 13. 10 Ibid. 11 For an overview of the negotiations that led to the final drafting of the gatt, see Douglas Irwin et al., The Genesis of the GATT (Cambridge University Press, 2008). 12 See Melaku Geboye Desta, ‘The Organization of Petroleum Exporting Countries, the World Trade Organization, and Regional Trade Agreements’, 37(3) Journal of World Trade 523 (2003); Alan Yanovich, ‘WTO Rules and the Energy Sector’, in Yulia Selivanova (ed.),

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exporting countries joined the newly established World Trade Organization (wto), followed by China, one of the largest energy consumers, and Ukraine, a very important transit country for natural gas. At the same time, environmentalists began knocking on the wto’s doors asking its members to acknowledge the importance of facilitating trade in renewable energy goods, services, and technologies as part of broader climate change mitigation strategy. Although not designed with energy in mind, international trade norms are nevertheless relevant for the energy sector: they impose disciplines on all trade in goods and services –​past, present, and future –​and, to the extent that energy can be classified as a good or a service, relevant wto rules will apply. As noted by Bradbrook in his 1996 seminal paper Energy Law as an Academic Discipline, it was perfectly clear that international trade norms –​and in particular those of the gatt and of the North American Free Trade Agreement that had just been negotiated –​had “the potential to impinge upon energy trade in a number of important respects.”13 However, in 1996, it was not yet entirely clear what would be the exact implications of these rules in the energy context. What was soon to become clear, on the other hand, was the relative inadequacy of at least some of these rules. Because energy is not ‘just another commodity’, it requires ad-​hoc rules, able to fully capture the specificities of its unique industry, and the one-​size-​fits-​ all approach of wto disciplines might not always be adequate to effectively regulate energy trade. Energy transit, for instance, being often linked to fixed infrastructure, is partly different from transit of many other goods and requires specific disciplines. The gatt, however, establishes a general rule of freedom of transit and regulates all transit by the same token, completely disregarding a number of specific matters that are absolutely key in the energy context. Similarly, multilateral trade rules do not allow countries to treat electricity differently depending on whether it is generated from fossil, renewable, or fissile energy. However, each of these energy sources presents unique characteristics, advantages, and challenges, thus calling for a more fine-​grained approach. Even in the context of the regulation of foreign investments, opting for a one-​size-​fits-​all approach does not always represent the most suitable route. Generally speaking, energy projects require large capital investments and,

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Regulation of Energy in International Trade Law: WTO, NAFTA, and Energy Charter 1–​47 (Kluwer Law International, 2011). Bradbrook, ‘Energy Law’ (n 5) 205. See e.g. Ernest E. Smith and David P. Cluchey, ‘GATT, NAFTA and the Trade in Energy: A US Perspective’, 12 Journal of Energy and Natural Resources Law 27 (1994); Catherine Redgwell, ‘Energy, Environment and Trade in the European Community’, 12 Journal of Energy and Natural Resources Law 128 (1994).

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because they tend to involve long-​term agreements, they are exposed over long periods of time to political risk, which can be defined as “the possibility that political developments in the host state undermine the economics on which an investment decision was based,”14 ranging from the more straightforward cases of nationalization or forced renegotiation to more subtle and extensive examples of political problems a foreign investor might face.15 Moreover, energy projects and investments often produce significant social, economic, and political impacts, and raise thorny questions of energy security and state sovereignty. The level of state interference is higher than in most other sectors, and public and private interests must constantly be kept in balance.16 The severe uncertainty that characterizes this sector often leads to tensions between investors, who seek a stable and predictable investment climate, and host states, trying to retain sufficient policy space to protect important competing national interests.17 While it has been observed that, in a legal-​technical sense, “investment disputes in the energy sector are not fundamentally different from ‘regular’ investment disputes,”18 the specific characteristics of foreign investment in this industry should not be overlooked. Once again, energy is not ‘just another commodity’, and this is precisely the reason why certain rules have been developed which apply only to disputes related to investments in the energy sector. The adoption, in 1994, of the Energy Charter Treaty (ect) and the increasing number of disputes based on it are evidence that, although energy-​related investment arbitration is not fundamentally different from ‘regular’ investment arbitration, it does often involve the application of ad-​hoc rules and requires addressing issues and questions peculiar to this sector: even when the general rules apply –​for instance outside of the scope of ect –​the specific characteristics of the energy industry tend to influence the reasonings and decisions

14

Thomas W. Wälde, ‘Investment Arbitration Under the Energy Charter Treaty –​From Dispute Settlement to Treaty Implementation’ 12(4) Arbitration International 429 (1996), 431. 15 Ibid. 16 Argyrios A. Fatouros, ‘An International Legal Framework for Energy’, Recueil des cours (2007) 373. 17 Kaj Hobér, ‘Overview of Energy Charter Treaty Cases’, in M. Scherer (ed.), International Arbitration in the Energy Sector 175–​202 (Oxford University Press, 2018), 175. 18 Eric De Brabandere, ‘The Settlement of Investment Disputes in the Energy Sector’, in Eric De Brabandere and Tarcisio Gazzini (eds), Foreign Investment in the Energy Sector. Balancing Public and Private Interests 131 (Brill, 2014).

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of arbitral tribunals.19 However, the ect itself has not proven to be the silver bullet many countries had hoped for. Although tailored to energy specifically, its rules are not immune to criticism, and its future has become uncertain. 3

Economic v. Non-​Economic Values: Between Synergy and Conflict

Accounting for the specificities of the energy sector is but one of the challenges faced by international trade and investment law over the years. A second challenge requires the two regimes to account for the environmental and human rights impacts of trade and investment activities in this sector. Over the last decade, new concepts have emerged, trying to reconcile environmental and economic considerations. One example is the notion of ‘eco-​ efficiency’, which emphasizes the potential economic gains from reducing pollution and better managing natural resources. It follows that protecting the environment is no longer a matter merely of ‘responsibility’ but rather ‘profitability’ and states are now urged to build their economic models on environmental considerations in order to do better in economic terms.20 The underlying idea is that it is not sufficient to integrate environmental considerations in existing patterns of economic activity but rather to design a whole new economic paradigm to fit new environmental imperatives. This is summarized by the notion of ‘green economy’, which has had a strong impact on the private sector as it translates into the need to abandon certain modes of production, and sometimes to pursue new ‘greener’ business opportunities.21 Through what Daniel Esty and Andrew Winston call an ‘environmental lens’, moving from brown to green means moving from green to gold, as going ‘green’ “is not just a nice strategy tool or a feel-​good digression from the real work of a company [but rather] an essential element of business strategy in the modern world.”22 The United Nations (UN) 2030 Agenda for Sustainable Development identifies trade policies and investment schemes as instrumental to environmental protection and the achievement of many sustainable development goals, portraying these economic instruments as ‘means of implementation’ of the 19

See Anibal Sabater and Mark Stadnyk, ‘International Arbitration and Energy: How Energy Disputes Shaped International Investment Dispute Resolution’, in Kim Talus (ed.), Research Handbook on International Energy Law 199 (Edward Elgar, 2014). 20 Viñuales, Foreign Investment (n 7) 13. 21 See David Pearce et al., Blueprint for a Green Economy (Earthscan, 1990). 22 Esty and Winston, Green to Gold (n 7) 4.

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Partnership for Sustainable Development envisaged in the Agenda.23 As a result, non-​economic considerations have started shaping trade and investment policies and decisions with regards to the energy sector, and governments are proactively inducing a systemic shift in their production and consumption patterns in order to foster energy efficiency and facilitate the current renewable energy transition.24 Economic and non-​economic considerations have therefore become increasingly intertwined and, to a certain extent, inseparable in the realm of energy. This synergy, however, is not reflected at the level of international norms and regulations. Once again, the one-​size-​fits-​all approach adopted by the international trade and investment regimes fails to capture these recent developments and risks acting as a barrier, rather than an encouragement to the adoption of energy trade and investment policies along a ‘greener’ path. On the one hand, the international trade regime does not allow for environmental differentiation under its rules: the legitimacy of environmental regulations depends solely on what is produced rather than how it is produced, while the environmental footprint of processes and production methods is not taken into account in the substantive provisions of the agreements. However, when it comes to environmental measures, their environmental footprint is rarely –​if ever –​reflected in the final composition of a product. As a result, wto norms do not allow countries to distinguish, for instance, electricity sourced from renewables from electricity sourced from fossil fuels. After all, economic growth through trade liberalization represents the primary goal of trade agreements, while environmental protection is mostly seen as a potential obstacle to smooth trade flows and, as a result, enters trade agreements through narrow exceptions, interpreted and applied by panels who lack any environmental expertise and whose rules and procedures are often criticized for being biased towards trade values.25 The recent case law on subsidies and countervailing measures26 has brought to the surface the inherent shortcomings of the existing subsidies discipline, in particular in the context of renewable energy subsidies, widely used by 23 2030 Agenda for Sustainable Development, Goal 17. 24 See Chapter 2 [Espa] in this volume. 25 See e.g. Daniel C. Esty, Greening the GATT. Trade, Environment, and the Future (Institute for International Economics, 1994) 29; Sungjoon Cho, ‘Linkage of Free Trade and Social Regulation: Moving Beyond the Entropic Dilemma’, 5 Chicago Journal of International Law 640 (2005); Philip Nichols, ‘Trade Without Values’, 90 North Western University Law Review 701 (1996). 26 Appellate Body Report, Canada –​Certain Measures Affecting the Energy Generation Sector, wt/​d s412ab/​r , adopted 6 May 2013 and Canada –​Measures Relating to the Feed-​In Tariff Program wt/​d s426ab/​r , adopted 6 May 2013. Appellate Body Report, India –​Certain

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governments to spur renewable energy technologies and accelerate the structural transformation towards a low-​carbon economy.27 The one-​size-​fits-​all approach adopted by the wto Subsidies Agreement, where all subsidies are lumped in the same basket, does not allow to distinguish an undesirable ‘subsidy’ from one that is adopted for legitimate reasons, and scholars have been discussing ways to fill this gap and different views have been put on the table.28 Just like trade norms are mainly concerned with ensuring and promoting economic growth through trade liberalization, investment agreements have traditionally been drawn up with the precise objective of protecting foreign investors’ rights. Even when investors operate in environmental markets or their activities have an impact on the environment –​which is often the case in the context of energy projects –​environmental considerations have traditionally played a marginal role in the relevant disputes. For a long time, environmental law has been used in what we could define as a ‘classical’ or ‘traditional’ way, merely as an exception, as a way for the respondent state to justify the alleged violation of provisions contained in international investment agreements.29 Likewise, investment tribunals would generally turn a blind

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Measures Relating to Solar Cells and Solar Modules, wt/​d s456/​a b/​r , adopted 16 September 2016. An overview of such measures is available on the Intentional Nationally Determined Contributions (indc s) submitted by each individual country to the United Framework Convention on Climate Change (unfccc) Secretariat on its website. For a comprehensive analysis of these measures (in particular, subsidies and other trade-​related measures), see Dani Rodrik, ‘Green Industrial Policy: Accelerating Structural Change Towards Wealthy Green Economies’, in Partnership for Action on Green Economy (page), Green Industrial Policy: Concept, Policies, Country Experiences (2017). See Chapters 2 [Espa], 5 [van Asselt & Verkuijl], and 8 [Marhold] in this volume. See e.g. Alan Sykes, ‘The Economics of wto Rules on Subsidies and Countervailing Measures’, U. Chicago Law & Economics, Olin Working Paper No. 186 (2003), 1; Steve Charnovitz and Carolyn Fischer, ‘Canada-​Renewable Energy: Implications for wto Law on Green and Not-​So-​Green Subsidies’, 14(2) World Trade Review (2015). Petros C. Mavroidis and Aron Cosbey, ‘A Turquoise Mess: Green Subsidies, Blue Industrial Policy and Renewable Energy: The Case for Redrafting the Subsidies Agreement of the wto’, eui Working Paper rscas 2014/​17 (2014); Luca Rubini, ‘Ain’t Wastin’ Time No More: Subsidies for Renewable Energy, the scm Agreement, Policy Space and Law Reform’, 15 Journal of International Economic Law 525 (2012); Elena Cima, ‘Caught between Trade and Climate Change. The Economic Rationale of ‘Green Subsidies’,’ in K. Mathis & B. R. Huber (eds.), Environmental Law and Economics 379–​404 (Springer, 2017). See e.g. S.D. Myers. v. Canada, Statement of Defense (18 June 1999), para 14; and Methanex Corporation v. United States of America, nafta (uncitral), Amended Statement of Defense (5 December 2003), para 398.

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eye to these arguments, declaring their irrelevance and dismissing any related evidence.30 In addition to being environment-​blind, investment law and arbitration have proven to be oblivious to other non-​economic concerns, such as the protection of human rights. Several examples have followed one another over the years, each illustrating different ways in which energy investment projects can lead not only to environmental degradation but to various forms of human rights violations as well.31 Traditional investment norms, however, do not provide any tangible solutions to these circumstances, being their mandate the protection of foreign investors rather than that of human rights. 4

Structure of the Book

This introductory chapter has highlighted two sets of challenges the international trade and investment regimes are currently facing in the context of energy: accounting for the specificities of the energy sector and for the environmental and human rights impact of energy trade and investment activities. How to ensure that international trade and investment norms are adequate to deal with energy and how to best adapt them to these more recent challenges? This volume attempts precisely to shed light on these important questions and venture possible answers and alternative solutions, and the overall structure of the book reflects the steps outlined in this introduction. Chapters 2 and 3 address the two core assumptions of the book. On the one hand, the fact that both international trade and investment law had not initially been designed with energy in mind, leading to the frequent inadequacy of the two legal frameworks whenever they are faced with energy-​related questions and, on the other, the inadequacy of the very same legal frameworks in integrating non-​economic concerns, including environmental and human rights protection, when regulating energy trade and investment. Chapter 2 deals with the applicability of international trade rules to the energy sector. In her contribution, Ilaria Espa addresses the inadequacy of existing wto rules in addressing green industrial policy, a subset of which includes trade or trade-​related measures adopted to spur renewable energy 30 31

See e.g. Compañía del Desarrollo de Santa Elena S.A. v. Republic of Costa Rica, icsid Case No. arb/​96/​1, Award (17 February 2000), para. 71. Notable examples include the activities conducted by the Nigerian National Petroleum Company (nnpc) and Shell Petroleum Development Corporation (sdpc) in the Ogoni region in Nigeria, and the activities of Severstal, Russia’s largest iron-​smelting company.

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technologies. By doing so, this chapter falls into the rich scholarship providing suggestions to reform the wto Agreement on Subsidies and Countervailing Measures. Unlike the vast majority of this literature, however, the author observes that while introducing –​or reintroducing –​an exception clause in the text of the Agreement may be instrumental to shelter ‘greenish’ subsidies from being abusively countervailed, it would not solve the issue of protectionist ‘industrial’ anti-​dumping duties on renewable energy technologies, which represent the most trade distortive remedial tools used as disguised industrial policy measures. According to the author, trade remedy actions should be regarded as a de facto industrial policy tool in itself, and a possible way forward in wto law reform should consider multilateral disputes involving subsidies, which have received most of the attention, and domestic trade remedies cases altogether, as two facets of the same phenomenon. In Chapter 3, Athina Fouchard Papaefstratiou takes on the long-​term nature of energy contracts in the context of investment regulation. Because the energy sector generally requires long-​term investment contracts, where upfront investment in a project is heavy and returns are only to be expected after a significant lapse of time, foreign investors need to be shielded from changes in the legal or regulatory framework that might affect the equilibrium of their contract. In fact, although reliance on such stabilization clauses has decreased in the recent years, they are still common in contracts related to the extractive and energy industries. In her contribution, the author provides a critical analysis of the evolution of these clauses over the years, as well as of their interpretation and application by arbitral tribunals. The chapter in particular investigates the impact of the new ‘era of corporate social responsibility’ on the content and scope of stabilization clauses, focusing on two questions of extreme practical importance: to what extent will these clauses become more and more limited over time and how will international tribunals apply this new generation of stabilization clauses. Against the background painted by these first two chapters, characterized by international trade and investment law’s attempts to adapt to the specific features of the energy industry, Chapters 4, 5, and 6 take on a new challenge by inviting non-​economic voices to join the debate and examine the complex relationship between energy trade and investment on the one hand and environmental or human rights concerns on the other –​characterized by both synergies and tensions. On the one hand, unprecedented multi-​dimensional ecological and social challenges are forcing societies to align their economic development goals with such non-​economic considerations, having a significant impact on the energy industry of most countries. On the other, many existing international trade and investment norms –​from the one-​size-​fits-​all

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approach of the wto agreement on subsidies to stabilization clauses in investment contracts –​do not seem entirely adequate to integrate non-​economic concerns. The following three chapters explore these tensions, focusing in particular on the pursuit of sustainable development goals, the challenges posed by climate change, and the protection of human rights in the context of energy activities. In Chapter 4, Jason Rudall provides an analysis of the most relevant international law instruments dealing with energy –​focusing in particular on those related to trade and investment –​from a non-​economic perspective, more precisely a ‘sustainable development perspective’. As a result, the focus, rather than being on energy as a whole, is on sustainable energy. According to the author, the Sustainable Development Goals are likely to change the global trade and investment agenda in a fundamental way and some sectors, such as the energy sector, will be affected more than others. A number of environmental legal instruments have helped promote trade and investment in sustainable energy, as well as the corresponding technology and knowledge transfer, critical to realising Sustainable Development Goals in developing countries. Moving from the environmental legal framework to the ones directly regulating economic activities, the contribution further explores how and to what extent such goals have begun to penetrate treaty drafting and adjudication of both international trade and investment law as well as the existing and possible impacts for the energy sector. One of the Sustainable Development Goals places significant emphasis on the need to phase out fossil fuels subsidies, a thorny subject that is taken on by Harro van Asselt and Cleo Verkuijl in Chapter 5. The authors start from the assumption that, because fossil fuel subsidies have a negative impact on climate change, the inverse logic would posit that fossil fuel subsidy reform represents an untapped source of climate change mitigation. The two main international legal regimes that could provide a potential platform for the negotiation and development of rules addressing fossil fuel subsidies –​the climate change and the trade regime –​do not provide for binding rules. In fact, fossil fuel subsidies have largely evaded legally binding disciplines. Against this background, the authors explore the possible role of international institutions and of the growing system of informal international law-​making in the context of a possible fossil fuel subsidies reform, focusing as well on the challenges this framework might face. The quest for alternatives to the traditional normative instruments of international law continues in Chapter 6, where Ginevra Le Moli shifts the focus from the environmental externalities associated with energy trade and investment to those related to various human rights violations. In her contribution,

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the author identifies and classifies a number of general human rights as well as several environmental human rights, of both substantive and procedural nature, which may be impaired by energy activities. Given the silence of international trade and investment norms on the subject, the author explores the different legal instruments that address these rights, together with their application in cases directly related to the energy sector. One of the main challenges faced by these instruments, as flagged in this contribution, is the presence of both public and private entities in the context of the exploration and exploitation of energy resources. In many of the scenarios presented in the chapter, states and non-​state actors seem to share responsibility for their contribution to possible human rights violations and, given the current lack of international legal obligations for non-​state actors, the result is a quest for alternative forms of standard-​setting and accountability. As these three chapters demonstrate, the multifaceted nature of energy trade and investment calls for a dialogue between different international legal frameworks, in a cohesive and comprehensive manner. In this spirit, Chapters 7, 8, and 9 take the first steps towards building such a dialogue, in an attempt to ‘bridge the gap’ between economic and non-​economic approaches to the international regulation of energy activities. In light of the difficulties experienced by the international trade and investment regimes in the integration of non-​economic concerns into their substantive rule-​making, the following final chapters propose alternative solutions to bridge the gap. Chapter 7 explores whether incorporating environmental provisions in the text of free trade agreements represents a possible approach to facilitate trade in renewable energy goods, services, and technologies, and create a more favourable environment for renewables. In her contribution, Elena Cima provides a taxonomy of the main techniques used by countries to include renewable energy provisions in the text of their bilateral and regional trade agreements, focusing in particular on the United States and the European Union, and investigates to what extent their texts distance themselves from wto agreements. As a result, besides categorizing the relevant provisions, which is a necessary first step, the chapter addresses their legal implications to assess whether they are in fact capable of transforming trade agreements into vehicles able to secure environmental and sustainability objectives. In particular, the analysis focuses on the possible implications of this evolution for renewable energy subsidies, an area of regulation where, as clarified by other chapters of this volume, wto law seems to be especially struggling to capture the specificities of the energy sector. The focus on subsidies is maintained in Chapter 8, where Anna Marhold continues the discussion on how to transform trade law into a legal framework

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more open towards renewable energy. While the previous contribution focused on free trade agreements as a promising avenue to this end, the present chapter advances suggestions as to how to best reform wto rules. The focus in particular is on the rules on subsidies and the author relies on the European renewable energy legal framework –​and on its application by EU institutions –​as a possible example to be followed in reforming the wto subsidies disciplines. In fact, the general dilemma with energy subsidies being that support schemes for clean energy production and consumption are needed to correct market failures, European state aid legislation acknowledges it by taking into account the policy rationale of the subsidies in their regulation. If wto Members were to take seriously any reform of the Agreement on subsidies, a framework inspired by EU state aid exemption rules may serve as a valuable starting point for discussion. The role of environmental differentiation is similarly explored in the context of international investment arbitration. In fact, Chapter 9 explores adjudication –​and in particular investment arbitration –​as a possible avenue to streamline environmental and other non-​economic values. In their contribution, Makane Moïse Mbengue and Elena Cima identify three drivers of change, capable of transforming investment arbitration from an environment-​blind system to a system capable of actually contributing to environmental protection: the way in which the parties to a dispute have relied on environmental law and considerations, their use by tribunals, and the ‘greening’ of investment treaties. Given the abundance of investment arbitration cases in the energy sector and the environmental concerns that investment projects in this sector raise, this transformation could significantly influence existing and future energy-​related disputes.

References

Bradbrook, Adrian. 1996. ‘Energy Law as an Academic Discipline’, 14 Journal of Energy and Natural Resources Law 193. Charnovitz, Steve and Carolyn Fischer. 2015. ‘Canada-​Renewable Energy: Implications for wto Law on Green and Not-​So-​Green Subsidies’, 14(2) World Trade Review. Cho, Sungjoon. 2005. ‘Linkage of Free Trade and Social Regulation: Moving Beyond the Entropic Dilemma’, 5 Chicago Journal of International Law 640. Cima, Elena. 2017. ‘Caught between Trade and Climate Change. The Economic Rationale of ‘Green Subsidies’, in Klaus Mathis and Bruce R. Huber (eds.), Environmental Law and Economics 379–​404 (Springer).

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De Brabandere, Eric. 2014. ‘The Settlement of Investment Disputes in the Energy Sector’, in Eric De Brabandere and Tarcisio Gazzini (eds), Foreign Investment in the Energy Sector. Balancing Public and Private Interests 131 (Brill). Desta, Melaku G. 2003. ‘The Organization of Petroleum Exporting Countries, the World Trade Organization, and Regional Trade Agreements’, 37(3) Journal of World Trade 523. Esty, Daniel C. 1994. Greening the GATT. Trade, Environment, and the Future (Institute for International Economics). Esty, Daniel C. and Andrew S. Winston. 2006. Green to Gold (Yale University Press). Fatouros, Argyrios A. 2007. ‘An International Legal Framework for Energy’, Recueil des cours. Hobér, Kaj. 2018. ‘Overview of Energy Charter Treaty Cases’, in M. Scherer (ed.), International Arbitration in the Energy Sector 175–​202 (Oxford University Press). Irwin, Douglas et al. 2008. The Genesis of the GATT (Cambridge University Press). Jiménez-​Guerra, Andrea. 2001. ‘The World Trade Organization and Oil’, Oxford Institute for Energy Studies, SP12. Lyster, Rosemary and Adrian Bradbrook. 2006. Energy Law and the Environment (Cambridge University Press). Mavroidis, Petros C. and Aron Cosbey. 2014. ‘A Turquoise Mess: Green Subsidies, Blue Industrial Policy and Renewable Energy: The Case for Redrafting the Subsidies Agreement of the wto’, eui Working Paper rscas 2014/​17. Nichols, Philip. 1996. ‘Trade Without Values’, 90 North Western University Law Review 701. Pearce, David et al. 1990. Blueprint for a Green Economy (Earthscan). Pittock, Barrie and G. Dale Hess. 2009. ‘Sustainable Atmospheric Management’, in Kala Sravanamuthu (ed.), Extending Schumacher’s Concept of Total Accounting and Accountability into the 21st Century (Emerald Group Publishing). Redgwell, Catherine. 1994. ‘Energy, Environment and Trade in the European Community’, in 12 Journal of Energy and Natural Resources Law 128. Rodrik, D. 2017. ‘Green Industrial Policy: Accelerating Structural Change Towards Wealthy Green Economies’, in Partnership for Action on Green Economy (PAGE), Green Industrial Policy: Concept, Policies, Country Experiences. Rubini, Luca. 2012. ‘Ain’t Wastin’ Time No More: Subsidies for Renewable Energy, the SCM Agreement, Policy Space and Law Reform’, 15 Journal of International Economic Law 525. Sabater, Anibal and Mark Stadnyk. 2014. ‘International Arbitration and Energy: How Energy Disputes Shaped International Investment Dispute Resolution’, in Kim Talus (ed.), Research Handbook on International Energy Law 199 (Edward Elgar). Schumacher, E.F. 1964. Energy International. Smith, Ernest E. and David P. Cluchey. 1994. ‘GATT, NAFTA and the Trade in Energy: A US Perspective’, 12 Journal of Energy and Natural Resources Law 27.

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Sykes, Alan. 2003. ‘The Economics of WTO Rules on Subsidies and Countervailing Measures’, U. Chicago Law & Economics, Olin Working Paper No. 186. Talus, Kim. 2015. ‘Internationalization of Energy Law’, in Kim Talus (ed.), Research Handbook of International Energy Law (Edward Elgar). Viñuales, Jorge E. 2012. Foreign Investment and the Environment in International Law (Cambridge University Press). Wälde, Thomas W. 1996. ‘Investment Arbitration Under the Energy Charter Treaty –​From Dispute Settlement to Treaty Implementation’ 12(4) Arbitration International 429. Yanovich, Alan. 2011. ‘WTO Rules and the Energy Sector’, in Yulia Selivanova (ed.), Regulation of Energy in International Trade Law: WTO, NAFTA, and Energy Charter 1–​47 (Kluwer Law International).

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­c hapter 2

Dissecting the Green Component of 21st Century Industrial Policy in the Energy Sector: Implications for the wto System Ilaria Espa 1

Introduction

Governments have long resorted to industrial policy with a view to selectively favour the development of certain national industries over others.1 Such choices have traditionally purported to achieve the broader objective of pushing structural change, that is, “restructuring economies towards a better societal outcome.”2 Conventional industrial policy objectives have thus included productivity growth, economic diversification, and technological progress as a means to creating the conditions for higher incomes, better employment opportunities and, ultimately, better standards of living.3 Unprecedented, multi-​dimensional ecological challenges –​climate change in primis –​are forcing societies to align such economic development goals with environmental considerations. This is well reflected in the 2030 Agenda for Sustainable Development, and it has driven governments to proactively induce a systemic shift in production and consumption patterns in order to foster resource efficiency and greenhouse gas (ghg) emissions mitigation.4 Accordingly, industrial policymaking has gradually streamlined environmental

1 This article draws from Ilaria Espa, ‘New Features of Green Industrial Policy and the Limits of WTO Rules: What Options for the 21th century?’, 53 Journal of World Trade 979 (2019). Johannes A. Schwarzer, Industrial Policy for a Green Economy (International Institute for Sustainable Development, 2013), iii. 2 Dani Rodrik, ‘Green Industrial Policy’, 30 Oxford Review of Economic Policy 469 (2004). 3 Dani Rodrik, ‘Green Industrial Policy: Accelerating Structural Change Towards Wealthy Green Economies, in Partnership for Action on Green Economy (PAGE)’, Green Industrial Policy: Concept, Policies, Country Experiences (2017), 9–​11. 4 For a detailed analysis of how the tension between development and environment plays out in the Sustainable Development Goals see, for all, page, Green Industrial Policy and Trade: A Tool-​Box (2017), 11–​16.

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Dissecting the Green Component of 21st Century Industrial Policy 17

considerations in parallel with the emergence of a new ‘green’ economy paradigm.5 Such process has led to the coining of the expression ‘green’ industrial policy. In its broadest meaning, green industrial policy has been defined as “including any government measure aimed to accelerate the structural transformation towards a low-​carbon, resource-​efficient economy in ways that also enable productivity enhancements in the economy.”6 This definition encompasses both ‘classical’ industrial policy instruments (e.g. tariffs and government support schemes) and environmental policies susceptible to push structural change towards a green economy, either on the production side (e.g. environmental fiscal reforms, carbon equalisation measures, emission standards) or on the consumption side (e.g. eco-​labelling programmes).7 Either of such green industrial policy measures are highly relevant from an international trade perspective inasmuch as they include trade policies as such (e.g. tariffs and other border measures) or else a range of policy instruments that are subject to strict World Trade Organization (wto) disciplines due to their trade restrictive/​distortive effects (e.g. subsidies).8 Any of such measures have been widely used by governments, predominantly to spur renewable energy (re) technologies,9 but also with a view to spark a number 5 The expression green economy generally stands for a model of economic growth that aims at achieving environmental sustainability in a broad sense. See Markus W. Gehring, ‘Legal Transition to the Green Economy’, 12 McGill Journal of Sustainable Development Law 139 (2016). 6 Rodrick, ‘Green Industrial Policy’ (n 3) 11. 7 page, Green Industrial Policy and Trade (n 4) 13–​14. Traditional industrial policy does not target the consumption side. See Rodrick, ‘Green Industrial Policy’ (n 3) 13. According to this author, in particular, the variety of green industrial policy instruments reflects the wider set of objectives –​both economic and environmental –​enshrined in the new paradigm, as well as a number of defining features of green industrial policy derived from its environmental connotation: (i) the need to prioritize environmental externalities over other market failures; (ii) the urgency to take action, despite high uncertainty, based on an environmentally-​ informed dichotomy between ‘good’ and ‘bad’ technologies; (iii) the need for wider and better policy coordination; and, (iv) the difficulty to advance domestic industry and global commons protection in tandem. Ibid., 11–​16. 8 For a full-​fledged categorization of ‘trade-​related’ green industrial policies, see page, Green Industrial Policy and Trade (n 4) 15–​16. 9 The reason why governments have primarily used green industrial policy to target the re sector is that, as a result of the widespread adoption of re targets (179 countries according to most recent statistics), the sector has experienced unprecedented growth in latest years and available projections predict an ever faster rate of expansion of both installed capacity and re consumption. See Renewable Energy Policy Network (REN21), Renewables 2018 –​Global Status Report (2018), < http://​www.ren21.net/​gsr-​2018/​chapters/​chapter_​02/​chapter_​02> (accessed 18 July 2019).

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18 Espa of other environmental sectors, from low-​emission transportation technologies to water-​saving technologies.10 And yet, if one looks at how green industrial policy has been accommodated in the international trade law discourse, it is the use of classical types of industrial policy instruments in the re sector that has taken centre stage so far.11 Recent years have in particular witnessed an upsurge of high-​profile re-​ related wto disputes targeting governmental support schemes.12 Ever since the first of such disputes, Canada –​Renewable Energy, the proliferation of re-​ related cases has created alarm over a presumedly insufficient regulatory space left under the wto Agreement on Subsidies and Countervailing Measures (ascm) to pursue climate change goals.13 Widely overlooked within such context is, however, the stream of wto cases concerning the alleged unlawfulness of countervailing duties (cvd s), anti-​dumping duties (ad s) and, more recently, safeguards imposed on re technologies and determined by national

10

An account is given in A. Cosbey, P. Wooders, R. Bridle and L. Casier, ‘In with good, out with bad: Phasing out polluting sectors as green industrial policy’, in page, Green Industrial Policy (n 3) 70. The proactive dismantling of environmentally harmful sectors (e.g. the fossil fuel industry) is also considered a form of green industrial policy, namely, the so-​called disruptive green industrial policy. Ibid., 69–​85. 11 See, e.g., the seminal work of Salzman and Wu, who were the first to launch the idea of a ‘next generation of trade and environment conflicts’ at the wto, inspired by the rise of green industrial policies targeting re industries. James Salzman and Mark Wu, ‘The Next Generation of Trade and Environment Conflicts: The Rise of Green Industrial Policy’, 108 Northwestern University Law Review 401 (2014). A number of environmental policy tools have also been challenged in the wto system (e.g. environmentally-​inspired labelling schemes), but they will not be examined in this paper inasmuch as the scrutinised measures have not targeted the energy sector specifically. The same holds true with respect to the series of wto disputes targeting China’s export regime on raw materials, which Salzman and Wu still include into their definition of ‘next generation of trade and environment conflict’ (ibid., 419–​422). This is because such instruments de facto subsidise downstream industries, which not only include industries operating in the renewable energy sector (e.g. rare earth elements are used for permanent magnets of wind turbines) but also many more sectors which are not ‘green’ (e.g. rare earth elements are also essential inputs in military applications). Ilaria Espa, ‘Re-​Assessing Mineral Export Restraints as Industrial Policy Instruments: What Role, if Any, for the WTO Subsidy Law?’, 9 Trade, Law and Development 2 (2017), 135–​136. 12 All re subsidies cases broght before the wto dispute settlement system have been filed since 2010. See infra, Table 2.1. 13 On the emergence of a conventional wisdom that there exists a clash between wto subsidy law and climate change goals, see Ilaria Espa and Gracia Marín Durán, ‘Renewable Energy Subsidies and WTO Law: Time to Rethink the Case for Reform Beyond Canada –​Renewable Energy/​FIT Program’, 21(3) Journal of International Economic Law 621 (2018), 622.

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administrative authorities.14 wto trade remedy cases in renewable energy are still but a handful, and yet they importantly point to a much more galopping and worrying phenomenon, that is, the explosion of domestic trade remedies cases in renewable energy.15 Although the two trends are very much related,16 they have seldom been analysed together as constituting two facets of green industrial policy.17 More specifically, the proliferation of trade remedy actions has been scrutinized more as an evidence of the relative ‘unimportance’ of multilateral ascm disputes when it comes to constraining policy space for re subsidies,18 rather than as a de facto industrial policy tool in and of itself.19 Against this backdrop, this chapter will investigate both phenomena altogether with a view to contribute to further qualify, substantiate and possibly go beyond the existing calls for reform of the ascm from a trade/​climate change mutual supportiveness standpoint. To this end, it will first give an account of the different types of green industrial policy measures targeted by wto disputes and critically assess the interplay between their ‘green’ and their ‘industrial’ components. Accordingly, it will discuss how this interplay has been dealt with under wto law in light of the outcomes of existing re-​related disputes. Finally, it will bring some suggestions on how the wto should deal with this interplay based on a critical analysis of existing shortcomings from a mutual supportiveness perspective. 14 15 16

17

18 19

See Timothy Meyer, ‘Explaining Energy Disputes at the World Trade Organization’, 17 International Environmental Agreements: Politics, Law and Economics 391 (2017). See also Section 3.2 in the text. In this sense, see, e.g. Gary Horlick, ‘Solar Energy Wars and Peace’, in ictsd (2013), Clean Energy and the Trade System Group: Proposals and Analysis (Geneva, Switzerland), pp. 72–​ 76. For a detailed analysis, see Section 2.2 in the text. As it is known, cvd s are unilateral responses to subsidisation, whereas ad duties are unilateral responses to a producer selling its good in a foreign market at less than the ‘normal’ value. The existence of public support schemes is one typical reason why re products may be available in a foreign market at less than the normal value. For a more detailed explanation, see below, Section 2.2. Salzman and Wu, e.g., do give an account of the explosion of unilateral trade remedies cases rather than multilateral cases, provide a thorought political economy explanation and suggest possible pro-​environment reform proposals (pp. 451–​456). Yet, they do not focus on trade remedy tariffs as such as ‘green’ industrial policy tools. This expression is borrowed from Meyer, ‘Explaining Energy Disputes’ (n 14) 395. See also Espa and Marín Durán, ‘Renewable Energy Subsidies’ (n 13) 628–​632. Trade policy tariffs are framed as trade-​related green policy instruments in page, Green Industrial Policy and Trade (n 4) 37–​38. This study, however, aims at providing a tool-​box for governments and thus does not engage into a systematic analysis of what are the implications of the rise in the use of such measures for ascm reform.

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20 Espa 2

How Green Is Green Industrial Policy? Explaining Patterns in wto Disputes

Inasmuch as wto-​targeted green industrial policy, as defined in this chapter, has mainly revolved around the use of ‘classical’ types of industrial policy instruments, the question is whether treating it differently under wto law because of its ‘green’ core is necessary in order to ensure trade/​climate change mutual supportiveness. In other words, how is green industrial policy different from ‘standard’ industrial policies and why? From a purely economic standpoint, this might look like a non-​issue. Dani Rodrik, for instance, affirms that “in many ways, steering investment towards a green economy is not that different from steering them towards conventional industrial policy objectives, such as higher value and enhanced productivity.”20 Similarly, Schwarzer notes that “green industries are essentially infant industries, with all the characteristics of conventional infant industries and subject to the same opportunities and challenges of promoting them.”21 Yet, from a wto regulatory point of view, the question remains insofar as green industrial policy may contribute to climate change mitigation, on the one hand, while still restricting/​distorting trade, on the other hand. 2.1 Green v. Industrial Narrative in re Government Support Schemes The landscape of ‘renewable energy subsidies’ is much vaster than what such general label may suggest at a first glance. One first macro-​distinction that informs subsequent defining features of re public support schemes is whether they subsidize renewable electricity generation as such or rather re technologies (e.g. equipment and associate components) used to produce that electricity.22 Support schemes targeting green electricity are meant to facilitate the integration of increasing share of renewables, either via furthering green electricity generation or capacity deployment or through creating the conditions for large infrastructural projects needed to better accommodate renewables into the grid.23 The typical example are price support mechanisms, that is, feed-​in tariff (fit) schemes.24 fit s are conventionally considered in and 20 Rodrick, ‘Green Industrial Policy’ (n 3) 11. 21 Schwarzer, Industrial Policy (n 1) vi. 22 For more details, see Espa and Marín Durán, Renewable Energy Subsidies’ (n 13) 624–​626. 23 See Thomas Cottier and Ilaria Espa, ‘Introduction and Overview’, in Thomas Cottier and Ilaria Espa (eds), International Trade in Sustainable Electricity: Regulatory Challenges in International Economic Law (Cambridge University Press, 2017), 1–​17. 24 See e.g., unep, Feed-​ in Tariffs as Policy Instrument for Promoting Renewable Energies and Green Economies in Developing Countries (2012), Elena Cima and Makane Moïse Mbengue - 978-90-04-46348-6

Dissecting the Green Component of 21st Century Industrial Policy 21

of themselves the ‘greenest’ type of re subsidies due to the more proximate climate change mitigation goals inherent to the expansion of green electricity generation and/​or capacity deployment.25 Yet, they often incorporate so-​ called local content requirements (lcr s) so that eligibility for the schemes depends upon the use of a minimum percentage of domestic inputs in the development and construction of qualifying electricity generation facilities.26 Such conditional subsidies have a strong ‘industrial’ core insofar as they seek to ensure that the manufacturing of re technologies used for green electricity generation remains domestic.27 In other words, lcr s ‘dilute’ the green component of fit schemes by making them discriminatory and hence exposing them to wto litigation risks.28 Not surprisingly, out of all the wto disputes targeting re subsidies launched so far, all of the ones challenging feed-​in tariffs have insisted on their discriminatory nature.29

(accessed 18 July 2019). fit schemes are still the most common type of subsidy used to encourage renewable electricity generation. For latest data in this respect, see Espa and Marín Durán, ‘Renewable Energy Subsidies’ (n 13) 635. 25 See, for all, Aaron Cosbey and Petros C. Mavroidis, ‘A Turquoise Mess: Green Subsidies, Blue Industrial Policy and Renewable Energy –​the Case for Re-​drafting the Subsidies Agreement of the WTO’, 17(1) Journal of International Economic Law 11 (2014), 28. 26 Sadeq Z. Bigdeli, ‘Clash of Rationalities: Revisiting the Trade and Environment Debate in light of WTO Disputes over Green Industrial Policy’, 6 Trade, Law and Development 177 (2014), 205–​208; Salzman and Wu, ‘The Next Generation’ (n 11) 401–​410. For a thorough study on the use of local content requirements in the renewable energy sector, see Gary C. Hufbauer et al., Local Content Requirements: A Global Problem (Columbia University Press, 2013). 27 Reasons include the promotion of job creation, technology innovation and industry competitiveness. See, among others, Joanna Lewis, ‘The Rise of Renewable Energy Protectionism: Emerging Trade Conflicts and Implications for Low Carbon Development’, 14 Global Environmental Politics 10 (2014), 14. 28 For a detailed explanation of the legal (and environmental) arguments against lcr s see Section 3.1 in the text. 29 Three wto cases have targeted feed-​in tariff schemes with local content requirements at the time of writing: Canada –​Renewable Energy (Complainants: Japan and the EU), European Union and Certain Member States –​Certain Measures Affecting the Renewable Energy Sector (Complainant: China), and India –​Certain Measures Relating to Solar Cells and Solar Modules (Complainant: US). As to the first dispute, the Appellate Body recommendations were implemented on 5 June 2014, whereas in the last dispute the Appellate Body report was adopted on 14 October 2017 but compliance proceedings were initiated soon thereafter (23 January 2018) and are still pending. The second dispute is still formally at the consultations stage. For more details, see Espa and Marín Durán, ‘Renewable Energy Subsidies’ (n 13) 629–​630. See also Section 3.1 in the text.

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22 Espa Public stimulus to manufacturing of re technologies, by contrast, usually takes one of these two forms: (i) fiscal measures (e.g. tax reductions, tax credits), aimed at encouraging investment in re technologies; and, (ii) investment support measures (e.g. capital grants, favourable lending conditions, risk-​ mitigating instruments, research & development grants), aimed at alleviating the capital costs linked to re technologies deployment.30 This type of public incentives mainly seeks to boost the competitiveness of re industries but can ultimately contribute to abating the costs of re technologies deployment via enabling new market entrants to become competitive and thus furthering technological innovation.31 Yet, in this case the environmental benefit is more indirect than in the case of fit scheme. Government support schemes to re technologies, moreover, also exhibit an industrial core, to a lesser or greater extent, irrespective of whether they incorporate lcr s. This is because, albeit not discriminatory in and of themselves, they may de facto end up reinforcing the position of domestic manufacturers in the green technology space owing to the usually less significant penetration of foreign companies in the territory of the subsidizing country.32 While a definitive conclusion on whether the ‘green’ or the ‘industrial’ core is to prevail for such type of subsidies necessarily depends on a case-​by-​case assessment, it is worth-​noting that, out of the three wto cases concerning government support to re technologies, all have targeted programmes incorporating a lcr and not the more ‘greenish’ re technologies subsidies.33 30 31

32

33

For a more detailed explanation see Espa and Marín Durán, ‘Renewable Energy Subsidies’ (n 13) 624–​625; see also Ilaria Espa and Sonia E. Rolland, Subsidies, Clean Energy and Climate Change, E15 Initiative. Geneva: ictsd and wef, 2015. Significantly, the International Energy Agency (iea) has estimated that the decarbonization of the energy sector is to require a substantial increase in the volume of public incentives to re technologies (from usd 270 billion in 2014 to usd 400 billion by 2030 according to its recent ‘Bridge Scenario’). iea, Energy and Climate Change –​World Energy Outlook Special Report (2015), < https://​www.actu-​environnement.com/​media/​pdf/​news-​ 24754-​rapport-​aie.pdf> (accessed 18 July 2019), 13 and 85. International Institute for Sustainable Development (iisd)/​United Nations Environment Programme (unep), Trade and Green Economy: Handbook (2014), https://​www.iisd.org/​ sites/​default/​files/​publications/​trade-​green-​economy-​handbook-​third-​edition-​en.pdf (accessed 18 July 2019), 105. The three cases are China –​Measures Concerning Wind Power Equipment (Complainant: US), which targeted various grants, funds and awards to wind-​power equipment manufacturers and is still formally at the consultations stage; United States –​Certain Measures Relating to the Renewable Energy Sector (Complainant: India), which targets several fiscal and financial measures by eight US States, including to renewable energy generators, manufacturers of green technology equipment and biodiesel/​ethanol distributors (Panel report appealed on 15 August 2019); and, United States –​Certain Measures Related to

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Dissecting the Green Component of 21st Century Industrial Policy 23

2.2 Green v. Industrial Narrative in re Trade Remedy Actions The need to discuss the green/​industrial interplay of trade remedy tariffs derives from the explosion of domestic trade remedy actions in renewable energy.34 Although relatively recent, the upward trend in trade remedy proceedings before domestic administrative agencies is becoming a prominent avenue for challenging public incentives to re technologies traded internationally.35 According to a recent study by the United Nations Conference on Trade and Development (unctad), the number of anti-​dumping and countervailing duty cases in the renewable energy sector “far outnumbers the number of [renewable energy] disputes that have arrived at the wto.”36 Based on latest surveys, in particular, 45 trade remedy investigations were initiated in the renewable energy sector in the period 2006–​2015: 28 anti-​dumping and 17 parallel countervailing duty proceedings. The majority of them (21) targeted solar technology products (e.g., solar cells and modules, solar grade polysilicon, and solar glass), whereas 9 cases involved wind technology products (i.e., wind turbine blades including glass fibre and wind turbines) and the other 15 Renewable Energy (Complainant: China), which also targets various fiscal and financial measures by three US States, including to renewable energy generators, manufacturers of green technology equipment and still formally is at the consultations stage. For more details see Espa and Marín Durán, ‘Renewable Energy Subsidies’ (n 13) 629–​630. 34 This technically refers to both anti-​dumping and countervailing duty investigations: for a more detailed examination, see Peter Van den Bossche and Werner Zdouc, The Law and Policy of the World Trade Organization (Cambridge: Cambridge University Press, 4th edition, 2017), Chapter 11 and Chapter 12 (846–​864). However, oftentimes safeguards are also pragmatically considered a ‘trade remedy’ measure, although they formally constitute an ‘economic emergency’ instrument that is subject to different substantive and procedural requirements. According to Article xix gatt and the wto Agreement on Safeguards, in particular, the application of safeguards does not require a finding of ‘unfair’ trade practices (i.e. that subsidized or dumped imports exist), but only that there are increased imports causing (or threatening to cause) ‘serious injury’ to the domestic import-​ competing industry (Article 2.1). For a more detailed examination, see ibid., 634–​658. 35 iisd/​u nep, Trade and Green Economy (n 32) 105. Otherwise said, trade remedies are not used against feed-​in tariffs and other programmes targeting electricity, the reason being that electricity is still scarcely traded. For an account of the physical and technical constraints in this respect, see Espa and Marín Durán, ‘Renewable Energy Subsidies’ (n 13) 625–​626. Yet, for an overview of the recent developments towards greater and more efficient interconnections enabling cross-​border electricity transmission, see Spyridon Chatzivasileiadis and Damien Ernst, ‘The State of Play in Cross-​Border Electricity Trade and the Challenges towards a Global Electricity Market Environment’, in Cottier and Espa (eds), International Trade in Sustainable Electricity (n 23) 21–​45. 36 United Nations Conference on Trade and Development (unctad), Trade Remedies: Targeting the Renewable Energy Sector (2014), (accessed 18 July 2019), 13.

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24 Espa cases concerned instead biofuels (i.e., biodiesel and ethanol).37 The European Union (EU) initiated the majority (14) of these ad/​c vd cases, followed by the United States (9), India (6), China (5), Australia (5), Peru (4) and Canada (2).38 As these data show, countervailing duty investigations against subsidised re technologies have usually been conducted in parallel with anti-​dumping proceedings.39 One well-​known example is the parallel ad/​c vd investigations initiated by the EU against Chinese imports of solar pv panels and their key components (i.e. solar cells and solar glass),40 which resulted in the imposition of definitive anti-​dumping duties (ranging from 27.3% to 64.9%)41 and countervailing duties (raging from 3.5% to 11.5%)42 in December 2013. Such duties were subsequently prolonged in March 2017 for a period of eighteen months,43 resulting in one of the largest trade remedy actions pursued by the European Commission until now.44 Other prominent examples include the exceptionally high rates of anti-​dumping and countervailing duties on (allegedly) subsidised Chinese imports of solar cells and wind towers initiated by the United States.45 As a more general trend, ad duties have comparatively been much higher than parallel cvd s due to the ‘relaxed’ way ad laws define dumping.46 Peaks have 37 Kim Kampel, Options for Disciplining the Use of Trade Remedies in Clean Energy Technologies (ictsd: Geneva, 2017), 13–​15. 38 Ibid. 39 This raises the so-​called issue of ‘double remedies’. For more details, see, among others, Christine Barthelemy and Daniel Peat, ‘Trade Remedies in the Renewable Energy Sector: Normal Value and Double Remedies’, 16 Journal of World Trade & Investment 436 (2015). 40 Commission Implementing Regulation 2017/​ 366 of 1 March 2017, oj 2017 L56/​ 1; Commission Implementing Regulation 2017/​367 of 1 March 2017, oj 2017 L56/​131. 41 EU Regulation 2017/​367, para 1. 42 EU Regulation 2017/​366, paras 1–​2. Following acceptance of a Minimum Price Undertaking by the Commission, however, around 75% of the solar panel imports from China were exempted from the definitive cvd s. 43 EU Regulation 2017/​366, para 784; EU Regulation 2017/​367, para. 373. 44 Kati Kulovesi, ‘International Trade Disputes on Renewable Energy: Testing the Ground for Mutual Supportiveness between WTO Law and Climate Change Law’, 23 Review of European Community and International Environmental Law 324 (2014), 349. 45 For a critical analysis of the trade remedy ‘war’ in the solar sector between the US and China, see Sherzod Shadikhodjaev, ‘Renewable Energy and Government Support: Time to Green the SCM Agreement?’, 14 World Trade Review 479 (2015), 488–​489; Edwin Vermulst and Madison Meng, ‘Dumping and Subsidy Issues in the Renewable Energy Sector’, in Cottier and Espa, International Trade in Sustainable Electricity (n 23) 340–​342. 46 According to unctad, “over the past 50 years, ad laws were relaxed to allow penalty duties against almost any form of below cost or discriminatory pricing, including forms that are perfectly acceptable when practiced within a national territory. As a result, trade remedies (especially ad s) have become increasingly flexible for dealing with the

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Dissecting the Green Component of 21st Century Industrial Policy 25

in particular been directed at China due to the use of particularly burdensome methodologies accepted under the wto Anti-​Dumping Agreement (ada) for calculating dumping margins in the case of Non-​Market Economies (nme s).47 When looking at these trends overall from a green industrial policy perspective, two main factors should be retained. First, trade remedy actions do not require a prior determination by the wto that an illegal subsidy exists, that is, domestic administrative authorities have only to assess whether a material injury has materialized for a domestic industry. This has led to two main consequences. One the one hand, there seems to be a trend of trade remedy actions against the types of re technologies subsidies that were defined ‘greenish’ above.48 In other words, wto members have tended to challenge ‘industrial’ types of re subsidies (i.e. those enshrining a lcr) multilaterally,49 whereas they have generally focused on actionable, ‘greenish’ subsidies when imposing cvd s and ad duties.50 On the other hand, national investigating authorities

47

48 49

50

pressures of trade liberalization and for buttressing industrial policies”. See unctad, Trade Remedies (n 36) 2. For a more detailed examination of the implications of such shortcomings when it comes to green industrial policy, see below, Section 3.2. As per Section 15 (a) of China’s Accession Protocol to the wto in 2001, it was agreed that for 15 years China could be treated as a Non-​Market Economy (nme). Ilaria Espa and Philip I. Levy, ‘The Analogue Method Comes Unfastened –​The Awkward Space Between Market and Nonmarket Economies in EC –​Fasteners (Article 21.5)’, 17 World Trade Review 313 (2018). See Section 2.1 in the text. The rationale behind this strategy most likely reflects a combination of considerations: (i) the aspiration to get the withdrawal of the troubling measure, which is not mandatory for not prohibited subsidies (i.e. actionable subsidies); (ii) the likelihood of success argument, based on which wto members tend to file cases that they will easily win; (iii) the fact that, in the case of fit s incorporating lcr s, they could not be counteracted via the imposition of tariffs due to the negligeable amount of renewable electricity being traded. See e.g. Salzman and Wu, ‘The Next Generation’ (n 11) 437. While trade remedy actions do not presuppose that the targeted subsidies be removed, it should be noted that in such cases the counteracted subsidies may be desirable from an environmental economics standpoint. Dani Rodrik, for instance, notes that, because of the spillover effects of non-​discriminatory subsidies that have a positive effect on global commons, ‘a “subsidy race” [in the renewable energy sector] among nation states can be a good thing as it accelerates the development and global dissemination of green technologies’. Rodrik, ‘Green Industrial Policy’ (n 2) 471. More specifically, the author explains: ‘there is a case for subsidizing deployment of clean technologies, even beyond the point where they break even with harmful technologies. Traditional industrial policy would foster technologies only at their infant stage and withdraw support as soon as they start competing in the market place. In contrast, the logic of green transformation implies that where environmentally sustainable solutions compete with harmful ones it is in the public interest to accelerate the substitution rather than waiting for markets to reward commercially superior alternatives’. See Rodrik, ‘Green Industrial Policy’ (n 3) 13. Finally, in those cases where ad duties

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26 Espa enjoy a very wide margin of discretion when conducting ad and cvd determinations.51 This leads to the second factor, namely that domestic authorities have shown an inherent tendency towards protecting local (industrial) interests.52 In other words, as Gary Horlick puts it, ‘many trade remedy enforcement authorities around the world view their jobs as “defending domestic industry” so the opportunities for biased application are quite numerous and frequently used.’53 The re sector is no exception to this more general trend; quite the contrary, this is especially true for re technologies given countries’ race to enhance competitiveness of their re industries and their export shares in the ever expanding re market.54 For all these factors, it has become progressively clear that trade remedy tariffs in renewable energy have ultimately been intended to protect domestic firms, regardless of the ‘fairness’ of trade practices abroad.55 This has led to abuses of wto trade remedy laws, with excessively high tariffs de facto distorting the playing field in favour of domestic industries rather than levelling it.56 According to recent statistics, not only do trade remedy actions account for a global trade loss of approximately usd 14 billion/​year,57 but they also detrimentally affect accessibility of re technologies for user industries and

do not correspond to re subsidies, and leaving aside considerations pertaining to trade fairness (for those, see Section 3.2 in the text), it should be noted that, again from a pure environmental perspective, the fact that current ad disciplines are so ‘relaxed’ means that they also capture dumping practices that are in principle ‘beneficial’ inasfar as they contribute to wider dissemination of re technologies at lower prices. 51 See Article 9.1 ada and Article 19.1 ascm. 52 Gary N. Horlick and Peggy A. Clarke, ‘Rethinking Subsidy Disciplines for the Future –​Synthesis of the Policy Options’ (January 2016), (accessed 18 July 2019), 8. 53 Horlick, ‘Solar Energy’ (n 15) 72. 54 See, among others, Kampel, Options for Disciplining (n 37) 17. 55 See unctad, Trade Remedies (n 36) 3, but also Horlick, ‘Solar Energy’ (n 15); Jonas Kasteng, ‘Trade Remedies on Clean Energy: A New Trend in Need of Multilateral Initiatives’, in ictsd, Clean Energy, 63–​71; and Simon Lester and K. William Watson, ‘Free Trade in Environmental Goods: The Trade Remedy Problem’, Free Trade Bulletin No. 54, 19 August 2013, (accessed 18 July 2019). In this respect, the classical distinction between cvd s and ad duties, on the one hand, and safeguards, on the other hand, gets diluted. Accordingly, the next section will also include wto disputes concerning safeguards imposed on re technologies. 56 page, Green Industrial Policy and Trade (n 4) 6. 57 That is, almost 75 per cent of the total for all of the trade remedies currently in force. See Kasteng, ‘Trade Remedies’ (n 55) 67.

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Dissecting the Green Component of 21st Century Industrial Policy 27

consumers due to higher prices, erode the competitiveness of renewable electricity with fossil fuel-​fired electricity and, ultimately, undermine supply chain optimization.58 These factors impose to think of trade remedy tariffs in renewable energy as tools of industrial policy rather than as a means to maintain policy space for green industrial policy. 3

Assessing Mutual Supportiveness in Light of the Outcomes of wto Disputes

Having worked out how green the different types of green industrial policy measures targeted in this study are, this section will discuss how they have been treated under wto law. To this end, it will discuss the outcomes of existing re-​related wto disputes with a view to assessing whether wto law has so far constrained desirable policy space from a mutual supportiveness standpoint, that is, whether any actual incompatibility materializes a ‘trade/​climate change’ clash. 3.1 re Subsidies under wto Law wto disputes targeting re subsidies have increased significantly in latest years but have so far only targeted those support programmes with a predominant ‘industrial’ core, that is, re subsidies incorporating a lcr component.59 In three cases, the measures at issue were discriminatory fit programmes, and in other three cases subsidies granted to manufacturers of re technologies in the form of discriminatory fiscal and/​or financial incentives.60 At the time of writing, the wto adjudicatory bodies have only ruled in three instances (Canada –​ Renewable Energy, India –​Solar Cells, and US –​Renewable Energy61), whereas the other cases are either settled or still (formally) pending at the consultations stage.62 In both reports adopted so far, the Appellate Body (ab) unequivocally 58 59 60 61 62

unctad, Trade Remedies (n 36) 3. See Espa and Marín Durán, ‘Renewable Energy Subsidies’ (n 13), 629–​630. See Section 2.1 in the text. The Panel report is still under appeal, however. United States –​ Certain Measures Relating to the Renewable Energy Sector, Notification of an Appeal by the United States and India, wt/​d s510/​5 and wt/​d s510/​6 , dated 16 August 2019 and 22 August 2019, respectively. In the case of China –​Measures Concerning the Wind Power Equipment (DS419), for instance, an amicable solution was found quite rapidly. See Office of the United States Trade Representative (ustr), ‘Press Release: China Ends Wind Power Equipment Subsidies Challenged by the United States in wto Dispute’ (June 2011), (accessed 18 July 2019).

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28 Espa condemned the lcr s incorporated in the fit programmes under Article iii:4 of the General Agreement on Tariffs and Trade (gatt) and Article 2.1 of the wto Agreement on Trade-​related Investment Measures (trims Agreement),63 but no inconsistency findings were made under the ascm. In Canada –​Renewable Energy, in particular, the Appellate Body avoided to condemn the Ontario’s fit scheme altogether as a prohibited subsidy (contingent on the use of domestic over imported inputs) under Article 3.1 (b) ascm by means of a sophisticated –​and very controversial –​benefit test which ultimately made it impossible for the ab to consider the targeted fit programme a ‘subsidy’ within the meaning of the ascm.64 Interestingly, and although it is far from clear that the Appellate Body’s interpretative approach to the benefit analysis is replicable,65 in India –​Solar Cells the US dismissed its initial Article 3 ascm-​based claim from its second request for consultations (filed after the Appellate Body’s report in Canada –​Renewable Energy) and focused solely on its claims under the gatt/​t rims non-​discrimination provisions.66 Otherwise said, at least in the case of fit schemes incorporating lcr s, wto Members have been dis-​incentivized from raising claims under the ascm due to the heavy evidentiary burden entailed by the built-​in flexibility created by the Appellate Body’s approach.67 What does this mean for mutual supportiveness between international trade and climate change? Based on available evidence, there is not a strong case for considering that this state of thing materializes a clash with environmental goals. There is indeed by now very little evidence that lcr s bring any 63

64 65 66 67

Appellate Body Report, Canada –​Certain Measures Affecting the Renewable Energy Generation Sector/​Measures Relating to the Feed-​in Tariff Program [Canada –​Renewable Energy], wt/​d s412/​d s426/​a b/​r , adopted 24 May 2013, para. 5. 85; Appellate Body Report, India –​ Certain Measures Relating to Solar Cells and Solar Modules [India –​Solar Cells], wt/​d s456/​a b/​r , adopted 14 October 2016, paras. 5.41 and 6.2(c); Panel Report, United States –​ Certain Measures Relating to the Renewable Energy Sector [US –​Renewable Energy], wt/​d s510/​r , circulated 27 June 2019, para. 8.4. For an overview of these disputes see, Henok B. Asmelash, ‘Energy Subsidies and the WTO Dispute Settlement System: Why Only Renewable Energy Subsidies Are Challenged’, 18(2) Journal of International Economic Law 261 (2015), 275–​278. See also Holger P. Hestermeyer and Laura Nielsen, ‘The Legality of Local Content Measures under WTO Law’ 48(3) Journal of World Trade 553 (2014). For a complete recollection and a critical analysis, see Espa and Marín Durán, ‘Renewable Energy Subsidies’ (n 13) 633–​634 and references cited therein. A discussion on why this may indeed not be replicable is provided ibid., 637–​643. The authors also explain that, even in the affirmative, a partial carve-​out may only be derived for fit programmes and not for subsidies given to re technologies. See Asmelash, ‘Energy Subsidies’ (n 63) 277–​278. The same approach approach was furthermore followed by the parties in US –​Renewable Energy, which concerns discriminatory fiscal and financial measures.

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Dissecting the Green Component of 21st Century Industrial Policy 29

added environmental benefits.68 Quite the contrary, at least in the short-​run, lcr s induce a substitution effect whereby less competitive but domestically-​ produced re technology is preferred over more efficiently manufactured, thus cheaper foreign re technology, and hence result in higher re costs.69 It should be noted, however, that theoretical environmental arguments exist in favour of lcr s in the longer term, according to which they would enable local re infant-​industries to achieve maturity and become competitive innovators in the global re market with the result of bringing down world prices of re technologies.70 Yet, the environmental effectiveness of lcr s would seemingly be conditioned on a wide range of factors71 so that, overall, evidence is tilted towards confirming lcr effectiveness in achieving their most immediate industrial policy objective.72 As much as one may still want to think in terms of a supposed ‘clash’, however, it should be noted that this would not materialize at the level of the ascm as the conventional wisdom goes. For the above-​mentioned reasons, in fact, discriminatory re subsidies have only been condemned in light of the non-​ discrimination (national treatment) principle under the gatt and the trim s Agreement. Importantly, both agreements admit exceptions to such principle, including environmental exceptions, informed by a balancing test.73 And yet, as the recent India –​Solar Cells shows, lcr s are very unlikely to stand the Article xx gatt test, which again confirms their fundamental ‘industrial’ inspiration.

68

69 70 71 72

73

Aaron Cosbey and Luca Rubini, ‘Does it FIT? An Assessment of the Effectiveness of Renewable Energy Measures and of the Implications of the Canada –​Renewable Energy/​ FIT Disputes’ (December 2013), (accessed 18 July 2019), 1–​2. See Espa and Marín Durán, ‘Renewable Energy Subsidies’ (n 13) 627 and references cited therein. iisp/​u nep, Trade and Green Economy (n 32) 95; and Cosbey and Mavroidis, ‘A Turquoise Mess’ (n 25) 30. Among them are market stability and size, level of domestic input, and level of interaction with investment promotion policies. See page, Green Industrial Policy and Trade (n 4) 59. See Jean-​Christoph Kuntze and Tom Moerenhout, Local Content Requirements and the Renewable Energy Industry –​A Good Match?, ictsd (May 2013), (accessed 18 July 2019), 1–​2, 6–​12, 31–​34 and 42–​44. Yet, the authors note that, at least in the abstract, it cannot be excluded that lcr s can accomplish this long-​term environmental goal given their novel character. See Salzman and Wu, ‘The Next Generation’ (n 11) 451–​454.

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30 Espa One final point, which perhaps nuances this conclusion, concerns the so-​called political feasibility argument, that is, the argument according to which lcr s are a ‘political necessity for the very existence of re deployment policies’74 inasmuch as they make public spending on renewable energy attractive to domestic constituencies interested in reaping directly the local economic benefits (e.g. job creation) associated with the requirements. The faith of Ontario’s fit scheme in the aftermath of the Appellate Body ruling in the Canada –​Renewable Energy would seem to point to the soundness of this proposition insofar as the government of Ontario ultimately removed the fit programme altogether (and not only its wto-​incompatible lcr s) after unsuccessful legislative attempts at maintaining it without its discriminatory component.75 One counterargument to this would be that, as Salzman and Wu put it, ‘in most of these disputes, the protectionist element of the [subsidy] is not integral to the implementation of the pro-​environment policy’.76 This is evident is one takes, for instance, what happened in Measures Concerning the Wind Power Equipment, which was amicably solved after China agreed to get rid of the lcr s attached to its grant program.77 More generally, as Howse rightly notes, ‘[w]‌hile [local content] requirements may have been a political necessity to get enough backing for the initial policy package, it does not follow that they remain a political necessity, now that the clean-​energy market is up and running.’78 Yet, as noted elsewhere, should this prove to be the case, the question would remain: how ‘to articulate a legal standard to assess whether or not there is genuine ‘political necessity’ for lcr s –​in other words, where and how do we draw a line between politically necessary (and thus, justifiable) and non-​politically necessary (and thus, unjustifiable) lcr s?’.79 In light of the foregoing, it is far from clear that wto law has so far constrained desirable policy space from a trade/​climate change mutual supportiveness standpoint when it comes to treating discriminatory re subsidies.

74 75

Bigdeli, ‘Clash of Rationalities’ (n 26) 207. Timothy Meyer, ‘Free Trade, Fair Trade and Selective Enforcement 118 Columbia Law Review 491 (2018). 76 Salzman and Wu, ‘The Next Generation’ (n 11) 445. 77 Ibid., 463. 78 Robert Howse, ‘Securing Policy Space for Clean Energy under the SCM Agreement: Alternative Approaches’ (December 2013), (accessed 18 July 2019), 1, cited in Espa and Marín Durán, ‘Renewable Energy Subsidies’ (n 13) 627. 79 Ibid.

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Dissecting the Green Component of 21st Century Industrial Policy 31

Based on the likeness of success argument,80 moreover, the choice of wto members to only focus on discriminatory programmes when bringing multilateral claims would seem not to be a coincidence. A recent study indeed shows that non-​discriminatory fit schemes would face only a very slim chance of being ascm-​incompatible, whereas in the case of subsidies to re technologies evidence of incompatibility is inconclusive despite them facing comparatively higher risks than in the case of fit s.81 3.2 re Trade Remedies under wto Law Section 2.2 above has shown that the escalation in the use of nationally determined trade remedies in renewable energy responds to a predominantly ‘industrial’ logic. This is confirmed is one looks at how cvd s and ad duties imposed in the sector have been treated in relevant wto disputes. As Table 2.1 below indicates, where the domestic investigations have been challenged before the wto, the challenging party has prevailed every time. This information needs however some qualification. First, when matching the number of domestic cvd and ad cases with what has occurred multilaterally, it is evident that wto members have not been much inclined to resort to wto dispute settlement. Out of the 45 national trade remedy investigations in renewable energy reported in Section 2.2 above, only three were the disputes filed and only one concerned re technologies (i.e. polysilicon in solar panels, and wind turbines), although not specifically.82 Interestingly, moreover, until very recently none had targeted solar technologies specifically despite them being subject to the highest number of domestic trade remedy actions. Even so, the latest dispute filed by the Republic of Korea does not explicitly raise ascm/​a d claims but rather claims under the Agreement on Safeguards due to the controversial US decision to apply

80 81 82

For a detailed explanation, see Dirk De Bièvre et al., ‘No Iceberg in Sight: On the Absence of Potential and Actual WTO Disputes Against Fossil Fuel Subsidies’, International Environmental Agreements: Politics, Law and Economics 17 (2017), 411–​425. See Espa and Marín Durán, ‘Renewable Energy Subsidies’ (n 13) Table 2, 644. In the latter case, in particular, the explosion of domestic trade remedy cases would seem to corroborate the authors’ conclusions. US –​Countervailing and Anti-​ Dumping Measures on Certain Products from China (Complainant: China) concerned the cvd s imposed by the United States Department of Commerce’s (usdoc) on a total of 17 products from China. For a more detailed explanation, see Rachel Brewster et al., ‘Trade in Environmental Goods: A Review of the WTO Appellate Body’s Ruling in US‒Countervailing Measures’ (China), 15 World Trade Review 327 (2016).

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32 Espa definitive safeguard tariffs on imported solar cells and modules in May 2018.83 In this specific case, however, the US safeguard tariffs add up to the ad duties and cvd s imposed by the US on (allegedly) subsidised/​dumped Chinese solar imports since 2012.84 Overall, this trend is not surprising if one considers the costs entailed by the wto dispute settlement process, on the one hand, and what it specifically means for the renewable energy sector, on the other hand. As regards to the former aspect, to put it in the words of Wu and Salzman, wto dispute settlement “is time-​consuming and resource intensive. In addition, it does not readily offer the prospect of retrospective damages.”85 Such costs are even more unbearable for re technologies given that, as Gary Horlick aptly notes, they are typical ‘examples of the so-​called Moore’s Law where costs (and prices) are cut in half every 18 months by “learning curve” economics.’86 Otherwise said, for a market characterized by rapid cost and price decreases, a multilateral track that takes four to six years before a wto-​authorized retaliation can begin is simply not an option.87 When compared to those costs, unilateral trade remedies represent, to cite Salzman and Wu again, ‘a much faster, more direct, and more politically popular means of response to unfair industrial policies compared to wto disputes.’88 This is even more so if one considers that, according to many experts, the way trade remedy law is currently designed and practiced makes cvd s and ad duties much prone to be abused. In the case of anti-​dumping, in particular, many scholars and practitioners have critically pointed to the fact that defining 83

The rates of the safeguard tariffs are as follows: 30% in the first year, 25% in the second year, 20% in the third year and 15% in the fourth year. Over this four-​year timespan, the first 2.5 gigawatts of imported solar cells are not going to be subject to the safeguard tariffs. The same holds true for solar cells and modules imported from developing countries accounting for less than 3% of total exports. For more details, see ustr, ‘Fact Sheet –​ Section 201 Cases: Imported Large Residential Washing Machines and Imported Solar Cells and Modules’ (January 2018), (accessed 18 July 2019). 84 According to the ustr, such duties could not alleviate the severe hardship faced by the US solar industry inasmuch as 25 companies went out of business in 2012–​2017 and only one US producer of solar cells and modules was still operational in 2017. Ibid., 3. It is however worth-​noting that, after the Republic of Korea’s wto challenge, the US is introducing legislation to repeal the measures, although allegedly because of their detrimental effect on the US solar market performance. See Inside U.S. Trade, ‘Senators introduce bill to repeal Section 201 restrictions on solar products’, 12 June 2018. 85 Salzman and Wu, ‘The Next Generation’ (n 11) 436. 86 Horlick, ‘Solar Energy’ (n 15) 72. 87 Ibid. 88 Salzman and Wu, ‘The Next Generation’ (n 11) 468.

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(Complainant: Republic of Korea)

14/​05/​2018

US –​Countervailing 17/​09/​2012 and Anti-​Dumping Measures on Certain Products from China (Complainant: China) EU –​Biodiesel 22/​12/​2010 (Complainant: Argentina) EU –​Biodiesel 10/​06/​2014 (Complainant: Indonesia) Biodiesel

Biodiesel

Solar panels and wind turbines (among other products)

Industry or program targeted

Safeguards Crystalline silicon photovoltaic products

ad

ad

ad/​a scm (cvd)

Consultation Claims request

Panel/​AB reports adopted (26/​10/​2016) Implementation notified (13/​10/​2017) Panel Report adopted (28/​02/​2018) Reasonable period of time set to expire 28 October 2018 In consultations

Panel/​AB reports adopted (22/​07/​2014) Reasonable period of time expired (25 August 2015)

Current status

a  source: ilaria espa, ‘new features of green industrial policy and the limits of wto rules: what options for the 21th century?’, 53 journal of world trade 979 (2019), 993.

545

480

473

449

Dispute Dispute title number

Table 2.1 wto disputes on trade remedies in renewable energy (as of June 2019)a

newgenrtpdf

Dissecting the Green Component of 21st Century Industrial Policy 33

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34 Espa dumping as selling a product abroad at a price that is below ‘fully loaded cost’ rather than ‘average variable cost’ corresponds to ‘creating a substantial protectionist wedge between the prices allowed by domestic producers and the prices allowed by imports,’ thus giving a very large space of manoeuvre to domestic authorities for finding inflated dumping margins.89 Admittedly, the flexibility inherent to such approach goes very far in explaining the higher incidence of ad trade remedy cases compared to cvd s as well as the higher rate of remedial tariffs imposed by governments.90 In particular, this is very much the case for China-​centric trade remedy actions, which can count on the ‘additional policy space’ de facto made available via possible recourse to alternative methodologies admitted in the case of investigations involving nme s under the purview of the ada.91 Although on a comparatively smaller scale,92 the same flexibility logic applies to cvd actions.93 Finally, and importantly, although always won by the complainants, wto disputes targeting trade remedy tariffs have been uniquely decided upon technical matters pertaining to cvd/​a d duties’ calculation. More specifically, wto dispute settlement bodies did not –​and could not –​venture in meaningfully restricting the application of cvds to environmental goods in future cases, but just pertinently applied the minimum substantive and procedural requirements imposed by wto trade remedy law treating trade remedies on renewable technologies the same way as trade remedies imposed on any of

89 90

91 92 93

Horlick, ‘Solar Energy’ (n 15) 72. This is even more so if one considers the Moore’s Law applicability to the sector and the inherent protectionist bias in domestic investigations’ conduct. See Section 2.2 in the text. In fact, in certain instances where parallel proceedings were brought under both the ascm and the ada, national authorities eventually focused on ad only. This is case of the ad cases brought against the EU by Argentina and Indonesia, respectively, and concerning the de facto subsidizing effect of a selective export tax imposed on biodiesel by the European Union. See Table 2.1 and Vermulst and Meng, ‘Dumping and Subsidy Issues’ (n 45) 354. Ibid. and Espa and Levy, ‘The Analogue Method’ (n 47) 313–​334. Among others, Gary Horlick explains how national cvd laws were originally constructed out of ‘a relatively non-​protectionist set of methodologies’, which however got twisted over time. See Horlick, ‘Solar Energy’ (n 15) 74. In the words of Vermulst and Meng: ‘in cvd investigations, specificity findings and recourse to external benchmarks based on “facts available” make subsidy findings … automatic’. See Vermulst and Meng, ‘Dumping and Subsidy Issues’ (n 45) 353. Under the ASCM, there is however no additional nme-​specific ‘policy space’. In anticipation of the prospective expiration of China’s nme status, cvd cases are however expected to increase exponentially. Ibid, 347.

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Dissecting the Green Component of 21st Century Industrial Policy 35

the other challenged goods.94 Otherwise said, it is up to each wto member to let national investigating authorities perform any balancing of the injurious effects that subsidized (or dumped) imports of re technologies have on its domestic industry against their positive contribution towards the climate change mitigation goals.95 For all these reasons, countries have responded to punitive trade remedy tariffs in renewable energy with other punitive trade remedy tariffs on their end. Otherwise said, wto countries have opted for tit-​for-​tat retaliation in alternative to disfunctional (in the specific scenario, for the above reasons) multilateral challenges. Indeed, if one goes back to the numbers, they can be easily explained through the lens of tit-​for-​tat application.96 In conclusion, when looking at the other side of the relationship between green industrial policy and wto law, that is, when looking at how wto law has treated domestically determined trade remedies tariffs, two considerations should be made. First, when called to review domestic investigations on re products, wto dispute settlement bodies have never sustained in its entirety a domestic finding of an illegal subsidy. This is important to further qualify the case for a supposed clash between the ascm and climate change goals. Second, because of its inherent inadequacy to deal with galopping, time-​sensitive tit-​ for-​tat escalation, the wto dispute settlement system undercaptures a wide range of environmentally costly trade remedies in renewable energy. In other words, members have so far enjoyed a large margin of manoeuvre to resort to protectionist trade remedies in the name of reserving a supposed ‘green’ industrial policy space but leading, however, to huge environmental costs.97

94

95

96 97

In this sense, see the Appellate Body’s report in US –​Countervailing and Anti-​Dumping Measures on Certain Products from China, where the ab stated that it does not want to undermine or circumvent the ‘right’ of members to apply cvd s even to environmental goods (DS459, para. 4.50). As it is known, the EU legislation is quite peculiar in this respect insofar as it envisages the so-​called ‘Union interest’ test. For a detailed description of how this test has played out in the determination of whether cvd s imposed on Chinese solar technology products should be discontinued, also in consideration of EU’s climate policy objectives, see Espa and Marín Durán, ‘Renewable Energy Subsidies’ (n 13) 642–​643. Yet, this is so far an isolated case inasmuch as domestic authorities normally show an inherent bias towards protecting domestic (industrial) interests, rather than promoting global environmental or economic welfare gains. See Section 2.2 in the text. For more information on the magnitude of such costs, see Brewster et al., ‘Trade in Environmental Goods (n 82) 328.

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36 Espa 4

What Way Forward?

The analysis above has shown that, on the one hand, re government support has been mainly constrained by trade remedies imposed unilaterally under the ascm and the ada rather than by multilateral challenges brought under the ascm –​the exception being discriminatory re subsidies, which have however being condemned under the gatt/​t rim s national treatment principle. On the other hand, it has illustrated that unilateral trade remedies in renewable energy are de facto industrial policy tools entailing gross environmental costs and potentially huge tit-​for-​tat escalation effects ultimately jeopardizing green policy space. Based on such analysis, it is possible to further qualify and substantiate the case for reforming the ascm from a green industrial policy perspective, i.e. a more targeted, re-​informed variation of the classical trade and environment mutual supportiveness standpoint. To this end, the first basic point to retain is the clear insufficiency of ascm-​specific proposals purported to solve the supposed lack of policy space left to wto members to use ‘good’ re subsidies. Such proposals have revolved around two main ideas: (i) applying Article xx gatt to the ascm as a means of introducing a balancing mechanism that could serve to justify violations of the ascm; or, (ii) re-​introducing a specific exception for certain ‘good’ re subsidies along the lines of the now expired Article 8 ascm.98 The first would not address the problem of the proliferation of unilateral challenges against ‘greenish’ re subsidies,99 while still evidently capturing discriminatory, ‘industrial’ ones.100 The second would consist of ‘reviv[ing] and enhanc[ing] the scope for exemptions’ under Article 8.2 (c) ascm,101 or negotiating ‘an interim but extendable renewables-​specific’ exception anew.102 Such a proposal would have the merit of granting to re subsidies legal protection from both multilateral and unilateral challenges and 98

For a thorough recollection of both options, see Espa and Marín Durán, ‘Renewable Energy Subsidies’ (n 13) 643–​650. See also Chapter 8 (Marhold) in this volume. 99 For more details, see Espa and Marín Durán, ‘Renewable Energy Subsidies’ (n 13), 643–​647. 100 This is most likely to include ‘boundary cases’ where lcr s could eventually prove environmentally beneficial in the long-​run. See Section 3.1 in the text. A wto case would in fact presumably occur much earlier than such effects could be proven. 1 01 Bigdeli, ‘Clash of Rationalities’ (n 26) 20, cited in Espa and Marín Durán, ‘Renewable Energy Subsidies’ (n 13) 648. 102 Shadikhodjaev, ‘Renewable Energy and Government Support’ (n 45) 495. Some authors have discussed the opportunity to greenlight re subsidies within a broader category of permissible subsidies to be resuscitated under the ascm. See, e.g., Horlick and Clarke, ‘Rethinking Subsidy Disciplines’ (n 52) 11–​12.

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Dissecting the Green Component of 21st Century Industrial Policy 37

thus deserves a closer look. A few factors are in particular worth-​examining for our purposes to understand pros and cons of such option. First, in order to bring value added, any exception would need to be designed in a way that ensures that legal clarity is not achieved at the expenses of excessive stringency in the eligibility criteria set for ‘good’ State practice. While this proposition seems reasonable as a matter of principle, the big practical challenge is to reach an agreement among 164 wto members an ascm exemption clause that at once shields ‘good’ (green) re subsidies (that is, re subsidies that can be presumed to be more climate-​friendly than trade-​distortive) and yet is not subject to abuse.103 This is because, on the one hand, wto members are very unlikely to negotiate and agree on extremely detailed requirements to the extent that they would arguably make it harder for them to successfully invoke the exemption;104 and, on the other hand, sufficiently detailed substantive criteria would mean nothing if there were not matched with appropriate notification and monitoring procedures.105 Cognisant of such difficulties, existing proposals have so far remained quite general, often in the form of guiding principles. Scholars have consistently urged for any exemption to clearly target re subsidies aimed at promoting the use of clean energy only, while leaving aside re subsidies targeting domestic re manufacturing (that is, discriminatory re support programmes) in keeping with the spirit of Article 3 ascm.106 Much harder is however the quest for (general and category-​specific) conditions aimed at positively defining non-​actionable re subsidies.107 Most proposals seem oriented towards exempting minimally-​distortive re subsidies only, but it is not yet clear how this can be achieved –​possible solutions include confining the applicability of the exemption to a closed list of re goods and allowing for graduation among

103 The unfortunate faith of Article 8.2 (c) ascm already shows how difficult it is to reach an agreement among members with different and at times conflicting interests. Bigdeli, ‘Clash of Rationalities’ (n 26) 4–​9. 104 Shadikhodjaev, ‘Renewable Energy and Government Support’ (n 45) 494. This is even more so should one want to address the question of ‘green’ lcr s (see above, Section 3.1), which would require a very calibrated and narrow definition and additional abuse-​ prevention safeguards. 105 For an account of the limits of the notification and monitoring procedures envisaged under the expired Article 8.3 ascm, see Bigdeli, ‘Clash of Rationalities’ (n 26) 8 and 11. 106 Horlick and Clarke, ‘Rethinking Subsidy Disciplines’ (n 52) 11. 107 For an account of whether any lesson could be drawn from the EU’s regulatory experience in dealing with RE subsidies, see Gracia Marín Durán, ‘Sheltering Government Support to “Green” Electricity: The European Union and the World Trade Organization’ 67 International and Comparative Law Quarterly 129 (2018).

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38 Espa countries with different levels of re technology development.108 Furthermore, the debate is still open as to how to treat unavoidable ‘boundary’ cases and whether any exception may even be designed in a way as to avoid such cases.109 Some authors have recommended that such situations be treated via a mix of hard and soft law approaches, including more severe transparency and notification requirements, but such proposals have not garnered wide consensus.110 Equally, scholars still debate as to the most appropriate procedural safeguards when it comes to preventing abuses of green-​light subsidies.111 The second point is that, importantly, even if wto members were to agree on a sufficiently calibrated exemption clause for re subsidies, such a proposal would still bring but an incomplete solution to the problem of environmentally costly trade remedies in renewable energy inasmuch as, as shown above, these are predominantly imposed through recourse to ad investigations due to higher flexibility of anti-​dumping rules.112 Hence, given all the political and practical challenges involved, the proposal of re-​introducing an exemption for re subsidies seemingly entails too big a trouble for the benefits it would bring, namely: (i) a legal shelter for good (green) subsidies, for which there is no such lack of policy space as usually alluded to, as demonstrated above;113 (ii) inevitable ‘boundary cases’, against which wto members would likely hardly agree to commit not to act, either multilaterally or unilaterally;114 and, (iii) an incomplete solution to the problem of proliferating protectionist trade remedies coming within the purview of ad laws. Accordingly, one solution susceptible to solve the most evident shortcomings of an Article 8 ascm-​like exception would be to similarly amend the ad Agreement in a way as to make it responsive to climate change concerns. While several proposals have been formulated to date in this direction,115 they 1 08 Shadikhodjaev, ‘Renewable Energy and Government Support’ (n 45) 495–​496. 109 In this sense, see also Horlick and Clarke, ‘Rethinking Subsidy Disciplines’ (n 52) 11. 110 In this regard, Horlick and Clarke suggest boundary cases could be handled through ‘discussions in relevant wto committees on the role originally envisioned for the Permanent Group of Experts (pge) in the ascm –​i.e. reviewing mandatory pre-​notified “permissible” subsidies under Article 8 as originally drafted’. Ibid. 111 Bigdeli, ‘Clash of Rationalities’ (n 26) 15–​17. 112 See Section 2.2 in the text. 113 See Section 3.1 in the text. 114 See Espa and Marín Durán, ‘Renewable Energy Subsidies’ (n 13) 650. This potentially includes boundary lcr s. See Section 3.1 in the text. 115 See, among others, Horlick, ‘Solar Energy’ (n 15) 72–​ 73; and Kampel, Options for Disciplining (n 37) 18–​20. As mentioned, the majority of such proposals selectively tackle bits and pieces of the problem and are not always individually capable of addressing all the shortcomings that we have presented in this chapter.

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Dissecting the Green Component of 21st Century Industrial Policy 39

all suffer from the same types of challenges in principle applicable to ascm-​ specific proposals, that is, the very fact that the possibility that wto members agree on amending the ada, be it for the sole purpose of targeting anti-​ dumping actions imposed on re technologies or within the framework of a much wider reform effort, are ostensibly slim at least at the present juncture.116 In light of the foregoing, it is argued that, out of all the options that have been copiously advanced by scholars and practitioners,117 perhaps the most interesting are the ones that seek to address cvd and ad actions altogether and that could also be implemented in a unilateral, or plurilateral manner as a matter of starting. This include in particular the proposal for a peaceclause or ceasefire on the use of trade remedies that countries may agree upon in the context of the revived Environmental Goods Agreement negotiations.118 These negotiations involve in fact the primary users of trade remedies in re technologies, who may realistically be interested in capitalizing on their mutual commitments to eliminate/​reduce import tariffs on re technologies by avoiding they get eviscerated by the selective imposition of trade remedy tariffs by others.119 Another interesting and more realistic solution in principle is for re-​ relevant trade remedies provisions to be negotiated within the context of free trade agreements (fta s).120 In this respect, it should be noted that the EU has already engaged in negotiating the inclusion of ‘consideration of public interest’ clauses in its latest fta s.121 Yet, only a few of its partners are primary trade 116 A case in point which well reflects the reluctance of wto members to change the status quo is the case of China’s nme status, which already led China to bring two disputes before the wto dispute settlement bodies against the EU and the US, respectively. See Request for Consultations by China, United States –​ Measures Related to Price Comparison Methodologies, and Request for Consultations by China, European Union –​ Measures Related to Price Comparison Methodologies. As explained, however, this long-​awaited transition would already solve at least some of the ‘protectionist’ conducts, thus contributing to mitigate, albeit partially, the environmental costs associated with punitive anti-​ dumping duties imposed on re technologies. 117 For a comprehensive overview of the different options tabled so far for disciplining the use of trade remedies in clean energy technologies, see Kampel, Options for Disciplining (n 37) 18–​27. 118 This would imply that trade remedy actions would not be allowed on listed environmental or clean energy goods. Ibid., 22. Depending on the proponents, such option may be short-​term or longer-​term. 119 See ‘Environmental Goods Agreement’, (accessed 18 July 2019). 120 Ricardo Meléndez Ortiz, Enabling the Energy Transition and Scale-​Up of Clean Energy Technologies: Options for the Global Trade System, E15 Expert Group on Clean Energy Technologies and the Trade System –​Policy Option paper (Geneva: ictsd, 2016). 121 See (accessed 18 July 2019).

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40 Espa remedies users in re technologies (e.g. Canada) and in any case they have not directed (at least so far) such tariffs against the EU. For the rest, the majority of the primary users of trade remedies in re technologies have either already negotiated fta s without incorporating re-​relevant trade remedies rules or not yet entered into fta negotiations among each other. 5

Conclusions

This chapter has shown that, contrary to how the conventional wisdom goes, the rise of green industry policy does not as much confront the wto system with the problem of reserving more policy space that it is currently available for good (‘green’) re subsidies, but rather with the problem of eroding the larger than optimal policy space that currently exists for bad (‘industrial’) trade remedies targeting re technologies. Building on this, the chapter critically assessed the main ascm reform proposals purporting to solve the clash between wto law and climate change through the lens of such broader green industrial policy angle. It argued in particular that, while the re-​introduction of the category of permissible subsidies may be instrumental to shelter ‘greenish’ subsidies from being abusively countervailed, it would still not solve the issue of protectionist (‘industrial’) anti-​dumping duties on re technologies, that is, the most frequent and most trade distortive remedial tools used as disguised green industrial policy instruments. In this respect, it pinpointed some of the most interesting proposals which could address both multilateral and unilateral challenges to re subsidies. Admittedly, selected options may still not be first-​bests compared to others for various reasons and depending on the perspective adopted, e.g. the fact that they are not, as of now, multilateral solutions or that they are environment(re)-​specific.122 Yet, in light of the huge environmental costs entailed by the galopping use of trade remedies in re technologies and the ever more urgent challenge of climate change mitigation, prioritizing sectorial solutions à géometrie variable may arguably be the way to go as a matter of starting, always seeking opportunities for multilateralization in mind.

122 As it is known, trade remedies more generally have been widely subject to abuses in many more sectors than just re technologies. See e.g. Horlick, ‘Solar Energy’ (n 15) 72.

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Dissecting the Green Component of 21st Century Industrial Policy 41



References

Asmelash, Henok B. 2015. ‘Energy Subsidies and the WTO Dispute Settlement System: Why Only Renewable Energy Subsidies Are Challenged’, 18(2) Journal of International Economic Law 261. Barthelemy, Christine and Daniel Peat. 2015. ‘Trade Remedies in the Renewable Energy Sector: Normal Value and Double Remedies’, 16(3) Journal of World Trade & Investment 436. Bigdeli, Sadeq Z. 2014. ‘Clash of Rationalities: Revisiting the Trade and Environment Debate in light of WTO Disputes over Green Industrial Policy’, 6(1) Trade, Law and Development 177. Brewster, Rachel et al. 2016. ‘Trade in Environmental Goods: A Review of the WTO Appellate Body’s Ruling in US‒Countervailing Measures’ (China), 15(2) World Trade Review. Cosbey, Aaron and Petros C. Mavroidis. 2014. ‘A Turquoise Mess: Green Subsidies, Blue Industrial Policy and Renewable Energy –​the Case for Re-​drafting the Subsidies Agreement of the WTO’, 17(1) Journal of International Economic Law 11. Cosbey, Aaron and Luca Rubini. 2013. ‘Does it FIT? An Assessment of the Effectiveness of Renewable Energy Measures and of the Implications of the Canada –​Renewable Energy/​FIT Disputes’, E15 Initiative, ictsd. Cottier, Thomas and Ilaria Espa (eds). 2017. International Trade in Sustainable Electricity: Regulatory Challenges in International Economic Law (Cambridge University Press). Espa, Ilaria. 2017. ‘Re-​ Assessing Mineral Export Restraints as Industrial Policy Instruments: What Role, if Any, for the WTO Subsidy Law?’, 9 Trade, Law and Development 2. Espa, Ilaria and Gracia Marín Durán. 2018. ‘Renewable Energy Subsidies and WTO Law: Time to Rethink the Case for Reform Beyond Canada –​Renewable Energy/​FIT Program’, 21(3) Journal of International Economic Law 621. Espa, Ilaria and Sonia E. Rolland. 2015. Subsidies, Clean Energy and Climate Change, E15 Initiative. Geneva: ictsd and wef. Espa, Ilaria and Philip I. Levy. 2018. ‘The Analogue Method Comes Unfastened –​The Awkward Space Between Market and Nonmarket Economies in EC –​Fasteners (Article 21.5)’, 17 World Trade Review 2. Gehring, Markus W. 2016. ‘Legal Transition to the Green Economy’, 12 McGill Journal of Sustainable Development Law 139. Hestermeyer, Holger P. and Laura Nielsen. 2014. ‘The Legality of Local Content Measures under WTO Law’ 48(3) Journal of World Trade 553. Howse, Robert. 2013. ‘Securing Policy Space for Clean Energy under the SCM Agreement: Alternative Approaches’, E15 Initiative, ictsd.

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42 Espa Hufbauer, Gary C. et al. 2013. Local Content Requirements: A Global Problem (Columbia University Press). Kampel, Kim. 2017. Options for Disciplining the Use of Trade Remedies in Clean Energy Technologies (ictsd). Kulovesi, Kati. 2014. ‘International Trade Disputes on Renewable Energy: testing the Ground for Mutual Supportiveness between WTO Law and Climate Change Law’, 23(3) Review of European Community and International Environmental Law 324. Kuntze, Jean-​Christoph and Tom Moerenhout. 2013. Local Content Requirements and the Renewable Energy Industry –​A Good Match?, ictsd. Marín Durán, Gracia. 2018. ‘Sheltering Government Support to “Green” Electricity: The European Union and the World Trade Organization’, 67 International and Comparative Law Quarterly 129. Meléndez Ortiz, Ricardo. 2016. Enabling the Energy Transition and Scale-​Up of Clean Energy Technologies: Options for the Global Trade System, E15 Expert Group on Clean Energy Technologies and the Trade System –​Policy Option paper, ictsd. Meyer, Timothy. 2017. ‘Explaining Energy Disputes at the World Trade Organization’, 17 International Environmental Agreements: Politics, Law and Economics 391. page. 2017. Green Industrial Policy and Trade: A Tool-​Box. Rodrik, Dani. 2004. ‘Green Industrial Policy’, 30 Oxford Review of Economic Policy 469. Rodrik, Dani 2017. ‘Green Industrial Policy: Accelerating Structural Change Towards Wealthy Green Economies, in Partnership for Action on Green Economy (PAGE)’, Green Industrial Policy: Concept, Policies, Country Experiences. Salzman, James and Mark Wu. 2014. ‘The Next Generation of Trade and Environment Conflicts: The Rise of Green Industrial Policy’, 108 Northwestern University Law Review 401. Schwarzer, Johannes A. 2013. Industrial Policy for a Green Economy (International Institute for Sustainable Development). Shadikhodjaev, Sherzod. 2015. ‘Renewable Energy and Government Support: Time to Green the SCM Agreement?’, 14(3) World Trade Review 479. Van den Bossche, Peter and Werner Zdouc. 2017. The Law and Policy of the World Trade Organization (Cambridge: Cambridge University Press, 4th edition).

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­c hapter 3

Stabilisation Clauses in Long-​Term Investment Contracts Their Evolution and Their Application by Investment Tribunals Athina Fouchard Papaefstratiou 1

Introduction

The following are nightmare scenarios for an investor who has been granted the right to explore and then exploit an oil field: after having made substantial investments during the exploration phase of the project, once the production phase starts, the oil field is nationalised against minimal compensation; or the host state imposes new taxes that are so high, that net profits of the project are reduced to zero; or new legislation unilaterally modifies the revenue share terms between the investor and the state, and the state receives practically all the profits of the project. Such situations are not unheard of in international business. The prime remedy against such risks is contractual stabilisation clauses. Stabilisation clauses are “clauses in private contracts between investors and host states that address the issue of changes in the law in the host state during the life of the project.”1 They aim to shield investors from changes in the legal or regulatory framework that affect the equilibrium of the contract. Stabilisation clauses have been used for decades as a contractual risk-​mitigation tool, along with hardship, force majeure, and price review clauses. They are relatively common in long-​term investment contracts in the mining or energy sector.2 Indeed, from a lender’s perspective, stabilisation clauses are considered as an important element of the bankability of an investment project, particularly in emerging markets, where lenders often insist that at least the fiscal terms applicable to the investment be stabilised. As will be seen in section 2.2 below, there are several types of stabilisation clauses. We can mainly distinguish between freezing clauses (that prevent 1 Andrea Shemberg, Stabilisation Clauses and Human Rights, A research project conducted for IFC and the United Nations Special Representative to the Secretary General on Business and Human Rights (2009), para 15. 2 Ibid., 16.

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44 

Fouchard Papaefstratiou

the application to the investment of more onerous new laws and regulations enacted during the term of the contract) and economic equilibrium clauses (whereby the state agrees to adopt measures to restore the economic equilibrium of the contract if new laws or regulations affect the investor’s assets). One can also distinguish between stabilisation clauses of wide and of limited scope (for example limited in terms of duration or in terms of type of legislation –​ commonly to tax or custom legislation). In recent years, the legitimacy of stabilisation clauses has been subject to criticism, and this to a large extent relates to the fact that stabilisation clauses have the potential to shield the investment not only from changes in economic regulation, but also from new norms relating to the environment, human rights, social rights, etc. To illustrate, an investor benefitting from a wide stabilisation clause could exercise pressure on the host state to not implement or to not subject the investor to new laws introducing higher environmental protection standards. In its 2011 Guiding Principles on Business and Human Rights, the United Nations Office of the High Commissioner for Human Rights highlighted that: […] [T]‌he terms of international investment agreements may constrain States from fully implementing new human rights legislation, or put them at risk of binding international arbitration if they do so. Therefore, States should ensure that they retain adequate policy and regulatory ability to protect human rights under the terms of such agreements, while providing the necessary investor protection.3 As will be seen below, in light of such criticisms, as well as of the fostering of the rule of law in many economies, we are currently witnessing a curb in the use of stabilisation clauses. This paper focuses on the evolution of the use of stabilisation clauses in practice (Section 2). It also examines the manner in which international tribunals have applied stabilisation clauses, aiming at shedding further light on the interaction between stabilisation clauses and investment protection (Section 3).

3 ohchr, Guiding Principles on Business and Human Rights, 2011, Commentary to Principle 9, 11.

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Stabilisation Clauses in Long-Term Investment Contracts

2

45

The Evolution of Stabilization Clauses

2.1 From Indispensable Protection to Criticized Practice Stabilisation clauses originated in the period between the First and Second World Wars, when states, particularly in Latin America, began to compulsorily acquire investment projects to operate them themselves, or to hand them over to local companies. In his Separate Opinion in Kuwait v Aminoil, Sir Fitzmaurice explained that such circumstances formed the origin of stabilisation clauses: It was specifically in the light of those occurrences that stabilisation clauses began to be introduced into concessionary contracts, particularly by American Companies in view of their Latin-​American experiences, and for the express purpose of ensuring that Concessions would run their full term, except where the case was one of which the Concession itself gave a right of earlier termination.4 Professor Sonarajah noted that “the more important function of the stabilisation clause is to preclude the possibility of legislation nationalising all foreign investments from applying to the particular foreign investment made on the basis of a foreign investment contract containing a stabilisation clause.”5 Stabilisation clauses became practically the norm for long-​term investment contracts in certain countries, and in industries such as the extractive industry and oil exploration and production, where upfront investment in a project is heavy, and returns are only to be expected after a significant lapse of time. In the 1980s, many developing states handed over the management of oil production to their national oil companies. These national companies became the contracting parties in long-​term contracts with foreign investors. The stabilisation clauses inserted in these contracts did not provide that the legislative and regulatory framework should remain unchanged, but provided for the national oil companies’ obligation to counter-​balance additional requirements imposed on the investor due to changes in the legal or regulatory framework.6 4 5

6

Award in the Matter of an Arbitration between Kuwait and the American Independent Oil Company (Aminoil), (1982) 21 ILM 976 [hereinafter Aminoil v. Kuwait] Separate Opinion of Sir Fitzmaurice, 1052, n 7. Muthucumaraswamy Sornarajah, The Settlement of Foreign Investment Disputes (Kluwer Law International, 2000), 50. See also paras 45–​48 investment cases involving Libya where tribunals sanctioned Libya for nationalising the investor’s interest in violation of the stabilisation clauses contained in the deeds of concession. Catherine Titi, ‘Les Clauses de Stabilisation dans les Contrats d’Investissement: Une Entrave au Pouvoir Normatif de l’Etat d’Accueil?’ 2 JDI 541 (2014), 545; Thomas W. Waelde and George Ndi, ‘Stabilizing International Investment Commitments: International Law Elena Cima and Makane Moïse Mbengue - 978-90-04-46348-6

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Long-​term contracts are not the only instruments containing stabilisation clauses. These are frequently included in domestic legislation. For example, the mining codes of several African countries contain stabilisation clauses,7 even though the current trend is towards the limitation of such general undertakings by the legislator. As a recent example, the Democratic Republic of Congo introduced a new mining code which includes a stabilisation clause limited to five years from the mining code’s entry into force, and applicable only in relation to tax, custom and exchange legislation.8 Less commonly, stabilisation clauses are inserted in foreign investment laws (which apply not only to industries requiring heavy upfront investments, but to a wide range of industries and investments).9

7

8

9

Versus Contract Interpretation’, 31 Texas International Law Journal 215 (1996). For such agreements, see e.g., Agreement on the Joint Development and Production Sharing for the Azeri and Chirag Fields and the Deep Water Portion of the Gunashli Field in the Azerbaijan Sector of the Caspian Sea among the State Oil Company of the Azerbaijan Republic and amoco Caspian Sea Petroleum Limited, bp Exploration (Caspain Sea) Limited et al. (‘Azeri-​Chirag-​Gunashli Production Sharing Agreement’), Art xxiii, 23.2; Agreement on the Exploration, Development and Production Sharing for the Shah Deniz Prospective Area in the Azerbaijan Sector of the Caspian Sea between the State Oil Company of the Azerbaijan Republic and socar Commercial Affiliate, bp Exploration (Azerbaijan) Limited, et al., Art 23.2. This is frequent among African states, see e.g.: Benin, Art 74 of Law No 2006-​17 of 17 October 2006 establishing the Mining and Mineral Taxation Code; Cameroon, Art 190 of Law No 2016-​17 of 14 December 2016 establishing the Mining Code; Central African Republic, Art 134 of Law No 09-​005 of 29 April 2009 establishing the Mining Code; Ivory Coast, Art 164 of law No 2014-​138 of 24 March 2014 establishing the Mining code; Guinea, Art 182 of Law L/​ 2013/​no 053/​cnt of 8 April 2013 amending the law establishing the Mining Code; Niger, Art 97 of Ordinance No 93-​16 of 2 March 1993 establishing the Mining Law; Senegal, Art 27 and 117 of Law No 2016-​32 of 8 November 2016 establishing the Mining Code; Chad, Arts 132 and 357–​359 of Ordinance No 004/​pr/​2018 of 21 February 2018 establishing the Mining Code; Mauritania, Art 141 of Law No 2008-​11 of 27 April 2008 establishing the Mining Code. The previous mining code included a 10-​year stabilisation commitment applicable from any amendment introduced to the mining code and contained no limitation in terms of type of legislation. See Law No 18/​001 of 28 March 2018 amending Law No 007/​2002 establishing the Mining Code, Art 276, al 2; and Law No 2002-​07 of 11 July 2002 establishing the Mining Code, Art 276. See also Amendments to the Mauritanian Mining Code in 2012 (law No 2012.012), limiting the scope of the stabilisation provision by excluding ‘economic’ regulation from the list of regulated sectors to which the stabilisation clause applies. See e.g., Armenia, Art 7 of the law on foreign investment; Kuwait, Art 10 of Law No 8/​2001 regulating direct foreign investment capital; Tajikistan, Art 5 of the Law on Investments; Turkmenistan, Art 20 of the Law on Foreign Investments; Ukraine, Art 8 of the Law on the Regime of Foreign Investment; Uzbekistan, Art 3 of the Law on Foreign Investments; Vietnam, Art 21a of the Law on Foreign Investment. See also, Mauritania, Art 5 of Law No 2012-​052 establishing the Investment Code; Democratic Republic of Congo, Art 40 of Law No 004 of 21 February 2002 establishing the Investment Code; Niger, Art 51 of

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Finally, stabilisation clauses may be found in relatively few International Investment Agreements (iia s), such as several Bilateral Investment Treaties (bit s) entered into by Italy.10 Inserting a stabilisation clause in a bit gives the stabilisation clause an extremely wide scope of application: it may apply to current and future investments, and possibly to investors of several nationalities through a most-​favoured-​nation treatment clause contained in another treaty concluded by one of the contracting states.11 The acme of stabilisation clauses seems however to be behind us. The use of freezing stabilisation clauses in investment contracts has been widely criticised, even though it is still quite common in the extractive industry and in certain geographic areas, such as Africa. Stabilisation clauses have been criticised as representing an excessive restriction of freedom of legislative power, which is an inherent and undeniable right of sovereign states, and therefore of state sovereignty itself.12 The validity of a self-​imposed restriction on a state’s

10

11 12

Law No 2014-​09 of 16 April 2014 establishing the Investment Code. See also Duke Energy International Peru Investments No 1 Ltd. v Republic of Peru, icsid Case No arb/​03/​28, Award (18 August 2008), paras. 189–​190 outlining the tax stabilisation regime provided under Peruvian laws at the origin of legal stability agreements at stake in the arbitral proceedings. Italy-​Mozambique bit, signed on 14 December 1998, entered into force on 17 November 2003, Art 12(3): ‘Whenever, after the date when the investment has been made, a modification should take place in laws, regulations, acts or measures of economic policies governing directly or indirectly the investment, the same treatment shall apply upon request of the investor that was applicable to it at the moment when the investment was agreed upon to be carried out.’ See also similar clauses contained in Italy’s bit s with Angola, Armenia, Azerbaijan, Bosnia, Cameroon, Kazakhstan, Macedonia, Moldova, Tanzania, Uganda, and Uzbekistan. Tarcisio Gazzini, ‘Beware of Freezing Clauses in International Investment Agreements’ 191 Columbia FDI Perspectives (2017). International Energy Charter, Handbook on General Provisions Applicable to Investment Agreements in the Energy Sector, Special Paper Series 2017, 33; Titi, ‘Les Clauses de Stabilisation’ (n 6) 541; Charles Leben, ‘La théorie du contrat d’état et l’évolution du droit international des investissements’, 302 RCADI 240 (2003). The sovereign right to exercise legislative power has been constantly recognised by investment tribunals where the investor has not signed a stabilisation clause: see e.g., Daimler Financial Services ag v Argentine Republic, uncitral, Decision on Liability (30 July 2010) para 139; Parkerings-​Compagniet as v Republic of Lithuania, icsid Case No arb/​05/​8 [hereinafter Parkerings v Lithuania], Award (11 September 2007), para 332. Moreover, it has been recognised that States have a permanent sovereignty right over their natural resources: Arts 1 and 4 of unga Resolution on the Permanent Sovereignty over Natural Resources, Resolution 1803 (xvii) of 1962; Texaco v Libya, 389; Amoco International Finance Corporation, v The Government Of The Islamic Republic Of Iran, National Iranian Oil Company, National Petrochemical Company And Kharg Chemical Company Limited [hereinafter Amoco v Iran], Partial Award, (1987), 15 iusctr 189; Aminoil v. Kuwait, para 143.

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sovereign power, and therefore the validity of a stabilisation clause, is not questioned today.13 However, even though valid, stabilisation clauses may in certain circumstances have a negative effect on a state’s sustainable development. Even though states cannot be legally prevented from amending their legislation, and in practice even freezing stabilisation clauses only create a right of compensation to the investor in case of an unfavourable change in legislation,14 it is possible that the state would be hesitant to enact or apply new legislation, if this would entail paying compensation to a plethora of investors protected by stabilisation clauses.15 Stabilisation clauses are also strongly criticised to the extent that, when drafted in wide terms, they may prevent States from enacting legislation protective of human and social rights, the environment, etc. It has been argued that these clauses could undermine States’ ability to fulfil their duties pursuant to international human rights law. As explained in the 2009 Report on Stabilisation Clauses and Human Rights by the International Finance Corporation (ifc) and the UN Special Representative to the Secretary General on Business and Human Rights: [I]‌t is clear that in a number of cases the stabilization clauses are in fact drafted in a way that may allow the investor to avoid compliance with, or seek compensation for compliance with, laws designed to promote environmental, social, or human rights goals. Assuming the validity of using social and environmental laws as a surrogate for human rights, 13

See e.g., Arbitral Tribunal Award in Liberian Eastern Timber Corporation (letco) v The Government of the Republic of Liberia (Recovery of Damages for Breach of a Concession Agreement), (1987) 26 ilm 647, 666–​667; Libyan American Oil Company (Liamco) v The Government of The Libyan Arab Republic (1981) 20 ilm, 1 [hereinafter Liamco v Libya], 59. Scholars have also confirmed this consensus: Francisco V. Garcia-​Amador, ‘State Responsibility in Case of Stabilization Clauses’, 2 Journal of Transnational Law & Policy 23 (1993), 33–​34. These cases will be further addressed in section 3.1. 14 The vast majority of tribunals has awarded compensation, even in the event of breach of freezing clauses. See for example agip S.p.A. v People’s Republic of the Congo icsid Case No arb/​77/​1, [hereinafter Agip v Congo], Award (30 November 1979), para 88; Liamco v Libya, 140. Even in a reported case where, exceptionally, a tribunal ordered restitutio in integrum, the Government did not enforce this decision and settled compensation with the investor. Texaco v Libya. It is to be noted that even though in the international sphere the legality of stabilisation clauses is not questioned, this is not necessarily true for the national judge. As an illustration, it has been reported that the Israeli High Court of Justice held in 2016 that a contract to develop natural gas would have to be cancelled if it contained a stabilisation clause, which was deemed to be unconstitutional. International Energy Charter, Handbook on General Provisions (n 12), 35–​36. 15 Shemberg, Stabilisation Clauses and Human Rights (n 1) para 120.

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it is possible to infer further that some stabilization clauses in modern contracts may negatively impact the host state’s implementation of its human rights obligations.16 As will be seen in the following section, partly due to international criticism against the use of stabilisation clauses, or at least against the use of wide freezing clauses, the current trend is towards the use of more restricted stabilisation clauses.17 2.2 Stabilisation Clauses in the Era of Corporate Social Responsibility The idea that the capacity of states to commit themselves through contracts with private parties may be limited by their international obligations to abide by human rights has gained momentum today.18 An example of this trend is the 2012 US-​Model bit, which contains a reservation of rights clause for environmental regulation.19 At the same time, multinationals are invited to support states in their effort to regulate in a way that would foster sustainable development. In 2011, the Organization for Economic Cooperation and Development (oecd) published its Guidelines for Multinational enterprises. These guidelines invite enterprises to refrain from seeking the freezing of regulations in the areas of human rights, environment, health safety, labour, taxation, financial incentives or other issues.20 Despite their non-​binding nature, these guidelines reflect, particularly in the context of investment protection, the will of states and the private sector to cooperate, in order to foster sustainable development and protect social and human rights. The Human Rights Undertaking of the Baku Tbilisi Ceyhan Pipeline is an enlightening example of the current trend. In 2000, Azerbaijan, Georgia and Turkey executed Host Government Agreements for the construction of a pipeline for exporting crude oil crossing the three countries. bp is the operating company of the project involving a consortium of 11 oil companies including Total, agip and Conoco, and the State Oil Company of Azerbaijan (socar). 16 17 18 19

20

Ibid., para 135. Ibid., 17, 37. Titi, ‘Les Clauses de Stabilisation’ (n 6) 556. US-​Model bit, Art 12(3): ‘The Parties recognize that each Party retains the right to exercise discretion with respect to regulatory, compliance, investigatory, and prosecutorial matters, and to make decisions regarding the allocation of resources to enforcement with respect to other environmental matters determined to have higher priorities.’ oecd Guidelines for Multinational Enterprises’ (2011) (accessed 20 July 2019).

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The lenders financing the project include several institutions such as the ifc, and the European Bank for Reconstruction and Development (ebrd). Non-​ governmental organizations (ngo s) rapidly raised their concern regarding the stabilisation clauses contained in the Host Government Agreements, whereby the states forfeited their right to impose more stringent environmental and social standards during the 40-​year term of the agreement, unless they provided compensation for the losses incurred as a result of the application of such standards. In response, the consortium publicly agreed to renegotiate the scope of the stabilisation clauses. In 2003, it adopted a unilateral commitment to refrain from seeking compensation under the stabilisation clauses of the agreements with the host states in a manner that would preclude any action or inaction reasonably required to fulfil any obligation of the host state, under any international treaty on human rights, labour or health, safety and environment applicable to the relevant project.21 In that context of focus on corporate social responsibility, the use of stabilisation clauses appears to be less common, as compared to past decades, and stabilisation clauses currently negotiated are often limited in nature, as regards the obligation they impose on the state, as well as regarding their scope of application.22 This trend is also up to a certain extent due to the fostering of the rule of law more generally, which has increased investor confidence. 2.2.1 From Freezing Clauses to Economic Equilibrium Clauses The traditional stabilisation clauses are the so-​called ‘freezing clauses’, which consist in a state making a general promise to not modify the legal or regulatory framework. The law applicable to the contract is ‘frozen’ at the date of conclusion or of performance of the contract.23 Among freezing clauses, we can also identify the non-​opposability clauses, less restrictive of state sovereignty, which guarantee that the modified framework will not apply to the investor

21 The Baku-​ Tbilisi-​ Ceyhan Pipeline Company, btc Human Rights Undertaking, 22 September 2003. 22 Shemberg, Stabilisation Clauses and Human Rights (n 1) 17, 37; UN Human Rights Council, Business and Human Rights: Towards Operationalizing the Protect, Respect and Remedy Framework: Report of the Special Representative of the Secretary-​General on the issue of human rights and transnational corporations and other business enterprises, John Ruggie, (2009), a/​h rc/​1 1/​1 3, para 32. 23 Prosper Weil, Les clauses de stabilisation ou d’intangibilitéinsérées dans les accords de développement économique, 307; Christophe Schreuer et al, The ICSID Convention: A Commentary (Cambridge University Press, 2001), 588.

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without its consent.24 The cotco-​Cameroon Oil Development and Pipeline Agreement is illustrative of both: With regard to activities undertaken under this Convention, the Republic of Cameroon shall not modify such legal, tax, customs and exchange control regime in such a way as to adversely affect the rights and obligations of cotco, Shareholders, Affiliates, Contractors, Sub-​Contractors, Shippers or Lenders arising from this Convention and no legislative, regulatory or administrative measure contrary to the provisions of this Convention shall apply to the persons mentioned above without cotco’s prior consent.25 Today, the drafting of stabilisation clauses tends towards ‘economic equilibrium clauses’. A classic type of economic equilibrium clause requires the state party to an investment contract to take all action possible to restore the economic equilibrium of the contract, affected by legislative or regulatory changes. Article 37.2 of the Energy Charter Treaty Model Host Government Agreement provides for example as follows: The Host Government shall take all actions available to it to restore the Economic Equilibrium established under this Agreement […] if and to the extent the Economic Equilibrium is disrupted or negatively affected, directly or indirectly, as a result of any change (whether the change is specific to the Project or of general application) in [host state] law (including any laws regarding Taxes, health, safety and the environment) occurring after the Effective Date, as applicable, including changes resulting from the amendment, repeal, withdrawal, termination or expiration of [host state] law, the enactment, promulgation or issuance of [host state] law, the interpretation or application of [host state] law (whether by the courts, the executive or legislative authorities, or administrative 24

25

A particular sub-​category within freezing clauses are intangibility clauses, whereby a State promises not to exercise its sovereign power to unilaterally terminate the contract. Scholars such as Prosper Weil have considered that intangibility clauses do not concern the legislative framework of the host state but only aim to remedy abusive exercise of State’s sovereign powers that affect the contractual rights of the investor. Catharine Titi has pointed out that distinguishing legislative acts from contractual acts (such as contractual termination) of a Government oversees the fact that unilateral termination from the State generally occurs through a legislative act. Titi (n 6) 547. cotco-​ Cameroon Oil Development and Pipeline Agreement, Art 24(1) [emphasis added].

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or regulatory bodies), the decisions, policies or other similar actions of judicial bodies, tribunals and courts, the Local Authorities, jurisdictional alterations, and the failure or refusal of judicial bodies, tribunals and courts, and/​or the Local Authorities to take action, exercise authority or enforce [host state] law (a ‘Change in Law’).26 These remodelled clauses appear in response to one of the traditional critiques against freezing clauses, as they “do not impinge upon the Host State’s right to legislate but only foresee economic compensation in case of subsequent amendments negatively affecting the contractual equilibrium.”27 Sometimes, the obligation in case of a change in law is to renegotiate with the investor. ‘Renegotiation clauses’ aim at keeping the original contractual equilibrium alive “by requiring the parties to strike a new balance whenever there are circumstances justifying a change in the original obligations in the contract.”28 A parallel can thus be made between economic equilibrium clauses and with hardship clauses in commercial contracts, which often entail a duty of the parties to renegotiate. The Azerbaijan-​Texas production sharing contract provides an example of an economic equilibrium clause entailing a renegotiation obligation: [I]‌n the event that any Government Authority invokes any present or future law, treaty, intergovernmental agreement, decree or administrative order which contravenes the provisions of this Agreement or adversely or positively affects the rights or interests of Contractor hereunder, included, but not limited to, any changes in tax legislation, regulations, or administrative practice, or jurisdictional changes pertaining to the Contract Area, the terms of this Agreement shall be adjusted to re-​establish the economic equilibrium of the Parties, and if the rights or interests of Contractor have been adversely affected, then socar shall indemnify Contractor (and its assignees) for any disbenefit, deterioration in economic circumstances, loss or damages that ensue therefrom.29 26

Energy Charter Treaty Secretariat’s Model Host Government Agreement in Model Intergovernmental and Host Government Agreements for Cross-​Border Pipelines (2nd edition), Art 37.2 [Option 2]; quoted in Titi, ‘Les Clauses de Stabilisation’ (n 6) 544. 27 Lorenzo Cotula, ‘Pushing the Boundaries vs Striking a Balance: The Scope and Interpretation of Stabilization Clauses in Light of the Duke v Peru Award’, 11 Journal of World Investment & Trade 27 (2010), 29; International Energy Charter (n 12) 33. 28 Sornarajah, The Settlement (n 5) ch 2 part 3.7. 29 Azerbaijan Union Texas/​Commonwealth Production Sharing Agreement (1998), Art 22(2); referred to by Bertrand Montembault-​Heveline & Rebecca Major, ‘Stabilisation’, in 2 AIPN Host Government Contract Handbook (aipn July 2002), para 2; quoted in Doak R. Bishop,

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From a practical point of view, it may make a significant difference if the obligation of the state party to a contract is to take all action necessary to restore the contractual equilibrium, or to renegotiate the contractual terms. In the latter case, the state’s obligation is likely to be considered as a best-​efforts obligation, and it may be extremely difficult to prove that a state which entered into unfruitful negotiations with the investor following a legislative change has breached the stabilisation clause. A related question which arose in practice is whether a clause which provides for renegotiation in the event of legislation affecting the contractual equilibrium to the detriment of either party should be considered as a stabilisation clause or rather a typical commercial clause negotiated by parties having equal bargaining power. The Perenco v Ecuador and Burlington v Ecuador tribunals reached opposite conclusions on the issue. Both cases concerned foreign investments in oil fields in Ecuador in the early 2000s. Burlington and Perenco, two foreign companies, concluded production sharing contracts (psc s) with the state to explore blocks of an oil field in Ecuador. The contracts contained very similar economic equilibrium clauses: Modification to the tax system: In the event of a modification to the tax system or the creation or elimination of new taxes not foreseen in this Contract or of the employment contribution, in force at the time of the execution of this Contract and as set out in this Clause, which have an impact on the economy of this Contract, a correction factor will be included in the production sharing percentages to absorb the impact of the increase or decrease in the tax or in the employment contribution burden. This correction factor will be calculated between the Parties and will be subject to the procedure set forth in Article thirty-​ one (31) of the Regulations for Application of the Law Reforming the Hydrocarbons Law.30 Following a sharp increase in oil prices worldwide, the companies began making great profits. After a failed attempt to renegotiate a higher revenue share, Ecuador enacted ‘Law 42’, a legislation taxing first up to 50% and then up to

30

James Crawford and Michel Reisman, Foreign Investment Disputes, Cases, Materials and Commentary (Kluwer Law International, 2005), 298 [emphasis added]. Tax modification Clause of the psc for Block 7, clause 11.12, Burlington Resources Inc. v Republic of Ecuador, icsid Case No arb/​08/​5 (formerly Burlington Resources Inc. and others v. Republic of Ecuador and Empresa Estatal Petróleos del Ecuador (PetroEcuador)) [hereinafter Burlington v Ecuador], Decision on Liability (14 December 2012), para 21.

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90% of the profits made in excess of the average oil price at the time the contracts were signed. The companies initiated arbitral proceedings claiming expropriation of their investment, and also of their contractual rights under the above-​mentioned stabilisation clauses. The Burlington tribunal found that the production sharing contract contained a mandatory stabilisation clause, and that the parties’ understanding was that if renegotiation between the parties was unfruitful, an international adjudicator could be called to resolve the dispute.31 The tribunal concluded: For the foregoing reasons, the Tribunal deems that the application of a correction factor is mandatory when a tax affects the economy of the psc s for Blocks 7 or 21. This correction factor must be of such extent as to wipe out the effects of the tax on the economy of the psc. Otherwise stated, the correction factor must restore the economy of the psc to its pre-​tax modification level.32 Two years later, when faced with the same issue, the Perenco tribunal did not accept the characterization of the clause as a stabilisation clause, as the clause did not purport to freeze Ecuadorian law.33 Even though the tribunal did not discuss the issue, it is noteworthy that in principle the tax stabilisation clause was also applicable in situations where the new legislation had a negative impact on the state’s interests, and not only on the interests of the investor. 2.2.2

From Stabilisation Clauses with a Broad Scope of Application to Limited Stabilisation Clauses Traditionally, stabilisation clauses were designed to apply broadly. The 2009 Report on Stabilisation Clauses and Human Rights by the ifc and the United Nations (UN) Special Representative to the Secretary General on Business and Human Rights provides two examples of a broad stabilisation clause: the 2000 Model Infrastructure Agreement of a Latin American State, and a Sub-​Saharan extractive agreement from the 2000s:

31 32 33

Ibid., para 328–​335. Ibid., para 334. For a discussion of the relevant findings of the Burlington v Ecuador tribunal, see paragraph 57 below. Perenco Ecuador Ltd. v The Republic of Ecuador and Empresa Estatal Petróleos del Ecuador, icsid Case No arb/​08/​6, [hereinafter Perenco v Ecuador], Decision on Remaining Issues of Jurisdiction and on Liability (12 September 2014), para 366.

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The State guarantees the Investors and the Recipient Company that this Investment Contract […] shall enjoy absolute legal stability. Accordingly, […] the Investment Contract may not be modified unilaterally by laws or other dispositions from the State of any type that affect it or changes in the interpretation or application thereof […]. The government hereby undertakes and affirms that at no time shall the rights (and the full and peaceful enjoyment thereof) granted by it under this Agreement be derogated from or otherwise prejudiced by any Law or by the action or inaction of the government, or any official thereof, or any other Person whose actions or inactions are subject to the control of the government. In particular, any modifications that could be made in the future to the Law as an effect on the Effective Date shall not apply to the concessionaire and its Associates without their prior written consent, but the concessionaire and its Associates may at any time elect to be governed by the legal and regulatory provisions resulting from changes made at any time in the Law as in effect on the Effective Date. In the event of any conflict between this Agreement or the rights, obligations and duties of a Party under this Agreement, and any other Law, including administrative rules and procedures and matters relating to procedure, and applicable international law, then this agreement shall govern he rights, obligations, and duties of the Parties.34 The clause in question in the Amoco International Finance Corp v Iran case is another example of a broad clause: “Measures of any nature to annul, amend or modify the provisions of this Agreement shall only be made possible by the mutual consent of npc and amoco.”35 More recent stabilisation clauses tend to be narrower in terms of scope of application. This trend towards a narrower scope of stabilisation clauses can be seen in relation to both freezing and economic equilibrium stabilisation clauses. The limitations in the scope of application of stabilisation clauses vary. They may concern conditions for their application, types of regulation, temporal limitations, etc. First, stabilisation clauses may be subject to a minimum amount invested. In 2005, Madagascar amended its Mining Code to subject the access to and

34 Shemberg, Stabilisation Clauses and Human Rights (n 1) para 6. 35 Amoco v Iran, para 168, quoting Art 21(2) of the agreement between the investor and the host State [emphasis added].

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the duration of stabilisation guarantee to a minimum amount invested by the investor.36 Second, they may be limited to certain types of regulation. In Bogdanov v Moldova, the sole arbitrator refused to construe widely a limited stabilisation clause that provided that: [s]‌hould new laws be adopted deteriorating the conditions of Free Zone residents’ activities with regard to the customs and tax regimes stipulated by the present Jaw, the residents shall be entitled to rely, for a period of ten years as of the date of the enactment of the new law, and the legislation of the Republic of Moldova in force on the date of the registration of the residents in the Economic Free Zone.37 The tribunal highlighted that the stabilisation clause only concerned customs and value added tax privileges for residents of the Free Zones and did not extend to legislation in other fields.38 Third, stabilisation clauses may only apply in the face of discriminatory regulation. In Aguaytía Energy llc v Peru,39 although the tribunal, on jurisdictional grounds, did not address the issue of the application of the stabilisation clause, the ‘stability agreement’ concluded between Peru and a US company exploring and exploiting a gas field contained the following clause: Stability of the right to non-​discrimination, as provided for in item c), article 10, of Legislative Decree 662, which implies that the state or neither one of its bodies, notwithstanding these may include entities or companies from the Central Government, Regional or Local Governments, may apply a differentiated treatment to aguaytia by reason of its nationality, the sectors or types of economic activity it shall develop, or the geographical location of the firm in which it invests, and neither as far as the matters herein below specified: The term of effectiveness of this juridical Stability Agreement is ten (10) years counted as from the date of its execution. Accordingly, throughout this term, it may not be amended by

36 37 38 39

Law No 99-​022 of 19 August 1999 establishing the Malagasy Mining Code, as amended by Law No 2005-​021, Arts 154–​160. Yuri Bogdanov & Yulia Bogdanova v The Republic of Moldova, scc Case No v(091/​2012) [hereinafter Bogdanov v Moldova], Final Award (16 April 2013), para 60. Ibid., para 188. Aguaytía Energy, llc v Republic of Peru, icsid Case No arb/​06/​13, Award (11 December 2008).

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either of the parties individually, regardless of whether the national legislation could be eventually amended and notwithstanding the fact that such amendments to the national legislation may turn out to be more beneficial or harmful to any of the Parties, than those agreed hereunder.40 Fourth, stabilisation clauses may also a contain temporal limitation. The examples above included such a limitation. Even though it may appear as a minor limitation, the temporal scope is, in reality, very important in long-​term contracts. Bringing, as the Democratic Republic of the Congo (drc) recently did,41 the duration of the stability clause down to five years, in practice covers one electoral cycle and does not provide assurances that the investment will still be protected after a change in Government. 3

The Application of Stabilisation Clauses by International Tribunals

Having discussed contractual practice regarding stabilisation clauses, the second part of the present study will focus on the application of stabilisation clauses by international tribunals. International arbitral case law relating to stabilisation clauses has evolved both with respect to contract claims, where the foreign investor claimed that the change in the law amounted to a contractual breach, as well as with respect to treaty claims, where the foreign investor claimed that the breach of the stabilisation clause led to a breach of investment treaty protections. The present section will be divided in three parts. The first part examines the early international arbitral awards, issued on the basis of contract claims, which focused on the question of the law applicable to the stabilisation clause, and its legality (3.1). The second part will focus on arbitration awards that have examined the content of the vested right created by a stabilisation clause, as well as what may constitute a breach thereof (3.2). The third part looks into how stabilisation clauses interlink with investment treaty protections (3.3). 3.1 Early Cases: The Legality of Stabilisation Clauses The first arbitral case law on stabilisation clauses dates back to the 1970s and the 1980s.42 40 41 42

Ibid., 86. See n 9. The first cases arising out of contracts containing stabilisation clauses did not specifically deal with issues related to the stabilisation clause: Lena Goldfields, Ltd v ussr, Award (3

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These arbitrations were initiated following the nationalisation of investments, in cases where the investor had signed with the state a contract (typically a concession) containing a stabilisation clause. The tribunals generally decided that the stabilisation clause constituted a valid, self-​imposed limitation on the sovereign right of states to nationalise private property, and found that the nationalisation of the investment led to the states’ duty to pay compensation. In reaching this conclusion, the tribunals discussed the effect of stabilisation clauses on the contract’s international character.43 In the 1970s, Libya initiated nationalisation measures that led to three different arbitrations. The first one is bp v Libya. Judge Lagergren, the sole arbitrator in this case, bypassed the assessment of the specific breach of the stabilisation clause included in the deed of concession and concluded that the nationalisation measures constituted a fundamental breach of the agreement, and that the taking of property, rights, interests of the claimant were in clear violation of international law.44 In Texaco v Libya, Professor René-​Jean Dupuy, acting as sole arbitrator, found that Libya had breached deeds of concession held by two United States (US) companies, by enacting a decree of nationalisation in breach of its contractual commitment to provide a stable regime for the investor.45 He considered that the stabilisation clause did not impair, in principle, the sovereignty of the Libyan State, which was free to regulate and exercise its sovereignty with respect to national or foreign persons with whom it had not undertaken the obligation contained in the clause.46 He concluded that the sovereign right of a state to nationalise cannot prevail over the power of a state to commit itself

43

44 45 46

September 1930), reprinted in Arthur Nussbam, ‘The Arbitration between Lena Goldfields Ltd and the Soviet Government’, Cornell Law Quarterly 31 (1950); and Sapphire Petroleum Ltd v National Iranian Oil Company (1967) 35 ilr 136. The tribunal in Aminoil v Kuwait reached the contrary conclusion. In that case, the Claimant claimed that Kuwait had violated the stabilisation clause of a concession agreement, when it enacted a decree terminating the concession agreement and nationalising the property and assets of Aminoil. The tribunal, applying the evolutionary interpretation approach (in accordance with the icj decision in the Gabčíkovo-​Nagymaros case (Gabčíkovo-​Nagymaros Project (Hungary v Slovakia), Judgment, 1. C. J. Reports 1997, 7, para 112)), decided that there had been a change in the contract circumstances which was tacitly acquiesced by the investor. Given that the stabilisation clause could not be isolated from the rest of the contract, this clause had lost its ‘former absolute character’ and could not be applied. See Aminoil v Kuwait, para 101. bp Exploration Company (Libya) v Government of Libyan Arab Republic, Award (10 October 1973) 53 ilr 297, para 329. Texaco v Libya, paras 58–​79. Ibid., para 71.

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internationally through stabilisation clauses, unless the state act is an ‘act of government’.47 In Liamco v Libya, the tribunal similarly recognised that stabilisation clauses constitute binding contractual undertakings that a state must respect.48 In the same way, in Agip v Congo, the act of nationalisation was found to amount to a repudiation of the stabilisation clause contained in the concession.49 The tribunal held the state liable to pay compensation to the investor.50 In taking this stand, the tribunals regarded contracts containing stabilisation clauses as international contracts, the violation of which by the state gives rise to its international liability.51 Indeed, as explained by Vandevelde: The rule that had emerged by the nineteenth century was that contracts are obligations created by domestic law and thus are enforceable to the extent provided by the law applicable to the contract, typically host-​state law. Where a host state law breached a contract with a foreign investor, the investor’s remedy was through a contract action in local courts. […] By the mid-​twentieth century, some contended that at least certain contracts could create obligations founded on international law and that a breach of these contracts would violate customary law.52 The Revere Copper case is illustrative of this approach. A stabilisation clause had been inserted in an agreement between Revere, a US company, and Jamaica for the investment in a plant to convert bauxite to alumina. The agreement 47

Ibid., para 73. Acts of government are, under French administrative law, those acts that do not fall under the prerogatives of the State recognised by the theory of administrative contracts; for instance, nationalisation appears as an act of government, i.e., an extra-​ contractual power of the State (see para 72 of the Award). 48 Liamco v Libya, 61. 49 See also Texaco v Libya. 50 Agip v Congo, paras 85–​88. 51 Schreuer, The ICSID Convention (n 23) 589 referring to Agip v Congo, paras 86–​88. On the theory of internationalization, see also Margarita T.B. Coale ‘Stabilisation Clauses in International Petroleum Transactions’, 30(2) Denver Journal of International Law & Policy 217–​238 (2002), 225 ff. 52 Kenneth J. Vandevelde, Bilateral Investment Treaties (Oxford University Press, 2010), 257. Footnotes omitted. See also Arghyrios A. Fatouros ‘International Law and the Internationalized Contract’, 74 American Journal of International Law 134 (1980), 137–​ 138: “In reality the most important consequence of internationalization is implicit. In simplest terms, once a contract has moved to the international level, it cannot lawfully be affected by unilateral, national legal action. Since states cannot invoke their sovereignty to abrogate an international treaty, it is argued, neither can they do so to alter internationalized contract.”

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expressly provided that no further taxes, burdens or levies would be imposed on bauxite, as well as on bauxite reserves and operations. Nevertheless, the Jamaican Government enacted a bauxite levy and increased the royalties due by Revere. The tribunal decided to apply Jamaican law “for all ordinary purposes of the Agreement” but at the same time to apply public international law principles which govern the responsibility of states for injuries to aliens.53 Various reasons were put forward: “it would be contrary to well established principles of international law to leave the question of state responsibility to the alien party to the determination by that state as to what it lawfully could or could not do;”54 but also that international law is applicable “particularly as regards the so-​called stabilization clauses.”55 The tribunal concluded that long term economic development agreements signed with foreign investors “are basically international in that they are entered into as part of a contemporary international process of economic development, particularly in the less developed countries.”56 The Revere tribunal thus found that a stabilisation clause inserted in the contract between the parties was ‘internationally binding’, and found that the state had breached this contractual commitment by repudiating the investor’s contract.57 In Texaco v Libya, after pointing to the fact that concession contracts are generally of international character, Professor Dupuy held that the inclusion of a stabilisation clause in a contract in any event has the effect of internationalising it.58 By the end of the 1980s, a consensus had clearly emerged. The validity and legality of stabilisation clauses was no longer an issue for arbitral tribunals. The tribunal’s finding in Letco v Liberia in 1987 is representative of this consensus: This clause, commonly referred to as a ‘Stabilisation Clause’ is commonly found in long-​term development contracts and, […] is meant to avoid the arbitrary actions of the contracting government. This clause must be respected, especially in this type of agreement. Otherwise, the contracting

53

The traditional approach was that municipal law governs contracts between States and foreign private parties. See Serbian and Brazilian Loans Case (1929) pcij, Ser. A, No 20, 41. 54 Revere Copper & Brass, Inc v Overseas Private Investment Corporation (opic), American Arbitration Association, Award (24 August 1978) 17(06) ilm 1321, at 1331. 55 Ibid. 56 Ibid. 57 Ibid., 1353. 58 Texaco v Libya, paras 31–​36.

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state may easily avoid its contractual obligations by legislation. Such legislative action could only be justified by nationalization […].59 3.2 Stabilisation as a Vested Right One of the reasons relied on by investment tribunals to enforce stabilisation clauses is that a promise to stabilise creates a property right, a ‘vested right’ that is protected as a matter of international law.60 In light of this, rights granted by a state under a contract may constitute qualifying investments and thus benefit from investment treaty protection.61 The question arises as to whether stabilisation clauses constitute vested rights not only when they are contractually agreed, but also when they form part of national law. Certain authors appear to make no distinction, depending on the source of the stabilisation undertaking: “A legislative stabilisation clause, like a contractual one, can be the source of a vested right that a tribunal must honour […] [and] can be the basis of an investor’s detrimental reliance.”62 The Oxus Gold award on the contrary has suggested a distinction between rights emanating from a contractual stabilisation clause and a legal stabilisation clause. The tribunal held that the stabilisation clause in a legislative act “does not give a vested right to the investor, as the State can always modify its laws and general regulations. The situation is different when a stabilisation clause is included in a contract or a regulation specifically directed at the investor, as in the present case, where the different Decrees all concerned expressly Amantaytau Goldfields Joint Venture.”63 Scholars such as Thomas Waelde and Georges Ndi also make such distinction. They identify stabilisation clauses as waivers of sovereignty, hence they stress that a stabilisation clause contained in a national legislation is too general to constitute a binding waiver.64 As to the question of what may constitute a violation of a stabilisation clause, the Tribunal in aes v Kazakhstan highlighted that the new legislation 59 60

letco v Liberia, 666–​667. Joseph E. Neuhaus, ‘The Enforceability of Legislative Stabilization Clauses’ in D.D. Caron et al (eds.), Practicing Virtue: Inside International Arbitration (Oxford University Press, 2015). 61 Ibid,. 326. 62 Ibid. 63 Oxus Gold plc v Republic of Uzbekistan, uncitral, Final Award (17 December 2015), para 823. 64 Waelde and Ndi, ‘Stabilizing International Investment Commitments’ (n 6) 240. See Charanne and Construction Investments v Spain, scc Case No v 062/​2012, [hereinafter Charanne v Spain], Award (21 January 2016) [Spanish], para 360.

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has to be taken into account as a whole in order to assess whether it negatively affects the investment: Where a new law is promulgated and implemented, it must be looked at in its entirety, and it must also be put into its general context. Stabilization cannot mean that an investor is entitled to cherry-​pick favourable provisions in a new legislation and request to be exempted from the application of unfavourable provisions. This would not only be unmanageable, but it would also create problems of transparency and predictability as to which provisions apply to a particular investor and which do not. The fact that specific provisions within the general legal framework may have had adverse effects on Claimants’ operations and business cannot therefore be sufficient to conclude that Claimants’ position was ‘adversely affected’ under Article 6 of the 1994 fil.65 Finally, the Duke Energy tribunal considered that in the absence of a formal change in law, a change in the interpretation of the law falls under the scope of the stabilisation commitments undertaken by the state.66 It remains to be seen if future tribunals will follow the same approach. The Interplay between Stabilisation Clauses and International Investment Treaty Protection The violation of a stabilisation clause may amount to a breach of an international investment agreement. First, and as discussed, the stabilised right may qualify as an investment under bit s which also protect contractual rights having an economic value. In that case, a violation of the stabilised right could be sanctioned as expropriation of that very right. Second, the breach of a stabilisation clause may amount to a breach of the bit through the application of the bit’s umbrella clause. Third, a violation of a stabilisation clause may 3.3

65

aes Corporation and Tau Power B.V. v Republic of Kazakhstan, icsid Case No arb/​10/​16, Award (1 November 2013), para 272. 66 The Duke Energy v Peru case concerns a foreign investment in the electricity sector in Peru. The arbitration involved highly complex tax issues, notably new taxes imposed on the investor that had concluded a stabilisation agreement with the host state in accordance with the stabilisation provisions contained in Peruvian investment laws. The claimant claimed for losses allegedly caused by the administrative interpretation of the law by tax authorities that amounted to a breach of the stabilisation clauses. The tribunal found that the assessment by the Peruvian authorities of the tax liability at stake breached the stability agreement (providing for ‘the continuity of the existing rules’) and awarded more than usd 18 million in damages plus interest. Duke v Peru (n 10), para 219.

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represent a violation of the investor’s legitimate expectations, and more generally of the fet standard. In that respect, several investment arbitral awards have used stabilisation clauses as an antithetical example, to explain that the standard protections of a bit are not equivalent to the protection offered by a stabilisation clause, in that they do not shield investors from the application of new general legislation. 3.3.1

Breach of Stabilisation Obligation as Expropriation of the Stabilised Right As explained earlier in section i(B)(1) above, in Burlington v Ecuador, the investor claimed that new taxes implemented by Ecuador were in breach of the stabilisation clauses contained in the concession agreement, and at the same time amounted to expropriation. One of the claims put forward by the claimant was that the new taxes constituted a taking of the stabilised right, in that case, the right to a fixed revenue share: “in passing Law 42 and then ignoring the requests for readjustment, Ecuador extinguished Burlington’s right to the participation share to which it was entitled under the production sharing contracts. In this way, Ecuador effected a taking of Burlington’s contract rights, a conclusion that finds support in the Revere Copper and Benvenuti decisions, where the tribunals held that tax measures that impair contract rights can effect a taking”.67 It transpires from the award that although the claimant mentioned specific expropriatory acts such as the taking of its stabilised revenue share, it complained, in essence, about the expropriation of its investment as a whole. The tribunal assessed the impact of the new legislation on the investment as a whole, rather than on the contractual right, and did not find sufficient evidence to conclude that Burlington had been substantially deprived of its investment by the effect of Law 42.68 We note however that the applicable US-​Ecuador bit included in the definition of investment ‘any right conferred by law or contract, and any licenses and permits pursuant to law’.69 Therefore, a possible basis for the expropriation claim could have been that the claimant’s stabilised right had been expropriated. The Methanex v US tribunal noted, on the other hand, that in the absence of a stabilisation clause, non-​discriminatory general legislation would not amount to expropriation: 67 68 69

Burlington v Ecuador, para 356. Ibid., para 456. The tribunal made a finding of unlawful expropriation, but on the basis of a different claim. USA-​Ecuador bit, signed on 27 August 1993, entered into force on 11 May 1997, Art 1(a)(v). The bit was terminated on 18 May 2018.

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as a matter of general international law, a non-​discriminatory regulation for a public purpose, which is enacted in accordance with due process and, which affects, inter alios, a foreign investor or investment is not deemed expropriatory and compensable unless specific commitments had been given by the regulating government to the then putative foreign investor contemplating investment that the government would refrain from such regulation.70 3.3.2

Violation of the Stabilisation Clause Amounting to a Breach of the Umbrella Clause of a bit Many bit s contain observance of obligations clauses, which require the host state to observe any obligation it has entered into with respect to an investment. These clauses are also called ‘umbrella clauses’, as they bring contractual commitments under the ‘umbrella’, or the cover of a bit, transforming them into international obligations.71 There is still controversy regarding inter alia the type of commitments or breaches of commitments covered by an umbrella clause.72 There are tribunals that have considered that only contractual breaches committed by the host state acting in its sovereign capacity, rather than as an ordinary party to a contract, are covered by the umbrella clause.73 In the presence of a stabilisation clause, the contractual breach by the host state, consisting in applying new legislation despite the existence of a stabilisation clause, is clearly a contractual breach actionable through an umbrella clause. On account of the umbrella clause in the applicable Argentina-​US bit, the tribunal in El Paso v Argentina concluded that the bit covered additional

70

Methanex Corporation v United States of America, uncitral, Final Award of the Tribunal on Jurisdiction and Merits (3 August 2005), subsection iv(D) para 7. 71 Vandevelde, Bilateral Investment Treaties (n 52) 257. For the operation of umbrella clauses see also Prosper Weil, Recueil des Cours iii (1969), 132 et seq. For an example of an umbrella clause see Art 10(3) of the Korea-​Belarus 1997 bit, signed on 22 April 1997, entered into force on 9 August 1997: “Each Contracting Party shall observe any other obligation it may have entered into with regard to investments in its territory by investors of the other Contracting Party.” See other examples of umbrella clauses in Katia Yannaca-​ Small, ‘Interpretation of the Umbrella Clause in Investment Agreements’, oecd Working Papers on International Investment, 2006/​ 03, oecd Publishing. (accessed 20 July 2019), 23. 72 Yannaca-​Small, ‘Interpretation of the Umbrella Clause’ (n 71) 15–​22; Vandevelde, Bilateral Investment Treaties (n 52) 263 et seq. 73 See for example Sempra Energy International v The Argentine Republic, icsid Case No arb/​02/​16, Award (28 September 2007).

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investment protections contractually agreed by the state as a sovereign, such as stabilisation clauses.74 3.3.3

A Breach of Stabilisation Clause as a Breach of the Fair and Equitable Treatment or the Protection and Security Standard In Bogdanov v Moldova, the claimants asserted that the stabilisation clause inserted in Moldovan legislation gave rise to their legitimate expectations. Although the tribunal found that the new legislation fell out of the scope of the stabilisation clause, it acknowledged that had this change fallen within the scope of the clause, it would have constituted a breach of the fair and equitable standard.75 In general, very few tribunals have been asked to decide whether a breach of a stabilisation clause would amount to a breach of a bit protection. Most recent investment arbitration cases referring to stabilisation clauses are cases where no stabilisation clause was present in the contract between the investor and the state entity, or the bit itself. In the absence of a stabilisation clause, investors have invoked other protections usually found in international investment agreements to complain about the detrimental effect of legislative changes on their investment: for example, the fair and equitable treatment (which protects their legitimate expectations), and the full protection and security standard. Investment tribunals dealing with cases initiated in the context of the Argentine crisis have highlighted that the fair and equitable treatment standard incorporates a general right of the investor to a certain amount of stability in the legal and business environment. The cms v Argentina tribunal took a step further. In that case, the investor claimed that the ‘pesification’ process in Argentina leading to the depreciation of the Argentine Peso adopted in the early 2000s violated the fair and equitable treatment obligation undertaken by Argentina under the Argentina-​US bit. Taking into account the preamble of the applicable bit, the cms v Argentina tribunal held that “a stable legal and business environment is an essential element of fair and equitable treatment.”76 However, in the absence of a stabilisation clause, most tribunals finally refused to infer a quasi-​stabilisation obligation from the fair and equitable treatment clause or from the preamble of a bit which referred to the 74 75 76

El Paso Energy International Company v Argentine Republic, icsid Case No arb/​03/​15 [hereinafter El Paso v Argentina], Decision on Jurisdiction (27 April 2006), para 81. Bogdanov v Moldova, para 187. cms Gas Transmission Company v The Republic of Argentina, icsid Case No arb/​01/​8 [hereinafter cms v Argentina], Award (12 May 2005), para 274.

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stability of the legal regime, and considered that such an interpretation would be unreasonable.77 More generally, tribunals have highlighted that bit s do not guarantee to foreign investors economic health and the maintenance of the economic conditions prevailing at the time of the investment.78 In that vein, a series of awards have referred to stabilisation clauses in order to delimit the protection offered by the applicable bit, holding that a bit cannot offer protection equivalent to a stabilisation clause. The Parkerings v Lithuania tribunal, for example, concluded that “legislative changes, far from being unpredictable, were in fact to be regarded as likely”79 and that “[b]‌y deciding to invest notwithstanding this possible instability, the Claimant took the business risk to be faced with changes of laws possibly or even likely to be detrimental to its investment. The Claimant could (and with hindsight should) have sought to protect its legitimate expectations by introducing into the investment agreement a stabilisation clause or some other provision protecting it against unexpected and unwelcome changes.”80 Similarly, the Perenco tribunal held that “it is well recognized in investment treaty arbitration that States retain flexibility to respond to changing circumstances unless they have stabilised their relationship with an investor.”81 Tribunals found that investors are aware that legislation is likely to change, especially when their contract is a long-​term one. They thus should consider this in their risk assessment from the beginning of the investment.82 In the 77 78

79 80 81

82

Continental Casualty Company v The Argentine Republic, icsid Case No arb/​03/​9, Award (5 September 2008), para 258. See also Total S.A. v The Argentine Republic, icsid Case No arb/​04/​01, Decision on Liability (27 December 2010), para 115. Impregilo S.p.A. v Argentine Republic, icsid Case No arb/​07/​17 [hereinafter Impregilo v Argentina], Award (21 June 2011), para 368; El Paso v Argentina, Award (31 October 2011), para 368; Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v The Argentine Republic, icsid Case No arb/​07/​26, para 591. Parkerings v Lithuania, para 332. See also Impregilo v Argentina, para 290. Parkerings v Lithuania, para 336. Perenco v Ecuador, para 586. Similarly, in aes v Hungary, the tribunal inferred from the absence of stabilisation clause that the claimants could not legitimately expect that Hungary would not change its price regime to adapt to new circumstances as it is its sovereign right. aes Summit Generation Limited and aes-​Tisza ErömüKft. v Republic of Hungary, icsid Case No arb/​07/​22, Award (23 September 2010), para 9.3.29. See also Azurix Corp. v. The Argentine Republic, icsid Case No arb/​01/​12, Award (14 July 2006) para 409; Charanne v Spain, para 502; cme Czech Republic B.V. v The Czech Republic, uncitral, Partial Award (13 September 2001), para 356–​357; cms v Argentina, para 277; Ioan Micula and others v Romania, icsid Case No. arb/​05/​20, Award (11 December 2013), para 529. See e.g., Sergei Paushok, cjsc Golden East Company and cjsc Vostokneftegaz Company v Government of Mongolia, uncitral, Award on Jurisdiction and Liability (28 April 2011), para 302.

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absence of a stabilisation clause, changes in the regulatory framework would be considered as breaches of the duty to grant full protection and fair and equitable treatment only in case of ‘a drastic or discriminatory changes in the essential features of the transaction’.83 The Canada–​ European Union Comprehensive Economic and Trade Agreement (ceta)84 includes a specific provision on this: it reaffirms the state parties’ right to regulate to achieve legitimate policy goals and a ‘non-​ stabilisation’ clause providing that any act of general regulation which negatively affects an investment or interferes with the investor’s expectation would not amount to a treaty violation.85 4

Conclusions

It seems likely that stabilisation clauses will continue to be inserted in long-​ term investment contracts for many years, at least in the extractive sector and in certain regions of Africa. That said, in the era of corporate social responsibility, and with the fostering of the rule of law, it is possible that stabilisation clauses will gradually be limited to tax, customs, foreign exchange regulation, to protect foreign investors from a state’s legislative action, such as expropriatory taxation, that could destroy the investment. Freezing stabilisation clauses may become extremely rare and be replaced by contractual equilibrium clauses. It remains to be seen how international tribunals will apply this new generation of stabilisation clauses. It may be difficult to sanction the violation of a clause which provides that in the event of new, more burdensome tax legislation, the parties will need to negotiate the price of the contract. If the State party enters into negotiations but no solution is found, it may be difficult to conclusively attribute the failure of the negotiations to one of the parties. Perhaps the way forward would be to provide, as is typical in price review clauses in the energy sector, that in the event of an unsuccessful renegotiation of the financial terms of the contract (such as the revenue share terms) following a significant legislative change, an arbitral tribunal may fix such terms.

83 84 85

Toto Costruzioni Generali S.p.A. v Republic of Lebanon, icsid Case No arb/​07/​12, Award (7 June 2012), para 244; El Paso v Argentina (n 79), para 375. Canada–​European Union Comprehensive Economic and Trade Agreement, signed on 27 October 2016 (hereinafter ceta). ceta, Art. 8.9.

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References

Bishop, Doak R. James Crawford and Michel Reisman. 2005. Foreign Investment Disputes, Cases, Materials and Commentary (Kluwer Law International). Coale, Margarita T.B. 2002. ‘Stabilisation Clauses in International Petroleum Transactions’, 30(2) Denver Journal of International Law & Policy 217. Cotula, Lorenzo. 2010. ‘Pushing the Boundaries vs Striking a Balance: The Scope and Interpretation of Stabilization Clauses in Light of the Duke v Peru Award’, 11 Journal of World Investment & Trade 27. Fatouros, Arghyrios A. 1980. ‘International Law and the Internationalized Contract’, 74 American Journal of International Law 134. Garcia-​Amador, Francisco V. 1993. ‘State Responsibility in Case of Stabilization Clauses’, 2 Journal of Transnational Law & Policy 23. International Energy Charter. 2017. Handbook on General Provisions Applicable to Investment Agreements in the Energy Sector, Special Paper Series. Leben, Charles. 2003. ‘La théorie du contrat d’état et l’évolution du droit international des investissements’, 302 RCADI 240. Montembault-​Heveline, Bertrand and Rebecca Major. 2002. ‘Stabilisation’, in 2 AIPN Host Government Contract Handbook (aipn). Neuhaus, Joseph E. 2015. ‘The Enforceability of Legislative Stabilization Clauses’ in David D. Caron, Stephan W. Schill, Abby Cohen Smutny and Epaminontas E. Triantafilou (eds.), Practicing Virtue: Inside International Arbitration (Oxford University Press). Nussbam, Arthur. 1950. ‘The Arbitration between Lena Goldfields Ltd and the Soviet Government’, Cornell Law Quarterly 31. Schreuer, Christophe et al. 2001. The ICSID Convention: A Commentary (Cambridge University Press). Shemberg, Andrea. 2009. Stabilisation Clauses and Human Rights, A research project conducted for IFC and the United Nations Special Representative to the Secretary General on Business and Human Rights. Sornarajah, Muthucumaraswamy. 2000. The Settlement of Foreign Investment Disputes (Kluwer Law International). Titi, Catherine. 2014. ‘Les Clauses de Stabilisation dans les Contrats d’Investissement: Une Entrave au Pouvoir Normatif de l’Etat d’Accueil?’ 2 JDI 541. Vandevelde, Kenneth J. 2010. Bilateral Investment Treaties (Oxford University Press). Waelde, Thomas W. and George Ndi. 1996. ‘Stabilizing International Investment Commitments: International Law Versus Contract Interpretation’, 31 Texas International Law Journal 215.

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Weil, Prosper. Les clauses de stabilisation ou d’intangibilitéinsérées dans les accords de développement économique, 307. Yannaca-​Small, Katia. 2006. ‘Interpretation of the Umbrella Clause in Investment Agreements’, oecd Working Papers on International Investment, 2006/​03, oecd Publishing.

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­c hapter 4

The Implications of Sustainable Development Goals for Energy Trade and Investment Jason Rudall* 1

Introduction

The potential for international law to further the Sustainable Development Goals (sdgs) and for the sdgs to further international law is significant. This is no more or less the case in the context of international trade and investment law as it relates to energy. While the jurisprudence of the World Trade Organization’s (wto) Dispute Settlement Body (dsb) and investment tribunals has so far presented a challenging picture for the renewables sector, several emerging features, particularly in international investment law, offer avenues through which the sdgs could come into play. First, this chapter maps the relevance of the sdgs for energy, charting the specific targets and indicators that have been set. Second, a survey of the international law instruments that apply to energy is conducted. Third, the chapter turns to a consideration of the role that trade and investment will play in the realization of the sdgs. Fourth, the chapter examines the entry points for the sdgs in the international trade law framework, as well as appraising recent wto jurisprudence on government supported renewable energy measures. Fifth, the chapter considers the new developments in international investment agreements (iias) that lend themselves to the incorporation of international standards such as the sdgs, as well as an analysis of recent investor-​state dispute settlement jurisprudence. Finally, the chapter synthesizes the findings and assesses the prospects for sdgs in energy trade and investment going forward.

* Assistant Professor of Public International Law, Leiden University.

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The sdgs and Energy

The sdgs comprise seventeen goals, are part of the United Nations (UN)’s 2030 Agenda for Sustainable Development and were adopted by states in 2015.1 The 17 goals are accompanied by 169 targets. Neither the goals nor the targets are legally binding. sdg 7 provides for affordable and clean energy for all. Thirteen per cent of the world still does not have electricity.2 Moreover, three billion people use wood, coal, charcoal or animal waste to cook with or for heating purposes.3 Given that energy amounts to 60 per cent of overall greenhouse gas emissions in the world, it is the most significant cause of climate change.4 Indoor air pollution resulted in 4.3 million deaths in 2012, and 60 per cent of these deaths were women or girls.5 Renewable energy accounted for just 17.5 per cent of overall energy consumption in 2015.6 sdg 7 aims to ensure that there is “universal access to affordable, reliable and modern energy services” by 2030.7 This will be measured by the proportion of the population that has access to electricity as well as the proportion that primarily relies on clean fuels and technology.8 Further, there should be a substantial increase in the use of renewable energy.9 Further still, sdg 7 commits to doubling “the global rate of improvement in energy efficiency” by 2030.10 This will be measured by reference to primary energy intensity and gross domestic product.11 As for clean energy research and technology, enhanced cooperation is sought and greater investment should be channelled to energy infrastructure and clean energy technology.12 In particular, greater efforts should be made to “expand infrastructure and upgrade technology for supplying modern and sustainable energy services for all in developing countries.”13 These targets will be measured by “[i]‌nternational financial flows to 1

See UN General Assembly Resolution 70/​1, ‘Transforming our World: The 2030 Agenda for Sustainable Development’, 25 September 2015. 2 United Nations, Sustainable Development Goals: 7 Affordable and Clean Energy, (accessed 5 December 2019). 3 Ibid. 4 Ibid. 5 Ibid. 6 Ibid. 7 sdg 7, Target 7.1. 8 sdg 7, Indicators 7.1.1 and 7.1.2. 9 sdg 7, Target 7.2. 10 sdg 7, Target 7.3. 11 sdg 7, Indicator 7.3.1. 12 sdg 7, Target 7.A. 13 sdg 7, Target 7.B.

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72 Rudall developing countries in support of clean energy research and development and renewable energy production, including in hybrid systems,” as well as “[i] nvestments in energy efficiency as a percentage of gdp and the amount of foreign direct investment in financial transfer for infrastructure and technology to sustainable development services.”14 While access to electricity in developing countries, energy efficiency, and the use of renewable energy has improved, there remains much progress to be made. For example, 840 million people in the world are still without access to electricity.15 Moreover, many people do not have access to clean fuels or technology for cooking. Around 3 billion people use inefficient and polluting methods for cooking.16 As for energy efficiency, this has improved by a rate of 2.3 per cent between 2010 and 2015, but an improvement rate of 2.7 per cent is required to meet the target set under sdg 7.17 Furthermore, international financial flows to developing countries for the propagation of clean and renewable energy has increased from usd 9.9 billion in 2010 to usd 18.6 billion in 2016.18 As for renewable energy, the share of renewable energy consumption has risen from 16.6 per cent in 2010 to 17.5 per cent in 2016. The switch to renewable energy must be much faster than this if climate goals are to be met. Indeed, climate targets are closely related to energy use. sdg 13 provides for climate action. This includes taking measures that will facilitate cleaner economies, encourage the transition to renewable energy, and reduce emissions. It requires coordinated action at the international level to ensure that developed and developing countries move to low-​carbon economies.19 In this context, the Paris Agreement, which was adopted at the U.N. Framework Convention on Climate Change (unfccc) Conference of Parties in 2015, will play a central role. The Paris Agreement, which came into force in 2016, seeks to keep global warming well below 2°C, but also pledges to “pursue efforts to limit the temperature increase to 1.5°C.”20 Under the Paris Agreement, national targets in terms of reduction are not set in stone, nor are they imposed in the treaty 14 15

sdg 7, Indicators 7.A.1 and 7.B.1. Secretary General, ‘Special Edition: Progress Towards the Sustainable Development Goals’, 8 May 2019, UN Doc. E/​2019/​68. 16 Ibid. 17 Ibid. 18 Ibid. 19 United Nations, Sustainable Development Goals: 13 Climate Acton, (accessed 5 December 2019). 20 Article 2(1)(a), Paris Agreement, Decision 1/​c p.21, in cop Report No. 21, Addendum, at 2, U.N. Doc. fccc/​c p/​2015/​10/​Add.1, 13 December 2015.

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instrument. Parties are invited to independently determine their own set of unique national commitments, which are known as nationally determined contributions (ndc s). By adopting this bottom-​up approach, coupled with certain parameters for ndc s as well as iterative processes for successively and collectively increasing ambition over time (e.g. five-​year cycles in Article 4.9, the transparency framework in Article 13, and the global stocktake in Article 14), the agreement seeks to establish a balance between broad participation and a level of commitment that can make a difference in the fight against climate change. sdg 12, which is concerned with ensuring sustainable consumption and production patterns, is also relevant to investment and trade in the energy sector. Target 12.c refers to the need for reform as regards subsidies on fossil fuels. There is a commitment to [r]‌ationalize inefficient fossil-​fuel subsidies that encourage wasteful consumption by removing market distortions, in accordance with national circumstances, including by restructuring taxation and phasing out those harmful subsidies, where they exist, to reflect their environmental impacts, taking fully into account the specific needs and conditions of developing countries and minimizing the possible adverse impacts on their development in a manner that protects the poor and the affected communities.21 This will be measured by recourse to the amount of fossil-​fuel subsidies that exist in relation to gdp as well as the amount of national expenditure on fossil fuels. Beyond the sdgs, international law has through various instruments been concerned with sustainable energy and we turn to these instruments next. 3

International Law and Sustainable Energy

Several other international instruments have sought to propagate recourse to sustainable energy. Energy played an important role in the realisation of the Millennium Development Goals (mdgs), although it wasn’t mentioned explicitly.22 International treaties have not generally set binding sustainable energy 21 22

sdg 12, Target 12.c. See Chapter 6 [van Asselt & Verkuijl] in this volume. Stuart Bruce and Sean Stephenson, ‘SDG 7 On Sustainable Energy for All: Contributions of International Law, Policy and Governance’, (2016) UNEP /​CISDL Issue Brief 7, 1.

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74 Rudall commitments but have instead incentivised policy choices that support sustainable energy.23 Some of those conventional regimes most relevant to the propagation of sustainable energy include the Statute of the International Renewable Energy Agency (irena), the United Nations Framework Convention on Climate Change, the Kyoto Protocol, the Paris Agreement, the United Nations Convention on the Law of the Sea (unclos) and the Energy Charter Treaty (ect).24 We will consider trade and investment agreements, which are also relevant, in subsequent sections of this chapter. According to Article 3 of the irena Statute, renewable energy is defined as “… all forms of energy produced from renewable sources in a sustainable manner, which include … 1. bioenergy; 2. geothermal energy; 3. hydropower; 4. ocean energy, including inter alia tidal, wave and ocean thermal energy; 5. solar energy; and 6. wind energy.”25 Specific mention is also made of sdg 7 in this Statute, and particularly strong support for the transfer of knowledge, capacity building and international cooperation on sustainable energy is present. Several instruments have helped to promote investment in sustainable energy as well as technology and knowledge transfer. This is particularly the case for the legal architecture of the climate regime. Renewable energy is not explicitly referred to in the unfccc, but the preamble does recognise that … all countries, especially developing countries, need access to resources required to achieve sustainable social and economic development and that, in order for developing countries to progress towards that goal, their energy consumption will need to grow taking into account the possibilities for achieving greater energy efficiency and for controlling greenhouse gas emissions in general, including through the application of new technologies on terms which make such an application economically and socially beneficial;26 The Kyoto Protocol is concerned with the reduction of greenhouse gas emissions and establishes market mechanisms that seek to incentivize this. It thus, in turn, supports the switch to renewable forms of energy. Moreover, Article 2(1) (a) offers possible policy options for parties to adopt, including “enhancement 23 Ibid., at 2. 24 Ibid. 25 Statute of the International Renewable Energy Agency, 2700 unts 27, 26 January 2009. 26 United Nations Framework Convention on Climate Change (unfccc), 31 ilm 849, 9 May 1992.

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of energy efficiency in relevant sectors of the national economy” as well as “promotion, development and increased use of, new and renewable forms of energy.” Similarly, both the unfccc and the Kyoto Protocol encourage cooperation on, sharing and transfer of low-​carbon technology, know-​how and finance.27 The preamble of the Paris Agreement provides that there is a ‘… need to promote universal access to sustainable energy in developing countries, in particular in Africa, through the enhanced deployment of renewable energy’.28 Under unclos, coastal states have the freedom to explore, exploit, conserve and manage their natural resources. As such, states are free to construct renewable energy infrastructure such as offshore wind turbines or wave power generators within their exclusive economic zone or on their continental shelf.29 As for the Energy Charter Treaty, states have committed to “have particular regard to improving energy efficiency, to developing and using renewable energy sources, to promoting the use of cleaner fuels and to employing technologies and technological means that reduce pollution.”30 Furthermore, the Protocol on Energy Efficiency and Related Environmental Aspects seeks to promote energy efficiency measures that are in line with sustainable development.31 Indeed, Article 1 provides for “the promotion of energy efficiency policies consistent with sustainable development”, “fostering of cooperation in the field of energy efficiency” as well as using energy in a way that takes into account “environmental costs and benefits”. Further still, Article 3(2) requires that parties develop (a) efficient functioning of market mechanisms including market-​ oriented price formation and a fuller reflection of environmental costs and benefits; (b) reduction of barriers to energy efficiency, thus stimulating investments; (c) mechanisms for financing energy efficiency initiatives; (d) education and awareness; (e) dissemination and transfer of technologies; (f) transparency of legal and regulatory frameworks.

27 28 29 30 31

See, for example, Articles 4(1)(c), 4(1)(g), 4(1)(i), 4(3)-​(5), 6(b) and 11(1), unfccc, Articles 10(c)-​(e) and 11(2), Kyoto Protocol, 2303 unts 162, 11 December 1997. Paris Agreement. Article 56(1)(a), 60 and 80, United Nations Convention on the Law of the Sea, 1833–​5 unts 3, 10 December 1982. Article 19(1)(d), Energy Charter Treaty, 2080 unts 95, 17 December 1994. Energy Charter Protocol on Energy Efficiency and Related Environmental Aspects, 2081 unts 3, 17 December 1994.

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76 Rudall This brief survey reveals that international law intersects with sustainable energy in a variety of ways and can be concerned with its promotion. We now turn to consider how trade and investment intersects or will intersect with the sdgs. 4

The sdgs, Trade, and Investment

The sdgs are likely to change the global trade and investment agenda in a fundamental way. Some sectors, like trade in industrial goods and agriculture, will be affected more than others. While trade was only mentioned explicitly once in the Millennium Development Goals –​in mdg 8: Develop a Global Partnership for Development –​the sdgs refer to trade nine times. sdg 17 provides for “a universal, rules-​based, open, non-​discriminatory and equitable multilateral trading system under the wto”. That said, trade is likely to be impacted by many of the sdgs, including sdg 2, which aims to end hunger, achieve food security and improve nutrition, as well as promote sustainable agriculture; sdg 3, which is concerned with ensuring healthy lives and promoting well-​being for all at all ages; sdg 8, which aims at promoting inclusive and sustainable economic growth, employment and decent work for all; sdg 10, which seeks to reduce inequality within and among countries; sdg 14, which is about conserving the oceans, seas and marine resources, as well as promoting their sustainable use; and sdg 15, which is concerned with the sustainable management of forests, combating desertification, halting and reversing land degradation, and arresting biodiversity loss. Trade will help to further sdgs 7 and 9 through increased competition, as well as technology, knowledge and innovation transfer. Open markets can facilitate increased trade between developing and developed countries. Trade in renewable energy has significantly increased.32 That said, renewable energy often costs more than fossil fuel-​based sources of energy, even if the cost of renewables has fallen over time. Trade and investment in wind and solar energy technology has helped to grow the market in renewable energy goods. Given the importance of access in sdg 7, it will be incumbent on governments to ensure renewable energy is available for the lowest possible price. Government subsidies for fossil fuels has a significant impact on the global market for energy and puts renewable energy at a distinct disadvantage. To 32

oecd and iea, ‘Renewable Energy –​Medium-​Term Market Report 2014’ (Paris: oecd–​ iea), (accessed 5 December 2019).

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provide just one benefit of removing subsidies on fossil fuels, it has been observed that eliminating consumption subsidies on fossil fuels would likely reduce greenhouse gas emissions by 2050 by 6 to 13 per cent.33 Investment will be critical to realising the sdgs, and this will particularly be so in developing countries. Partnerships with the private sector and propagating the adherence to international standards by private actors will be important as well.34 unctad has predicted that usd 2.5 trillion a year is needed to supplement current finance available to further the sdgs.35 A third of this amount should come from private sector trade and investment, particularly to build cities, infrastructure, schools, and hospitals. Given the importance of trade and investment in furthering the sdgs, we now turn to look at the specific legal frameworks governing these areas, and in particular consider the prospects for the sdgs. 5

The sdgs and International Trade Law

Sustainable development has attained a central place in international trade law. Several well-​known features of the Agreement Establishing the World Trade Organisation speak to sustainable development. Notably, the preamble refers to “… the optimal use of the world’s resources in accordance with the objective of sustainable development, seeking to protect and preserve the environment and to enhance the means for doing so”. Preambles can inform the interpretation of the whole treaty as they help to identify the object and purpose of a treaty. Under the rules of interpretation in international law, namely Article 31 of the Vienna Convention on the Law of Treaties, the object and purpose of the treaty is a key element of interpreting the rest of the provisions in a treaty. The Appellate Body has acknowledged that sustainable development was a goal of the international trading system. In interpreting Article xx of the General Agreement on Tariffs and Trade (gatt) 1947, which provides for

33 34 35

Alan Matthews, ‘Two Steps Forward, One Step Back: Coupled Payments in the CAP’, 16 April 2015, (accessed 5 December 2019). See, for example, (accessed 5 December 2019). unctad, ‘UN launches one stop shop for development finance’ (accessed 5 December 2019).

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78 Rudall health, exhaustible natural resources and other public policy exceptions to trade rules, the Appellate Body of the wto opined that The words of Article xx (g), ‘exhaustible natural resources’, were actually crafted more than 50 years ago. They must be read by a treaty interpreter in the light of contemporary concerns of the community of nations about the protection and conservation of the environment. While Article xx was not modified in the Uruguay Round, the preamble attached to the wto Agreement shows that the signatories to that Agreement were, in 1994, fully aware of the importance and legitimacy of environmental protection as a goal of national and international policy. The preamble of the wto Agreement –​which informs not only the gatt 1994, but also the other covered agreements –​explicitly acknowledges ‘the objective of sustainable development’.36 The Ministerial Decision on Trade and Environment of 1994 similarly links trade with the environment and sustainable development.37 At this occasion, the wto Committee on Trade and Environment and the Committee on Trade and Development were created. Further still, the 2001 Doha wto Ministerial Declaration encouraged greater synergy between trade rules and sustainable development.38 In particular, it was noted that trade and environment could be mutually supportive.39 Moreover, a commitment was made to negotiate reductions or eliminate tariff and non-​tariff barriers on environmental goods and services.40 Trade-​related targets are present in 12 of the sdgs. Overall, it is argued that mainstreaming trade will help to achieve the sdgs.41 The global trading system should facilitate inclusive growth, create jobs, and assist with poverty reduction. An effort should also be made to reduce trade costs, and it has been suggested that this can in part be achieved by fully implementing the wto’s Trade Facilitation Agreement, which entered into force on 22 February 2017 and aims 36

Appellate Body Report United States –​Import Prohibition of Certain Shrimp and Shrimp Products [hereinafter US –​Shrimps], wt/​d s58/​ ab/​r , adopted 12 October 1998, para. 129. 37 Decision on Trade and Environment, mtn.tnc/​4 5min, 15 April 1994. 38 wto Ministerial Conference Fourth Session, Ministerial Declaration, wt/​m in(01)/​ Dec/​1, 14 November 2001. See also, Anna Aseeva, ‘(Un)Sustainable Development(s) in International Economic Law: A Quest for Sustainability’ 10 (2018) Sustainability 4022. 39 Ibid. 40 Ibid. 41 wto, ‘Mainstreaming Trade to Attain the Sustainable Development Goals’, (accessed 5 December 2019).

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at simplifying, modernizing and harmonizing export and import processes.42 Furthermore, building capacity, strengthening infrastructure and ensuring the diversification of exports, particularly in developing and least developed countries, will be central to the realization of the sdgs through trade. Other measures, such as strengthening the services sector, introducing flexibility to the application of rules of origin and ensuring non-​tariff measures are not barriers to trade are also important in this endeavour. Finally, embracing the possibilities of e-​commerce and supporting small and medium sized businesses to trade internationally will all help in the realization of the sdgs through the multilateral trading system.43 Several free trade agreements have provisions which aim to help facilitate the development and propagation of sustainable energy. The EU-​Caribbean Forum encourages parties to … agree to cooperate, including by facilitating support, in the following areas: … (a) projects related to environmentally friendly products, technologies, production processes, services, management and business methods, including those related to appropriate water-​saving and Clean Development Mechanism applications; (b) projects related to energy efficiency and renewable energy.44 In a similar way, the Chile-​Colombia Free Trade Agreement provides that The objective of the cooperation in the energy sector will deepen integration, complementation and energy development in the electric, geothermal, oil and derivatives areas, and alternative fuels. … For this purpose, parties shall conduct the following joint activities, which will take effect by the competent authorities in the energy sector, including, but not limited to: (a) experts exchange (b) training and capacity building (c) research (d) project development (e) promotion and facilitation of enterprise-​level agreements for energy trade and investment.45

42 Ibid. 43 Ibid. 44 Economic Partnership Agreement between the cariforum States, of the one part, and the European Community and its Member States, of the other part, oj l 289, 15 October 2008. 45 Article 19.5, Free Trade Agreement between Chile and Colombia, 27 November 2006.

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80 Rudall The Central America-​Dominican Republic-​United States Free Trade Agreement provides in its Article 17.9 that “the Parties have identified the following priorities for environmental cooperation activities: … (g) facilitating technology development and transfer and training to promote the use, proper operation, and maintenance of clean production technologies.”46 The Partnership Agreement Between the Members of the African, Caribbean and Pacific Group of States and the European Union, sets out in Article 32(1)(iii) that the Parties commit to “cooperation on environmental protection and sustainable utilisation and management of natural resources,” including on “renewable energy sources notably solar energy and energy efficiency.”47 Finally, the EU-​Korea Free Trade Agreement of 2011 and all EU trade and economic partnership agreements since have sought to incorporate trade and sustainable development chapters. These instruments offer a promising framework for the promotion of sustainable development and the propagation of renewable energy, which in turn will help in the quest to realize the sdgs. Potential for the sdgs in the Jurisprudence of the wto’s Dispute Settlement Body Despite this promising conventional and political framework, however, wto case law concerning renewable energy does not paint such an optimistic picture. Indeed, in light of this, some have argued for a wto climate waiver such that climate friendly trade measures can be made consistent with the wto regime.48 Many others have called for reform of the wto Agreement on Subsidies and Countervailing Measures, in particular to ensure government support for renewable energy is shielded from challenge at the wto.49 5.1

46 Central America-​ Dominican Republic-​ United States Free Trade Agreement, 5 August 2004. 47 The Partnership Agreement between the Members of the African, Caribbean and Pacific Group of States of the one part, and the European Community and its Member States, of the other part, oj l 317, 23 June 2000. 48 James Bacchus, ‘The Case for a WTO Climate Waiver’, 2 November 2017, (accessed 5 December 2019). 49 See, for example, Luca Rubini, ‘Ain’t Wastin Time No More: Subsidies for Renewable Energy, the SCM Agreement, Policy Space and Law Reform’ 15(2) Journal of International Economic Law 525 (2012); Aaron Cosbey and Petros Mavroidis, ‘A Turquoise Mess: Green Subsidies, Blue Industrial Policy and Renewable Energy –​the Case for Re-​drafting the Subsidies Agreement of the WTO’ 17(1) Journal of International Economic Law 11 (2014); Paolo Farah and Elena Cima, ‘The World Trade Organization, Renewable Energy Subsidies, and the Case of Feed-​in Tariffs: Time for Reform Towards Sustainable Development’, 27 Georgetown International Environmental Law Review 515 (2015). See also Chapter 9 [Marhold] in this volume.

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In a relatively short space of time a disproportionately high number of cases challenging support for renewable energy have come before the wto. For example, in Canada –​Renewable Energy and Canada –​Feed-​In Tariff Program, feed-​in tariffs for renewable electricity generators were challenged because this government support was contingent on the use of domestic generation equipment for wind and solar generated electricity.50 China –​Measures Concerning Wind Power Equipment concerned a complaint by the US that governmental support for wind power equipment manufacturers was contingent on the use of domestic inputs.51 In European Union and Certain Member States –​Certain Measures Affecting the Renewable Energy Sector, China complained that feed-​ in tariffs for renewable electricity generators were contingent on the use of domestic generation equipment in Italy and Greece.52 Similarly, India –​Certain Measures Relating to Solar Cells and Solar Modules was a case in which the US complained that feed-​in tariffs for solar power was only available if solar cells and modules produced locally were used.53 In European Union and Certain Member States –​Certain Measures on Importation and Marketing of Biodiesel and Measures Supporting the Biodiesel Industry, Argentina complained that reductions on excise duty and internal consumption tax for sustainable biofuels in Belgium and France only applied to biofuels produced in the EU.54 Most recently, in US –​Certain Measures Relating to the Renewable Energy Sector, India complained that a number of US states had adopted certain fiscal and financial measures that supported renewable energy generators, renewable energy technology manufacturing as well as biodiesel and ethanol distributors. However, it was found that this support was contingent upon certain domestic content usage and only biodiesel and ethanol produced in certain US states could benefit from tax refunds or reductions.55

50 51 52 53 54 55

Appellate Body Report, Canada –​Certain Measures Affecting the Renewable Energy Generation Sector/​Measures Relating to the Feed-​in Tariff Program [Canada –​Renewable Energy], wt/​d s412/​d s426/​a b/​r , adopted 24 May 2013. China –​Measures Concerning the Wind Power Equipment, (DS419), Consultations, 22 December 2010. European Union and Certain Member States –​Certain Measures Affecting the Renewable Energy Sector, (DS452), Consultations, 5 November 2012. Appellate Body Report, India –​ Certain Measures Relating to Solar Cells and Solar Modules [India –​Solar Cells], wt/​d s456/​a b/​r , adopted 14 October 2016. European Union and Certain Member States –​Certain Measures on Importation and Marketing of Biodiesel and Measures Supporting the Biodiesel Industry, (DS459), Consultations, 15 May 2013. wto Panel Report, US –​Certain Measures Relating to the Renewable Energy Sector, wt/​d s 510/​r , adopted 27 June 2019.

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82 Rudall As a consequence, it is likely that states will have to remain prudent in designing their clean energy policies to further the sdgs, ensuring that they are applied in a fair and non-​discriminatory way. We now turn to consider the legal framework governing foreign direct investment. 6

The sdgs and International Investment Law

I will first consider iia s. The rationale of such treaties is often said to be the promotion of reciprocal investment by foreign investors. As a result, they have tended to be a source of rights for private investors. However, certain developments suggest several exceptions to this rule are emerging such that iias now make provision for greater obligations incumbent upon investors.56 This is evident in a variety of ways and in different parts of these treaties. These developments will be important for the sdgs to play a role in governing foreign direct investment and in particular for ensuring that private actors make their contribution to the realization of the sdgs. Several preambular provisions of iia s contain references to environmental protection, labour rights or economic or sustainable development, alongside the more traditional objectives such as promoting reciprocal investment or mutually beneficial economic activity.57 Others explicitly recognize the connection that exists between investment and poverty reduction, job creation, or human development.58 Specific substantive provisions of several recent iia s are also given to the protection or promotion of sustainable development. Some iia s require proactive behaviour on the part of foreign investors in respecting human rights or ensuring environmental protection.59 Indeed, they provide that investors must 56 See Laurence Boisson de Chazournes, ‘Changes in the Balance of Rights and Obligations: Towards Investor Responsibilization’ 111 Proceedings of the ASIL Annual Meeting 53 (2017). 57 See, for example, Preamble, Treaty between the Government of the United States of America and the Government of the Republic of Rwanda Concerning the Encouragement and Reciprocal Protection of Investment, 19 February 2008; Preamble, Agreement Between the Government of Canada and the Government of the Republic of Benin for the Promotion and Reciprocal Protection of Investments, 9 January 2013. 58 Preamble, Agreement for Cooperation and Investment Facilitation between Brazil and Mozambique, 30 March 2015. 59 See, for example, Article 18(2), Reciprocal Investment Promotion and Protection Agreement between the Government of the Kingdom of Morocco and the Government of the Federal Republic of Nigeria, 3 December 2016; Article 14(2) Supplementary Act a/​s a.3/​1 2/​0 8 Adopting Community Rules on Investment and the Modalities for their

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protect the environment and respect human rights in both the workplace and their local community, as well as manage and operate their investments in a manner that is consistent with environmental, labour or human rights standards that are binding on the host or the home state.60 Furthermore, they add that where there is a difference in such standards in the home or the host state, the investor should abide by those standards that are higher.61 Others place an obligation on investors to contribute to the economic, social and environmental progress in host states and to ensure the latter’s sustainable development.62 Several iia s require investors to conduct a social and/​or environmental impact assessment of the investment prior to its establishment.63 Further still, investors can be required to make their environmental and social impact assessments available to the local community and to affected interests in the host state.64 Finally, investors may be obliged to apply the precautionary principle to their environmental and social impact assessment and this must be clearly articulated in the environmental and social impact assessment itself.65 In preserving the regulatory power of host states regarding environmental and human rights protection, some iias safeguard against a relaxation of such standards. For example, such agreements may stipulate that it is inappropriate to encourage investment by relaxing domestic health, safety or environmental measures and will oblige parties to refrain from waiving or derogating from such measures to attract investment.66 Similarly, other bit s may encourage

Implementation with ecowas, 19 December 2008. On the impact of the Morocco-​Nigeria bit, 2016, see Tarcisio Gazzini, ‘The 2016 Morocco-​Nigeria BIT: An Important Contribution to the Reform of Investment Treaties’, 8(3) Investment Treaty News, September 2017. 60 See, for example, Articles 13, 14, 15, 16, and 22 sadc Model bit 2012; Articles 19(2)-​(3), 20(1), 22, 24, and 37(3), Draft Pan-​African Investment Code; Article 12(1)-​(2), India Model bit 2016. 61 See, for example, Article 15(3), sadc Model bit, 2012. 62 See, for example, Article 22(3), Draft Pan-​African Investment Code, 2016. 63 See, for example, Article 14(2), Morocco-​Nigeria bit, 2016; Article 12, Supplementary Act a/​s a.3/​1 2/​0 8 Adopting Community Rules on Investment and the Modalities for their Implementation with ecowas, 19 December 2008. 64 Article 12, Supplementary Act a/​s a.3/​1 2/​0 8 Adopting Community Rules on Investment and the Modalities for their Implementation with ecowas, 19 December 2008. 65 Ibid. 66 Ad Article 3, Protocol of the Agreement between the Swiss Confederation and the United Mexican States on the Promotion and Reciprocal Protection of Investments, 10 July 1995; Article 7, Agreement between the Belgium-​Luxembourg Economic Union and the Government of the Republic of Mozambique on the Reciprocal Promotion and Protection of Investment, 18 July 2006.

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84 Rudall state parties to strive to continually improve environmental or human rights legislation.67 Indeed, the state’s right to regulate in the public interest has been recognised in the jurisprudence of international investment tribunals, as was the case in Marvin Feldman v. Mexico, which highlighted the need for governments to be able to act in the broader public interest through, for example, measures to protect the environment. It went on to note that “[r]‌easonable governmental regulation of this type cannot be achieved if any business that is adversely affected may seek compensation.”68 A handful of investment treaties make provision for the regulatory power of the state through general exceptions, much like gatt Article xx in the context of international trade law. As long as such measures are “not applied in an arbitrary or unjustifiable manner” nor “constitute a disguised restriction on international trade or investment” they may be adopted where they are, for example, “… necessary to protect human, animal or plant life or health” or relate “… to the conservation of living or non-​ living exhaustible natural resources.”69 A number of iias also make reference to corporate social responsibility that foreign investors should abide by. Where these standards are augmented over time, foreign investors should abide by the higher level standards.70 Others make reference to socially responsible practices or encourage investors to adopt principles in their internal policies that address labour standards, the environment, human rights, community relations and anti-​corruption.71 These provisions have the effect of bringing certain existing international law norms

67 68 69

70 71

Article 7, Agreement between the Belgium-​Luxembourg Economic Union and the Government of the Republic of Mozambique on the Reciprocal Promotion and Protection of Investment, 18 July 2006. Marvin Feldman v Mexico, Award, icsid Case No. arb(af)/​99/​1, 16 December 2002, at para. 103. See, for example, Article 33, Agreement Between the Government of Canada and the Government of the People’s Republic of China for the Promotion and Reciprocal Protection of Investments, 9 September 2012; Article ix, Agreement between Canada and the Slovak Republic for the Promotion and the Protection of Investments, 20 July 2010; Article xvii-​2, Agreement between the Government of Romania and the Government of Canada for the Promotion and Reciprocal Protection of Investments, 8 May 2009. See, for example, Chapter iii on the Obligations and Duties of Investors and Investments, Supplementary Act a/​s a.3/​1 2/​0 8 Adopting Community Rules on Investment and the Modalities for their Implementation with ecowas, 19 December 2008. See, for example, Article 9, Investment Cooperation and Facilitation Agreement between Brazil and Malawi, 25 June 2016; Article 16, Agreement Between the Government of Canada and the Government of the Republic of Benin for the Promotion and Reciprocal Protection of Investments, 9 January 2013.

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and standards into the investment treaty arena, which may be an important entry point for the sdgs in international investment law. There are in fact a wide variety of soft-​law instruments that impose duties on private actors, such as foreign investors, to respect human rights or the environment.72 These instruments may help to appraise how foreign investment may contribute to sustainable development.73 In the context of the international investment law regime, private corporations may be subject to their standards in the interpretation of multilateral investment treaties by tribunals whether or not there is explicit reference to them in the provisions of iias, as recent tribunal practice –​explored below –​demonstrates. As for holding private investors accountable for the manifold provisions discussed above, certain procedural tools are also emerging in iia s. A relatively small number of international investment treaties contain provisions on counterclaims, which we will see shortly have been availed of by states to make certain non-​economic claims in recent case law. Such express provision for counterclaims has the effect of removing any doubt that tribunals may hear these claims.74 Combined with explicit substantive provisions on human rights and environmental protection in iias, a firm legal basis is emerging to hold corporations accountable for violations of non-​investment concerns.75 The sdgs may inform the standards such investors are held to. 6.1 Potential for the sdgs in the Jurisprudence of Investment Tribunals As with the jurisprudence of the wto’s Dispute Settlement Body, state support for renewable energy measures has been the subject of much case law before investment tribunals.76 In this case law, investors have variously claimed that 72

73

74

75 76

In addition to the sdg s, these may include, for example, the United Nations Global Compact, the International Labour Organisation’s Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy, the oecd Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights. See Frank Fariello, Laurence Boisson de Chazournes, and Kevin E. Davis (eds.), Financing and Implementing the Post-​2015 Development Agenda, The World Bank Legal Review (World Bank, Vol 7, 2016) 194; Markus Krajewski, ‘Human Rights in International Investment Law: Recent Trends in Arbitration and Treaty-​making Practice’, 15 April 2018, (accessed 5 December 2019). Article 28(9), comesa Investment Agreement provides a clear example and sets out that ‘a Member State against whom a claim is brought by a comesa investor … may assert as a defense, counterclaim, right of set off or other similar claim, that the comesa investor bringing the claim has not fulfilled its obligations …’. Articles 19 and 29(19), sadc Model bit make similar provision, as does Article 43, Draft Pan-​African Investment Code. Krajewski, ‘Human Rights’ (n 73). See, for example, The pv Investors v Spain, uncitral, pca Case No 2012–​14; Antin Infrastructure Services Luxembourg S.à.r.l. and Antin Energia Termosolar B.V. v Kingdom

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86 Rudall measures relating to clean energy programmes were tantamount to either indirect expropriation, discrimination, a breach of the fair and equitable treatment standard or legitimate expectations. That said, these complaints have largely focused on the differential treatment afforded to foreign investors through state sponsored measures concerning sustainable energy. Notwithstanding, several recent developments in the jurisprudence of investment tribunals suggest a more promising outlook for sustainable energy and the realization of the sdgs in this context. Urbaser v. Argentina77 was the first investment tribunal to accept jurisdiction over a counterclaim on human rights. As I have alluded to, this procedural mechanism –​counterclaim –​allows a host state to bring a claim against the investor, usually as long as the claim is in connection with the investment. In that case, the Tribunal determined that there was a sufficient factual connection between the initial claim and the counterclaim. During the merits, the Tribunal was of the view that the bilateral investment treaty at issue did not constitute a ‘closed system’.78 As a result, the state was entitled to invoke legal obligations beyond the treaty. The Tribunal also rejected the argument that the Claimant, being a non-​state entity, could not be bound by human rights obligations. The Tribunal emphasized that human rights and labour standards were applicable to public and private actors, although it seemed to suggest that the character of commitment may be different for public and private actors respectively.

77 78

of Spain, icsid Case No. arb/​13/​31; Eiser Infrastructure Limited and Energia Solar Luxembourg S.à.r.l. v Spain, icsid Case No. arb/​13/​36; Masdar Solar & Wind Cooperatief u.a. v Kingdom of Spain, icsid Case No. arb/​14/​1; NextEra Energy Global Holdings b.v. and NextEra Energy Spain Holdings b.v. v Kingdom of Spain, icsid Case No. arb/​14/​11; InfraRed Environmental Infrastructure gp ltd. et al v Spain, icsid Case No. abr/​14/​12; renergy S.à.r.l. v Spain, icsid Case No. abr/​14/​18; rwe Innogy GmbH and rwe Innogy Aersa s.a.u. v Spain, icsid Case No. abr/​14/​34; Stadtwerke München GmbH, rwe Innogy GmbH et al. v Spain, icsid Case No. abr/​15/​1; steag GmbH v Spain, icsid Case No. abr/​15/​ 4; 9REN Holding S.a.r.l v Spain, icsid Case No. arb/​15/​15; BayWa r.e. Renewable Energy GmbH and BayWa r.e. Asset Holding GmbH v Kingdom of Spain, icsid Case No. arb/​15/​16; Cube Infrastructure Fund sicav and others v Spain, icsid Case No. arb/​15/​20; Matthias Kruck and others v Spain, icsid Case No. arb/​15/​23; ks Invest GmbH and tls Invest GmbH v Kingdom of Spain, icsid Case No. arb/​15/​25; jgc Corporation v Kingdom of Spain, icsid Case No. arb/​15/​27. Antaris Solar GmbH and Dr. Michael Göde v The Czech Republic, uncitral, pca Case No. 2014-​01; Voltaic Network GmbH v Czech Republic, uncitral, pca Case No. 2014-​20; icw Europe Investments Limited v Czech Republic, uncitral, pca Case No. 2014-​21. Urbaser sa and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic, Award, icsid Case No. arb/​07/​26, 8 December 2016. Ibid., para. 1191.

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Interestingly, the Tribunal noted that “international law accepts corporate social responsibility as a standard of crucial importance for companies operating in the field of international commerce.”79 It also said that it can “no longer be admitted that companies operating internationally are immune from becoming subjects of international law,” although it cautioned that certain soft law instruments were not “on their own sufficient to oblige corporations to put their policies in line with human rights law.”80 The Tribunal referred to the Universal Declaration of Human Rights as well as the International Covenant on Economic, Social and Cultural Rights and the ilo’s Tripartite Declaration of Principles in explaining that they should be taken into consideration through Article 31(3)(c) of the Vienna Convention on the Law of Treaties in the interpretation of the bit.81 This is also known as the principle of systemic integration and provides that relevant rules of international law that apply in the relationship between the parties should be taken into consideration when interpreting a treaty. This could also play a role in integrating the sdgs in iias in the future. Similar litigation has taken place in connection with environmental obligations and has led to the award of compensation for environmental damage in a number of cases. In fact, more broadly, the last few years has seen a marked trend in the award of such compensation.82 In the investor-​state dispute settlement context, one of the first examples is Burlington Resources v. Ecuador. In this case, an International Centre for the Settlement of Investment Disputes (icsid) tribunal ordered the payment of usd 41 million in compensation for environmental damage caused by the investor, an oil exploration company, following Ecuador’s counterclaim to enforce certain environmental obligations.83

79 Ibid., para. 1195. 80 Ibid. 81 Ibid., paras 1198, 1200–​1203. For an insightful analysis of the Tribunal’s reasoning on this point, see Eric de Brabandere, ‘Human Rights and Foreign Direct Investment’, in Markus Krajewski and Rhea Hoffmann (eds), Research Handbook on Foreign Direct Investment (Edward Elgar, 2018). 82 Certain Activities Carried Out by Nicaragua in the Border Area (Costa Rica v. Nicaragua) (Compensation), icj General List No. 150, 2 February 2018; Burlington Resources v. Ecuador, Decision on Ecuador’s Counterclaim, icsid Case No. arb/​08/​5, 7 February 2017; Perenco v. Ecuador and Empresa Estatal Petróleos del Ecuador (Petroecuador), Interim Decision on the Environmental Counterclaim, icsid Case No. arb/​08/​6, 11 August 2015. 83 Burlington Resources v. Ecuador, Decision on Ecuador’s Counterclaim, icsid Case No. arb/​08/​5, 7 February 2017.

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88 Rudall In a separate but factually connected case, Perenco v. Ecuador,84 Ecuador argued through a counterclaim that the Claimant had caused environmental damage in the amount of usd 3 billion by polluting parts of the Amazon rainforest in its oil extraction activities. The Tribunal noted that “[p]‌roper environmental stewardship has assumed great importance in today’s world” and “that if a legal relationship between an investor and the State permits the filing of a claim by the State for environmental damage caused by the investor’s activities and such a claim is substantiated, the State is entitled to full reparation.”85 It explained that the Rio Declaration on Environment and Development of 1992, a soft-​law instrument like the sdgs, had been an important source in the drafting of the Ecuadorian law on the protection of the environment86 and observed that “a State has wide latitude under international law to prescribe and adjust its environmental laws, standards and policies in response to changing views and a deeper understanding of the risks posed by various activities, including those of extractive industries such as oilfields.”87 In the 2017 award of Bear Creek v. Peru, a tribunal decided that Peru had indirectly expropriated the investment of a Canadian mining company by revoking a licence granted to them as they sought to operate a silver mine in Peru.88 However, in his partial dissenting opinion, Arbitrator Philippe Sands observed that the investor’s behaviour in causing social unrest among local communities should have been accounted for in the calculation of compensation. Having reference to ilo Convention No. 169 concerning Indigenous and Tribal Peoples in Independent Countries, Sands was of the view that “the fact that the Convention may not impose obligations directly on a private foreign investor as such does not, however, mean that it is without significance or legal effects for them.”89 Referring to the Urbaser tribunal’s engagement with human rights considerations, Sands noted “[t]‌he same considerations apply in the present case in relation to the requirements of the ilo Convention 169, and in particular its Article 15 on consultation requirements.”90 For Sands, the investor had not obtained a social licence to operate as they failed to consult with the local population and establish trust. As a result, he opined that the 84 85 86 87 88 89 90

Perenco Ecuador Ltd. v. The Republic of Ecuador and Empresa Estatal Petróleos del Eduador (Petroecuador), Interim Decision on the Environmental Counterclaim, icsid Case No. arb/​08/​6, 11 August 2015. Ibid., para. 34. Ibid., para. 331. Ibid., para. 35. Bear Creek Mining v. Peru, Award, icsid Case No. arb/​14/​21, 30 November 2017. Ibid., Partial Dissenting Opinion of Philippe Sands, para. 10. Ibid., para. 11.

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damages awarded to Bear Creek should be mitigated in light of their contributory fault. This case, and particularly the dissenting opinion, further serves to illustrate the importance of social and environmental standards, like the sdgs, for private actors. In David Aven et al v. Costa Rica a tribunal found that the Claimants had breached environmental laws in Costa Rica and that Costa Rica had justifiably interfered with a tourism project investment on the grounds of environmental protection.91 David Aven et al made their claim under the Dominican Republic-​Central America Free Trade Agreement (dr-​c afta). They argued that they had received the required permits and approvals, including those related to the environmental viability of the project. However, following subsequent inspection of the site, Claimants argued that administrative and judicial actions were taken to shut down the project to avoid environmental harm to wetlands and forests. According to Claimants, this destroyed the investment and breached the dr-​c afta’s provisions on fair and equitable treatment, non-​ discrimination and expropriation. Costa Rica responded that environmental protection was a policy that could be legitimately pursued under the dr-​c afta, that environmental protection could be prioritized above the rights of investors and that it acted in accordance with domestic environmental law in order to protect its environment and ecosystems. Costa Rica went on to submit a counterclaim against the Claimants for a violation of the provisions on environmental protection under Article 10.16 of the dr-​c afta. The Tribunal was of the view that Costa Rica did not act in an arbitrary way and had not violated the dr-​c afta. The Claimants had damaged the environment and Costa Rica had acted to protect the wetland at risk. It had done so in accordance with municipal and international law. Moreover, it went on to find that counterclaims for environmental damage could be established under the dr-​c afta. However, the Tribunal ultimately rejected Costa Rica’s counterclaim for procedural reasons. The Tribunal noted that “environmental law is integrated in many ways to international law, including dr-​c afta”92 and that while it was for states to implement appropriate environmental law, foreign investors were also subject to particular obligations in relation to the environment as set out under the treaty at hand and international law. Moreover, Section A of Article 10 of the dr-​c afta provides that investors are under an obligation to comply with

91 92

David Aven et al v. Costa Rica, Award, dr-​c afta Case No. unct/​15/​3, 18 September 2018. Ibid., para. 737.

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90 Rudall measures taken at the national level for environmental protection and the Tribunal observed that there are no “substantive reasons to exempt [a]‌foreign investor of the scope of claims for breaching obligations under Article 10 Section A dr-​c afta, particularly in the field of environmental law.”93 iias having environmental or sustainable obligations for investors, and which may even explicitly refer to the sdgs, is the most promising way to allow investment tribunals to consider such matters. Other avenues may be through the Vienna Convention on the Law of Treaties’ systemic integration provision as explained above.94 In the final analysis, however, these recent cases and others evidence a trend towards the environment becoming a more regular feature of international investment adjudication, and offer a more promising outlook for efforts aimed at realizing the sdgs. 7

Conclusions

There is great potential for international law to further the sdgs and the sdgs are also likely to have an impact on the development of international law, particularly in the areas of trade and investment. This may be in the form of preambular provisions in treaties, in substantive provisions, or through references made by courts and tribunals. Given the need to involve private actors as well as the centrality of cross-​border commerce in the realization of the sdgs, international trade and investment law may offer valuable tools to harden these soft-​law commitments.

References

Aseeva, Anna. 2018. ‘(Un)Sustainable Development(s) in International Economic Law: A Quest for Sustainability’ 10 Sustainability 4022. Boisson de Chazournes, Laurence. 2017. ‘Changes in the Balance of Rights and Obligations: Towards Investor Responsibilization’ 111 Proceedings of the ASIL Annual Meeting 53. Bruce, Stuart and Sean Stephenson. 2016. ‘SDG 7 On Sustainable Energy for All: Contributions of International Law, Policy and Governance’, UNEP /​CISDL Issue Brief 7.

93 94

Ibid., para. 739. de Brabandere, ‘Human Rights’ (n 81).

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Cosbey, Aaron and Petros Mavroidis. 2014. ‘A Turquoise Mess: Green Subsidies, Blue Industrial Policy and Renewable Energy –​the Case for Re-​drafting the Subsidies Agreement of the WTO’ 17(1) Journal of International Economic Law 11. De Brabandere, Eric. 2018. ‘Human Rights and Foreign Direct Investment’, in Markus Krajewski and Rhea Hoffmann (eds), Research Handbook on Foreign Direct Investment (Edward Elgar). Farah, Paolo and Elena Cima. 2015. ‘The World Trade Organization, Renewable Energy Subsidies, and the Case of Feed-​in Tariffs: Time for Reform Towards Sustainable Development’, 27 Georgetown International Environmental Law Review 515. Fariello, Frank, Laurence Boisson de Chazournes, and Kevin E. Davis (eds.). 2016. Financing and Implementing the Post-​2015 Development Agenda, The World Bank Legal Review (World Bank, Vol 7). Gazzini, Tarcisio. 2017. ‘The 2016 Morocco-​Nigeria BIT: An Important Contribution to the Reform of Investment Treaties’, 8(3) Investment Treaty News. Krajewski, Markus. 2018. ‘Human Rights in International Investment Law: Recent Trends in Arbitration and Treaty-​making Practice’. Rubini, Luca. 2012. ‘Ain’t Wastin Time No More: Subsidies for Renewable Energy, the SCM Agreement, Policy Space and Law Reform’ 15(2) Journal of International Economic Law 525.

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­c hapter 5

The International Governance of Fossil Fuel Subsidies as Testing Ground for the Fragmentation and Deformalisation of International Law? Harro van Asselt* and Cleo Verkuijl** 1

Introduction

Fossil fuel subsidies constitute a sizeable burden for public finances and contribute significantly to environmental problems, including climate change and local air pollution. Consequently, reforming fossil fuel subsidies constitutes an opportunity to address global and local environmental challenges, while saving money for the public purse. Yet notwithstanding the broad agreement among experts about the benefits of reforming fossil fuel subsidies and high-​level commitments to do so, subsidies for the production and consumption of fossil fuels continue to be handed out in many countries. This support can take many forms, including setting prices above or below market rates, offering tax exemptions, providing favourable loans, or building a railroad from a coal mine to a port.1 Consumer subsidies usually aim at reducing the costs of fossil fuel users, and tend to be found in developing countries.2 Producer subsidies provide support to fossil fuel producers by increasing the price or lowering production costs, and can be found in both developed and developing countries.3

* Professor of Climate Law and Policy, University of Eastern Finland Law School, Joensuu, Finland; Visiting Researcher, Copernicus Institute of Sustainable Development, Utrecht University, Utrecht, the Netherlands; Affiliated Researcher, Stockholm Environment Institute, Oxford, United Kingdom. ** Research Fellow, Stockholm Environment Institute, Oxford, United Kingdom; Adjunct Professor Energy, Resources and Environment, Johns Hopkins University School of Advanced International Studies, Bologna, Italy. 1 Ronald Steenblik, ‘A Subsidy Primer’ (Global Subsidies Initiative 2008). 2 See e.g. Toshiyuki Shirai and Zakia Adam, ‘Commentary: Fossil-​fuel Consumption Subsidies Are Down, but not Out’, International Energy Agency (20 December 2017). 3 See e.g. Elizabeth Bast et al, Empty Promises: G20 Subsidies to Oil, Gas, and Coal Production (Overseas Development Institute and Oil Change International 2015).

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Although estimates of their size vary, by any measure the costs of fossil fuel subsidies are large.4 A joint estimate by the Organisation for Economic Co-​ operation and Development (oecd) and the International Energy Agency (iea) suggests that global fossil fuel subsidies were usd 478 billion in 2019.5 Notwithstanding reform efforts in various countries, including India, Indonesia, and Mexico, new subsidies are still being put in place in countries such as Argentina, Russia, and the United Kingdom.6 Several economic and political factors can act either as a barrier or driver for reform.7 Macroeconomic factors such as global fossil fuel prices and financial crises have played an important role in reforms, yet the influence of such factors will often depend on the domestic political context, including the positions and relative power of special interest groups, the governance capacity of the state, and the political system in question.8 While macroeconomic factors and domestic politics thus play a major role in determining whether reform happens, the possible role of international institutions is increasingly drawing attention.9 Indeed, it was following an international commitment that the issue of fossil fuel subsidies quickly rose on political agendas across the world. Specifically, the Group of 20’s (G20) 2009 commitment to “phase out and rationalise over the medium term inefficient fossil fuel subsidies”10 strengthened activities to improve the transparency of fossil fuel subsidies, including efforts by international organisations 4 To give just one example, for 2014, the iea calculated that fossil fuel subsidies exceeded renewable energy subsidies by four times. See Michael Kavanagh, ‘A World Map of Subsidies for Renewable Energy and Fossil Fuels’ (Financial Times, 26 July 2016). 5 oecd, ‘Governments Should Use Covid-​19 Recovery Efforts as an Opportunity to Phase out Support for Fossil Fuels, Say OECD and IEA’ (5 June 2020) (last accessed 2 November 2020). 6 oecd, OECD Companion to the Inventory of Support Measures for Fossil Fuels 2018 (oecd Publishing 2018), 17–​18. 7 See Shelagh Whitley and Laurie van der Burg, Fossil Fuel Subsidy Reform: From Rhetoric to Reality (New Climate Economy 2015); Jun Rentschler and Morgan Bazilian, ‘Principles for Designing Effective Fossil Fuel Subsidy Reforms’, 11 Review of Environmental Economics & Policy 138 (2017). 8 For a discussion, see Jakob Skovgaard and Harro van Asselt, ‘The Politics of Fossil Fuel Subsidies and Their Reform: An Introduction’ in Jakob Skovgaard and Harro van Asselt (eds), The Politics of Fossil Fuel Subsidies and Their Reform (cup 2018), 3. 9 See e.g. Thijs Van de Graaf and Harro van Asselt, ‘Introduction to the Special Issue: Energy Subsidies at the Intersection of Climate, Energy, and Trade Governance’, 17 International Environmental Agreements: Politics, Law & Economics 313 (2017). 10 Group of 20 (G20), ‘G20 Leaders Statement: The Pittsburgh Summit’ (24–​25 September 2009), para 24.

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to measure subsidies, as well as voluntary self-​reporting by G20 countries and peer reviews of country reports by other G20 members. Given the multifaceted nature of fossil fuel subsidies –​touching on energy, trade, fiscal, development, environmental, social, and climate change policy –​ it is not surprising that they fall within the ambit of multiple international institutions. As such, the international governance of fossil fuel subsidies reflects an important trend in –​and, according to some, challenge to –​international law, namely that of fragmentation.11 The concept of ‘fragmentation’ (or the lack thereof)12 continues to spur animated debates on the unity of international law as well as the advantages and drawbacks of a diversity of international norms and institutions in certain issue areas of global governance.13 To study whether and how the various international institutions in the area of fossil fuel subsidies act in concert, and how they, taken together, help promote subsidy reform, this chapter therefore first provides a bird’s eye view of the institutional complex14 governing fossil fuel subsidies (Section 2). 11

The fragmentation of international law has been the subject of a long-​standing debate, particularly after a study group of the International Law Commission (ilc) released a report in 2006; ilc Study Group Fragmentation in International Law, ‘Difficulties Arising from the Diversification and Expansion of International Law, Report of the Study Group of the International Law Commission finalized by Martti Koskenniemi’ UN Doc a/​c n.4/​ l.682 (13 April 2006). See also Martti Koskenniemi, and Päivi Leino, ‘Fragmentation of International Law? Postmodern Anxieties’, 15 Leiden Journal of International Law 553 (2002); Andreas Fischer-​Lescano and Gunther Teubner, ‘Regime-​Collisions: the Vain Search for Legal Unity in the Fragmentation of Global Law’, 25 Michigan Journal of International Law 999 (2004); Joost Pauwelyn, ‘Bridging Fragmentation and Unity: International Law as a Universe of Inter-​Connected Islands’, 25 Michigan Journal of International Law 903 (2004); Eyal Benvenisti and George Downs, ‘The Empire’s New Clothes: Political Economy and the Fragmentation of International Law’, 60 Stanford Law Review 595 (2007). 12 See e.g. Margaret A. Young (ed), Regime Interaction in International Law: Facing Fragmentation (Cambridge University Press, 2012); Mario Prost, The Concept of Unity in Public International Law (Hart, 2012); Dirk Pulkowski, The Law and Politics of International Regime Conflict (Oxford University Press, 2014); Mads Andenas and Eirik Bjorge (eds), A Farewell to Fragmentation: Reassertion and Convergence in International Law (Cambridge University Press, 2015). 13 See e.g. Anne Van Aaken, ‘Fragmentation of International Law: The Case of International Investment Law’, 17 Finnish Yearbook of International Law 91 (2008); Panos Delimatsis, ‘The Fragmentation of International Trade Law’ 45 Journal of World Trade 87 (2011); Harro van Asselt, The Fragmentation of Global Climate Governance: Consequences and Management of Regime Interactions (Edward Elgar 2014). 14 An institutional complex can be defined as “a set of two or more international institutions that are interdependent and as such interact to co-​govern a particular issue area in international relations.” Sebastian Oberthür and Justyna Pożarowska, ‘Managing Institutional Complexity and Fragmentation: The Nagoya Protocol and the Global Governance of

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In addition to being a site of institutional fragmentation, the international governance of fossil fuel subsidies also seems to be a testing ground for another development in international law, namely its deformalisation.15 Although the increasing ‘normative relativity’ in international law was already observed by Prosper Weil in 1983,16 there is an increase in the exercise of authority at the international level that is not easily classified under traditional notions of international law-​making. Pauwelyn and others define such ‘informal international law-​making’ broadly as follows: Cross-​border cooperation between public authorities, with or without the participation of private actors and/​or international organizations, in a forum other than a traditional international organization (process informality), and/​or as between actors other than traditional diplomatic actors (such as regulators or agencies) (actor informality) and/​or which does not result in a formal treaty or other traditional source of international law (output informality).17 In other words, informal international law may involve new actors (e.g. businesses, nongovernmental organisations or subnational authorities), draw on procedures that do not involve traditional intergovernmental deliberations (e.g. political dialogues outside of the auspices of the United Nations), and may not result in a legally binding output (e.g. a non-​binding declaration or voluntary commitments). Such informal international law is emerging especially

15 16 17

Genetic Resources’, 13 Global Environmental Politics 100 (2013), 102. This definition is slightly more encompassing than the concept of ‘regime complex’. See Kal Raustiala and David G. Victor, ‘The Regime Complex for Plant Genetic Resources’, 58 International Organization 277 (2004); Robert O. Keohane and David G. Victor, ‘The Regime Complex for Climate Change’, 9 Perspectives on Politics 7 (2011); Amandine Orsini et al, ‘Regime Complexes: A Buzz, a Boom, or a Bust for Global Governance?’ 19 Global Governance 27 (2013). The notion of ‘institutional complexity’ acknowledges the relevance of international institutions that do not qualify as ‘regimes’. See Fariborz Zelli and Harro van Asselt, ‘The Institutional Fragmentation of Global Environmental Governance: Causes, Consequences, and Responses’, 13 Global Environmental Politics 1 (2013), 7. See Jean d’Aspremont, ‘The Politics of Deformalization in International Law’, 3 Goettingen Journal of International Law 503 (2011). Prosper Weil, ‘Towards Relative Normativity in International Law?’ 77 American Journal of International Law 413 (1983). Joost Pauwelyn, ‘Informal International Lawmaking: Framing the Concept and Research Questions’ in Joost Pauwelyn et al (eds), Informal International Lawmaking (oup 2012), 13, 22.

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in areas where formal international law is stagnating.18 While not drawing to the same extent on state consent as formal international law, by building on a ‘thick stakeholder consensus’ informal international law can nevertheless result in ‘normatively superior cooperation’.19 This raises the question of whether informal international law can help address the problem of fossil fuel subsidies.20 As this chapter will show, fossil fuel subsidies have largely evaded legally binding disciplines. Under the international climate change regime, the main development has been the voluntary inclusion of fossil fuel subsidy reform in the ‘nationally determined contributions’ of some countries. Under the international trade regime, existing disciplines on subsidies have largely failed to capture fossil fuel subsidies (Section 3). Instead, the institutional complex for fossil fuel subsidies and their reform is characterised by a growing system of informal international law-​making, including voluntary commitments, and efforts to make fossil fuel subsidies transparent through measurement, reporting and review (Section 4). The chapter argues that the influence of such informal international law can nonetheless be significant in situations of complex governance. However, to strengthen the influence of the institutional complex as a whole, it is necessary to address a few challenges, including the definition and measurement of fossil fuel subsidies and the extension of commitments and transparency to countries not yet covered. 2

Mapping the Institutional Complex

It is beyond the scope of this chapter to discuss each of the international institutions active on fossil fuel subsidy reform in depth. However, to give an overview of the institutions involved, Table 5.1 lists the main institutions, including information on their membership, mission and their work or relevance for fossil fuel subsidies. The focus here is on international institutions with active

18

Joost Pauwelyn et al, ‘When Structures Become Shackles: Stagnation and Dynamics in International Lawmaking’, 25 European Journal of International Law 733 (2014), 734–​738 (citing, among others, international economic law and international environmental law as examples). 19 Ibid.,755. 20 Using informal international law to address subsidies that negatively affect global public goods has also been explored by Gregory Shaffer et al, ‘Can Informal Law Discipline Subsidies?’, 18 Journal of International Economic Law 711 (2015).

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participation by public authorities. Purely nongovernmental initiatives –​however important21 –​are not included. On the basis of this overview, a few inferences can be drawn. The first and most obvious one is that fossil fuel subsidies fall within the scope of a wide range of institutions, without any central or dominant institution. Because of their multifaceted nature, these institutions cover a range of issue areas, including energy, climate change, and trade. Significantly, they also are addressed by international economic organisations such as the World Bank and the International Monetary Fund (imf). This institutional complexity means that there is a risk of fragmentation in the form of duplication of work and inefficiency, and potentially rule development that points in diverging directions.22 An initial indication of this was already hinted at above: international organisations have defined and measured fossil fuel subsidies differently, with diverging estimates as a result.23 Another consequence of the institutional diversity is that there are geographical gaps and incongruences in terms of the coverage. While some institutions involve nearly all countries in the world, others only involve a limited coalition of countries –​although in cases such as the G20 those countries include major economies as well as providers of fossil fuel subsidies. At the same time, the institutional fragmentation also offers opportunities for driving fossil fuel subsidy reform. Indeed, the diversity of institutions includes international organisations that have significant clout in the development of national policies, such as the imf. Moreover, the different angles covered by the various institutions (e.g. fiscal policy, trade, climate, air pollution, development) allows for different drivers of subsidy reform to be emphasised. The fragmented landscape also offers opportunities for smaller groups of like-​minded countries (e.g. the fffsr) or regions (e.g. apec) to move forward 21

The activities by the Geneva-​based Global Subsidies Initiative, as well as other nongovernmental organisations active in the field of fossil fuel subsidies and their reform, come to mind. Their activities have helped to shed light on the scale and scope of fossil fuel subsidies and provided insights into how to achieve successful and durable reform. For a discussion of the Global Subsidies Initiative’s role in driving fossil fuel subsidy reform, see Nathan Lemphers et al, ‘The Global Subsidies Initiative: Catalytic Actors and the Politics of Fossil Fuel Subsidy Reform’ in Skovgaard and van Asselt, The Politics of Fossil Fuel Subsidies and Their Reform (n 8) 173. 22 See generally Zelli and van Asselt, ‘The Institutional Fragmentation of Global Environmental Governance’ (n 14). 23 See Jakob Skovgaard, ‘The Devil Lies in the Definition: Competing Approaches to Fossil Fuel Subsidies at the IMF and the OECD’, 17 International Environmental Agreements: Politics, Law & Economics 341 (2017); Doug Koplow, ‘Defining and Measuring Fossil Fuel Subsidies’ in Skovgaard and van Asselt, The Politics of Fossil Fuel Subsidies and Their Reform (n 8) 23.

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Table 5.1 International institutions addressing fossil fuel subsidiesa

Institution

Type

Members

Mission

Group of 20 (G20)

igo

19 largest Global economies economic plus the governance EU

Group of 7 (G7)

igo

7 states

World Trade Organization (wto) United Nations Framework Convention on Climate Change (unfccc) Organisation for Economic Co-​operation and Development (oecd) International Energy Agency (iea)

igo

164 states

igo

197 states

igo

37 states

igo

30 states

Global economic, security and financial governance Trade liberalisation

Work on/​relevance for fossil fuel subsidies Establishes overall goal to phase out ‘inefficient’ fossil fuel subsidies; organises country peer reviews of fossil fuel subsidies Establishes overall goal to phase out ‘inefficient’ fossil fuel subsidies by 2025

Provides definition of ‘subsidies’, and regulates subsidies in general Address Creates avenues for climate change Parties to adopt wide range of policies to reduce greenhouse gas emissions, including fossil fuel subsidy reform Promote policies that improve economic and social well-​being Ensure reliable, affordable and clean energy

Carries out research on fossil fuel subsidies, and publishes estimates

Carries out research on fossil fuel subsidies, and publishes estimates

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The International Governance of Fossil Fuel Subsidies99 Table 5.1 International institutions addressing fossil fuel subsidies (cont.)

Institution

Type

Members

Mission

Work on/​relevance for fossil fuel subsidies

Organization igo of the Petroleum-​ Exporting Countries (opec) World Bank igo

13 states

Raise oil rents Carries out research on for producers fossil fuel subsidies

189 states

Poverty reduction

International igo Monetary Fund (imf)

189 states

Monetary and financial stability

Energy Charter Treaty (ect)

igo

54 states plus the EU

High-​Level Political Forum

igo

193 UN member states

United igo Nations Environment Programme (unep)

193 UN member states

Regulate energy trade and investment Guidance on sustainable development, including follow-​up and review of commitments Environmental protection

Carries out research on fossil fuel subsidies; and works with countries to implement subsidy reform Carries out research on fossil fuel subsidies, and publishes estimates; fossil fuel subsidy reform included in lending conditions for individual countries Reduction of fossil fuel subsidies may be challenged under ect arbitration Reviews progress in implementing the Sustainable Development Goals (sdg s)

Carries out research on environmentally harmful subsidies; lead agency for developing methodology on measuring fossil fuel subsidies (sdg 12.c.1)

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Table 5.1 International institutions addressing fossil fuel subsidies (cont.)

Institution

Type

Members

Mission

Asia-​Pacific Economic Cooperation (apec)

igo

21 states

Support economic growth in the Asia-​Pacific

Friends of Fossil Fuel Subsidy Reform (fffsr)

Informal 9 states coalition

Work on/​relevance for fossil fuel subsidies

Establishes overall goal to phase out ‘inefficient’ fossil fuel subsidies; organises country peer reviews of fossil fuel subsidies Promote fossil Campaigns to encourage fuel subsidy fossil fuel subsidy reform at reform national and international levels.

a  Adapted from Van de Graaf and van Asselt, ‘Introduction to the Special Issue’ (n 9) 315. ‘igo’ refers to intergovernmental organisation.

without having to wait for multilateral consensus. Finally, fragmentation allows for some redundancy, meaning that if one institution fails, other forums can act as a fall-​back. Second, it is notable that among the international institutions, there are several that provide a potential platform for the negotiation and development of rules addressing fossil fuel subsidies, and that can avail of mechanisms to ensure those rules are complied with. This specifically applies to the global climate change regime established by the United Nations Framework Convention on Climate Change (unfccc), and the global trade regime by the World Trade Organization (wto). These institutions –​and their activities related to fossil fuel subsidies –​are therefore discussed in more detail in Section 3. Third, much international activity is in the form of setting voluntary commitments to subsidy reform, and strengthening transparency through the measurement, reporting and review of fossil fuel subsidies. Although clearly different from international rule development, such activities may nonetheless influence reform of fossil fuel subsidies. This emerging body of informal international law is examined in Section 4.

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Promoting Fossil Fuel Subsidy Reform through International Legal Regimes

Several institutions listed in the overview in Section 2 are international legal regimes, through which legally binding rules on fossil fuel subsidies could conceivably be developed. Indeed, rules developed under these regimes in principle already apply to fossil fuel subsidies (i.e. there is no specific opt-​out for fossil fuel subsidies). However, as this section will show, existing rules have largely failed to drive fossil fuel subsidy reform. In the case of the global trade regime, this is due largely to the ‘undercapture’ of fossil fuel subsidies by international trade law, especially compared to renewable energy subsidies. In the case of the global climate regime, it is due largely to the unwillingness of Parties to prescribe any specific policy measure in the pursuit of global climate change mitigation objectives.24 3.1 Fossil Fuel Subsidies and the Global Trade Regime The World Trade Organization would seem well suited to address fossil fuel subsidies for various reasons. Not only may fossil fuel subsidies have distorting impacts on trade and investment,25 the wto has a wide membership, plays a key role in regulating trade-​distorting subsidies across economic sectors, and hosts a strong dispute settlement system. Fossil fuel subsidies –​like any other government subsidy –​could potentially be disciplined under the wto’s Agreement on Subsidies and Countervailing Measures (ascm). The usefulness of wto disciplines, however, has been limited. 24

25

Aside from these two regimes, the rules of the ect could also apply to fossil fuel subsidies. Indeed, a recent report by two nongovernmental organisations argues that the ect rules could lead to investment disputes in case member countries decide to phase out their fossil fuel subsidies, in a similar way to the plethora of renewable energy arbitrations that have already taken place under the auspices of the ect. See Pia Eberhardt et al, The Ever-​expanding Energy Charter Treaty and the Power It Gives Corporations to Halt the Energy Transition (Corporate Europe Observatory and Transnational Institute 2018), 82. See also Kyla Tienhaara, ‘Regulatory Chill in a Warming World: The Threat to Climate Policy Posed by Investor-​State Dispute Settlement’, 7 Transnational Environmental Law 29 (2018). However, the ect may also have a role to play in disciplining fossil fuel subsidies. Indeed, a report commissioned by the ect Secretariat suggests that “[g]‌athering facts, initiating discussion, and then negotiating the rules can be used as an algorithm for tackling of [sic] fossil fuel subsidy reform in the Energy Charter context.” Peter Cameron, ‘The Energy Charter Treaty Provisions on Low Carbon Investment’ (28 October 2012), 57. Jean-​Marc Burniaux et al, ‘The Trade Effects of Phasing Out Fossil‐Fuel Consumption Subsidies’ (oecd 2011); Tom Moerenhout and Tristan Irschlinger, ‘Exploring the Trade Impacts of Fossil Fuel Subsidies’ (iisd 2020).

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Discussions about the role of the wto in addressing fossil fuel subsidies need to be seen in their historical context. While fossil fuel subsidies as such may have not received much attention in this forum, the notion of ‘dual pricing’ has been the subject of contestation between states (e.g. in the wto accession negotiations for Russia and Saudi Arabia).26 Dual pricing refers to practices by fossil fuel exporters that set a lower domestic price for fuels than the price charged internationally. Such practices have drawn the ire of fossil fuel importers, such as the European Union (EU), who argue that dual pricing violates provisions in both the wto’s General Agreement on Tariffs and Trade (gatt) and the ascm.27 Nonetheless, there is a clearly relevant body of law, with the ascm providing the main rules on subsidies. According to the treaty, subsidies need to entail a ‘financial contribution by a government or any public body’ or ‘any form of income or price support’ that confers a benefit.28 A key question is whether measures are defined as ‘prohibited’ or ‘actionable’ subsidies under the agreement. Prohibited subsidies are contingent upon export performance or upon the use of domestic over imported goods.29 Actionable subsidies are subsidies that are ‘specific’ (aimed at certain enterprises or industries; prohibited subsidies are specific by rule).30 If such subsidies create ‘adverse effects’, they can be challenged. The latter refers to injury to the domestic industry of another Member, nullification or impairment of the benefits accrued by another Member under the gatt, or serious prejudice to the interests of another Member.31 If a subsidy is not specific, it is non-​actionable. In addition, the ascm obliges wto Members to notify other Members about subsidies, providing sufficient details to allow other Members to assess the impacts on trade.32 Subsidies that are notified are reviewed through a surveillance mechanism involving the Committee on Subsidies and Countervailing

26 Daniel Behn, ‘The Effect of Dual Pricing Practices on Trade, the Environment, and Economic Development: Identifying the Winners and the Losers Under the Current WTO Disciplines’ (2007) https://​papers.ssrn.com/​sol3/​papers.cfm?abstract_​ id=1151553 (accessed 2 November 2020); Anna Marhold, ‘Fossil Fuel Subsidy Reform in the WTO: Options for Constraining Dual Pricing in the Multilateral Trading System’ (ictsd 2017). 27 Marhold, ‘Fossil Fuel Subsidy Reform in the WTO’ (n 26) 6. 28 Agreement on Subsidies and Countervailing Measures (adopted 15 April 1994, entered into force 1 January 1995) 1867 unts 14 art 1(1). 29 Ibid., Art. 3. 30 Ibid., Art. 2. 31 Ibid., Art. 5. 32 Ibid., Art. 25.

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Measures (scm Committee) every three years.33 In addition to the ascm, gatt provisions may also be invoked to challenge fossil fuel subsidies, as the subsidies may be tied to requirements that violate the gatt’s core provisions (i.e. national treatment and most-​favoured nation treatment), or amount to an illegal quantitative export restriction. However, using these provisions in practice has proven difficult, and no fossil fuel subsidy has been challenged by a wto Member.34 Moreover, notification rates of subsidies have generally been low, due to a lack of commitment (possibly due to fear of starting a trade dispute), a lack of clarity about which subsidies need to be reported, and inherent difficulties of estimating them.35 Even if Members do report subsidies, the surveillance mechanism rarely leads to the questioning of the subsidies.36 A key reason why fossil fuel subsidies are undercaptured –​particularly compared to subsidies for renewable energy –​by existing wto subsidies disciplines is the challenge to establish that a fossil fuel subsidy will have ‘adverse effects’ and result in injury of other wto Members.37 Moreover, for fossil fuel consumer subsidies a key challenge is to prove that such subsidies are ‘specific’, given that the benefits of such subsidies generally accrue to a broad group of producers and/​or consumers.38 In addition to these explanations related to the legal structure of the ascm, other reasons have been put forward as well. 33 34

35 36 37

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Ibid., Art. 26. In the early 1990s, Australia pressured the European Community and its Member States to address their coal production subsidies, but while it was raised in the context of the gatt, it never moved forward to the dispute stage. See Ronald Steenblik et al, ‘Fossil Fuel Subsidies and the Global Trade Regime’ in Skovgaard and van Asselt, The Politics of Fossil Fuel Subsidies and Their Reform (n 8) 121. Liesbeth Casier et al, ‘Shining a Light on Fossil Fuel Subsidies at the WTO: How NGOs Can Contribute to WTO Notification and Surveillance’, 13 World Trade Review 603 (2014). Terry Collins-​Williams and Robert Wolfe, ‘Transparency as a Trade Policy Tool: The WTO’s Cloudy Windows’, 9 World Trade Review 551 (2010); Ronald Steenblik and Juan Simón, ‘A New Template for Notifying Subsidies to the WTO’ (Global Subsidies Initiative 2011). See generally Chris Wold et al, ‘Leveraging Climate Change Benefits through the World Trade Organization: Are Fossil Fuel Subsidies Actionable?’ 43 Georgetown Journal of International Law 635 (2012); Henok B. Asmelash, ‘Energy Subsidies and WTO Dispute Settlement: Why Only Renewable Energy Subsidies Are Challenged’, 18 Journal of International Economic Law 261 (2015); Dirk De Bièvre et al, ‘No Iceberg in Sight: On the Absence of WTO Disputes Challenging Fossil Fuel Subsidies’, 17 International Environmental Agreements: Politics, Law & Economics 411 (2017); Cleo Verkuijl et al, ‘Tackling Fossil Fuel Subsidies through International Trade Agreements: Taking Stock, Looking Forward’, 58 Virginia Journal of International Law 309 (2019). Kerryn Lang et al, ‘Increasing the Momentum of Fossil-​Fuel Subsidy Reform: A Roadmap for International Cooperation’ (iisd 2010).

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Meyer, for instance, argues that states are more likely to challenge measures in countries with diversified economies, and many fossil fuel–​producing nations do not fall into this category. Moreover, he suggests that states are more likely to challenge new trade restrictions rather than measures that have been in place for a long time. Given that many fossil fuel subsidies were introduced long ago, it arguably makes them less prone to a wto challenge.39 Another reason is that countries do not challenge other Members’ fossil fuel subsidies out of fear of retaliatory litigation,40 including against their own subsidies (i.e. the ‘glasshouse’ syndrome). While the ascm therefore has been limited in the way it addresses fossil fuel subsidies, there have been other relevant developments in the context of the wto. The issue of fossil fuel subsidies and their reform is regularly brought up in the wto’s Committee on Trade and Environment, as well as in the context of the wto’s Trade Policy Review Mechanism, which monitors wto Members’ national trade policies. Moreover, at the December 2017 wto Ministerial Conference a set of 12 Members adopted the ‘Fossil Fuel Subsidies Reform Ministerial Statement’, calling for further wto action on disciplining fossil fuel subsidies.41 The statement reaffirms the signatories’ commitments related to sustainable development under the 2030 Agenda, and recognises that wto Members had made relevant pledges in the context of, inter alia, the G20, apec, the Paris Agreement, and the Addis Ababa Action Agenda on Financing for Development.42 It further seeks to build the case for action under the wto, suggesting that ‘trade and investment distortions caused by fossil fuel subsidies reinforce the need for global action including at the World Trade Organization’, and arguing that the wto ‘can play a central role in achieving effective disciplines on inefficient fossil fuel subsidies’.43 As such, the countries adopting the statement ‘seek to advance discussion in the [wto] aimed at achieving ambitious and effective disciplines on inefficient fossil fuel subsidies that encourage wasteful consumption, including through enhanced

39 40 41

42 43

Timothy Meyer, ‘Explaining Energy Disputes at the World Trade Organization’, 17 International Environmental Agreements: Politics, Law & Economics 391 (2017). Wold et al, ‘Leveraging Climate Change’ (n 38) 635. ‘Fossil Fuel Subsidies Reform Ministerial Statement’ wt/​m in(17)/​ 54 (12 December 2017). The statement was made by Chile, Costa Rica, Iceland, Liechtenstein, Mexico, the Republic of Moldova, New Zealand, Norway, Samoa, Switzerland, the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu, and Uruguay. Ibid., para 2. Ibid., paras 9–​10.

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[wto] transparency and reporting that will enable the evaluation of the trade and resource effects of fossil fuel subsidies programmes’.44 Finally, while progress at the wto on fossil fuel subsidies has been limited, they have been discussed in the context of regional and ‘megaregional’ trade agreements. For example, in the negotiations on the Trans-​Pacific Partnership (tpp),45 a proposal was made to link the agreement to voluntary commitments under apec, though this proposal was not included in the final text due to the opposition of some countries.46 In the EU-​Singapore Free Trade Agreement, the negotiating parties did manage to agree on a provision specifically aimed at fossil fuel subsidies: The Parties recognise the need to ensure that, when developing public support systems for fossils [sic] fuels, proper account is taken of the need to reduce greenhouse gas emissions and to limit distortions of trade as much as possible. While subparagraph (2)(b) of Article 12.7 (Prohibited Subsidies) does not apply to subsidies to the coal industry, the Parties share the goal of progressively reducing subsidies for fossil fuels. Such a reduction may be accompanied by measures to alleviate the social consequences associated with the transition to low carbon fuels.47 However, the wording of the provision is hortatory and does not include any legally binding language. Moreover, the provision is not subject to the agreement’s dispute settlement system.48 Interestingly, specific rules for eliminating fossil fuel subsidies are under negotiation as part of the plurilateral Agreement on Climate Change, Trade and Sustainability (accts), which involves Costa Rica, Fiji, Iceland, New Zealand, Norway and Switzerland. These negotiations are significant in that they link 44 45

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Ibid., para 10. Which at the time involved Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. Although the United States withdrew from the tpp, the other countries forged ahead, and agreed on the Comprehensive and Progressive Agreement for Trans-​Pacific Partnership (adopted 8 March 2018, not yet entered into force) < https://​www.mfat.govt.nz/​assets/​Trade-​ agreements/​CPTPP/​Comprehensive-​and-​Progressive-​Agreement-​for-​Trans-​Pacific-​ Partnership-​CPTPP-​English.pdf > (accessed 2 November 2020). Margaret A. Young, ‘Energy Transitions and Trade Law: Lessons from the Reform of Fisheries Subsidies’, 17 International Environmental Agreements: Politics, Law & Economics 371 (2017), 384–​385. EU-​Singapore Free Trade Agreement (April 2018), Art 12.11(3). Ibid., Art. 12.16. See also Vernon Rive, Fossil Fuel Subsidy Reform: An International Law Perspective (Edward Elgar 2019), 151.

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subsidies not to their impacts on trade, but rather their adverse effects on climate change.49 3.2 Fossil Fuel Subsidies and the Global Climate Change Regime By incentivising the burning of fossil fuels, fossil fuel subsidies can have a significant impact on greenhouse gas emissions and climate change.50 For instance, the iea estimates that 13 percent of global energy-​related carbon dioxide (CO2) emissions in 2014 were from subsidised fossil fuels.51 In addition to their contribution to increased fossil fuel production and use (and, by implication, to greenhouse gas emissions), fossil fuel subsidies prevent the uptake of renewable energy, because they ‘impair the competitiveness of renewable energy technologies, reinforce the continuation of fossil-​fuel-​based systems, and distort investment decisions in favour of fossil-​fuel technologies’.52 Moreover, fossil fuel subsidies contribute to the long-​term ‘lock-​in’ of fossil fuel infrastructures.53 As fossil fuel subsidies have an impact on climate change, the inverse logic is that fossil fuel subsidy reform is an untapped source of climate change mitigation. For example, one study of 20 countries finds that if these countries would reduce their fossil fuel subsidies to zero between 2016 and 2020, this would result in average greenhouse gas emission reductions of about 11 percent across these countries.54 However, since its inception in 1992, the global climate change regime established by the unfccc has, by and large, eschewed the issue of fossil fuel subsidies. While some Parties have drawn attention to the linkages between

49

50 51 52 53 54

Harro van Asselt, ‘Small Countries Punching above Their Weight: The New Initiative for an Agreement on Climate Change, Trade and Sustainability (ACCTS)’ (sdg Knowledge Hub, 3 October 2019) . This section is shortened and adapted from Harro van Asselt and Kati Kulovesi, ‘Seizing the Opportunity: Tackling Fossil Fuel Subsidies under the UNFCCC’, 17 International Environmental Agreements: Politics, Law & Economics 357 (2017). iea, World Energy Outlook 2015 (iea 2015) 23. Richard Bridle and Lucy Kitson, ‘The Impact of Fossil-​Fuel Subsidies on Renewable Electricity Generation’ (iisd 2014) 18. Peter Erickson et al, ‘Why Fossil Fuel Producer Subsidies Matter’ (2020) 578 Nature E1. Laura Merrill et al, Tackling Fossil Fuel Subsidies and Climate Change: Levelling the Energy Playing Field (Nordic Council of Ministers 2015). The countries covered are: Algeria, Bangladesh, China, Egypt, Ghana, India, Indonesia, Iran, Iraq, Morocco, Nigeria, Pakistan, Russia, Saudi Arabia, Sri Lanka, Tunisia, United Arab Emirates, United States, Venezuela, and Vietnam. See also Jessica Jewell et al, ‘Limited Emission Reductions from Fuel Subsidy Removal Except in Energy-​Exporting Regions’, 554 Nature 229 (2018).

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such subsidies and climate objectives, support to fossil fuel production or use is not explicitly mentioned in any of the three climate treaties –​the 1992 unfccc,55 the 1997 Kyoto Protocol,56 and the 2015 Paris Agreement57 –​let alone made subject to legally binding obligations. Indeed, fossil fuels are not directly addressed at all.58 Rather than pointing to fossil fuel production and consumption as a source of greenhouse gas emissions, the international climate regime has focused on fossil fuel–​producing nations’ concerns that taking climate action would have a negative impact on their economies. opec members such as Kuwait and Saudi Arabia initially sought to emphasise scientific uncertainty over climate change and ‘went to great lengths to … avoid any reference to energy’ in the Convention.59 Their concerns were reflected in the Convention, and have led to a protracted discussion on the impacts of ‘response measures’ on developing countries.60 There have been limited attempts by some Parties to start addressing fossil fuel subsidies. Already during the negotiations of the unfccc in the early 1990s, the small island Vanuatu, on behalf of the Alliance of Small Island States, proposed that the climate treaty should include a provision including a ‘prohibition on subsidising activities which contribute to climate change’.61 Sweden likewise called for a commitment to reduce ‘subsidies for the production and use of fossil fuels with a view to abolish such subsidies at the latest 55 56 57 58 59 60

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United Nations Framework Convention on Climate Change (adopted 9 May 1992, entered into force 21 March 1994) 1771 unts 107 [hereinafter unfccc]. Kyoto Protocol to the United Nations Framework Convention on Climate Change (adopted 11 December 1997, entered into force 16 February 2005) 2303 unts 162 [hereinafter Kyoto Protocol]. Paris Agreement (adopted 12 December 2015, entered into force 4 November 2016) 55 ilm 740 [hereinafter Paris Agreement]. Georgia Piggot et al, ‘Swimming Upstream: Addressing Fossil Fuel Supply under the UNFCCC,’ 18 Climate Policy 1189 (2018). Suraje Dessai, ‘An Analysis of the Role of OPEC as a G77 Member at the UNFCCC’ (wwf 2004), 19. The shorthand of ‘response measures’ refers to the impacts of measures taken to address climate change; impacts that can be drastic for nations that are highly economically dependent on fossil fuel production, such as Saudi Arabia. See generally Joanna Depledge, ‘Striving for No: Saudi Arabia in the Climate Change Regime’, 8 Global Environmental Politics 9 (2008); Nicholas Chan, ‘The “New” Impacts of the Implementation of Climate Change Response Measures’, 25 Review of European Community & International Environmental Law 228 (2016). unfccc ‘Preparation of a Framework Convention on Climate Change. Set of Informal Papers Provided by Delegations, Related to the Preparation of a Framework Convention on Climate Change’ UN Doc A/​AC.237/​Misc.1/​Add.3 (18 June 1991), 30.

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by the year (2000)’.62 Notwithstanding such calls, countries decided against listing any specific mitigation measures in the Convention that Parties would need to adopt. In the negotiations leading up to the Kyoto Protocol, some Parties –​including France, New Zealand, Norway, and Switzerland –​raised the prospect of fossil fuel subsidy reform or phase-​out as possible ‘policies and measures’ to mitigate climate change.63 Switzerland, for instance, suggested to either put in place targets for subsidy reduction or to have a blanket removal of ‘all types of subsidies except those related to research and environmental protection’.64 Even some oil-​producing nations put proposals forward, with Iran advocating the removal of coal subsidies ‘as the most pollut[ing] source of energy’.65 However, countries again failed to agree on a list of policies and measures that Kyoto Protocol Parties would be obliged to implement. Instead, they could only reach agreement on an indicative list of policies and measures. While fossil fuel subsidies are not mentioned in that list as such, the Protocol does mention the ‘[p]‌rogressive reduction or phasing out of market imperfections, fiscal incentives, tax and duty exemptions and subsidies in all greenhouse gas emitting sectors that run counter to the objective of the Convention and application of market instruments’.66 This could be seen as an implicit acknowledgement of fossil fuel subsidy reform as a possible climate mitigation measure. While the Kyoto Protocol has arguably provided the most sophisticated international legal framework for climate mitigation to date, its importance is rapidly diminishing. The first commitment period from 2008 to 2012 included all key developed countries apart from the United States, which never ratified the Protocol, and Canada, which formally withdrew in 2011. The Protocol amendment for the second commitment period from 2013 to 2020 only entered into force in late 2020, largely nullifying its relevance. Moreover, major developed countries like Japan and Russia decided to opt out of this second commitment period.

62 63 64 65 66

unfccc ‘Preparation of a Framework Convention on Climate Change. Set of Informal Papers Provided by Delegations, Related to the Preparation of a Framework Convention on Climate Change’ UN Doc A/​AC.237/​Misc.1/​Add.6 (20 June 1991), 4. Joanna Depledge, ‘Tracing the Origins of the Kyoto Protocol: An Article-​by-​Article Textual History’ UN Doc fccc/​t p/​2000/​2 (25 November 2000), paras 72–​73. unfccc ‘Implementation of the Berlin Mandate. Proposals from Parties’ UN Doc fccc/​ agbm/​1996/​Misc.2/​Add.3 (4 December 1996), 4. unfccc ‘Implementation of the Berlin Mandate. Proposals from Parties’ UN Doc fccc/​ agbm/​1997/​Misc.1 (19 February 1997), 32. Kyoto Protocol, Art. 2(1)(a)(v) [emphases added].

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The future mitigation framework under the climate regime will be based on the Paris Agreement, which came into force in November 2016. The Agreement’s key achievements include setting long-​term mitigation objectives, engaging all parties in mitigation action and introducing five-​year ambition cycles. Important in the context of fossil fuel subsidies is the Agreement’s long-​term goal to make ‘finance flows consistent with a pathway towards low greenhouse gas emissions and climate-​resilient development’.67 This goal arguably should steer Parties away from financially supporting fossil fuel production and consumption, including through subsidies. The Paris Agreement also includes provisions on enhanced transparency and regular global stocktaking.68 The Agreement’s main substantive provision provides that ‘[e]‌ach Party shall prepare, communicate and maintain successive nationally determined contributions that it intends to achieve’ and that ‘Parties shall pursue domestic mitigation measures, with the aim of achieving the objectives of such contributions’.69 The Agreement thus emphasises the role of national governments in determining their own mitigation ambition levels and measures in the form of nationally determined contributions (ndc s). Although several developed and developing countries referred to fossil fuel subsidies in their submissions on issues to be included in the Paris Agreement,70 fossil fuel subsidies do not feature in the new treaty. However, as the Paris Agreement cements the discretionary approach to policies and measures under the unfccc regime, with countries being free to adopt the policies they choose to pursue their targets, it has provided an opportunity for some parties to put forward fossil fuel subsidy reform as a mitigation measure. Specifically, the lack of standardisation for ndc s leaves countries with the option to include the types of information they deem useful.71 The range of mitigation policies and actions in countries’ ndc s could take the form of either specific actions and their expected outcomes, or defining the outcome (e.g. an emissions reduction target) and listing key policies and measures through which the target will be achieved. This has opened the door for some 67 68

Paris Agreement, Art. 2(1)(c). See generally Daniel Bodansky, ‘The Paris Climate Change Agreement: A New Hope’, 110 American Journal of International Law 288 (2016); Harro van Asselt, ‘International Climate Change Law in a Bottom-​Up World’, 6 Questions of International Law 5 (2016). 69 Paris Agreement, Art. 4(2). 70 Virginia Benninghoff, ‘Prioritizing Fossil-​ Fuel Subsidy Reform in the UNFCCC Process: Recommendations for Short-​Term Actions’ (Global Subsidies Initiative 2015). 71 See Laura Merrill et al, ‘Fossil-​Fuel Subsidies and Climate Change Options for Policy-​ Makers within Their Intended Nationally Determined Contributions’ (Nordic Council of Ministers 2015).

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countries to include fossil fuel subsidy reform in their ndc s. Indeed, 13 countries already included references to fossil fuel subsidy reform in their intended ndc s in the run-​up to Paris.72 Ethiopia’s ndc, for example, indicates that the country has ‘already removed fossil fuel subsidies to enable enhanced generation and use of clean and renewable energy’.73 Morocco’s ndc commits the country to ‘[s]‌ubstantially reducing fossil fuel subsidies, building on reforms already undertaken in recent years’.74 And India’s ndc explains how India has ‘cut subsidies and increased taxes on fossil fuels (petrol and diesel) turning a carbon subsidy regime into one of taxation’.75 These developments thus show that even though the Paris Agreement offers little concrete guidance, Parties have nevertheless started to link fossil fuel subsidy reform to climate change policy. 4

Promoting Fossil Fuel Subsidy Reform through Informal International Law

The previous section underscores that notwithstanding activities by small groups of countries, the role of international legal regimes in promoting fossil fuel subsidy reform is limited, and no binding rules have been agreed. But in the absence of action under these regimes, a plethora of activity has taken place under the umbrella of other institutions. This section discusses some of the main ways through which international institutions seek to drive reforms, namely (i) the adoption of voluntary commitments, and (ii) strengthening transparency through measurement, reporting and review.76 72

Anika Terton et al, ‘Fiscal Instruments in INDCs: How Countries are Looking to Fiscal Policies to Support INDC Implementation’ (iisd, 2015). Intended ndc s are Parties’ ndc s under the Paris Agreement unless they have communicated otherwise. See unfccc ‘Decision 1/​CP.21, Adoption of the Paris Agreement’ UN Doc fccc/​c p/​2015/​10/​Add.1 (29 January 2016), para 22. 73 ‘Intended Nationally Determined Contribution (INDC) of the Federal Democratic Republic of Ethiopia’ (10 June 2015) 7 (accessed 2 November 2020). 74 ‘Intended Nationally Determined Contribution (INDC) under the UNFCCC’ (5 June 2015)

(accessed 2 November 2020). 75 ‘India’s Intended Nationally Determined Contribution’ (2 October 2015) 27 (accessed 2 November 2020). 76 To be clear, these are not the only ways in which international institutions can exert influence. Coercion is another mechanism, one that has been employed by the imf (not without controversy). Another mechanism is building capacity and offering technical assistance to help countries with implementing and managing fossil fuel subsidy reform.

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4.1 Voluntary Commitments Although there are no international legal obligations binding countries to phase out or otherwise reform their fossil fuel subsidies, a series of voluntary commitments have emerged in the past decade. Perhaps most notably, the G20 –​established in 1999 in response to the Asian financial crisis and comprising 19 developed, developing and emerging countries,77 as well as the EU –​ included a commitment ‘[t]‌o phase out and rationalize over the medium term inefficient fossil fuel subsidies while providing targeted support for the poorest’ in its 2009 Leaders’ Declaration.78 The G20 commitment transformed fossil fuel subsidies into a high-​priority issue on the international plane. Although arguably not a direct cause of fossil fuel subsidy reform, the commitment is key to understanding the increasing attention to fossil fuel subsidies and the cases of fossil fuel subsidy reform since 2009. This pledge has been reaffirmed at subsequent G20 summits and has also inspired engagement in fossil fuel subsidy reform by other actors, including apec and the Friends of Fossil Fuel Subsidy Reform. While not legally binding, the pledge moreover appears to fulfil a valuable norm-​framing function, creating ‘increasing political costs’ to countries that do not reform their fossil fuel subsidies.79 At the same time, however, the commitment is couched in vague language that leaves considerable discretion to the G20 members. No definitions are given for key terms such as ‘rationalise’, ‘medium term’ and, importantly, ‘inefficient’. As a result, several G20 members have been able to claim they have no fossil fuel subsidies whatsoever. Moreover, the pledge does not contain any target date for implementation, notwithstanding calls to do so by 2020.80 The G20 commitment formed the starting point of other commitments. Just a few months after the adoption of the G20 commitment, members of apec –​a regional economic forum created in 1989 in response to the increasing

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For instance, the World Bank’s seeks to support countries implementing reform through its Energy Sector Management and Assistance Programme. See further Jakob Skovgaard, ‘International Push, Domestic Reform? The Influence of International Economic Institutions on Fossil Fuel Subsidy Reform’ in Skovgaard and van Asselt, The Politics of Fossil Fuel Subsidies (n 8) 100. Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, and the United States. G20, ‘G20 Leaders Statement’ (n 10) para 24. For a discussion, see Thijs Van de Graaf and Mathieu Blondeel, ‘Fossil Fuel Subsidy Reform: An International Norm Perspective’ in Skovgaard and van Asselt, The Politics of Fossil Fuel Subsidies and Their Reform (n 8) 83. See e.g. Michael Holder, ‘Investors Urge G20 to End Fossil Fuel Subsidies by 2020’ (BusinessGreen, 29 November 2018).

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economic interdependence of the Asia-​Pacific region –​similarly pledged to ‘rationalise and phase out over the medium term fossil fuel subsidies that encourage wasteful consumption’ in their 2009 Leader’s Declaration.81 Moreover, the G20 commitment helped trigger the formation of the Friends of Fossil Fuel Subsidy Reform in 2010, at the initiative of New Zealand.82 The fffsr is an informal coalition of nine countries,83 inspired by the ‘Friends of Fish’ model that helped put fisheries subsidies on the agenda of the wto,84 aiming to promote fossil fuel subsidy reform through various international institutions, including the global trade and climate change regimes (see Section 3). Although the fffsr have not adopted a separate voluntary commitment, they actively garnered support from non-​G20/​a pec countries for a non-​binding Communiqué launched in 2015,85 and were instrumental in the release of the wto Ministerial Statement adopted in December 2017. Whereas the G20 and apec commitments have remained vague about key terms in their commitments, the Group of 7 (G7) –​a political forum comprised of some of the world’s largest developed country economies86 –​agreed on a specific deadline (2025).87 Finally, as part of the 2030 Agenda for Sustainable Development,88 all United Nations member states have adopted a voluntary commitment to:

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83 84 85

86 87 88

Asia-​Pacific Economic Cooperation (apec), ‘2009 Leaders’ Declaration (14 November 2009) (accessed 2 November 2020). Vernon Rive, ‘Fossil Fuel Subsidy Reform: A New Zealand Perspective on the International Law Framework’, 27 New Zealand University Law Review 73 (2016); Vernon Rive, ‘The Friends of Fossil Fuel Subsidy Reform: Anatomy of an International Norm Entrepreneur’ in Skovgaard and van Asselt, The Politics of Fossil Fuel Subsidies and Their Reform (n 8) 156. Costa Rica, Denmark, Ethiopia, Finland, New Zealand, Norway, Sweden, Switzerland, and Uruguay. See Young, ‘Energy Transitions and Trade Law’ (n 46). The Communiqué calls for converting high-​level commitments on fossil fuel subsidy reform into practical action through three interrelated principles: (i) communication and transparency about the merits of subsidy policies and reform timetables; (ii) ambition in the scope and timeframe for implementing reform; and (iii) the provision of targeted support that safeguards the poorest. See (accessed 2 November 2020). Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. ‘G7 Ise-​Shima Leaders Declaration, G7 Ise-​Shima Summit (26–​27 May 2016)’ (accessed 2 November 2020) 28. unga ‘Transforming Our World: the 2030 Agenda for Sustainable Development’ UN Doc a/​r es/​70/​1 (25 September 2015).

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[r]‌ationalize inefficient fossil-​fuel subsidies that encourage wasteful consumption by removing market distortions, in accordance with national circumstances, including by restructuring taxation and phasing out those harmful subsidies, where they exist, to reflect their environmental impacts, taking fully into account the specific needs and conditions of developing countries and minimizing the possible adverse impacts on their development in a manner that protects the poor and the affected communities.89 However, the commitment was included under the Sustainable Development Goal related to sustainable consumption and production patterns (sdg 12), rather than the energy-​related (sdg 7) or climate-​related (sdg 13) goals. Moreover, the commitment does not refer to ‘phasing out’, does not include a timeframe, and offers various references (e.g. to national circumstances) contextualising the commitment. All these commitments are, by their very nature, non-​legally binding. Moreover, their phrasing leaves significant discretion for countries in their implementation, so much so that countries can claim that the commitment does not even apply to them. On the broader spectrum of legalisation, the commitments squarely fall within the area of ‘soft’ law.90 This suggests that even when commitments are clearly voluntary and non-​binding, some of the challenges afflicting formal international law (e.g. agreeing on concrete language) may also apply to informal international law-​making. This notwithstanding, the repeated affirmation by states of their intention to address fossil fuel subsidies can increase the reputational costs of reneging on that commitment.91 The adoption of commitments can make it harder for political leaders to backslide, and may even make it harder for

89 90

91

Ibid., 23, Goal 12.c. Following the criteria put forward by Abbott and Snidal, the commitments are characterised by a lack of obligation (they are formulated in non-​binding terms and part of non-​binding instruments), a lack of precision (key terms are undefined), and limited delegation –​although the latter to some extent is addressed through the voluntary peer review processes established by the G20 and apec (see Section 4.2). Kenneth W. Abbott and Duncan Snidal, ‘Hard and Soft Law in International Governance’, 54 International Organization 421 (2000). Joel E. Smith and Johannes Urpelainen, ‘Removing Fuel Subsidies: How Can International Organizations Support National Policy Reforms?’, 17 International Environmental Agreements: Politics, Law & Economics 327 (2017). Smith and Urpelainen draw on Andrew T. Guzman, How International Law Works: A Rational Choice Theory (Oxford University Press, 2008).

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future governments to reverse reforms, as domestic stakeholders may try to hold their governments to account for their non-​binding international commitment. Moreover, the adoption of commitments in various international forums can help engender, clarify and diffuse an emerging ‘norm of fossil fuel subsidy reform’ in international governance.92 Although not a norm in the legal sense,93 such a norm could develop into one through processes of ‘acculturation’ and ‘socialisation’.94 Nonetheless, as the preceding discussion highlights, the contents of any such a norm remain contested. Moreover, the most specific language adopted for any commitment was also adopted by the smallest group of countries (G7), whereas the language for the commitment by all UN member states is still the most general. But even if the commitments’ terms were clearer, to find out whether they are actually being implemented requires greater transparency. 4.2 Transparency through Measurement, Reporting and Review The G20 commitment was also instrumental in strengthening the transparency of fossil fuel subsidies. Leaders at the 2009 Pittsburgh summit agreed to report on strategies for rationalising and phasing out inefficient fossil fuel subsidies.95 To this end, a working group on energy was established, in which energy experts reviewed the fossil fuel subsidies in their countries.96 However, the results of this exercise were underwhelming.97 Seven G20 members failed to identify any eligible fossil fuel subsidies in their countries,98 and even though the remaining 12 countries did provide strategies and timelines for the

92 93 94 95 96 97

98

Van de Graaf and Blondeel, ‘Fossil Fuel Subsidy Reform’ (n 80). Here, a norm is rather more generally referred to as a standard of appropriate behaviour. See Martha Finnemore and Kathryn Sikkink, ‘International Norm Dynamics and Political Change’, 52 International Organization 887 (1998). Acculturation is referred to as ‘the general process by which actors adopt the beliefs and behavioural patterns of the surrounding culture’. Ryan Goodman and Derek Jinks, Socializing States: Promoting Human Rights through International Law (oup 2013) 4. G20, ‘G20 Leaders Statement’ (n 10) para 29. Joy A. Kim and Suh-​Yong Chung, ‘The Role of the G20 in Governing the Climate Change Regime’, 12 International Environmental Agreements: Politics, Law & Economics 361 (2012). See Thijs Van de Graaf and Kirsten Westphal, ‘The G8 and G20 as Global Steering Committees for Energy: Opportunities and Constraints’, 2 Global Policy 19 (2011), 28; and Sijbren de Jong and Jan Wouters, ‘Institutional Actors in International Energy Law’ in Kim Talus (ed.), Research Handbook on International Energy Law (Edward Elgar 2014), 18, 34. Australia, Brazil, France, Japan, Saudi Arabia, South Africa, and the United Kingdom; see Van de Graaf and Blondeel, ‘Fossil Fuel Subsidy Reform’ (n 79).

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phase-​out of inefficient subsidies, they provided figures ‘considerably lower’ than expected.99 While the outcome of the self-​reporting exercise may have been disappointing, the G20 has also sought to improve transparency in other ways, notably by engaging other actors. Specifically, the G20 leaders requested ‘relevant institutions’, such as the iea, opec, oecd, and World Bank, to provide an analysis of the scope of energy subsidies and suggestions for the implementation of the G20’s reform efforts.100 This request has led to five reports so far.101 In addition, it is highly likely that the G20’s commitment has indirectly catalysed additional research into fossil fuel subsidies by nongovernmental organisations and research institutions. Perhaps more importantly, a process to increase the transparency of a subset of G20 countries’ subsidies is ongoing. In June 2012, G20 leaders requested finance ministers to explore options for a voluntary peer review (vpr) process.102 The next year, G20 finance ministers committed to undertake such a process, and, several months later, released a corresponding methodology.103 99 1 00 101

102 103

Henok B. Asmelash, ‘Falling Oil Prices and Sustainable Energy Transition: Towards a Multilateral Agreement on Fossil-​Fuel Subsidies’ (United Nations University World Institute for Development Economics Research 2016), 8. G20, ‘G20 Leaders Statement’ (n 10) para 30. ‘Analysis of the Scope of Energy Subsidies and Suggestions for the G-​20 Initiative, iea, opec, oecd, World Bank Joint Report prepared for submission to the G-​20 Summit Meeting Toronto (Canada), 26–​ 27 June 2010’ (accessed 2 November 2020); ‘The Scope of Fossil-​Fuel Subsidies in 2009 and a Roadmap for Phasing out Fossil-​Fuel Subsidies: An iea, oecd and World Bank Report for the November 2010 G20 Summit Meeting in Seoul, Korea’ (accessed 2 November 2020); ‘Joint Report by iea, opec, oecd and World Bank on Fossil-​Fuel and Other Energy Subsidies: An Update of the G20 Pittsburgh and Toronto Commitments, Prepared for the G20 Meeting of Finance Ministers and Central Bank Governors (Paris, 14–​15 October 2011) and the G20 Summit (Cannes, 3–​ 4 November 2011)’ (accessed 2 November 2020); World Bank, ‘Transitional Policies to Assist the Poor While Phasing Out Inefficient Fossil Fuel Subsidies That Encourage Wasteful Consumption. Contribution by the World Bank to G20 Finance Ministers and Central Bank Governors’ (2010); ‘Update on Recent Progress in Reform of Inefficient Fossil Fuel Subsidies that Encourage Wasteful Consumption: Contribution by the International Energy Agency (iea) and the Organisation for Economic Co-​operation and Development (oecd) to the G20 Energy Transitions Working Group’ (2018) (accessed 2 November 2020). ‘G20 Leaders’ Declaration’, Los Cabos, Mexico (19 June 2012) (accessed 2 November 2020), para 74. G20, ‘Methodology for G-​20 Voluntary Peer Reviews on Inefficient Fossil Fuel Subsidies That Encourage Wasteful Consumption’ (2013) (accessed 2 November 2020).

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China and the United States were the first to announce their intent to undertake reciprocal vpr s under this process,104 the findings of which were published in September 2016.105 A second round of vpr s, by Germany and Mexico, was released in 2017.106 A third round of vpr s involved Indonesia and Italy, and Argentina and Canada have also committed to undergoing a vpr.107 In addition to the vpr s by G20 members, non-​G20 members can also undergo a peer review. The Netherlands chose to do so in 2020.108 Experiences with the vpr process so far are equivocal. On the one hand, there appears potential to contribute to domestic and bilateral policy learning in the area of fossil fuel subsidy reform. For instance, China’s self-​review reflects efforts to bring together different government departments to work on this area and liaison with a range of international and nongovernmental organisations, including the World Bank, the imf, the oecd, the Global Subsidies Initiative, and the G20 Sustainable Energy Working Group.109 The reviews of China and the United States were more detailed, and covered more policies, than either nation’s earlier progress report.110 Yet engagement in the voluntary process does not necessarily guarantee enhanced transparency. Germany’s vpr in particular has been accused of ‘ignoring the majority of fossil fuel subsidies’ in the country.111 104 The White House, ‘Joint Fact Sheet on Strengthening U.S.-​China Economic Relations’ (5 December 2013) (accessed 2 November 2020). 105 The peer reviews have been published on (accessed 2 November 2020). 106 Ibid. 107 Department of Finance, Canada, ‘Canada and Argentina to Undergo Peer Reviews of Inefficient Fossil Fuel Subsidies’ (14 June 2018) (accessed 2 November 2020). 108 oecd and iea, ‘The Netherlands’s Effort to Phase Out and Rationalise its Fossil-​Fuel Subsidies’ (2020) (accessed 2 November 2020). 109 China, ‘G20 Voluntary Peer Review by China and the United States on Inefficient Fossil Fuel Subsidies that Encourage Wasteful Consumption: China Self-​review Report’ (2015). 110 Ronald Steenblik, ‘An Overview of the G20 and APEC Voluntary Peer Reviews of Fossil-​ Fuel Subsidies’, Presentation for the International Conference on Fossil Fuel Subsidy Reform (Paris, 13 October 2016) (accessed 2 November 2020). 111 Overseas Development Institute, ‘Germany Ignoring Majority of Fossil Fuel Subsidies in G20 Review –​ODI Experts’ (15 November 2017) (accessed 2 November 2020).

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apec economies have also engaged in their own vpr process for fossil fuel subsidies.112 Guidelines for vpr s were adopted in November 2013, with Peru volunteering to be the first apec economy to undergo review.113 Additional vpr s have been conducted for New Zealand (2015), the Philippines (2015), and Chinese Taipei (2016), and Vietnam (2017).114 The apec vpr process involves a focused review of fossil fuel subsidies in the volunteer economy, facilitated by the apec Energy Working Group and the Fossil Fuel Subsidy Reform Secretariat.115 The results of the reviews, including policy reform recommendations are shared to help disseminate lessons learned and best strategies for reform.116 In addition to these reporting and review activities, international organisations –​in part responding to G20 calls –​have also intensified their efforts to measure the scale and scope of fossil fuel subsidies. The oecd releases regular inventories of fossil fuel subsidies –​most recently in 2018117 –​and maintains an online database with its estimates.118 The iea annually updates its estimates through its influential flagship report, the World Energy Outlook. Moreover, the imf has published several estimates of fossil fuel subsidies.119 However, estimates of fossil fuel subsidies differ due to varying coverage and methodologies (Table 5.2). The iea uses a so-​called ‘price-​gap’ approach to estimate fossil fuel subsidies, under which a reference price is compared to consumer market prices. The oecd, by contrast, follows an inventory approach under which individual government interventions are valued and aggregated. The imf employs both the price-​gap (for consumer subsidies) and inventory 112 apec Energy Working Group, ‘Guidelines on a Voluntary Peer Review for Reform of Inefficient Fossil Fuel Subsidies that Encourage Wasteful Consumption (VPR/​IFFSR)’ (2013) https://​www.ewg.apec.org/​documents/​FINAL_​VPR-​IFFSR_​Guidelines.pdf> (accessed 2 November 2020). 113 apec Fossil Fuels Subsidy Reforms Peer Review Team, ‘Peer Review on Fossil Fuel Subsidy Reforms in Peru’ (2015) (accessed 2 November 2020). 114 apec Energy Working Group, ‘Peer Review on Fossil Fuel Reforms in Chinese Taipei’ (2017) (accessed 2 November 2020), 1. 115 apec Fossil Fuels Subsidy Reforms Peer Review Team, ‘Peer Review on Fossil Fuel Subsidy Reforms in Peru’ (n 113). 116 iea, Tracking Fossil Fuel Subsidies in APEC Economies: Toward a Sustained Subsidy Reform (iea 2017). 117 oecd, OECD Companion (n 5). 118 < http://​www.oecd.org/​fossil-​fuels/​> (accessed 2 November 2020). 119 As reported in David Coady et al, ‘Global Fossil Fuel Subsidies Remain Large: An Update Based on Country-​Level Estimates’ (imf 2019).

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Table 5.2 Fossil fuel subsidy estimates by the iea, imf, and oecd

Size in billion USD (years)

ieaa 317.6 (in 2019)

imfb ‘Pre-​tax’: 296 (in 2017) ‘Post-​tax’: 5,200 (in 2017) 191 countries

Countries included

42 (developing) countries

Producer/​ consumer subsidies Methodology

Consumer

Producer and consumer

Price-​gap

Price-​gap and inventory

oecdc 478 (in 2019)

77 countries (responsible for 94% of global CO2 emissions) Producer and consumer Inventory

a  i ea, ‘Low Fuel Prices Provide a Historic Opportunity to Phase Out Fossil Fuel Consumption Subsidies’ (2 June 2020) (accessed 2 November 2020). b  Coady et al., ‘How Large’ (n 120). c  o ecd, OECD Companion (n 6).

(for producer subsidies) approaches. In addition, it includes non-​internalised externalities (e.g. road congestion and air pollution) in its subsidy definition, leading to a significantly higher estimate. As a result, the estimates used by these different international organisations varies, as does their coverage of countries and types of fossil fuel subsidies (production versus consumption subsidies). An interesting development in this regard is the coming together of several organisations in the development of a methodology to measure progress in the implementation of sdg 12.c on fossil fuel subsidies.120 The indicator for sdg 12.c (‘Amount of fossil-​fuel subsidies per unit of gdp (production and consumption) and as a proportion of total national expenditure on fossil fuels’) offered a starting point for a technical debate on defining and measuring subsidies, even though several of the

120 ‘Goal 12’ (accessed 2 November 2020).

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terms used in the indicator (e.g. ‘fossil fuels’ and ‘subsidies’) are open for multiple interpretations.121 In 2019, discussions in a technical expert groups involving governments and international and nongovernmental organisations led to the adoption of a common methodology for reporting fossil fuel subsidies under sdg 12.c.122 In addition to discussions under sdg 12.c, some collaboration between the organisations takes place, and the oecd’s 2018 Companion to the Inventory of Support Measures for Fossil Fuels for the first time harmonised the data for 43 countries also covered by the iea,123 and the two organisations now regularly release joint estimates.124 Following the dictum that ‘sunshine is the best of disinfectants’,125 strengthening transparency can be a key function of informal international law. According to Shaffer and others, ‘[i]‌nformation, and discussion of that information, in some sort of body provide an opportunity to learn from the experience of other countries and to consider whether government support serves a legitimate policy objective’.126 In the absence of legally binding disciplines or obligations related to fossil fuel subsidies, transparency offers a crucial first step to figure out the extent of the problem –​as well as the extent to which that problem is being effectively addressed by countries. Transparency can help shed light on whether nations are fulfilling their international commitments. Transparency can also help states themselves, by allowing them to better understand the fiscal burdens of fossil fuel subsidies, and in this way, help build and strengthen coalitions in favour of reform. Moreover, transparency can help build trust among states, and form the basis for reciprocal actions.127 However, as this section has shown, transparency has itself been an area of contestation, due to a lack of a clear definition for ‘fossil fuel subsidies’, as well as agreed methodologies to measure them. Having said that, while states may have an incentive to eschew a more concrete definition, there is more agreement between international organisations than the diverging estimates seem 121 See the discussion in Peter Wooders and Ronald Steenblik, ‘Options Paper: Monitoring SDG Indicator 12.c.1 on Fossil Fuel Subsidies’ (2017) (accessed 2 November 2020). 122 See unep, oecd and iisd, ‘Measuring Fossil Fuel Subsidies in the Context of the Sustainable Development Goals’ (unep 2019). 123 oecd, OECD Companion (n 6). 124 oecd (n 5). 125 Usually ascribed to Justice Louis Brandeis (1913). 126 Shaffer et al, ‘Can Informal Law Discipline Subsidies?’ (n 20) 714. 127 See also Joseph E. Aldy, ‘Policy Surveillance in the G-​ 20 Fossil Fuel Subsidies Agreement: Lessons for Climate Policy’, 144 Climatic Change 97 (2017).

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to suggest.128 Moreover, the common methodology under sdg 12.c may also yield further harmonisation in practice.129 5

Conclusion

This chapter has offered an overview of the functioning of the international institutional complex for fossil fuel subsidies. A first observation is that the very nature of fossil fuel subsidies –​as an issue intersecting with energy, financial, trade, development, economic, environmental, social, and climate change policy –​means that no single institution governs all aspects. The ‘across-​the-​ board’ model of international governance pursued in this issue area offers opportunities to exploit multiple drivers for fossil fuel subsidy reform, including fiscal reform, climate change mitigation, and reducing trade barriers. Furthermore, the involvement of informal coalitions such as the Friends of Fossil Fuel Subsidy Reform offers an opportunity for some countries to move forward in the absence of multilateral agreement on phasing out fossil fuel subsidies. At the same time, the coverage of fossil fuel subsidies by multiple institutions has also meant that several definitions of fossil fuel subsidies have emerged, making it difficult to obtain clarity on the scope of the problem. While fossil fuel subsidies and their reform are often seen as domestic issues, the chapter also shows that international institutions can influence the extent to which countries pursue fossil fuel subsidy reform. They do so in a variety of ways, including agenda-​setting, norm generation and diffusion, and strengthening transparency. To be clear, the precise influence and effectiveness of these activities remains to be determined, but it seems safe to say that progress would be more limited in the absence of the G20 commitment, reporting and peer review by countries through the G20 and apec, and ongoing efforts to strengthen transparency by international organisations such as the oecd, iea, and imf. This underscores the potential effects of informal international law-​ making in the absence of legally binding rules curtailing fossil fuel subsidies. At the same time, it is interesting to note that some of the challenges faced by formal international law also apply to informal international lawmaking. The fact that the G20’s commitment is voluntary and non-​legally binding has not stopped G20 policymakers from weakening the substantive contents of the 1 28 Koplow, ‘Defining and Measuring’ (n 23) 41–​43. 129 Though it should be kept in mind that even such a ‘technical’ process will inevitably need to come to terms with the political challenges inherent in defining and measuring subsidies.

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norm, leaving key terms undefined and omitting a deadline. This raises questions regarding the advantages that informal lawmaking may have vis-​à-​vis formal law. Similarly, while informal international lawmaking arguably allows some progressive states (e.g. the Friends of Fossil Fuel Subsidy Reform) to move ahead without requiring consent from other states, the same could be said for the Paris Agreement’s bottom-​up approach, which has allowed some countries to include fossil fuel subsidy reform as part of their ndc, and the wto, which has left space for a limited group of countries to adopt a Ministerial Statement. Moreover, the wto Ministerial Statement shows that states have not given up on the value of formal international lawmaking in the context of fossil fuel subsidies. Ultimately, the questions of forum and formality appear less important than implementation; both formal and informal international law appear to suffer from a lack of political will in this area. To strengthen the influence of the institutional complex as a whole, and help achieve the goals of the Paris Agreement and 2030 Agenda for Sustainable Development, it will be necessary to address a few challenges, including the definition and measurement of fossil fuel subsidies and the extension of commitments and transparency to countries not yet covered. Moreover, to strengthen the existing commitments, it will be important to imbue them with greater clarity, notably by specifying a timeline for phasing out subsidies, and offering an indication of which fossil fuel subsidies are covered. The new methodology for measuring fossil fuel subsidies under sdg 12.c is a promising development in this regard. References Aldy, Joseph E. 2017. ‘Policy Surveillance in the G-​ 20 Fossil Fuel Subsidies Agreement: Lessons for Climate Policy’, 144 Climatic Change 97. Andenas, Mads and Eirik Bjorge (eds). 2015. A Farewell to Fragmentation: Reassertion and Convergence in International Law (Cambridge University Press). Asmelash, Henok B. 2015. ‘Energy Subsidies and WTO Dispute Settlement: Why Only Renewable Energy Subsidies Are Challenged’, 18 Journal of International Economic Law 261. Asmelash, Henok B. 2016. ‘Falling Oil Prices and Sustainable Energy Transition: Towards a Multilateral Agreement on Fossil-​Fuel Subsidies’ (United Nations University World Institute for Development Economics Research). Bast, Elizabeth et al. 2015. Empty Promises: G20 Subsidies to Oil, Gas, and Coal Production (Overseas Development Institute and Oil Change International).

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van Asselt, Harro. 2014. The Fragmentation of Global Climate Governance: Consequences and Management of Regime Interactions (Edward Elgar). van Asselt, Harro 2016. ‘International Climate Change Law in a Bottom-​Up World’, 6 Questions of International Law 5. van Asselt, Harro 2019. ‘Small Countries Punching Above Their Weight: The New Initiative for an Agreement on Climate Change, Trade and Sustainability (ACCTS)’ (sdg Knowledge Hub). van Asselt, Harro and Kati Kulovesi. 2017. ‘Seizing the Opportunity: Tackling Fossil Fuel Subsidies under the UNFCCC’, 17 International Environmental Agreements: Politics, Law & Economics 357. Van de Graaf, Thijs and Kirsten Westphal. 2011. ‘The G8 and G20 as Global Steering Committees for Energy: Opportunities and Constraints’, 2 Global Policy 19. Van de Graaf, Thijs and Harro van Asselt. 2017. ‘Introduction to the Special Issue: Energy Subsidies at the Intersection of Climate, Energy, and Trade Governance’, 17 International Environmental Agreements: Politics, Law & Economics 313. Verkuijl, Cleo et al. 2019. ‘Tackling Fossil Fuel Subsidies through International Trade Agreements: Taking Stock, Looking Forward’, 58 Virginia Journal of International Law 309. Weil, Prosper. 1983. ‘Towards Relative Normativity in International Law?’ 77 American Journal of International Law 413. Whitley, Shelagh and Laurie van der Burg. 2015. Fossil Fuel Subsidy Reform: From Rhetoric to Reality (New Climate Economy). Wold, Chris et al. 2012. ‘Leveraging Climate Change Benefits through the World Trade Organization: Are Fossil Fuel Subsidies Actionable?’ 43 Georgetown Journal of International Law 635. Young, Margaret A. (ed). 2012. Regime Interaction in International Law: Facing Fragmentation (Cambridge University Press). Young, Margaret A 2017. ‘Energy Transitions and Trade Law: Lessons from the Reform of Fisheries Subsidies’, 17 International Environmental Agreements: Politics, Law & Economics 371. Zelli, Fariborz and Harro van Asselt. 2013. ‘The Institutional Fragmentation of Global Environmental Governance: Causes, Consequences, and Responses’, 13 Global Environmental Politics 1.

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Introduction

The regulation of energy activities at the international level is the result of the recognition of the increased coordination between states and non-​state actors for a number of operations,1 such as the exploitation of their energy resources, energy transit2 and transmission,3 energy trade and investment4 and energy security.5 Thus, shared responsibility arises because of cumulative effects of possible harmful outcome of their conducts, which international law seeks to prevent. The energy sector has indeed turned into a more and more internationalized field,6 carrying along the necessity to look at it through a 1 Adrian J. Bradbrook, ‘Energy Law as an Academic Discipline’, 14 Journal of Energy and Natural Resources Law 194 (1996), at 206. On the multiplicity of energy actors, see further Sijbren de Jong and Jan Wouters, ‘Institutional Actors in International Energy Law’, in Kim Talus (ed.), Research Handbook on International Energy Law (Edward Elgar, 2014), 18. 2 Danae Azaria, Treaties on Transit of Energy via Pipelines and Countermeasures (Oxford University Press, 2015); see also Ishrak A. Siddiky, ‘The International Legal Instruments for Cross-​Border Pipelines’, in Talus, Research Handbook (n 1) 308; Catherine Redgwell, ‘Contractual and Treaty Arrangements Supporting Large European Transboundary Pipeline Projects: Can Adequate Human Rights Be Secured?’, in Martha M. Roggenkamp et al. (eds), Energy Networks and the Law: Innovative Solutions in Changing Markets (Oxford: Oxford University Press, 2012), 102; and David Langlet, ‘Transboundary Transit Pipelines: Reflections on the Balancing of Rights and Interests in the Light of the Nordstream Project’, 63 International and Comparative Law Quarterly 977 (2014). 3 For example, Volker Roeben, ‘Governing Shared Offshore Electricity Infrastructure in the Northern Seas’, 62 International and Comparative Law Quarterly 839 (2013). 4 The Energy Charter Treaty, Lisbon, 17 December 1994, in force 16 April 1998, 2080 unts 95. More generally see Peter Cameron, International Energy Investment Law –​The Pursuit of Stability (Oxford University Press, 2010). 5 See Agreement on an International Energy Program, Paris, 18 November 1974, in force 19 January 1976, 1040 unts 271 (International Energy Agency Agreement or iea Agreement), generally Catherine Redgwell, ‘International Energy Security’, in Barry Barton et al (eds), Energy Security: Managing Risk in a Dynamic Legal and Regulatory Environment (Oxford University Press, 2004), 17. 6 See Kim Talus, ‘Internationalization of Energy Law’, in Talus, Research Handbook (n 1) 3; Freya Baetens, ‘Procedural Issues Relating to Shared Responsibility in Arbitral Proceedings’, 4 Journal of International Dispute Settlement 319 (2013).

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multidisciplinary lens. In this respect, this contribution focuses on the human rights route that may ground peoples’ claims against energy activities. It will first briefly discuss how the right to permanent sovereignty can legitimize peoples’ complaints in defining ownership and usage rights over natural resources. Second, it will present which type of human rights, both substantive and procedural, may be impaired by energy activities, also clarifying the obligations deriving from them. In conclusion, the article will identify, in this context, the main issues and challenges related to shared responsibility for human rights violations. 2

Right to Permanent Sovereignty over Natural Resources

The evolution of the principle of permanent sovereignty over natural resources runs in parallel with the consolidation of the peoples’ right to self-​ determination. More specifically, self-​determination provides peoples with “the right, in full freedom, to determine, when and as they wish, their internal and external political status, without external interference, and to pursue as they wish their political, economic, social and cultural development.”7 In particular, an express reference can be found in Article 1 of both the 1966 International Covenants.8 At the regional level, instead, Article 20 of the African Charter on Human and Peoples’ Rights (African Charter) designates peoples as the holders and beneficiaries of the right to self-​determination.9 In Mgwanga Gunme v Cameroon, the African Commission on Human and Peoples’ Rights (African Commission) explained that the drafters of the African Charter intentionally left the term ‘people’ undefined so as to permit flexibility in the subsequent interpretation and application of the Charter.10 The term indeed “varies in nature according to the right which is to be implemented.”11 7 8

9 10 11

Final Act of the Conference on Security and Cooperation in Europe (1975) 14 ilm 1292, art viii. Article 1, International Covenant on Economic, Social and Cultural Rights, 16 December 1966, United Nations, Treaty Series, vol. 993, p. 3 [hereinafter icescr]; Art. 1, International Covenant on Civil and Political Rights, 16 December 1966, United Nations, Treaty Series, vol. 999, p. 171 [hereinafter iccpr]. African Charter on Human and Peoples’ Rights, 27 June 1981, cab/​l eg/​67/​3 rev. 5, 21 i.l.m. 58 (1982) [hereinafter African Charter]. Communication 266/​03, Kevin Mgwanga Gunme et al v Cameroon (2009), para. 169; see also African Commission on Human and Peoples’ Rights v Republic of Kenya [hereinafter Ogiek case], ACtHPR App. 006/​2012, Judgment of 26 May 2017, para. 196. Fatsah Ouguergouz, The African Charter on Human and Peoples’ Rights: A Comprehensive Agenda for Human Dignity and Sustainable Development (Martinus Nijhoff, 2002), 211.

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It is important to note that the African Charter does not specify the precise content of the right to self-​determination enshrined in Article 20. Its economic nature is however closely connected with the people’s right to freely dispose of natural resources ex Article 21, which will be considered in more detail below. Thus, the inter-​relationship between the people’s right to self-​determination and the individual rights guaranteed by the Charter is of particular importance, as these different rights are intended to reinforce one another. Subsequently, while the realization of the right to self-​determination is, according to the UN Human Rights Committee, “an essential condition for the effective guarantee and observance of individual rights,”12 so too a specific community may only freely determine its political status and pursue its economic and social development on the condition that other African Charter’s rights are also protected. Yet, there are legal grounds to affirm that people are entitled to permanent sovereignty over natural resources.13 First, in 1962, the General Assembly adopted Resolution 1803 (xvii) on Permanent Sovereignty over Natural Resource clearly stated that peoples are beneficiaries of the right to permanent sovereignty over natural resources.14 Together with the United Nations Declaration on the Rights of Indigenous Peoples of 2007 (undrip), which vests peoples with right to consultation in decision making and to benefit sharing, it marked a significant development towards the recognition of the indigenous rights to land and natural resources.15 The individual and people’s rights to natural resources are also recognised in regional human rights treaties, under the African Charter16 and the American Convention.17 In particular, Article 21(1) of the African Charter designates the people as the exclusive holder and beneficiary of the right to dispose freely of natural resources and wealth and, thus, each State has the obligation to ensure that people fully enjoy this right. In 12

UN Human Rights Committee (‘hrc’), General Comment No 12: Article 1 (Right to Self-​ determination), The Right to Self-​determination of Peoples, UN Doc hri/​g en/​1/​Rev.1 at 12 (1994), para. 1. 13 See, e.g., African Charter; see also Emeka Duruigbo, ‘Permanent Sovereignty and Peoples’ Ownership of Natural Resources in International Law’, 38 George Washington International Law Review 33 (2006), 38–​ 67; Wentworth Ofuatey-​ Kodjoe, ‘Self-​ Determination’ in Oscar Schachter and Christopher C. Joyner (eds), United Nations Legal Order (Cambridge: Cambridge University Press, 1995) 349, 364. 14 ga Resolution 1803 (xvii), 14 December 1962, [hereinafter rpsnr], para 1. 15 See Article 29, United Nations Declaration on the Rights of Indigenous Peoples, ga Res 61/​295, un gaor, 61st sess, 107th plen mtg, Agenda Item 68, Supp No 49, UN Doc a/​r es/​ 61/​295 (2 October 2007) [hereinafter undrip]. 16 Art. 21, African Charter. 17 Art. 21, American Convention on Human Rights, ‘Pact of San Jose’, Costa Rica, 22 November 1969 [hereinafter American Convention].

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particular, the jurisprudence relating to this provision leaves no doubt that the term ‘peoples’ refers to the entire population of a State’s territory.18 The main international agreement recognising indigenous people’s rights to land and natural resources currently in force is, instead, the International Labor Organization (ilo) Convention 169.19 The latter provides for the recognition of indigenous land tenure systems, which are typically based on customary rules. Article 14(1) of ilo Convention 169 affirms that “the rights of ownership and possession of [indigenous peoples] over the lands which they traditionally occupy shall be recognized” and that measures shall be adopted in specific cases to protect the right of the peoples concerned to make use of lands to which they have traditionally had access for their activities. Under ilo Convention 169, indigenous land and resource rights are of a collective character, including a combination of possessive use and management rights. Moreover, at the international level, Article 1(2) of the two international human rights covenants of 1966 recalls that the interests of the people must be prioritised and protected when interpreting and implementing the right of free disposal of natural resources.20 In connection with the International Covenant on Economic, Social and Cultural Rights (icescr) provisions, it has been therefore noted that “self-​determination and resource sovereignty are the rights of a ‘people’, not the legal person of the state; Article 25 may have a role in negativing international obligations which conflict with the rights of the ‘people’ under Article 25 (and [Article] 1).”21 However, today, the main challenges to indigenous people’s interests over their land rights and entitlements derive from possible conflicts with those of the state and other private entities, mostly considering that, in many legal systems, the state detains the ownership over subsoil resources.22 The recognition of peoples’ entitlement to permanent sovereignty over natural resources could however form the basis of a complaint against a government’s decision to use them against “national development and [the] wellbeing of the people of the

18

Communication no. 328/​06, Front for the Liberation of the State of Cabinda v Republic of Angola (2013), para 130 (emphasis added); Ogiek case, para. 198. 19 Indigenous and Tribal Peoples Convention, ilo, 27 June 1989 [hereinafter C169]. 20 Manfred Nowak, UN Covenant on Civil and Poliical Rights: CCPR Commentary (Kehl am Rhein: Engel, 2nd ed., 2005), 801. 21 Ben Saul et al, The International Covenant on Economic, Social and Cultural Rights: Commentary, Cases and Materials (Oxford University Press, 2014), 111–​2. 22 See Yinka Omorogbe and Peter Oniemola, ‘Property Rights in Oil and Gas under Dominial Regimes’ in Aileen McHarg et al. (eds), Property and the Law in Energy and Natural Resources (Oxford University Press, 2010), 118.

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state.”23 In this respect, it is worth recalling that in 2004 the Constitutional Court of South Africa, by taking into account indigenous law and traditional occupation and use, held that ownership of, and thus entitlement over, subsoil and minerals may vest collectively in indigenous peoples.24 3

Human Rights Challenges to Energy Projects

The right of people to permanent sovereignty over natural resources is not only interlinked with the collective right to self-​determination but also to other related individual or collective substantive (general and environmental) human rights and procedural environmental rights. In particular, the latter are of increasing relevance in securing, inter alia, access to information, participation in decision-​ making, and access to justice. These two typologies of rights, general and environmental, of individual or collective nature,25 will be described in more detail below. 3.1 General Human Rights Two main groups of general individual and collective rights may be impaired by energy activities. First, both the right to life and the right to health have found recognition and protection in the Universal Declaration of Human Rights (udhr),26 regional charters27 and national instruments.28 The right to 23

rpsnr, para 1; Jona Razzaque, ‘Resource Sovereignty in the Global Environmental Order’ in Elena Blanco and Jona Razzaque (eds), Natural Resources and the Green Economy: Redefining the Challenges for People, States and Corporations (Martinus Nijhoff, 2012) 81, 83. 24 Alexkor Ltd v Richtersveld Community [2004] 5 sa 460 (Constitutional Court of South Africa) 64. 25 See Gillian Triggs, ‘The Rights of Indigenous Peoples to Participate in Resource Development: An International Legal Perspective’ and Catherine Redgwell, ‘The International Law of Public Participation: Protected Areas, Endangered Species, and Biological Diversity’ in Donald N. Zillman, Alistair Lucas, and George Pring (eds), Human Rights in Natural Resources Development (Oxford University Press, 2002), ­chapters 3 and 5. 26 Arts. 3 and 25, Universal Declaration of Human Rights, 10 December 1948, 217 A (iii) [hereinafter udhr]. 27 On right to life see Article 4, African Charter; Art. 5, Arab Charter on Human Rights, 15 September 1994 [hereinafter Arab Charter]; Art. 4, American Convention; Art. 2, European Convention for the Protection of Human Rights and Fundamental Freedoms, as amended by Protocols Nos. 11 and 14, 4 November 1950, ets 5 [hereinafter echr]; on the right to health see Art. 16, African Charter; Art. 39, Arab Charter. 28 See, for instance, Section 33(1) of the Constitution of the Federal Republic of Nigeria (cfrn), 1999, which provides that “every person has a right to life, and no one shall be deprived intentionally of his life, save in execution of the sentence of a court in respect of a criminal offence of which he has been found guilty in Nigeria.”

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food is provided for as well under other relevant legal frameworks.29 In the energy context, for instance, a case of gas flaring constitutes an example of possible violation of these rights. It has had known effects on the Ogoni people in Nigeria, where also noise pollution or black dust that settled in people’s homes have highly undermined their quality of life.30 In serac v Nigeria,31 the African Commission found indeed a violation of the right to life (Article 4), the right to health (Article 16) and the right to economic, social, and cultural development (Article 22). In Jonah Gbemre v Shell Nigeria Limited,32 instead, the court specifically declared that the continued gas flaring in the community was a violation of their fundamental right to life. Second, international law impinges upon the operation of private property rights through recognition of the right to property as a human right. The latter has indeed found its first protection in Article 17 of the udhr and subsequently in other international and regional instruments.33 In the context of natural resources development, a property right is viewed as a mechanism for allocating access to material resources.34 In the landmark case Awas Tingni v. Nicaragua, decided by the Inter-​American Court of Human Rights (ICtHR) in 2001,35 the Court held that the Nicaraguan government was in breach of

29

30 31 32 33

34 35

Provided for under Art. 25, udhr; Arts. 11 and 12 icescr; Art. 38, Arab Charter; Art. 12, Additional Protocol to the American Convention on Human Rights in the area of Economic, Social, and Cultural Rights [hereinafter Protocol of San Salvador], 6 November 1999, A-​52; Resolution on the Right to Food and Food Insecurity in Africa, achpr/​Res. 374 (lx) 2017. See ‘Nigeria: Petroleum, Pollution and Poverty in the Niger Delta’, Amnesty International Publications, 30 June 2009, afr 44/​017/​2009. Social and Economic Rights Action Center (SERAC) and others v. Nigeria, African Commission, Application no. 155/​96 (2001–​2002) [hereinafter Ogoni Case]. Jonah Gbemre v Shell Petroleum Development Corporation of Nigeria Limited (2005) ahrlr 151 (Nig HC2005), fhc/​b /​c s/​5 3/​05 Federal High Court Benin Judicial Division, 14 November 2005. See, Article 5(v), International Convention on the Elimination of All Forms of Racial Discrimination, 21 December 1965, United Nations, Treaty Series, vol. 660; Arts. 15(2), 16(1) (h), Convention on the Elimination of All Forms of Discrimination against Women, 18 December 1979, a/​r es/​3 4/​1 80; Arts. 14, 16, ilo C169; Art 1 of Protocol No 1, echr; Article 17 of the Charter of Fundamental Rights of the European Union, 26 October 2012, 2012/​ C 326/​02; Article 21, American Convention; Arts. 13(3), 14 and 21, the African Charter; Art. 26(1), the Commonwealth of Independent States Convention on Human Rights and Fundamental Freedoms 1995; Art. 31, the Arab Charter on Human Rights. Christopher Rodgers, ‘Nature’s Place? Property Rights, Property Rules and Environmental Stewardship’, Cambridge Law Journal 68(3) (2009), 550–​574. Mayagna (Sumo) Awas Tingni Community v. Nicaragua, ICtHR Series C No. 79, Judgment (31 August 2001) [hereinafter Awas Tingni v. Nicaragua], paras. 145–​55.

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the right to property of the Awas Tingni community36 for having provided a Korean investor with a logging concession, which included the right to extract wood from a forest in their traditional land.37 3.2 Environmental Human Rights 3.2.1 Substantive Rights Three specific environmental human rights fall within this framework. First, the human right to clean water and sanitation is regarded as having an environmental nature,38 although it can be considered “halfway between human rights law and environmental law.”39 In the energy context, the right to water and sanitation of local communities could be affected in various instances, such as in case of oil spills in water courses, which would contaminate drinking water and damage fisheries,40 in the case of chemical wastes which could contaminate groundwater and transnational waterways, as it happened in the Niger Delta or, as it happened in the West Pakistan Salt Miners Labour Union case,41 when poisonous waste water discharged from the mines pollutes a water supply source creating a health hazard.

36 37

38

39 40 41

Ibid., para. 155. Ibid., para. 149; similarly, see Indigenous People Kichwa of Sarayaku v. Ecuador, ICtHR Series C No. 245 [hereinafter Sarayaku v Ecuador], Judgment (merits and compensation) (27 June 2012), paras. 145–​7 (right to property) and 159–​68 (participatory rights). See Case of the Kuna Indigenous People of Madungandí and the Emberá Indigenous People of Bayano and their members v. Panama, ICtHR Series C No. 284 (Preliminary Objections, Merits, Reparations and Costs), Judgment (14 October 2014), paras. 111–​13. See also Kaliña and Lokono Peoples v. Suriname, ICtHR Case No. 12.639 (Merits, Reparations and Costs), Judgment (25 November 2015), paras. 129–​32; Saramaka People v. Suriname, ICtHR Series C No. 172, Judgment (28 November 2007), paras. 80–​6, para. 12. See Inga T. Winkler, The Human Right to Water (Hart, 2012); Pierre Thielboerger, The Human Right(s) to Water. The Multi-​Level Governance of a Unique Human Right (Springer, 2014); Malcolm Langford and Anna Russell (eds.), The Right to Water. Theory, Practice and Prospects (Cambridge University Press, 2017). Pierre-​Marie Dupuy and Jorge E. Vinuales, International Environmental Law, 2nd Edit. (Cambridge University Press, 2018), 380. See ‘Nigeria: Petroleum, Pollution and Poverty in the Niger Delta’ (n 30). West Pakistan Salt Miners Labour Union v The Director, Industries and Mineral Development, Supreme Court, 12 July 1994. See also Dubetska and Others v Ukraine, ECtHR, Fifth Section, 10 February 2011; Xákmok Kásek Indigenous Community v Paraguay, IACHR, 26 August 2010; Comunidades Indígenas del Cantón de Sisimitepet y Pushtan del Municipio de Nahuizalco c/​ Presidencia de la República de El Salvador y Otros, Tribunal Latinoamericano del Agua, 12 September 2008; Matsipane Mosetlhanyane and Gakenyatsiwe Matsipane v The Attorney General, Court of Appeal (Lobatse), 27 January 2011.

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Moreover, a right to development has been articulated in the (non-​binding) U.N. Declaration on the Right to Development, which seeks to impose on states “primary responsibility for the creation of national and international conditions favourable” to its realization.42 The use of ‘primary’ here infers that this responsibility is shared with other actors. In particular, the right to development has also been considered in many views of complaints mechanism. In the Ogoni Case, the African Commission found that the right of peoples to dispose freely of their own natural resources had been violated, as had their right to “ecologically sustainable development,”43 enshrined in the African Charter. In the Centre for Minority Rights Development (Kenya) and Minority Rights Group International on behalf of Endorois Welfare Council v. Kenya,44 the African Commission found a violation of the right to development, recognizing the African Convention’s endorsement of peoples’ rights and noting that: “the right to development is a two-​pronged test, that it is both constitutive and instrumental, or useful as both a means and an end. A violation of either the procedural or substantive element constitutes a violation of the right to development.”45 Interestingly, the Commission added that recognising the right to development implied fulfilling “five main criteria: it must be equitable, non-​discriminatory, participatory, accountable, and transparent, with equity and choice as important, over-​arching themes in the right to development.”46 Third, given the environmental impact of energy activities, a potentially even more fertile source of case law is human rights challenges to energy operations on the basis of impairment of the right to a particular quality of environment. However, under general human rights law, there is limited express recognition of a substantive right to environment and thus it remains mostly at the regional level.47 The UN formally recognised the right to a clean 42

Article 3(1), Declaration on the Right to Development, UN Doc. a/​r es/​4 1/​1 28 (4 December 1986); Yinka Y. Omorogbe, ‘Policy, Law, and the Actualization of the Right of Access to Energy Services’, in Talus, Research Handbook (n 1) 361. 43 Ogoni Case, paras 52-​55. 44 Centre for Minority Rights Development (Kenya) and Minority Rights Group International on behalf of Endorois Welfare Council v. Kenya, African Commission Application no. 276/​ 2003 [hereinafter Endorois Case]. 45 Ibid., para. 277. 46 Ibid. 47 See, generally, Alan E. Boyle and Michael R. Anderson (eds), Human Rights Approaches to Environmental Protection (Oxford University Press, 1998); John Merrills, ‘Environmental Rights’ in Daniel Bodansky, et al. (eds), Oxford Handbook of International Environmental Law (Oxford University Press, 2007); and Alan Boyle, ‘Human Rights and the Environment: Where Next?’ in Ben Boer (ed.), Environmental Law Dimensions of Human Rights (Oxford University Press, 2015).

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environment in 1972 and, subsequently, some regional instruments have made similar provisions.48 Most national constitutions now recognise this right, while many grant a justiciable human right to a clean environment to their citizens.49 In particular, such recognition is found in Article 24 of the African Charter which provides that “[a]‌ll peoples shall have the right to a generally satisfactory environment favourable to their development,” imposing a clear obligation upon a government. First, it “requires the state to take reasonable and other measures to prevent pollution and ecological degradation, to promote conservation, and to secure an ecologically sustainable development and use of natural resources.”50 The right to enjoy the best attainable state of physical and mental health enunciated in Article 16(1) of the African Charter and the right to a general satisfactory environment favourable to development (Article 24) require governments “to desist from directly threatening the health and environment of their citizens.”51 Thus, the state is under an obligation to respect, which entails largely non-​interventionist conduct. Second, the government compliance must also include “ordering or at least permitting independent scientific monitoring of threatened environments, requiring and publicising environmental and social impact studies prior to any major industrial development, undertaking appropriate monitoring and providing information to those communities exposed to hazardous materials and activities and providing meaningful opportunities for individuals to be heard and to participate in the development decisions affecting their communities.”52 Importantly, Article 24 of the African Charter combines recognition of the substantive right with recognition of an actio popularis, thus reducing the obstacle of standing to enforce the substantive right. It should also be noted that, as recalled in the 2005 Fadeyeva case before the European Court of Human Rights (EctHR), a dispute involving major long-​term air pollution from an adjacent factory complex, the nature of the obligation upon the State is therefore not merely a negative obligation of non-​interference but a positive obligation to act and to enforce, such as in the case of zoning legislation and emission limit requirements.53 48 49

50 51 52 53

See Art. 24, African Charter; Art. 38, the Arab Charter. For example, Ecuador, Bolivia and Kenya established justiciable environmental rights. States such as India, Spain, Ghana, Philippines, France, Russia, Turkey, Argentina, Brazil, Venezuela, Nigeria, Ethiopia, South Africa, Kenya, South Korea, recognize the right to environment. Ogoni Case, paras 52. Ibid,. para 52. Ibid., para 53. Fadeyevav Russia, ECtHR Case 55723/​00, 9 June 2005.

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3.2.2 Procedural Environmental Rights Public participation refers to the procedure of involving members of the public in decision and policy making activities of institutions in charge of policy development. It typically arises in three forms: access to information; public participation in decision-​making; and access to justice.54 Each form will be examined below. First, the right to access information refers to the public entitlement to seek and receive information related to natural resources.55 Accordingly, states should make publicly available all their data on public and private developers of natural resources. These rights are recalled in regional as well as international legal frameworks.56 In particular, Article 9 of the African Charter establishes in paragraph 1 that “[e]‌very individual shall have the right to receive information.” The latter has been interpreted expansively by the African Commission as encompassing the rights to access and to seek information. Thus, the Declaration of Principles on Freedom of Expression in Africa, adopted in 2002 by the African Commission, states in Article iv.1 that: “Public bodies hold information not for themselves but as custodians of the public good and everyone has a right to access this information, subject only to clearly defined rules established by law.”57 The Declaration further elaborates on the obligations incumbent upon States to give effect to this right, including: the obligation to guarantee the right by law; the duty “actively to publish important information of significant public interest” even in the absence of a request; and the duty to allow appeals in any case of refusal to disclose information.58 The right to information is however not unlimited, since restrictions to this right must be “provided by law, serve a legitimate interest and be necessary in a democratic society.”59 At the international level, instead, Article 19(2) of the International Covenant on Civil and Political Rights (iccpr) protects the right “to seek, receive and impart information.” According to General Comment No 34 of the 54 See George Pring and Susan Y. Noé, ‘The Emerging International Law of Public Participation Affecting Global Mining, Energy, and Resources Development’, in Zillman, Lucas, and Pring, Human Rights in Natural Resource Development (n 25) 28. 55 See generally Zillman, Lucas, and Pring, Human Rights in Natural Resource Development (n 25). 56 Art. 19, udhr; Art. 9, African Charter; Art. 32(1), Arab Charter; Art. 13, American Convention on Human Rights; Art. 10, echr. 57 Declaration of Principles on Freedom of Expression in Africa, 23 October 2002. 58 Ibid,. Art. iv(2). 59 Communication 379/​09, Monim Elgak, Osman Hummeida and Amir Suliman (represented by fidh and omct) v Sudan, para 114.

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UN Human Rights Council (hrc), this provision: “embraces a right of access to information held by public bodies. Such information includes records held by a public body, regardless of the form in which the information is stored, its source and the date of production.”60 Under the iccpr, the right to information is subject to restrictions “provided by law,” on the same conditions as the right to freedom of expression (Article 19(3)). Limitations to this right can only be established for two reasons: respect of the rights or reputations of others, or protection of national security, of public order, or of public health or morals.61 Second, the indigenous peoples’ right to free, prior, and informed consent can be regarded as an extension of the right to self-​determination. It implies that indigenous peoples should be consulted in the event that decisions made by national authorities and others could affect them and their traditional lands.62 At the international level, Articles 4(1) and 9 of the Aarhus Convention63 oblige state parties to ensure that public authorities’ environmental information is made available to the public. In the Fédération Départementale case, the court held that everyone has the right to participate in the public decision-​ taking process likely to affect the environment.64 Moreover, the right to consultation is also enshrined in the ilo Convention 169, which employs different standards ranging from consultation to participation and, in the case of relocation, informed consent.65 According to its Article 6(2), consultation must be undertaken “in good faith and in a form appropriate to the circumstances, with the objective of achieving agreement or consent.” It also adds that states shall guarantee the protection of indigenous peoples’ rights to natural resources throughout their territories, including their right “to participate in the use, 60 61 62

63 64

65

un hrc, General Comment No 34: Article 19 (Freedoms of Opinion and Expression), Doc No ccpr/​c /​g c/​3 4, 102nd session, 11–​29 July 2011, para 18. un hrc, General Comment No 34: Article 19 (Freedoms of Opinion and Expression), Doc No ccpr/​c /​g c/​34, 102nd session, 11–​29 July 2011, para 21. James Anaya, ‘Indigenous Peoples’ Participatory Rights in relation to Decisions about Natural Resource Extraction: The More Fundamental Issue of What Rights Indigenous Peoples Have in Lands and Resources’, 22 Arizona Journal of International and Comparative Law 7 (2005). See Convention on Access to Information, Public Participation in Decision-​Making and Access to Justice in Environmental Matters, opened for signature 25 June 1998, 2161 unts 447, (entered into force 30 October 2001) Art. 3 [hereinafter Aarhus Convention]. Fédération Départementale des Syndicats d’Exploitants Agricoles du Finistère [2012] Conseil constitutionnel 2012-​270 qpc, in WaterLex and wash United, The Human Rights to Water and Sanitation in Courts Worldwide: A Selection of National, Regional and International Case Law (WaterLex 2014) 197. Art. 15(1), ilo Convention 169 and Art. 19, undrip.

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management and conservation of [those] resources.”66 Participation at the broadest level of governance (including in national parliamentary debates) must not supplant local participation in connection with specific projects.67 However, a central concern is the scope and extent of the duty of consultation. It can be argued that the state duty to give effect to the indigenous right to prior and informed consent is largely dependent on the nature of the substantive rights at stake. The undrip sets the obligation of ‘prior and informed consent’, calling on states to prohibit forcible removal of indigenous peoples from their lands and declaring that “[n]‌o relocation shall take place without the free, prior and informed consent of the indigenous peoples concerned.”68 It also incorporates the right to participation in decision-​making in matters which would affect their rights,69 before the adoption and implementation of legislative or administrative measures that may affect them.70 Therefore, Anaya, on this basis, has argued that international law is developing to require consent by indigenous peoples where their property rights are affected by natural resource extraction.71 This is recognised in the undrip72 and under the law in some countries, such as the law applying to mining in the Northern Territory under the Aboriginal Land Rights (Northern Territory) Act 1976 (Cth).73 However, the inadequacy of laws as well as lack of community procedures74 still constitute a barrier to the full implementation of the right to prior and informed consent at the domestic level. A third procedural right is represented by the right to access justice. At least five international and regional conduits can be pursued by litigants in their quest for human rights’ (and environmental) justice. First, the compliance and monitoring bodies established under international human rights treaties can receive submissions in this respect. The hrc, for instance, has continued to favour an interpretation of Article 27 of the

66 Art. 15(1), ilo Convention 169. 67 Bartolomé Clavero, ‘The Indigenous Rights of Participation and International Development Policies’, 22 Arizona Journal of International and Comparative Law 41 (2005), 49. 68 undrip, UN Doc a/​r es/​6 1/​295, annex art 10. 69 Ibid,. Art. 18. 70 Ibid,. Art. 19. 71 Anaya, ‘Indigenous Peoples’ (n 62) 17. 72 Art. 32(2), undrip. 73 Art. 11(A)(3) Aboriginal Land Rights (Northern Territory) Act 1976 (Cth). 74 Anne Perrault, ‘Facilitating Prior Informed Consent in the Context of Genetic Resources and Traditional Knowledge’, (2004) 4(2) Sustainable Development Law and Policy 21 (2004), 23.

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iccpr that includes indigenous land, cultural and language rights75 and activities related to the use of the land as constituting an essential element of indigenous culture.76 In a similar vein, the U.N. Committee on Economic, Social and Cultural Rights (uncescr) has upheld indigenous natural resource rights arguing that “the traditional lands of indigenous peoples have been reduced or occupied, without their consent, by timber, mining and oil companies, at the expense of the exercise of their culture and the equilibrium of the ecosystem.”77 It has therefore recommended that states “ensure the participation of indigenous peoples in decisions affecting their lives,”78 requiring governments to consult and seek the people’s consent.79 Second, regional human rights bodies have been sympathetic to indigenous peoples’ land and natural resource rights. In particular, inter-​American human rights bodies, have in general taken a progressive stance on indigenous peoples’ land rights. For instance, in Sawhoyamaxa Indigenous Community v Paraguay (‘Sawhoyamaxa’)80 the Inter-​American Court ruled that Paraguayan legislation failed to provide an effective judicial remedy that protected legitimate land claims laid by indigenous communities.81 This constituted a violation, per se, of the American Convention,82 while the displacement and expropriation of indigenous’ lands amounted to a violation of the right to life.83 In a more recent case Kichwa Indigenous People of Sarayaku v Ecuador,84 75 76

77 78 79 80 81 82 83 84

See e.g., un hrc, Communication No 24/​1977: Canada, 13th sess, UN Doc ccpr/​c /​1 3/​d /​ 24/​1 977 (30 July 1981) [hereinafter Lovelace v Canada]. un hrc, Communication No 511/​1992, 52nd sess, UN Doc ccpr/​c /​5 2/​d /​511/​1992 (8 November 1994); un hrc, Communication No 671/​1995, 58th sess, UN Doc ccpr/​c /​5 8/​ d/​671/​1995 (30 October 1996); see also Anaya, ‘Indigenous Peoples’ (n 62) 12; un hrc, Communication No 197/​1985, 33rd sess, UN Doc ccpr/​c /​3 3/​d /​1 97/​1985 (27 July 1988). In this case, the hrc interpreted the decision in Lovelace v Canada as affirming that “a restriction upon the right of an individual member of a minority must be shown to have a reasonable and objective justification and to be necessary for the continued viability and welfare of the minority as a whole,” para 9.8. Committee on Economic, Social and Cultural Rights, Report on the Twenty-​Fifth, Twenty-​ Sixth and Twenty-​Seventh Sessions, UN Doc E/​2002/​22 and E/​C/​12/​2001/​17 (2002) [761]. Jan Lüdert, Deliberating Justice –​ Indigenous Peoples, the World Bank and the Principle of Free Prior Informed Consent (grin, 2007) 27. Committee on Economic, Social and Cultural Rights, Concluding Observations of the Committee on Economic, Social and Cultural Rights: Columbia 11/​30/​2001, 27th sess, UN Doc e/​c .12/​1 /​Add.74 (6 December 2001) [33]. [2006] Inter-​Am Court hr (ser C) No 146. Ibid., para 109–​111. Ibid., para 112. See also para 128. Ibid., para166. Sarayaku v Ecuador.

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the Court assessed whether Ecuador had violated the property rights of the Kichwa people of Sarayaku by providing a private company an oil exploration and exploitation concession which partially covered ancestral lands, without a consultation process or their free, prior and informed consent. The Court found that Ecuador had breached Article 21 of the American Convention,85 without however elaborating further on the obligations to consult and to obtain consent in the context of large-​scale extractive industry projects.86 Third, one of the most significant developments in the field of international law has been the emergence of non-​compliance procedures under various multilateral treaties.87 For instance, parties to ilo Convention 169 have to report on measures taken to ensure its implementation to the Committee of Experts on the Application of Conventions and Recommendations (Compliance Committee). The Compliance Committee may then take specific action against non-​compliance and has the power to submit ‘observations’ and make ‘direct requests’. For example, in a complaint concerning the Embera Katio people of Colombia, the Compliance Committee found that the duty to consult had not been fully complied with regard to an oil exploration concession in Ecuador and Colombia88 and affirmed that the concessions had been granted without fully consulting indigenous peoples concerned.89 It also recalled Article 6(2) of ilo Convention 169 to clarify that consultations must be in good faith, through

85 Ibid., para 232. 86 See Efrén C. Olivares Alanís, ‘Indigenous Peoples’ Rights and the Extractive Industry: Jurisprudence from the Inter-​American System of Human Rights’, 5 Goettingen Journal of International Law 187 (2013), 212. 87 The first noncompliance procedure was regulated in the Montreal Protocol on Substances that Deplete the Ozone Layer, opened for signature 16 September 1987, 1522 unts 3 (entered into force 1 January 1989), Art. 8. 88 See Governing Body, International Labour Organization, Report of the Committee Set Up to Examine the Representation Alleging Non-​Observance by Colombia of the Indigenous and Tribal Peoples Convention, 1989 (No 169), Made under Article 24 of the ilo Constitution by the Central Unitary Workers’ Union (cut), 282nd sess, ilo Doc gb.282/​ 14/​3 (November 2001). The purpose of such consultations is to guarantee ‘with the participation of the peoples concerned, coordinated and systematic action to protect their rights and to guarantee respect for their integrity’, Governing Body, International Labour Organization, Report of the Committee Set Up to Examine the Representation Alleging Non-​Observance by Colombia of the Indigenous and Tribal Peoples Convention 1989 (No 169), Made under Article 24 of the ilo Constitution by the Central Unitary Workers’ Union (cut) and the Colombian Medical Trade Union Association, 282nd sess, ilo Doc gb.282/​14/​4 (November 2001), para 58. 89 Ibid, para 40.

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culturally appropriate procedures and with the objective of reaching an agreement with the affected indigenous peoples.90 Fourth, at the domestic level, the picture is different and will vary from State to State. For instance, litigation under the United States Alien Tort Claims Act has been pursued by non-​state actors seeking to challenge the activities of energy companies allegedly violating human rights law, despite none of them has succeeded in surmounting obstacles to the exercise of jurisdiction by United States (U.S.) courts.91 The US Supreme Court in Jesner at al v Arab Bank Plc held that the federal courts are not available to aliens in actions against foreign corporations.92 On the contrary, the UK Court of Appeal, in the case Lungowe and others v. Vedanta Resources Plc and Konkola Copper Mines Plc, found that the claim of a group of Zambian Villagers related to environmental damage and human rights harm caused by mining operations could proceed against the appellants in the United Kingdom (UK). The U.K. Court of Appeal rejected the appeal93 brought by UK-​based Vedanta Resources Plc (Vedanta Resources) and its Zambian subsidiary Konkola Copper Mines (kcm), against a decision dismissing certain jurisdictional challenges brought by both of them.94 90

The Compliance Committee has adopted a similar stance in other cases involving disputes over natural resources: see, e.g., Governing Body, International Labour Organization, Report of the Committee Set Up to Examine the Representation Alleging Non-​Observance by Mexico of the Indigenous and Tribal Peoples Convention, 1989 (No 169), Made under Article 24 of the ilo Constitution by the Union of Workers of the Autonomous University of Mexico (stunam) and the Independent Union of Workers of La Jornada (sitrajor), 289th sess, ilo Doc gb.289/​17/​3 (March 2004) [102]. 91 in Kiobel v Royal Dutch Petroleum 133 S Ct 1659 (2013); ‘Agora: Reflections on Kiobel’, 107(4) American Journal of International Law 829 (2013); Paul David Mora, ‘The Alien Tort Statute After Kiobel: The Possibility for the Unlawful Assertions of Universal Civil Jurisdiction Still Remains’, 63(2) International Comparative Law 699 (2014); more generally, Harold H. Koh, ‘Separating Myth from Reality about Corporate Responsibility Litigation’, 7(2) Journal of International Economic Law 263 (2004). 92 Jesner at al v Arab Bank Plc No 16-​499, US Supreme Court, April 28, 2018. 93 [2017] ewca Civ 1528. In 2019, the Supreme Court unanimously held that Vedanta Resources plc could be sued in England, see Lungowe v Vedanta Resources plc [2019] UKSC 20. 94 The Court of Appeal decision in Vedanta followed a split in the High Court: in Vedanta at first instance, Coulson lj had permitted the claim to go ahead (and that was upheld in the Court of Appeal, ‘CoA’), whereas in Okpabi and others v Royal Dutch Shell Plc and another [2018] ewca Civ 191 (Okpabi), a similar claim had failed before Fraser lj, who upheld challenges to the jurisdiction of the English courts over claims by victims of oil leaks from pipelines in the Niger Delta and held that the claimants had not an arguable case that the parent company owed a duty of care. In Okpabi, the Court of Appeal dismissed by majority an appeal by the claimants. In 2021, the UKSC unanimously allowed

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Lastly, mostly in the context of large energy infrastructure projects, human rights standards may also be indirectly enforced through loan conditionality. In particular, in its lending practices, the World Bank demands conformity with specific ilo conventions, including the one on forcible resettlement of populations.95 Moreover, non-​state actors in the borrower country may also seek internal review by the Inspection Panel of the World Bank in cases of failure to comply with policies on environmental and human rights protection. Indeed, for instance, the Narmada dam in India was object of a controversy in this respect that ultimately led the World Bank to set up its inspection panel procedure as a mechanism to guarantee compliance with its regulations and procedures.96 4

Challenges to Shared Responsibility

In many of the scenarios examined above, state and non-​state actors may share responsibility for their contribution to harmful outcomes and possible violations of human rights. Redgwell has identified several contexts which might serve to illustrate its potential as a rich source of shared responsibility in practice, namely: access to energy; energy as a shared resource; shared transboundary infrastructure, specifically its use for energy transit; international cooperation to ensure energy security; and damage caused by energy activities.97 If shared responsibility of states and private actors98 is particularly

the claimants’ appeal, holding that it was reasonably arguable that Royal Dutch Shell Plc owed the claimants a duty of care, see Okpabi and others (Appellants) v Royal Dutch Shell Plc and another (Respondents) [2021] UKSC 3, on appeal from: [2020] ewca Civ 191. 95 World Bank, Operational Guidance on Environment Impact Assessment, op 4.01, January 1999 (revised in April 2013); see also the discussion in Triggs, ‘The Rights of Indigenous Peoples’ (n 25). 96 Alix Gowlland-​Galtieri, ‘The Environmental Accountability of the World Bank to Non-​ State Actors: Insights from the Inspection Panel’, 72 British Year Book of International Law 213 (2002). 97 Catherine Redgwell, ‘Energy’, in André Nollkaemper and Ilias Plakokefalos (eds), The Practice of Shared Responsibility in International Law (Cambridge University Press, 2017), 1071–​1096. 98 André Nollkaemper, ‘Concurrence between Individual Responsibility and State Responsibility in International Law’, 52 International and Comparative Law Quarterly 615 (2003); Jean d’Aspremont, et al., ‘Sharing Responsibility between Non-​State Actors and States in International Law: An Introduction’, 62 Netherlands International Law Review 49 (2015).

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evident in liability regimes for oil pollution and nuclear damage99 which take account of the central role of non-​state actors (ship and cargo owners; nuclear operators), it has been object of debate mostly in the human rights context, with (unsuccessful) attempts to hold corporations responsible for violations –​either directly or concurrently with state(s).100 Two main considerations shall be highlighted in this respect. First, notwithstanding claims as to their international legal effect,101 instruments setting human rights standards for private entities represent non-​binding instruments. Common examples are the U.N. Sub-​commission on the Promotion and Protection of Human Rights’ Norms on the Responsibilities of Transnational Corporations and other Business Enterprises with respect to Human Rights102 and, more recently, the 2011 Guiding Principles on Business and Human Rights.103 They have been regarded as ‘circuitous’ and ‘gluey’ legal developments104 and, as of today, attempts to directly apply such standards to private entities have remained at the hortatory level.105 Second, if responsibility of states and legal persons is shared, the contents, scope and limits of their respective responsibility remain however far from clear. A good example can be found in the 2006 Draft Principles on the Allocation of Loss in the Case of Transboundary Harm Arising Out of Hazardous Activities, which explicitly provide that measures of compensation foreseen by the state of origin “should include the imposition

99 100 101 1 02 103

1 04 105

See further, Günther Handl, ‘Preventing Transboundary Nuclear Pollution: A Post-​ Fukushima Legal Perspective’, in S. Jayakumar et al. (eds), Transboundary Pollution: Evolving Issues of International Law and Policy (Edward Elgar, 2015), 190. Andrea Gattini, ‘Breach of International Obligations’, in André Nollkaemper and Ilias Plakokefalos (eds), Principles of Shared Responsibility in International Law: An Appraisal of the State of the Art (Cambridge University Press, 2014), 54–​9. See, with respect to the 2003 norms, David Weissbrot and Muria Kruger, ‘Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights’, 97 American Journal of International Law 901 (2003). e/​c n.4/​Sub.2/​2003/​12/​Rev.2, 26 August 2003. Guiding Principles on Business and Human Rights: Implementing the United Nations ‘Protect, Respect and Remedy Framework (2011) a/​h rc/​17/​31, endorsed by the Human Rights Council by hrc Res 17/​4 (16 June 2011); in the energy context see the analysis by Rae Lindsay et al., ‘Human Rights Responsibilities in the oil and gas sector: Applying the UN Guiding Principles’, 6 Journal of World Energy Law and Business 2–​66 (2013). Gattini, ‘Breach of International Obligations’ (n 100) 57. Sean D. Murphy, ‘Taking Multinational Corporate Codes of Conduct to the Next Level’, 43 Columbia Journal of Transnational Law 489 (2005); Carlos M. Vasquez, ‘Direct vs Indirect Obligations of Corporations under International Law’ in ibid, 927; Elisa Morgera, Corporate Accountability in International Environmental Law (Oxford University Press, 2009).

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of liability on the operator or, where appropriate, other person or entity.”106 If the Commentary argues that this imposition of primary liability on the operator “is widely accepted in international treaty regimes and in national law and practice,”107 neither specifies whether the operator’s liability flows from international or domestic law, nor how the liability of the operator is connected with the responsibility of the state of origin.108 This illustrates the continuing difficulty of determining non-​state actors’ liability through the direct application of international obligations and the quest for alternatives at the local level, in particular by standard-​setting imposing a normative framework, such as the Organization of Economic Cooperation and Development (oecd) Guidelines, and a supervisory or compliance-​monitoring mechanism establishing accountability, such as oecd national contact points for complaints. 5

Concluding Remarks

As discussed in this contribution, indigenous peoples’ right to permanent sovereignty over natural resources is as an integral part of the right to self-​ determination. These two rights provide the basis for a series of individual and collective entitlements and substantive and procedural rights in relation to the governance of land and natural resources, as well as for obligations for state and non-​state actors. In particular, the strong presence of both public and private entities in the exploitation of energy resources grounds attempts to directly impose human rights and environmental standards on transnational corporations. However, the lack of directly applicable international legal obligations for non-​state actors fuels the quest for alternative forms of standard-​setting and accountability, mostly at the local level. In this respect, building dialogue between different international legal frameworks, in a multi-​disciplinary manner, is a welcome trend that could eventually facilitate ‘mainstreaming’ human rights in the international energy legal debate.

106 Article 4(2), Draft Principles on the Allocation of Loss in the Case of Transboundary Harm Arising Out of Hazardous Activities, ilc Yearbook 2006/​ii(2) [hereinafter 2006 Draft Principles]. 107 Ibid., para 11. 108 Gattini, ‘Breach of International Obligations’ (n 100) 57.

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References

Anaya, James. 2005. ‘Indigenous Peoples’ Participatory Rights in relation to Decisions about Natural Resource Extraction: The More Fundamental Issue of What Rights Indigenous Peoples Have in Lands and Resources’, 22 Arizona Journal of International and Comparative Law 7. Azaria, Danae. 2015. Treaties on Transit of Energy via Pipelines and Countermeasures (Oxford University Press). Baetens, Freya. 2013. ‘Procedural Issues Relating to Shared Responsibility in Arbitral Proceedings’, 4 Journal of International Dispute Settlement 319. Boyle, Alan. 2015. ‘Human Rights and the Environment: Where Next?’ in Ben Boer (ed.), Environmental Law Dimensions of Human Rights (Oxford University Press). Boyle, Alan E. and Michael R. Anderson (eds). 1998. Human Rights Approaches to Environmental Protection (Oxford University Press). Bradbrook, Adrian J. 1996. ‘Energy Law as an Academic Discipline’, 14 Journal of Energy and Natural Resources Law 194. Cameron, Peter. 2010. International Energy Investment Law –​The Pursuit of Stability (Oxford University Press). Clavero, Bartolomé. 2005. ‘The Indigenous Rights of Participation and International Development Policies’, 22 Arizona Journal of International and Comparative Law 41. d’Aspremont, Jean et al. 2015. ‘Sharing Responsibility between Non-​State Actors and States in International Law: An Introduction’, 62 Netherlands International Law Review 49. de Jong, Sijbren and Jan Wouters. 2014. ‘Institutional Actors in International Energy Law’, in Kim Talus (ed.), Research Handbook on International Energy Law (Edward Elgar). Dupuy, Pierre-​Marie and Jorge E. Vinuales. 2018. International Environmental Law (Cambridge University Press). Duruigbo, Emeka. 2006. ‘Permanent Sovereignty and Peoples’ Ownership of Natural Resources in International Law’, 38 George Washington International Law Review 33. Gattini, Andrea. 2014. ‘Breach of International Obligations’, in André Nollkaemper and Ilias Plakokefalos (eds), Principles of Shared Responsibility in International Law: An Appraisal of the State of the Art (Cambridge University Press). Gowlland-​Galtieri, Alix. 2002. ‘The Environmental Accountability of the World Bank to Non-​State Actors: Insights from the Inspection Panel’, 72 British Year Book of International Law 213. Handl, Günther. 2015. ‘Preventing Transboundary Nuclear Pollution: A Post-​Fukushima Legal Perspective’, in S. Jayakumar et al. (eds), Transboundary Pollution: Evolving Issues of International Law and Policy (Edward Elgar).

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Koh, Harold H. 2004. ‘Separating Myth from Reality about Corporate Responsibility Litigation’, 7(2) Journal of International Economic Law 263. Langford, Malcolm and Anna Russell (eds). 2017. The Right to Water. Theory, Practice and Prospects (Cambridge University Press). Langlet, David. 2104. ‘Transboundary Transit Pipelines: Reflections on the Balancing of Rights and Interests in the Light of the Nordstream Project’, 63 International and Comparative Law Quarterly 977. Lindsay, Rae et al. 2013. ‘Human Rights Responsibilities in the oil and gas sector: Applying the UN Guiding Principles’, 6 Journal of World Energy Law and Business 2. Lüdert, Jan. 2007. Deliberating Justice –​ Indigenous Peoples, the World Bank and the Principle of Free Prior Informed Consent (grin). Merrills, John. 2007. ‘Environmental Rights’, in Daniel Bodansky, et al. (eds), Oxford Handbook of International Environmental Law (Oxford University Press). Mora, Paul David. 2014. ‘The Alien Tort Statute After Kiobel: The Possibility for the Unlawful Assertions of Universal Civil Jurisdiction Still Remains’, 63(2) International Comparative Law 699. Morgera, Elisa. 2009. Corporate Accountability in International Environmental Law (Oxford University Press). Murphy, Sean D. 2005. ‘Taking Multinational Corporate Codes of Conduct to the Next Level’, 43 Columbia Journal of Transnational Law 489. Nollkaemper, André. 2003. ‘Concurrence between Individual Responsibility and State Responsibility in International Law’, 52 International and Comparative Law Quarterly 615. Nowak, Manfred. 2005. UN Covenant on Civil and Poliical Rights: CCPR Commentary (Kehl am Engel, 2nd ed.). Ofuatey-​ Kodjoe, Wentworth. 1995. ‘Self-​ Determination’ in Oscar Schachter and Christopher C. Joyner (eds), United Nations Legal Order (Cambridge University Press). Olivares Alanís, Efrén C. 2013. ‘Indigenous Peoples’ Rights and the Extractive Industry: Jurisprudence from the Inter-​American System of Human Rights’, 5 Goettingen Journal of International Law 187. Omorogbe, Yinka and Peter Oniemola. 2010. ‘Property Rights in Oil and Gas under Dominial Regimes’ in Aileen McHarg et al. (eds), Property and the Law in Energy and Natural Resources (Oxford University Press). Ouguergouz, Fatsah. 2002. The African Charter on Human and Peoples’ Rights: A Comprehensive Agenda for Human Dignity and Sustainable Development (Martinus Nijhoff). Perrault, Anne. 2004. ‘Facilitating Prior Informed Consent in the Context of Genetic Resources and Traditional Knowledge’, 4(2) Sustainable Development Law and Policy 21.

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Pring, George and Susan Y. Noé. 2002. ‘The Emerging International Law of Public Participation Affecting Global Mining, Energy, and Resources Development’, in Donald N. Zillman, Alistair Lucas, and George Pring (eds), Human Rights in Natural Resources Development (Oxford University Press). Razzaque, Jona. 2012. ‘Resource Sovereignty in the Global Environmental Order’ in Elena Blanco and Jona Razzaque (eds), Natural Resources and the Green Economy: Redefining the Challenges for People, States and Corporations (Martinus Nijhoff). Redgwell, Catherine. 2002. ‘The International Law of Public Participation: Protected Areas, Endangered Species, and Biological Diversity’, in Donald N. Zillman, Alistair Lucas, and George Pring (eds), Human Rights in Natural Resources Development (Oxford University Press). Redgwell, Catherine 2004. ‘International Energy Security’, in Barry Barton et al (eds), Energy Security: Managing Risk in a Dynamic Legal and Regulatory Environment (Oxford University Press). Redgwell, Catherine 2012. ‘Contractual and Treaty Arrangements Supporting Large European Transboundary Pipeline Projects: Can Adequate Human Rights Be Secured?’, in Martha M. Roggenkamp et al. (eds), Energy Networks and the Law: Innovative Solutions in Changing Markets (Oxford: Oxford University Press). Redgwell, Catherine 2017. ‘Energy’, in André Nollkaemper and Ilias Plakokefalos (eds), The Practice of Shared Responsibility in International Law (Cambridge University Press). Rodgers, Christopher. 2009. ‘Nature’s Place? Property Rights, Property Rules and Environmental Stewardship’, Cambridge Law Journal 68(3). Roeben, Volker. 2013. ‘Governing Shared Offshore Electricity Infrastructure in the Northern Seas’, 62 International and Comparative Law Quarterly 839. Saul, Ben et al. 2014. The International Covenant on Economic, Social and Cultural Rights: Commentary, Cases and Materials (Oxford University Press). Siddiky, Ishrak A. 2014. ‘The International Legal Instruments for Cross-​Border Pipelines’, in Kim Talus (ed.), Research Handbook on International Energy Law (Edward Elgar). Talus, Kim. 2014. ‘Internationalization of Energy Law’, in Kim Talus (ed.), Research Handbook on International Energy Law (Edward Elgar). Thielboerger, Pierre. 2014. The Human Right(s) to Water. The Multi-​Level Governance of a Unique Human Right (Springer). Triggs, Gillian. 2002. ‘The Rights of Indigenous Peoples to Participate in Resource Development: An International Legal Perspective’, in Donald N. Zillman, Alistair Lucas, and George Pring (eds), Human Rights in Natural Resources Development (Oxford University Press).

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Weissbrot, David and Muria Kruger. 2003. ‘Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights’, 97 American Journal of International Law 901. Winkler, Inga T. 2012. The Human Right to Water (Hart).

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­c hapter 7

Non-​Trade Concerns in International Economic Law Can Trade Agreements Work for Renewable Energy? Elena Cima 1

Introduction

The multilateral trading system, embodied by the World Trade Organization (wto), has experienced a certain difficulty in the integration of provisions dealing with renewable energy, and more broadly environmental protection, into its substantive rulemaking. That an ‘environmental’ clause, in one form or another, did not find its way into the General Agreement on Tariffs and Trade (gatt) in 1947 nor in the wto in 1994, might be one of the reasons behind countries’ efforts to pursue this very same objective through regional, bilateral, or unilateral initiatives.1 The EU Commission has summarized in a few well-​chosen words the potential function of free trade agreements, pointing out that they …can build on wto and other international rules by going further and faster in promoting openness and integration, by tackling issues which are not ready for multilateral discussion and by preparing the ground for the next level of multilateral liberalisation. Many key issues, […] which remain outside the wto at this time can be addressed through fta s.2 The question is whether such key issues encompass renewable energy development and diffusion, and environmental protection more broadly. In this spirit, this contribution intends to explore whether promoting renewable

1 See Olivier Cattaneo, ‘The Political Economy of PTAs’, in Simon Lester et al (eds.), Bilateral and Regional Trade Agreements. Commentary and Analysis 28 (Cambridge University Press, 2015), 36. 2 Global Europe: Competing in the World. A Contribution to the EU’s Growth and Jobs Strategy, Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions, com (2006) 0567 (Oct. 4, 2006), 11, as quoted in Cattaneo, ‘The Political Economy’ (n 1) 35.

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energy through the ever-​growing network of free trade agreements (fta s) represents a possible approach to facilitate trade in renewable energy goods, services, and technologies and create a better trading environment for renewables. It has indeed been suggested that “trade mechanisms can be an effective tool for securing environmental objectives” and that “regional trade arrangements could be designed to provide for an attractive package to settle trade-​ offs and conflicts of interest” as well as facilitate an increased use of renewable energy sources.3 However, while the applicability of wto rules to trade measures adopted in relation to renewable energy has been studied far and wide,4 literature mapping out and systematically classifying and analysing renewable energy provisions in free trade agreements is more limited.5 Ultimately, what matters are the legal implications of these provisions and whether they do transform trade agreements into a vehicle to secure environmental and sustainability objectives. Accordingly, the goal of this Chapter is twofold. First, it aims at providing a taxonomy, and subsequent analysis, of the main techniques used by countries –​and in particular by the United States (US) and the European Union (EU) –​to include provisions on renewable energy in their fta s. Second, it builds on this analysis to further investigate the ways in which fta s distance themselves from wto Agreements in the way they address and incorporate renewable energy provisions. Although several different elements are certainly worth examining, the analysis will focus on two aspects –​or avenues –​that could open the door to ‘greening’ trade law as it applies to renewable energy.

3 Rafael Leal-​Arcas, ‘Climate Change Mitigation from the Bottom Up: Preferential Trade Agreements to Promote Climate Change Mitigation’ 7 Carbon & Climate Law Review 34 (2013). 4 See e.g., Thomas Cottier et al. (eds), International Trade Regulation and the Mitigation of Climate Change: World Trade Forum (Cambridge University Press, 2009); Yulia Selivanova, Regulation of Energy in International Trade Law: WTO, NAFTA, and Energy Charter (Kluwer Law International, 2011); Rafael Leal-​Arcas et al., International Energy Governance: Selected Legal Issues (Edward Elgar Publishing, 2014). 5 See Leal-​Arcas, ‘Climate Change Mitigation’ (n 3); Markus W. Gehring et al, ‘Climate Change and Sustainable Energy Measures in Regional Trade Agreements (RTAs). An Overview’ (ictsd Issue Paper No. 3, Aug. 2013).

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A Taxonomy of Renewable Energy Provisions in fta s

Modern fta s exhibit features entirely different from those possessed by earlier agreements.6 fta s signed before the establishment of the wto in 1995 mostly took the form of free-​trade areas or customs unions, allowed within the framework created by the gatt to permit neighbouring countries to facilitate trade among each other.7 Generally, they only concerned trade in goods and were limited to tariff liberalization. After the establishment of the wto and the extension of multilateral trade agreements to trade in services and trade-​ related aspects of intellectual property rights, free trade agreements started expanding their scope as well by covering the same subjects.8 Their substance kept evolving over time and they now tend to include provisions in areas that are not covered by wto agreements (so called wto extra or wto-​x provisions) and these areas include inter alia environmental protection and renewable energy.9 Not only did such agreements gradually expand in scope and coverage but they also grew in number, as the Doha Round continues to flounder and the parties to the wto fail to achieve consensus in multilateral negotiations.10 2.1 Scope of the Research In the global landscape of ftas, the United States and the European Union, in particular, play a leading role, as they jointly account for around 80 percent 6

Throughout this chapter, the term ‘free trade agreements’ is used to refer to all the agreements analysed, regardless of their particular designation. 7 The legal basis for fta s is provided for by gatt Article xxiv and gats Article v. The former, at paragraph 5, states that “the provisions of this Agreement shall not prevent, as between the territories of contracting parties, the formation of a customs union or of a free-​trade area or the adoption of an interim agreement necessary for the formation of a customs union or of a free-​trade area.” gatt, Art. xxiv(5). 8 Henrik Horn et al, ‘Beyond the WTO? An Anatomy of EU and US Preferential Trade Agreements’ 7 (Bruegel Blueprint Series, 2009). See also Claudia Hofmann et al, ‘Horizontal Depth: A New Database on the Content of Preferential Trade Agreements’ (Policy Research Working Paper No. wps 7981, World Bank Group, 2017). 9 Other wto-​x provisions include, inter alia, competition policy, labour market regulations, data protection, human rights, taxation, and illegal immigration. The distinction between “wto plus” (wto+) or “wto extra” (wto-​x ) provisions was used in a study conducted by Henrik Horn, Petros C. Mavroidis, and André Sapir in 2009. Horn et al, ‘Beyond the WTO?’ (n 8). 10 The difficulties of achieving satisfactory results in multilateral negotiations explain not only the shift towards bilateral and regional solutions, but also the attempts to negotiate plurilateral agreements under the wto umbrella. See, e.g., the recent Agreement on Government Procurement, and the negotiations for the adoption of a Plurilateral Environmental Goods Agreement.

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Table 7.1 Free trade agreements signed by the EU

Agreements

Entry into force Agreements

Entry into force

EU-​Switzerland-​ Liechtenstein EU-​Iceland

1 Jan. 1973

eu-​c ariforum 1 Nov. 2008

1 Apr. 1973

EU-​Norway eea

1 July 1973 1 Jan. 1994

EU-​Turkey EU-​Tunisia EU-​Israel EU-​Morocco

1 Jan. 1996 1 Mar. 1998 1 June 2000 1 Mar.2000

EU-​South Africa

1 Jan. 2000

EU-​Mexico EU-​FYRoM EU-​Jordan EU-​Chile EU-​Lebanon EU-​Egypt EU-​Algeria EU-​Albania EU-​Montenegro

1 Oct. 2000 1 June 2001 1 May 2002 1 Feb. 2003 1 Mar. 2003 1 June 2004 1 Sept. 2005 1 Dec. 2006 1 Jan. 2008

EU-​Bosnia and Herzegovina EU-​Cote d’Ivoire EU-​Papua New Guinea and Fiji EU-​Cameroon EU-​Serbia EU-​South Korea EU-​Colombia-​ Peru EU-​Central America EU-​Georgia EU-​Moldova EU-​Ukraine eu-​s adc EU-​Ghana ceta EU-​Singapore EU-​Japan EU-​Vietnam

29 Dec. 2008 1 Jan. 2009 20 Dec. 2009 4 Aug. 2014 1 Feb. 2010 1 July 2011 1 Mar. 2013 1 Aug. 2013 1 Sept. 2014 1 Sept. 2014 1 Sept. 2014 10 Oct. 2016 15 Dec. 2016 21 Sept. 2017 21 Nov. 2019 1 Feb. 2019 1 Aug. 2020

of the rules that regulate the functioning of world markets,11 and have thus become the two main hubs in the pattern of such agreements. As a result, the set of agreements scrutinized in this chapter consists of all fta s signed by the European Union and the United States with other wto Members as of November 2020 (Tables 7.1 and 7.2).

11

André Sapir, ‘Europe and the Global Economy’, in Fragmented Power: Europe and the Global Economy (Bruegel, 2007).

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152 Cima Table 7.2 Free trade agreements signed by the US

Agreements

Entry into force

US-​Israel nafta US-​Jordan US-​Singapore US-​Chile US-​Australia US-​Morocco US-​Bahrain us-​c afta-​d r US-​Oman US-​Peru US-​South Korea US-​Colombia US-​Panama US-​Canada-​Mexico

19 Aug. 1985 1 Jan. 1994 (no longer in force) 17 Dec. 2001 1 Jan. 2004 1 Jan. 2004 1 Jan. 2005 1 Jan. 2006 11 Jan. 2006 1 Jan. 2009 1 Jan. 2009 1 Feb. 2009 15 Mar. 2012 15 May 2012 31 Oct. 2012 1 July 2020

Note: The analysis includes all the fta s signed by the US and the EU, in force and notified to the wto, as well as some of the most recently signed agreements, not yet entered into force.

For the purpose of this research, the provisions relevant to trade in renewable energy have been classified in three broad categories: i) ‘renewable energy-​ specific’, ii) ‘renewable energy-​related’, and iii) ‘renewable energy-​affecting’ provisions. –​ ‘Renewable Energy-​Specific’ Provisions. This category includes those provisions that expressly mention the terms “renewable energy” or “sources,” or even the broader expressions “cleaner,” “alternative,” or “sustainable fuels.” While the wto legal framework does not contain (renewable) energy-​specific disciplines,12 a number of recent fta s do mention

12

This absence is at least partly due to the fact that the main energy exporters (e.g. Saudi Arabia, Russia, Azerbaijan, Kazakhstan, Nigeria, and Algeria) were not signatories to the gatt when it was initially adopted.

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–​

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renewable energy sources and goods/​services in their text, and do contain provisions aimed at promoting their development and dissemination.13 ‘Renewable Energy-​Related’ Provisions. Renewable energy policies represent one component of the broader category of measures aimed at protecting the environment and, even more broadly, promoting sustainable development. It follows that provisions that pursue environmental or sustainable development objectives are related and often applicable to renewable energy as well, in particular when they focus on specific environmental issues that are directly relevant to renewable energy, such as climate change. A provision that liberalizes trade in environmental goods, for instance, could include renewable energy goods under its broad coverage. A widely used procedure involves featuring an “environment” chapter within the trade agreement, or an “environment” section within a broader chapter on “sustainable development.” Another option is to have a side agreement on the environment or other related matters. This procedure was pioneered by the North American Free Trade Agreement (nafta) with the conclusion of the North American Agreement on Environmental Cooperation (naaec), a separate, yet linked, legal treaty among the nafta parties. ‘Renewable Energy-​Affecting’ Provisions. This third and final category of provisions includes all those provisions that, although not explicitly related to renewable energy or even to environmental or sustainable development objectives, may indirectly, yet concretely, impact trade in renewable energy, as they apply horizontally to all sectors. These might include inter alia provisions on intellectual property, investment, or trade facilitation.

2.2 Developing the Taxonomy There are several ways to classify fta provisions, including location in the agreement, reasons for the inclusion, objective, scope, degree of specificity, and level of enforcement. In terms of their length and location, provisions related or specific to renewable energy in trade agreements vary considerably, ranging from as little as a line or two in the preamble, to a whole section or even chapter. The introduction of these provisions within the text of a trade agreement can have multiple objectives, including accessing new markets, increasing investment opportunities, facilitating transit through 13

fta s that expressly refer to renewable energy include those signed by the European Union with Chile, South Korea, Colombia and Peru, Moldova, Georgia, Ukraine, and Singapore, and ceta.

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154 Cima customs, and stimulating research and development related to renewable energy technologies. As to the reasons that motivate countries to negotiate such provisions, one of the main reasons is the pressure deriving from the largely shared understanding that trade and climate change are interrelated and that renewable energy development and diffusion can contribute greatly to the global climate change mitigation efforts, as well as energy security concerns.14 The United States and the European Union represent a prime example of the success of such efforts. The 2002 U.S. Trade Promotion Act contains a requirement to include environmental provisions in all trade agreements to which the country is a party, while the European Union has placed significant emphasis on sustainable development in many of its trade agreements.15 This different focus is reflected in the fact that fta s signed by the United States feature a chapter entirely devoted to the “environment” while EU agreements tend to combine environmental and labor provisions in “sustainable development” chapters.16 This paper classifies the renewable energy provisions incorporated into fta s according to the technique used to incorporate renewable energy or environmental consideration in the text of the agreement. Seven techniques have been identified: (i) general language in key statements; (ii) reservation of policy space for renewable energy or environmental regulation; (iii) identification of renewable energy or environmental protection as priority areas of cooperation among the parties; (iv) recognition of environmental regulatory sovereignty; (v) facilitation and enhancement of trade in environmentally friendly goods, services, and technologies; (vi) clarification of the relationship with multilateral environmental agreements (mea s); and (vii) regulation of institutions and dispute resolution mechanisms. The first two techniques –​key statements and reservation of policy space –​can be found in wto Agreements as well as fta s, although the latter tend to go beyond wto provisions with regard to both their content and scope. Techniques (iii) through (vi) are instead entirely new to fta s.

14 15 16

Daniel Yergin, ‘Ensuring Energy Security’ 85(2) Foreign Affairs 69 (2006). 19 U.S.C. §3802 (2002) [hereinafter U.S. Trade Promotion Act]. Council of the European Union, Review of the EU Sustainable Development Strategy, 10917/​06 (June 26, 2006). ceta represents an exception in this respect, as it features both a chapter on “Trade and Sustainable Development” (Chapter 22) and on “Trade and the Environment” (Chapter 24).

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2.2.1 Key Statements Virtually all the fta s analysed contain key statements referring to sustainable development, the environment, or even renewable energy.17 Some of these statements are often very broad, reproducing the language used in the preamble to the Marrakesh Agreement. Examples can be found in the US-​Jordan, US-​ Morocco, and US-​Bahrain fta s, which combine the social and environmental pillars of sustainable development in one single statement, expressing the Parties’ desire to strengthen “the enforcement of labour and environmental laws and policies, promote basic workers’ rights and sustainable development, and implement this Agreement in a manner consistent with environmental protection and conservation.”18 The preamble to other fta s includes one or two statements exclusively devoted to the environment. In the us-​c afta-​ dr fta, for instance, the parties agreed to “implement this Agreement in a manner consistent with environmental protection and conservation, promote sustainable development, and strengthen their cooperation on environmental matters; protect and preserve the environment and enhance the means for doing so, including through the conservation of natural resources in their respective territories.”19 The preamble to some fta s refer to specific mea s such as the United Nations Framework Convention on Climate Change (unfccc) and the Kyoto Protocol. In the EU-​Colombia-​Peru fta, for instance, the parties “recognize that climate change is an issue of common and global concern that calls for the widest possible cooperation by all countries and their participation in an effective and appropriate international response, for the benefit of present and future generations of mankind.”20 Some of the most recent trade agreements signed by the European Union go even further and contain an explicit reference to the need to promote energy efficiency and the use of renewable energy as well as the commitment to enhance the security of energy supply and facilitate the development of appropriate infrastructure.21 Although it does not provide for legally binding obligations, the language of the preamble is important as it reflects the value parties give to environmental concerns and as it is often referred to in the interpretation of substantive

17 18 19 20 21

One notable exception are the agreements signed between the European Union and Turkey, Tunisia, Israel, Morocco, FYRom, Egypt, Albania, and Montenegro. US-​Bahrain, Preamble. us-​c afta-​d r, Preamble. EU-​Colombia-​Peru, Art. 275. See also EU-​Singapore, Art. 13.6. See the Agreements signed by the European Union with cariforum, Moldova, Georgia, and Ukraine.

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156 Cima provisions within trade agreements as it is evidenced by the evolution of the wto trade/​environment case law.22 2.2.2 Reservation of Policy Space wto Agreements do not expressly recognize the Members’ right to regulate the environment. Rather, they do so only indirectly, through exception clauses. Many ftas , on the other hand, feature a broader range of provisions that contribute to reserving such policy space: they explicitly acknowledge the parties’ environmental regulatory sovereignty, their commitments under mea s, and, in addition to the use of gatt-​like exceptions, they increasingly phrase such clauses as exemptions or carve-​outs instead.23 (a) Exceptions The exception clause par excellence is, without any doubt, gatt Article xx.24 The exceptions in Article xx allow members to apply measures inconsistent with gatt obligations as long as they fit into one of the cases provided for in the subparagraphs and do not constitute an “arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade.”25 Not only this provision does not explicitly refer to “energy” or “renewable energy,” but it does not even mention the “environment.”26 Nevertheless, the exceptions under paragraphs (b) and (g) of Article xx –​referring to measures “necessary to protect human, animal or plant life or health” and “relating to the conservation of exhaustible 22

23 24 25 26

See e.g. gatt Panel Report, United States –​Prohibition of Imports of Tuna and Tuna Products from Canada, bisd/​29S/​91, adopted 22 February 1982; Canada –​Measures affecting Exports of Unprocessed Herring and Salmon, bisd/​35S/​98, adopted 22 March 1988; and Thailand –​Restrictions on the Importation of and Internal Taxes on Cigarettes bisd/​ 37S/​200, adopted 7 November 1990 [hereinafter Thailand –​ Cigarettes]. Appellate Body Report, United States –​Standards for Reformulated and Conventional Gasoline, wt/​d s2/​ ab/​r , adopted 20 May 1996 [hereinafter US –​Gasoline]; Appellate Body Report, United States –​Import Prohibition of Certain Shrimp and Shrimp Products, wt/​d s58/​a b/​r , adopted 6 November 1998 [hereinafter US –​Shrimps]; Appellate Body Report, European Communities –​Measures Affecting the Prohibition of Asbestos and Asbestos Products, wt/​ ds135/​a b/​r , adopted 5 April 2001 [hereinafter ec –​ Asbestos]. Elena Cima, ‘Promoting Renewable Energy through FTAs? The Legal Implications of a New Generation of Trade Agreements’ 52(4) Journal of World Trade 663 (2018), 668. Other examples include gats Art. xiv; tbt Arts. 2.2. and 2.3, sps Arts. 2.3 and 2.4, and trips Arts. 27.2 and 27.3. gatt Art. xx, chapeau. When the gatt was drafted, environmental protection was not one of the main concerns of the international community. See e.g. Steve Charnovitz, ‘The World Trade Organization and the Environment’ 8(1) Yearbook of International Environmental Law 98 (1997).

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natural resources” –​have most frequently been cited in trade disputes involving environmental measures, and are now generally treated as ‘environmental’ exceptions. The same can be said for Article xiv of the General Agreement on Trade in Services (gats). These exceptions are not applicable to other wto Agreements beyond the scope of the gatt or gats, as both the case law and the literature suggest. It follows that they cannot be used to justify measures adopted to promote renewable energy or, more broadly, to protect the environment, covered by other Covered Agreements, such as the Agreement on Technical Barriers to Trade (tbt), on Sanitary and Phytosanitary Measures (sps) or on Subsidies and Countervailing Measures (ascm).27 With these limits in mind, the exceptions included in many fta s address these concerns by expanding the scope of the corresponding provisions. Although the exception clauses contained in some fta s merely reproduce the wording of Article xx of the gatt, other agreements go further and formulate their own exception clauses which in turn provide for greater policy space for environmental regulations. Such broader coverage can be achieved either by modifying the wording of the exception clause, or by applying the latter more broadly than it happens in the wto (or even both). As to the first approach, a number of fta s explicitly refer to the environment in their exception clauses. The EU-​Colombia-​Peru fta, for instance, revises the gatt wording to explicitly include environmental measures.28 The second approach involves applying the general exceptions beyond the chapters on trade in goods and services, so as to include domestic measures in other areas, such as subsidies, investment, technical standards, and public procurement. For instance, Article 21.1 of the US-​Singapore fta extends gatt Article xx to its ­chapters 2 through 6 (National Treatment and Market Access for Goods, Rules of Origin, Customs Procedures, Textiles, Technical Barriers to Trade).29 Similarly, many fta s expand the scope of the exceptions to the provisions 27 28

29

Some of these agreements provide for their own exceptions to allow Member States to pursue legitimate policy objectives (e.g. tbt Art. 2.2 and sps Art. 5.6). Article 106 refers to measures “(b) necessary to protect human, animal or plant life or health, including those environmental measures necessary to this effect; […] (g) relating to the conservation of living and non-​living exhaustible natural resources, if such measures are made effective in conjunction with restrictions on domestic production or consumption.” See also US-​Jordan, Art. 12. The provision also contains the aforementioned clarification that “the measures referred to in gatt 1994 Article xx(b) include environmental measures necessary to protect human, animal, or plant life or health, and that gatt 1994 Article xx(g) applies to measures relating to the conservation of living and non-​living exhaustible natural resources,” thus representing a combination of both approaches. See also US-​Chile, Art. 23 and ceta, Art. 28.3.

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158 Cima regulating trade in services by applying an exception clause that resembles gatt Article xx to their chapter on services. As a matter of fact, Article xiv of the gats is narrower than gatt Article xx as the former only applies to measures “necessary to protect human, animal or plant life or health”30 while no reference is made to measures “relating to the conservation of exhaustible natural resources.”31 (b) Exemptions Just like exceptions stricto sensu, exemptions (or carve-​outs) within trade agreements provide for ‘windows’ to accommodate legitimate national policies, including policies aimed at fostering trade in renewable energy goods, services, and technologies. However, while exceptions identify circumstances in which the breach of other provisions of the agreement is justified, exemptions do not assume the breach of any rule of the fta, as they function as a removal of part of the restriction or prohibition imposed by a given provision, with the effect that said provision will not apply to the ‘carved-​out’ situation. The importance of this distinction lies in the fact that each technique carries different legal implications, which will be addressed in greater detail in Section 3.1 of this contribution. Recent fta s feature a wider variety of environmental exemptions. Many examples can be found in their investment chapters. Annex 8-​A of ceta, for example, explicitly excludes from the definition of ‘indirect expropriation’ “non-​discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety and the environment” except in rare circumstances.32 Similar environmental carve-​outs can be found in other investment provisions, such as those on the prohibition of performance requirements,33 as well as in the Chapters

30 31 32

33

gatt, Art. xx(b) and gats, Art. xiv(b). EU-​Colombia-​Peru, Art. 167(c). ceta, Art. 8.12 and Annex 8-​A. Other examples include US-​Chile, Annex 10-​D, US-​ Australia, Annex 11-​B; US-​US-​Morocco, Annex 10-​B; us-​c afta-​d r, Annex 10-​C. This type of carve-​out has been invoked in a number of recent disputes, which clearly show the legal implications of using carve-​outs rather than exceptions. See e.g. Adel A Hamadi Al Tamimi v. Sultanate of Oman, icsid Case No. arb/​11/​33, Award (Nov. 3, 2015). More precisely, the prohibition to impose or enforce the requirement to achieve a given level or percentage of domestic content, to purchase, use, or accord a preference to goods produced in its territory, or to purchase goods from persons in its territory, or to transfer a particular technology, production process, or other proprietary knowledge to a person in its territory, does not apply to measures “(ii) necessary to protect human, animal, or plant life or health; or (iii) related to the conservation of living or non-​living exhaustible natural

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dealing with marking and labelling, government procurement, and trade facilitation.34 The EU-​Singapore fta provides for an exemption within its subsidies discipline, marking a stark departure from the multilateral subsidies discipline which does not even feature an exception clause. The agreement allows the two parties to provide for subsidies that do have trade effects on the other party –​as long as such effects are contained and the subsidy is limited to the minimum needed to achieve the objective –​when such subsidies are necessary to achieve an objective of public interest, explicitly including subsidies “for environmental purposes.”35 2.2.3 Cooperation Most fta s contain provisions on bilateral or regional cooperation on several matters.36 These provisions vary greatly, and they can be classified according to different parameters, such as the areas covered by cooperation and the depth of the cooperation commitments. As far as the areas covered by cooperation are concerned, some provisions show the parties’ resolution to cooperate on matters related to trade and sustainable development broadly37 while other provisions bring the generic commitment to cooperate into focus by fleshing out different areas of cooperation, such as negotiations on trade-​related environmental issues

34

35

36 37

resources.” See nafta, Art. 1106, US-​Chile, Art. 10.5 and US-​Singapore, Art. 15.8. See also US-​Peru, Art. 10.9. According to the EU-​Colombia-​Peru fta, Parties that require mandatory marking or labelling on products shall not require the approval, registration, or certification of labels or marking as a precondition for sale in their respective markets “d) unless necessary in view of the risk of the products to human, animal or plant health or life, the environment or national safety.” Art. 81. See also EU-​South Korea, Art. 61(g); EU-​Chile, Art. 161. EU-​Singapore, Art. 12.8, Annex 12-​A(e). See also Annex ix of the EU-​South Africa fta. Another example is provided by the European Economic Area (eea). Article 61, which regulates state aid, prohibits “any aid granted by ec Member States, efta States or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods […] in so far as it affects trade between Contracting Parties.” However, under Article 61.3(c), “aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest” may be compatible with the functioning of the Agreement. Some even have side agreements devoted solely to environmental cooperation, such as nafta (with naaec) and the US-​South Korea fta (US-​Korea Environmental Cooperation Agreement). EU-​South Korea, Art. 13.1.

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160 Cima of mutual interest,38 the need to pursue cooperative environmental activities and strengthen environmental performance,39 or the rational use of non-​renewable natural resources and the sustainable use of renewable natural resources, thus promoting the protection of the environment, the prevention of environmental deterioration, and the control of pollution.40 Finally, a third set of provisions deals specifically with cooperation regarding renewable energy development and trade. For instance, Article 57 of the EU-​Tunisia fta identifies, as priority areas of cooperation between the parties, the promotion of renewable energies and the promotion of energy-​saving and energy efficiency.41 Likewise, Article 23 of the EU-​Mexico fta specifies that cooperation shall “aim to develop [the Parties’] respective energy sectors, concentrating on the promotion of transfer of technology and exchanges of information about their respective legislation.”42 A second distinction among cooperation provisions can be drawn on the basis of whether they provide for relatively generic statements or clearly specify the obligations of the parties. As a matter of fact, some provisions simply state the will of the parties to cooperate with each other, without any further explanation or clarification, while other provisions take an additional step, by listing different activities through which cooperation in the environmental/​ renewable energy sector shall be carried out.43 In this context, cooperation might refer to many different forms of interaction: sometimes, it is limited to a mere commitment to exchange and share information,44 while in other cases it can involve deeper commitments, such as joint activities to be conducted

38 39 40 41 42 43

44

EU-​Singapore, Arts. 13.6 and 13.10; EU-​South Korea, Art. 13.5; EU-​Colombia-​Peru, Art. 270; ceta, Art. 24.4. See e.g. EU-​Singapore, Art. 13.10, EU-​South Africa, Art. 57, ceta, Art. 22.3, and US-​Singapore, Art. 18.6. See e.g. EU-​Israel, Art. 50, EU-​Morocco, Art. 48, EU-​Egypt, Art. 44, and EU-​South Africa, Art. 48. See also EU-​Israel, Art. 51, EU-​Morocco, Art. 57, EU-​South Africa, Art. 57, EU-​Mexico, Art. 23, EU-​Egypt, Art. 53, EU-​Chile, Art. 22, eu-​c ariforum, Art. 138. Other examples include EU-​Georgia, EU-​Moldova, EU-​Ukraine, and ceta. EU-​Mexico, Art. 23. Ibid.: “… exchanges of information, training of human resources, transfer of technology and joint technological development and infrastructure projects, designing more efficient energy generation processes, promoting the rational use of energy, supporting the use of alternative renewable sources of energy which protect the environment, and the promotion of recycling and processing residues for use in generating energy.” EU-​Mexico, Arts. 23 and 34; EU-​Chile, Art. 22; eu-​c ariforum, Art. 138; EU-​Singapore, Art. 13.10; EU-​Ukraine, Art. 338; ceta, Art. 24.12; US-​Peru, Art. 18.10; US-​Singapore, Art. 18.6; US-​ Chile, Art. 19.5.

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by the parties, ranging from working together on issues of regional interest to conducting joint scientific research.45 2.2.4 Regulatory Sovereignty When signing fta s, countries maintain regulatory sovereignty, which is the prerogative to establish their own levels of (environmental) protection as well as to modify their (environmental) laws and policies accordingly. These provisions are generally not limited to the recognition of the parties’ right to establish their own levels of environmental protection, but they further provide for specific obligations (“each Party shall”)46 that countries need to comply with in the laws, standards, and policies they adopt domestically. These might include the obligation to use scientific knowledge when designing environmental measures, to ensure public participation in their adoption, to publish the measures once adopted, and to monitor the state of the environment while conducting environmental assessments.47 Additionally, these laws need to be effectively enforced. Article 16.2(2) of the EU-​Japan fta for instance, provides that the parties to the agreement shall not fail to effectively enforce their environmental laws “through a sustained or recurring course of action or inaction in a manner affecting trade or investment between the Parties” or encourage trade or investment by weakening or reducing the protection afforded in their environmental laws.”48 This provision is particularly interesting in that it contains two distinct obligations: the commitment of the parties to enforce their environmental laws and regulations, and the commitment not to relax such laws as a means to encourage trade or investment. The second commitment, which is aimed at addressing the risk of a race to the bottom and can be found in the investment chapter of several fta s, found its earlier expression in Article 1114(2) of nafta.49

45

46

47 48 49

naaec, Preamble; EU-​Tunisia, Art. 47; EU-​Morocco, Art. 47; EU-​Mexico, Arts. 23 and 34; EU-​Chile, Art. 22; eu-​c ariforum, Art. 138; US-​Singapore, Art. 18.6; US-​Chile, Art 19.5; US-​Australia, Art. 19.6; us-​c afta-​d r, Art. 17.9. Other examples include EU-​Georgia, EU-​ Moldova, EU-​Ukraine, and ceta Arts. 22.3 and 24.12. To quote McCaffrey, the intent of the Parties to create legal obligations is exemplified by words such as “ ‘shall,’ but also, ‘agree,’ ‘undertake,’ and the like. … [while] terminology such as ‘should’ and ‘will’ do not typically indicate such intent.” Stephen C. McCaffrey, Understanding International Law (LexisNexis, 2006), 82. For an analysis of the legal implications following the introduction of these positive obligations, see Section 3.1. EU-​Japan, Art. 16.2(2). nafta, Art. 1114(2).

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162 Cima Sometimes, countries decide to go even further and commit to achieve high levels of environmental protection, further clarifying the they “shall strive to continue to improve those laws” over time.50 However, despite the use of the word “shall,” such important objective is circumscribed in terms of the parties’ obligation to merely “strive to” improve their laws, thus ending up couched in hortatory rather than mandatory language.51 2.2.5 Trade Facilitation/​Enhancement A wide variety of obstacles hamper trade and investment in renewable energy goods, services, and technology. Most fta s deal broadly with removing barriers to trade in environmental goods and services, which are considered to include renewable energy as well. Some of the most recent agreements, however, contain provisions that explicitly mention renewable energy, although they tend to be mere statements of intent rather than providing for legally binding obligations. According to Article 24.9 of ceta, the parties shall “pay special attention to facilitating the removal of obstacles to trade or investment in goods and services of particular relevance for climate change mitigation and in particular trade or investment in renewable energy goods and related services.”52 Another example is provided for by the EU-​Colombia-​Peru fta, where the parties express their will to “promote trade and investment measures that promote and facilitate access, dissemination and use of best available technologies for clean energy production and use, and for mitigation of and adaptation to climate change.”53 A particularly significant obstacle to trade in renewable energy is the massive subsidization of fossil fuels.54 Gradually phasing out fossil fuel subsidies would make renewable energy more competitive and facilitate its production, trade, and investment. However, a commitment in this sense can only be found in the agreement between the European Union and Singapore –​not yet 50 51

52 53 54

EU-​South Korea, Art. 13.3; US-​Jordan, Art. 5; US-​Singapore, Art. 18.1. Other provisions that contain similar language are those stating that the Parties “shall endeavour to address any potential barrier to trade in environmental goods and services” or that “shall strive to facilitate and promote trade and foreign direct investment in environmental goods and services.” See EU-​Colombia-​Peru, Art. 271. ceta, Art. 24.9. Art. 275. Other fta s that explicitly refer to renewable energy when mentioning the need to promote their production and related trade/​investment are those signed by the European Union with South Korea, Georgia, Moldova, and Ukraine. In 2014, fossil fuel subsidies amounted to 493 billion usd, about four times the amount of subsidies received by renewable energy. International Energy Agency, World Energy Outlook 2014 (iea, 2014). See Chapter 6 [van Asselt & Verkuijl] in this volume.

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in force –​where the parties have agreed to progressively reduce subsidies for fossil fuels. Moreover, such commitment is followed by a caveat clarifying that such a reduction should “be accompanied by measures to alleviate the social consequences associated with the transition to low carbon fuels.”55 Ultimately, the provision, while recognizing the need to reduce greenhouse gas emissions and the parties’ intention to phase out fossil fuel subsidies, simultaneously undermines the normative significance of this acknowledgement by balancing it out with the need to “limit distortions of trade as much as possible.”56 Other barriers are specific to developing and least-​developed countries. Most renewable energy technologies are developed in industrialized nations (as well as a few economies in transition like China) and a number of factors, such as the high initial investment costs necessary to develop such technologies, the monopolistic power granted to the technology owner, asymmetric information, and market restrictions, constitute almost insuperable obstacles for many less developed countries. In these circumstances, technology transfer and technical assistance can play a key role, and trade agreements between industrialized and developing/​least-​developed countries could help speed up and facilitate the process with provisions on promotion and disclosure of technological innovations, as well as facilitation of dissemination of technology.57 As to technology transfer, although many fta s recognize the importance of adopting measures aimed at facilitating information flows and of creating an adequate environment in the host country, the parties ultimately fail to provide for the necessary mechanisms to effectively achieve the said results, thus weakening their overall commitments.58 Technical assistance and capacity building are often part of the cooperative efforts undertaken by many countries. According to Article 138 of the eu-​c ariforum fta, for instance, environmental cooperation should include awareness-​raising and training activities, as well provision of technical assistance.59 The EU-​Colombia-​Peru fta comprises an entire title (xiii) devoted to Technical Assistance and Capacity

55 56 57

58 59

EU-​Singapore, Art. 7.3. EU-​Singapore, Art. 13.11(3). See e.g. Keith E. Maskus, Private Rights and Public Problems: The Global Economic of Intellectual Property in the 21st Century (Peterson Institution for International Economics, 2012); Keith E. Maskus and Ruth L. Okediji, ‘Intellectual Property Rights and International Technology Transfer to Address Climate Change: Risks, Opportunities, and Policy Options’ (ictsd Issue Paper No. 32, 2010); unep and ictsd, Patents and Clean Energy: Bridging the Gap between Evidence and Policy (2010). EU-​South Korea, Art. 10.3. eu-​c ariforum, Art. 138.2(e) and (f).

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164 Cima Building, which should be aimed at boosting sustainable economic development and contributing to the achievement of the objectives of the unfccc.60 2.2.6 Relationship with mea s In terms of treaty language, no wto agreement refers to mea s, while many existing fta s do. In many agreements signed by the European Union, the parties affirm their commitment “to implement the multilateral environmental agreements to which [they are parties].”61 Some countries go even beyond this broad commitment and explicitly list the unfccc and the Kyoto Protocol among the mea s they commit to implement and even refer to the commitment to reach the ultimate objective of both the convention and the protocol, and to cooperate on the development of the future international climate change framework.62 In these cases, the purpose of mentioning certain mea s is to simply reaffirm the parties’ commitments undertaken elsewhere rather than prescribing new commitments, and therefore are likely not covered by the agreements’ dispute settlement provisions. Nevertheless, they represent useful interpretive tools that help better understand the real intentions of the parties and can be used to interpret other provisions of the same agreement. In other circumstances, countries decide to spell out the relationship between the provisions in the fta and those contained in mea s. In principle, the absence of any inherent hierarchy of treaty norms means that they all –​ regardless the specific area of law which they pertain to –​have the same legal status. The result is that, were a conflict to arise, the general rules of treaty interpretation, enshrined in the Vienna Convention on the Law of Treaties (vclt)63 would represent the only tool available to shed some light on the issue. Thus, clarifying the relationship between trade and environmental norms ex ante could avoid embarking in such interpretive exercise. 2.2.7 Dispute Settlement Any violation of any environmental provisions by one of the parties to the fta can be challenged by the other party(ies), just like any other obligation contained in the agreement. Most agreements, such as for instance those signed by the EU –​or by the US before 2007 –​establish a special dispute settlement mechanism under their ‘Sustainable Development’ or ‘Environment’ Chapters, which is able to hear any claims raised under the provisions contained therein. 60 EU-​Colombia-​Peru, Arts. 286(e) and 324. 61 See EU-​South Korea, Art. 13.5(2); EU-​Colombia-​Peru, Art. 270; and EU-​Singapore, Art. 13.6. 62 EU-​Colombia-​Peru, Art. 270; EU-​South Korea, Art. 13.5(3). 63 Vienna Convention on the Law of Treaties, May 23, 1969, 1155 U.N.T.S. 331 [hereinafter vclt].

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Although in the vast majority of cases, these chapters are not covered by the general dispute settlement mechanism, the mere existence of environmental provisions and even chapters within these agreements may have quite far-​ reaching consequences in the way trade/​environment disputes are handled and ultimately decided. Moreover, in all fta s signed by the US after 2007, the ‘environment’ chapter of each agreement is expressly covered by the dispute settlement procedure applicable to the other (trade-​related) chapters.64 In the United States, this change was possible thanks to the so-​called ‘May 10 Agreement’,65 which contains a template to be followed by any future U.S. trade agreement with regards to six topics, including the environment and provides that any violation of the environmental obligations contained in fta s shall be enforced “on the same basis as the commercial provisions” of the agreements.66 2.3 Assessment of the Provisions over Time The goal of this section is to analyse the provisions classified in the previous paragraphs and identify some trends in the way fta s have incorporated renewable energy provisions throughout the years. The first trend shows an increase in the number of provisions applicable to renewable energy (whether ‘specific’ or ‘related’ to renewable energy). A clear example of such trend is provided by the agreements signed by the United States with Israel in 1985 and with Peru in 2006. The former contains only one provision relevant to trade in renewable energy, while the latter contains more than fifteen.67 A second trend shows an increase in the number and variety of techniques used. Most of the trade agreements signed by the United States since nafta show significant changes and advances in their approach to encourage State parties to actively engage in environmental protection. For instance, fta s like the ones between the United States and Peru or Singapore show a broader range of provisions, as well as a higher level of commitment than could be found in the text of either nafta or naaec. The same can be said for trade 64 65

See e.g. US-​Peru, Art. 18.12(6). Office of the U.S. Trade Representative, Bipartisan Agreement on Trade Policy (May 2007). See H. Rep. 110-​421 (Nov. 5, 2007) (describing the May 10 Agreement). 66 Ibid. 67 For a visual representation of this trend with regard to the fta s signed by the EU, see Elena Cima, ‘Promoting Renewables through Free Trade Agreements? An Assessment of the Relevant Provisions’ c-​e enrg Working Papers 2016–​7, Cambridge Centre for Environment, Energy and Natural Resources Governance, University of Cambridge (2016).

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166 Cima agreements signed by the European Union. The introduction of certain provisions and the use of certain techniques in earlier fta s have affected more recent negotiations and agreements: once a provision is introduced or a technique used in a given agreement, subsequent agreements signed by the same parties with other trading partners tend to maintain said provisions and techniques. Certainly, many concurring factors can contribute to the reasons why certain provisions or techniques are used in certain agreements rather than others. However, on average, as the author has illustrated elsewhere,68 it is rare for subsequent agreements to abandon a technique or a type of provision altogether, further showing that the use of environmental provisions creates a foundation, that is then built upon in later negotiations. The third step consists of a textual analysis of the language used in these provisions, as well as their scope and specificity. It is possible to note that, with a few exceptions, recent provisions show a broader scope of application, as well as a higher level of commitment than could be found in the text of earlier agreements. If one were to consider, for instance, cooperation provisions regarding renewable energy specifically, a clear trend emerges. The trade agreements signed by the European Union with Tunisia and Morocco, respectively in 1995 and 1996 –​and the first ones to deal with renewable energy in their provisions on cooperation –​simply mention that cooperation between the parties should focus on renewable energy and promote the saving of energy and energy efficiency.69 The EU-​Mexico fta, signed in 1997 and entered into force in 2000, further specifies the activities through which such cooperation shall be carried out, including exchanges of information, training of human resources, and transfer of technology,70 while the later EU-​Chile fta clarifies the specific objectives of such cooperative activities, explaining each of them in greater details.71 Last, the agreement between the EU and Singapore shows an even broader scope, as it expressly mentions, among the areas of cooperation, eco-​labelling, green public procurement, and all “trade-​related aspects of the current and future international climate change regime, including ways to address adverse effects of trade on climate, as well as means to promote low-​ carbon technologies and energy efficiency.”72

68 Ibid. 69 EU-​Tunisia, Art. 57; EU-​Morocco, Art. 57. 70 EU-​Mexico, Art. 23. 71 EU-​Chile, Art. 22. 72 EU-​Singapore, Art. 13.10.

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Promoting Renewables through Free Trade Agreements?

The analysis conducted in the first part of this contribution lays the foundations for further investigating the ways in which fta s distance themselves from wto Agreements in the way they address and incorporate renewable energy provisions. In fact, although identifying and categorizing provisions specific or related to renewable energy is a necessary first step in the analysis, it does not by itself lead to any conclusion in terms of the degree of openness of fta s towards renewable energy. Ultimately, what matters are the legal implications of these provisions and whether they do transform trade agreements into a vehicle to secure environmental and sustainability objectives. In this spirit, this section will address the legal implications of one of the features of fta s identified in previous paragraphs, namely the introduction of exemptions in addition to exception clauses. 3.1 From Exceptions to Exemptions The term “exceptions” is often used –​misleadingly –​in a very broad and over-​ comprehensive fashion, to encompass similar, yet different, kinds of provisions. The reason why using the term “exception” interchangeably may be misleading is that several different techniques exist to achieve such exclusion, and each of them carries different legal implications. Viñuales, for example, identifies up to seven techniques that can be employed in treaties to “escape a rule.”73 From the very beginning, this contribution has distinguished between two of these techniques –​exceptions stricto sensu, and exemptions or carve-​ outs (see supra Section 2.2.2). This section is precisely devoted to the analysis of this distinction, as it is particularly important in the area of environmental protection and renewable energy promotion. In this area, the gatt employs an exception stricto sensu, Article xx (and in particular paragraphs b and g),74 and the same does the gats (Article xiv). As shown earlier, recent fta s, besides reproducing these exceptions, increasingly employ environmental carve-​outs. Hence, this section aims at shedding some light on the distinction between the use of “exceptions” and “exemptions” in trade agreements, which is an important distinction as these conceptual categories are not merely descriptive, but rather normative, in that they influence 73 74

Jorge E. Viñuales, ‘Seven Ways of Escaping a Rule: Of Exceptions and Their Avatars in International Law’, in Lorand Bartels & Federica Paddeu (eds), Exceptions in International Law (Oxford University Press, 2020). See e.g. Lorand Bartels, ‘The Chapeau of the General Exceptions in the WTO GATT and GATS Agreements: A reconstruction’ 109 American Journal of International Law 95 (2015).

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168 Cima the operation of the relevant provisions and carry different legal implications.75 With this context in mind, this section will first clarify the characteristics that allow for a distinction between the two techniques and it will then analyse the legal implications of using one technique rather than the other, focusing in particular on the allocation of the burden of proof and on their interpretation. 3.1.1 Different Conceptual Categories Although sometimes articulated in very similar terms, exceptions and exemption operate in a very different manner. Exceptions identify circumstances in which the breach of other provisions of an agreement is justified. On the other hand, exemptions do not assume the breach of any provision, as they function as a removal of a given measure from the scope of a rule or set of rules, with the effect that said rule (or set of rules) will not apply to the carved-​out measure. The wto Appellate Body has grasped and clarified this distinction on several occasions. In US –​Shrimps, it defined Article xx of the gatt as a “limited and conditional exception from the substantive obligations contained in the other provisions of the gatt 1994,”76 following the approach of earlier gatt panels.77 By contrast, in Canada –​Periodicals, referring to gatt Article iii:8, it stated that this provision exemplifies “the kinds of programs which are exempted from the obligations of Articles iii:2 and iii:4.”78 In subsequent cases, it was further clarified that the measures falling under Article iii:8 “do not violate Article iii”79 and are not subject to the national treatment obligations set out therein.80 The distinction between the two categories of provisions was made even clearer in cases arisen under the tbt and sps Agreements.81 75 76 77 78 79 80

81

The distinction between different techniques is not a prerogative of trade agreements but applies to international treaties broadly. See Viñuales (n 73). US –​Shrimps, para 157 (emphasis added). gatt Panel Report, United States –​Section 337 of the United States Tariff Act of 1930, L/​ 6439 –​36S/​345, adopted 7 November 1989 [hereinafter US –​Section 337 Tariff Act]. Appellate Body Report, Canada –​Certain Measures Concerning Periodicals, pp. 33–​34, wt/​ ds31/​a b/​r , adopted 30 July 1997 (emphasis added). Report of the Panel, Indonesia –​Certain Measures Affecting the Automobile Industry, para 14.43, wt/​d s54/​r , adopted 23 July 1998. Joint Appellate Body Report, Canada –​Certain Measures Affecting the Renewable Energy Generation Sector; Canada –​Measures Relating to the Feed-​In Tariff Program, para 5.56, wt/​d s412/​a b/​r , wt/​d s426/​a b/​r , adopted 24 May 2013 [hereinafter Canada –​ fit Program]. Appellate Body Report, European Communities –​Measures Concerning Meat and Meat Products, wt/​d s26/​a b/​r , adopted 16 January 1998 [hereinafter ec –​ Hormones], paras 104 and 172. Appellate Body Report, European Communities –​Trade Description of Sardines, para 275, wt/​d s231/​a b/​r , adopted 23 October 2002 [hereinafter ec –​ Sardines].

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The distinction between exceptions and exemptions is the product of a conceptual elaboration. Yet, these conceptual categories are not merely descriptive but rather of normative nature, as they carry different legal implications. Such implications are especially relevant in case a dispute arises but, even beyond litigation, they deeply affect the functioning of the norms involved. In the specific case of renewable energy and environmental protection, as with other non-​trade concerns, choosing between different techniques can lead to diametrically opposed results. Two such legal implications are of particular importance, namely the allocation of the burden of proof and interpretation. 3.1.2 The Allocation of the Burden of Proof The burden of proof is a concept related to the law of evidence, first developed at the level of domestic law, both in common and civil law traditions, and then applied to international proceedings.82 It can be further broken down in different duties or burdens: the “burden of raising,” which refers to the duty to raise a specific claim, the “burden of production,” meaning the duty to produce evidence, and the “burden of persuasion,” which is the burden of proving or disproving a claim and ultimately convince the trier. Whether a provision is framed as an exception or an exemption has direct consequences as to what party will bear each of these burdens. The use of exceptions vis-​à-​vis exemptions influences in particular the allocation of the burden of persuasion. The latter imposes upon one party the duty to persuade the trier, as well as the related “risk of non-​persuasion,” given that the party will lose if is unable to affirmatively discharge its burden.83 The burden of persuasion may fall on one party with regard to some issues and to the other party as to other issues, and what is important is to determine who bears the burden on each issue.84

82

For an insightful analysis of the evolution of the concept of the burden of proof in the civil law and common law legal systems, see Mojtaba Kazazi, Burden of Proof and Related Issues: A Study of Evidence Before International Tribunals (Martinus Nijhoff Publishers, 1996); Michelle T. Grando, Evidence, Proof, and Fact-​Finding in wto Dispute Settlement (Oxford University Press 2009) 74–​80. See also Joost Pauwelyn, ‘Evidence, proof and Persuasion in wto Dispute Settlement. Who Bears the Burden?’ 1 Journal of International Economic Law 227 (1998), 229–​231. 83 Charles v. Laughlin, ‘The Location of the Burden of Persuasion’18 University of Pittsburgh Law Review 3 (1956). 84 It is commonly accepted in public international law that the burden does not shift, but rather that there is a different burden on each operative fact. See Grando, Evidence (n 82) 83–​4 and Pauwelyn, ‘Evidence, proof and Persuasion’ (n 82) 230, 232.

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170 Cima The general rule with respect to the allocation of the burden of proof (of persuasion), applied consistently by international courts and tribunals, is the rule actori incumbit probatio, according to which “the party who asserts a fact, whether claimant or respondent, is responsible for providing proof thereof.”85 Accordingly, the party claiming the breach of a wto rule bears the burden of proving that such breach took place.86 On the other hand, the respondent who invokes an exception to the general rule carries the burden of demonstrating the compliance with the conditions reflected in the exception (quicumque exceptio invocat eiudem probare debet). The Appellate Body introduced these two guiding rules in the wto legal order in its report on US –​Shirts and Blouses when it stated that “the burden of proof rests upon the party, whether complaining or defending, who asserts the affirmative of a particular claim or defence.”87 It follows that while the party invoking the violation of a primary norm will have to prove that such norm has been violated, the party invoking an exception will have to prove that the exception applies.88 The maxim that the respondent bears the burden of proving the exception only applies to exceptions stricto sensu and not to exemptions or carve-​outs. In this case, in fact, the burden will not be on the respondent but rather on the complainant to prove a) that a general rule has been violated by the respondent and b) that the respondent does not fall under the situation foreseen by 85 Kazazi, Burden of Proof (n 82) 117. 86 Report of the Panel, Japan –​Taxes on Alcoholic Beverages, wt/​d s8/​r , adopted 1 November 1996. Appellate Body Report, United States –​Measure Affecting Imports of Woven Wool Shirts and Blouses from India, wt/​d s33/​a b/​r , adopted 23 May 1997, 14–​16. 87 US –​Shirts and Blouses, at 14. See Henrik Horn and Petros C. Mavroidis, ‘Burden of Proof in Environmental Disputes in the wto: Legal Aspects’ 11 (Research Institute for Industrial Economics, ifn Working Paper No. 793, 2009). 88 US –​Shirts and Blouses, at 14. See Horn & Mavroidis (n 87). gatt Panel Report, Canada –​Administration of Foreign Investment Review Act, bisd 305/​140, para 5.20, adopted 7 February 1984. See also US –​Section 337 Tariff Act, para 5.27 and USA –​Measures Affecting Alcoholic and Malt Beverages, paras 5.41 and 5.52, bisd 39S/​206, adopted 19 June 1992. Later, the ab continued on this track: see Appellate Body Report, Thailand –​ Customs and Fiscal Measures on Cigarettes from the Philippines, para. 176, wt/​d s371/​a b/​ r, adopted 15 July 2011; Appellate Body Report, Korea –​Measures Affecting Imports of Fresh, Chilled and Frozen Beef, para 157, wt/​d s161/​a b/​r , adopted 10 January 2001; US –​ Shirts and Blouses, at 14–​16; US –​Gasoline, at 22–​3. Appellate Body Report, United States –​ Measures Affecting the Cross-​Border Supply of Gambling and Betting Services, para 309, wt/​d s285/​a b/​r , adopted 20 April 2005 [with regard to gats Article xiv(a)] [hereinafter US –​Gambling]. Appellate Body Report, United States –​Tax Treatment for ‘Foreign Sales Corporations’ –​Recourse to Article 21.5 of the dsu by the European Communities, para. 133, wt/​d s108/​s b/​r w, adopted 29 January 2002 [with regard to footnote 59 of the scm Agreement].

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the excluding provision.89 In ec –​ Hormones, the Appellate Body reversed the panel’s finding that the burden of proof regarding sps Article 3.3 had to be assigned to the respondent and clarified that it was for the United States and Canada (the complainants) to prove that the norm did not apply.90 This statement formed the basis of Appellate Body decisions in later tbt cases, such as ec –​ Sardines, where the Appellate Body stressed that “it [was] for Peru –​as the complaining Member seeking a ruling on the inconsistency with Article 2.4 of the tbt Agreement of the measure applied by the European Communities –​ to bear the burden of proving its claim,”91 as the second part of tbt Article 2.4 represents an exemption and not an exception. Defining the allocation of the burden of proof and, in particular, of persuasion, does not necessarily affect the outcome of a dispute whenever there are strong grounds to rule in favor of one party or the other. On the other hand, it becomes a crucial question when the evidence is not sufficient or the arguments are in equipoise, as the panel or Appellate Body have to find against the party bearing the burden of proof. An element that further exacerbates the distance between the two scenarios is the standard of proof required to prove the violation of a primary norm and the applicability of an exception. The burden of persuasion imposed on the complainant to prove the violation of a wto obligation (such as those contained in Articles i, iii, and xi of the gatt), is generally rather “light” when compared to that borne by the respondent. For example, with regard to both Article iii and xi of the gatt, no adverse effects need to be shown to establish a violation92 and, with regard to Article iii, when determining whether a product has been taxed “in excess,” even a minimal tax differential is sufficient.93 Horn and Mavroidis, after a comprehensive analysis of the relevant disputes,94 argue that it is precisely the “light” burden imposed on the complainant to have contributed towards some (type ii) errors, where a measure that should have been allowed is found inconsistent.95

89 Grando, Evidence (n 82) 154. 90 ec –​ Hormones, paras 107–​9. 91 ec –​ Sardines, paras 275 and 282. 92 According to come scholars, this standard has been inherited from the gatt Superfund jurisprudence. See Horn and Mavroidis, ‘Burden of Proof’ (n 87) 14. 93 Japan –​Alcoholic Beverages ii, p. 23. 94 In particular, Japan –​Alcohol, Korea –​Alcohol, Chile –​Alcohol, and Korea –​Beef. 95 Based on the distinction between Type i errors, where a truly guilty defendant escapes liability, and Type ii errors, where a truly innocent defendant is found liable. Horn and Mavroidis, ‘Burden of Proof’ (n 87) 41.

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172 Cima 3.1.3 Interpretation Another important implication of resorting to exemptions rather than exceptions has to do with the way in which these clauses are interpreted by courts and tribunals. The authoritative source governing treaties’ interpretation, the vclt, does not contain any explicit rules regarding the interpretation of exceptions. The principle that exceptions should be interpreted restrictively has been drawn from the domestic practice of interpreting exceptions in statutes, as well as from the Latin maxim exceptio est strictissimae applicationis which is part of general international law and is consistently referred to by international tribunals.96 Although the Appellate Body has suggested that there existed no mandatory requirement to automatically interpret a provision restrictively simply because of its exceptional nature,97 this does not mean that exceptions should not be interpreted restrictively, but simply that qualifying a provision as an exception does not automatically trigger a strict interpretation. Several other elements lead to the conclusion that, in practice, exceptions are interpreted strictly in wto law as well. First, the Appellate Body has often emphasized that exceptions operate in a limited and conditional way. In US –​Shrimps, for instance, the Appellate Body has stressed the “limited ambit of such exceptions because the lack of their determinacy could otherwise endanger the integrity of the primary obligations under the relevant treaty.”98 The chapeau of Article xx, in addition, puts further limitations on the operability of the exceptions under gatt Article xx. Exemptions have not been addressed as thoroughly as exceptions with respect to their interpretation. If one were to follow the principle according to which “the more exceptional the clause the more restrictive the interpretation,” being exemptions less exceptional than exceptions, it would follow that their interpretation should be less restrictive.99 The investment dispute Mesa 96

See North Sea Continental Shelf (Ger. v. Den.), 1969 i.c.j. Rep. 3 (Feb. 1969) (dissenting opinion of Judge Tanaka, at186). Maritime Delimitation and Territorial Questions Between Qatar and Bahrain (Qatar v. Bahr.) Merits 2001 i.c.j. 40 (Mar. 2001). nafta Arbitral Panel Established Pursuant to Chapter Twenty: In the Matter of Cross-​Border Trucking Services (Secretariat File no. usa-​m ex-​98–​2008–​01). [in this case, however, the reference to the principle exceptio est strictissimae applicationis was made with respect to a reservation, and not an exception]. See Asif H. Qureshi, Interpreting WTO Agreements. Problems and Perspectives 105 (Cambridge University Press, 2006). Case C-​169/​00, Commission of the European Communities v. Republic of Finland, 2002 ecr i-​02433. 97 Qureshi, Interpreting WTO Agreements (n 96) 109. 98 US –​Shrimps, para. 157. 99 Viñuales, ‘Seven Ways’ (n 73).

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v. Canada provides a quite clear example of such an approach.100 The claimant (Mesa) suggested that “Article 1108(7)(a) must be interpreted restrictively because it is an exception,”101 while the tribunal qualified the provision as a carve-​out, whose function is “to exclude all procurement activities from the scope of some of the obligations of Chapter 11,”102 and sided with the Appellate Body in Canada –​Renewables in interpreting the term ‘procurement’ broadly.103 Similar to what has been argued with respect to the degree of standard of proof required, the expansive interpretation given to wto obligations and the de facto restrictive interpretation given to exceptions risks leading to Type ii errors. Providing the respondent with a “way out” through an exception stricto sensu might lead certain environmental measures to be found in violation of wto Agreements, while, had the provision been phrased as an exemption –​ and therefore given a more expansive reading –​the very same measure could be found to be wto-​consistent instead. 3.2 A New Subsidies Discipline on the Way? The legal implications identified in the previous paragraphs might make a difference in the way renewable energy is handled in trade agreements. One notable area where they could have far-​reaching effects is the treatment of renewable energy subsidies. The recent years have witnessed a steep increase in the number of disputes related to the renewable energy sector. Almost the entirety of these disputes, including the requests for consultation, involve renewable energy subsidies.104 This should not come as a surprise, considering 100 Mesa Power Group, llc v. Government of Canada, uncitral, pca Case No. 2012-​17 [hereinafter Mesa v. Canada]. See Viñuales, ‘Seven Ways’ (n 73). 101 Mesa v. Canada, para 405. 102 Ibid., para 427. 103 Ibid., paras 411–​413. Canada –​fit Program, para 5.59, where the ab understood “the word ‘procurement’ to refer to the process pursuant to which a government acquires products.” Viñuales (n 73). 104 Canada –​fit Program. Appellate Body Report, India –​Certain Measures Relating to Solar Cells and Solar Modules, wt/​d s456/​a br, adopted 14 October 2016. Other disputes have not gone beyond the consultation stage yet: Request for Consultations by the United States, China –​Measures Concerning Wind Power Equipment, wt/​d s419, 22 December 2010; Request for Consultations by China, European Union and Certain Member States –​Certain Measures Affecting the Renewable Energy Generation Sector, wt/​d s452, 5 November 2012; Request for Consultations by Argentina, European Union and Certain Member States –​ Certain Measures on the Importation and Marketing of Biodiesel and Measures Supporting the Biodiesel Industry, wt/​d s459, 15 May 2013; Request for Consultations by the Russian Federation, European Union and Its Member States –​Certain Measures Relating to the Energy Sector, wt/​d s476, 30 April 2014; Request for Consultations by India, United States –​ Certain Measures Relating to the Renewable Energy Sector, wt/​d s510, 9 September 2016.

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174 Cima that, in the area of renewable energy development, there is a need to create favourable economic conditions for these new technologies: because the market alone fails to address the externalities linked to the use of fossil fuels vis-​à-​ vis renewable sources,105 green technologies are not economically profitable, and government intervention is often seen as necessary to encourage their deployment. The wto regime regulates subsidies in the ascm. The latter originally included an exemption for, among others, “environmental” subsidies. Within a so-​called “traffic-​light system” –​where “red-​light” subsidies are prohibited, and “yellow-​ light” ones simply actionable –​Article 8 of the ascm disciplined three groups of “green-​light” subsidies, which were non-​actionable, and therefore allowed. Subsidies aimed at promoting the “adaptation of existing facilities to new environmental requirements imposed by law and/​or regulations which result in greater constraints and financial burden on firms” automatically excluded the applicability of other provisions of the agreement, including Article 3 on prohibited subsidies and Article 5 on actionable ones. However, this provision was an exemption sui generis, as it was meant to apply only temporarily and, after elapsing in 2000, it was not renewed by wto Members due to internal disagreements. As a result of the expiration of the green-​light subsidies category, the ascm now contains no exemptions nor exceptions able to account for the economic, environmental, and social objectives of certain subsidies. Yet, there may be legitimate rationales behind their use. In fact, although subsidies can distort resource allocation, undermine market access commitments by importing nations, and divert customers from one exporting nation to another, on the other hand, they can be used constructively to correct market failures and address negative externalities, as it is often the case with renewable energy subsidies.106 One of the main shortcomings of the ascm, as pointed out by a number of scholars, is precisely the inability to distinguish “undesirable” subsidies from those that address legitimate interests and concerns.107 The result 105 Nicholas Stern, The Economics of Climate Change: Stern Review (Cambridge University Press, 2007), 24. 106 Kyle Bagwell & Robert W. Staiger, ‘Will International Rules on Subsidies Disrupt the World Trading System?’ 96(3) American Economic Review 877–​895 (2006). 107 Alan O. Sykes, ‘The Economics of WTO Rules on Subsidies and Countervailing Measures’ (U. Chicago Law & Economics, Olin Working Paper No. 186, June 2003); Luca Rubini, ‘The Subsidization of Renewable Energy in the WTO: Issues and Perspectives’ (Working Paper No. 2011/​321, 2011). Petros C. Mavroidis and Aaron Cosbey, ‘A Turquoise Mess: Green Subsidies, Blue Industrial Policy and Renewable Energy: The Case for Redrafting the Subsidies Agreement of the WTO’ (eui Working Paper rscas 2014/​17, 2014); Steve Charnovitz and Carolyn Fischer, ‘Canada-​Renewable Energy: Implications for WTO Law

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is the adoption of a one-​size fits all approach, where all subsidies are lumped in the same basket and which results in the failure to deal effectively with the problem of renewable energy subsidies. The vast majority of the scholarship has centred around the possible extensive application of gatt Article xx to the ascm, or rather to the need to draft a similar exception within the text of the subsidies agreements itself. One of the strongest explanations why an exception is needed in the ascm is the simple fact that, because other wto agreements, such as the gatt and the gats, contain an exception clause while the ascm does not, Members could be able to justify measures, such as total bans and quotas, which are widely known as more restrictive and trade-​distorting than subsidies,108 and a result of this kind would not be in line with the overall purpose of the trade regime, which is to eliminate or reduce trade distortions. The need for an excluding clause that would allow the agreement to distinguish between “undesirable” subsidies from those that address legitimate interest and concerns is in no way contested here. However, the choice of the most suitable technique to achieve this goal deserves some thought. Although the immediate temptation might be to look at gatt Article xx, an exception stricto sensu is not necessarily the only, let alone the best, solution. I have argued elsewhere that another option could be equally viable, if not even more suitable: introducing an exemption rather than an exception within the scm Agreement, leading to a better balance between the need to avoid trade-​distortive measures and to pursue legitimate environmental and social goals.109 The analysis conducted in Section 2.2.2 of this contribution showcased a number of fta s that have started introducing exemptions when regulating subsidies. The EU-​Singapore fta allows parties to provide for subsidies that do have trade effects on the other party –​as long as such effects are contained and the subsidy is limited to the minimum needed to achieve the objective –​when such subsidies are necessary to achieve an objective of public interest, explicitly including subsidies for environmental purposes.110

on Green and Not-​So-​Green Subsidies’ 14(2) World Trade Review 177 (2015). See also Chapter 2 [Espa] in this volume. 108 For an overview of the arguments against the extensive application of gatt Article xx to other wto texts, see Rubini, ‘The Subsidization of Renewable Energy’ (n 107). 1 09 Elena Cima, ‘Caught between WTO Rules and Climate Change. The Economic Rationale of ‘Green Subsidies’’ in Klaus Mathis & Bruce R. Huber (eds), Environmental Law and Economics 379 (Springer, 2017) 400-​0 1. 110 Art. 12.8, Annex 12-​A(e).

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176 Cima Other examples are offered by the EU-​South Africa fta as well as the European Economic Area (eea). While the complete absence of an exceptional clause clearly disfavours governments that are trying to support their renewable energy industries with measures that will very likely be found to be either prohibited or actionable subsidies by a panel under the ascm, the introduction of an exception, of the kind of gatt Article xx, or the direct application of the latter to the subsidies discipline might not change the odds that much. The heavy burden of persuasion imposed on the respondent and the restrictive interpretation given to exceptions stricto sensu would make it very difficult for “green” subsidies to be found wto-​consistent. On the other hand, the legal effects of introducing a carve-​out instead might be able to level the playing field. 4

Conclusions

Since the adoption of the gatt in 1947, the space devoted to environmental and renewable energy considerations in trade agreements has significantly expanded. This study as revealed an increase in the number of provisions applicable to renewable energy, as well as in the number and variety of techniques used. Moreover, recent provisions show a broader scope of application, as well as a higher level of commitment than could be found in the text of earlier agreements. The specific aspect addressed in this contribution –​the shift from the sole use of environmental exceptions to the introduction exemptions –​far from providing a fully comprehensive picture of the legal value of fta s’ renewable energy provisions, shows the evolution of trade agreements towards a model that directly incorporates environmental concerns, with clear implications for domestic trade-​related policies in favour of renewable energy.

References

Bagwell, Kyle and Robert W. Staiger. 2006. ‘Will International Rules on Subsidies Disrupt the World Trading System?’ 96(3) American Economic Review 877. Bartels, Lorand. 2015. ‘The Chapeau of the General Exceptions in the WTO GATT and GATS Agreements: A reconstruction’ 109 American Journal of International Law 95. Cattaneo, Olivier. 2015. ‘The Political Economy of PTAs’, in Simon Lester et al (eds.), Bilateral and Regional Trade Agreements. Commentary and Analysis 28 (Cambridge University Press).

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Charnovitz, Steve. 1997. ‘The World Trade Organization and the Environment’ 8(1) Yearbook of International Environmental Law 98. Charnovitz, Steve and Carolyn Fischer. 2015. ‘Canada-​Renewable Energy: Implications for WTO Law on Green and Not-​So-​Green Subsidies’ 14(2) World Trade Review 177. Cima, Elena. 2016. ‘Promoting Renewables through Free Trade Agreements? An Assessment of the Relevant Provisions’ C-​ EENRG Working Papers 2016–​ 7, Cambridge Centre for Environment, Energy and Natural Resources Governance, University of Cambridge. Cima, Elena 2017. ‘Caught between WTO Rules and Climate Change. The Economic Rationale of ‘Green Subsidies’’ in Klaus Mathis & Bruce R. Huber (eds), Environmental Law and Economics 379 (Springer). Cima, Elena 2018. ‘Promoting Renewable Energy through FTAs? The Legal Implications of a New Generation of Trade Agreements’ 52(4) Journal of World Trade 663. Cottier, Thomas et al. (eds). 2009. International Trade Regulation and the Mitigation of Climate Change: World Trade Forum (Cambridge University Press). Gehring, Markus W. et al. 2013. ‘Climate Change and Sustainable Energy Measures in Regional Trade Agreements (RTAs). An Overview’ (ictsd Issue Paper No. 3). Grando, Michelle T. 2009. Evidence, Proof, and Fact-​Finding in WTO Dispute Settlement (Oxford University Press). Hofmann, Claudia et al. 2017. ‘Horizontal Depth: A New Database on the Content of Preferential Trade Agreements’ (Policy Research Working Paper No. wps 7981, World Bank Group). Horn, Henrik et al. 2009. ‘Beyond the WTO? An Anatomy of EU and US Preferential Trade Agreements’ 7 (Bruegel Blueprint Series). Horn, Henrik and Petros C. Mavroidis. 2009. ‘Burden of Proof in Environmental Disputes in the wto: Legal Aspects’ 11 (Research Institute for Industrial Economics, ifn Working Paper No. 793). International Energy Agency. 2014. World Energy Outlook 2014 (iea). Kazazi, Mojtaba. 1996. Burden of Proof and Related Issues: A Study of Evidence Before International Tribunals (Martinus Nijhoff Publishers). Laughlin, Charles V. 1956. ‘The Location of the Burden of Persuasion’18 University of Pittsburgh Law Review 3. Leal-​Arcas, Rafael. 2013. ‘Climate Change Mitigation from the Bottom Up: Preferential Trade Agreements to Promote Climate Change Mitigation’ 7 Carbon & Climate Law Review 34. Leal-​Arcas, Rafael et al. 2014. International Energy Governance: Selected Legal Issues (Edward Elgar Publishing). Maskus, Keith E. 2012. Private Rights and Public Problems: The Global Economic of Intellectual Property in the 21st Century (Peterson Institution for International Economics).

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178 Cima Maskus, Keith E. and Ruth L. Okediji. 2010. ‘Intellectual Property Rights and International Technology Transfer to Address Climate Change: Risks, Opportunities, and Policy Options’ (ictsd Issue Paper No. 32). Mavroidis, Petros C. and Aaron Cosbey. 2014. ‘A Turquoise Mess: Green Subsidies, Blue Industrial Policy and Renewable Energy: The Case for Redrafting the Subsidies Agreement of the WTO’ (eui Working Paper rscas 2014/​17). McCaffrey, Stephen C. 2006. Understanding International Law (LexisNexis). Pauwelyn, Joost. 1998. ‘Evidence, proof and Persuasion in WTO Dispute Settlement. Who Bears the Burden?’ 1 Journal of International Economic Law 227. Qureshi, Asif H. 2006. Interpreting WTO Agreements. Problems and Perspectives 105 (Cambridge University Press). Rubini, Luca. 2011. ‘The Subsidization of Renewable Energy in the WTO: Issues and Perspectives’ (Working Paper No. 2011/​321). Sapir, André. 2007. ‘Europe and the Global Economy’, in Fragmented Power: Europe and the Global Economy (Bruegel). Selivanova, Yulia. 2011. Regulation of Energy in International Trade Law: WTO, NAFTA, and Energy Charter (Kluwer Law International). Stern, Nicholas. 2007. The Economics of Climate Change: Stern Review (Cambridge University Press). Sykes, Alan O. 2003. ‘The Economics of WTO Rules on Subsidies and Countervailing Measures’ (U. Chicago Law & Economics, Olin Working Paper No. 186). unep and ictsd. 2010. Patents and Clean Energy: Bridging the Gap between Evidence and Policy. Viñuales, Jorge E. 2020. ‘Seven Ways of Escaping a Rule: Of Exceptions and Their Avatars in International Law’, in Lorand Bartels & Federica Paddeu (eds), Exceptions in International Law (Oxford University Press). Yergin, Daniel. 2006. ‘Ensuring Energy Security’ 85(2) Foreign Affairs 69.

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­c hapter 8

EU State Aid Law, wto Subsidies Disciplines and Renewable Energy Support Schemes Disconnected Paradigms in Decarbonizing the Grid? Anna-​Alexandra Marhold 1

Introduction

In its efforts to decarbonize its economy, meeting its commitments under international climate treaties and increasing its security of energy supply, the European Union (EU) promotes the scale up of clean energy and energy efficiency.1 The Union has several legal instruments at its disposal to further this goal, chiefly the Renewable Energy Directive, the 2014 E.U. Guidelines on State Aid for Environmental Protection and Energy, the EU General Block Exemption Regulation (gber) and supporting case law.2 As this contribution will reveal, while arguably consistent with Union law, the support schemes for renewable energy currently in existence in the EU may –​and likely are –​inconsistent with World Trade Organization (wto) subsidies disciplines as set out in the Agreements on Subsidies and Countervailing Measures (ascm).3 As the EU and its Member States are members to the World Trade Organization, the rules of the multilateral trading system are binding

1 Please note that this chapter was written based on the rules in force at the time of writing in 2018. Some rules may have been amended since then; Conference of Parties 21 (COP21) Paris Agreement: United Framework Convention on Climate Change (unfccc), UN Doc fccc/​c p/​2 015/​l .9/​Rev.1 ‘Adoption of the Paris Agreement’ (Dec. 2015) (hereinafter the Paris Agreement); Also see EU 2020 Climate and Energy Package (accessed 19 June 2018). 2 European Commission, Guidelines on State aid for environmental protection and energy 2014–​ 2020 (2014/​ C 200/​ 01) C 200/​ 1. 28.6.2014 (hereinafter Guidelines) and European Commission, Commission Regulation (EU) No 651/​2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty Text with eea relevance; oj l 187, 26.6.2014, 1–​78 (hereinafter gber). 3 World Trade Organization website, www.wto.org accessed 19 June 2018; Agreement on Subsidies and Countervailing Measures, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1869 U.N.T.S. 14.

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180 Marhold upon them.4 Consequently, when wto Members such as the EU maintain wto-​inconsistent policies, they open up avenues for other wto Members to initiate dispute settlement proceedings against them.5 This chapter investigates to what extent EU and wto law are disconnected paradigms with respect to support schemes for renewable energy: EU legislation and case law attempts to legitimize support schemes for renewable energy through its legal framework, while wto subsidies law presently offers little legal space to pursue policy goals such as the scale up of green energy. The current situation may lead to an unfavourable outcome for not only the EU, but other wto Members that wish to scale up the share of renewables in their energy mix. To better understand the place of renewable energy support schemes in the EU, Section 2 will first lay out the rationale of the EU internal energy market, including the interplay between gradually pursued liberalization and decarbonization. Section 3 will then proceed to discuss EU renewable energy law and policy and the treatment of support schemes under EU law. It will in particular focus on the E.U. General Block Exemption Regulation, the 2014 EU Guidelines on State Aid for Environmental Protection and Energy and relevant case law.6 Section 4 will test current EU State aid law in the renewable energy sector against some of the intricacies of wto subsidies regulation law and assess whether the EU and wto legal regime operate in disconnected paradigms. 2

EU Internal Energy Market Fundamentals at a Glance: The Interplay between Liberalization and Decarbonization

2.1 The Materialization of the EU Internal Energy Market The EU Internal Energy Market (iem) is a product of gradually introducing a more coherent, EU-​wide energy legislation and policy from the 1980s onwards. Its overall objective is to attain a fully interconnected EU energy market, that is at the same time liberalized, decarbonized and can guarantee security of energy supply for Europe’s citizens. Through iem legislation, two policy goals 4 See wto, ‘The European Union and the WTO’ (accessed 19 June 2018). 5 Dispute Settlement Understanding, Dispute Settlement Rules: Understanding on Rules and Procedures Governing the Settlement of Disputes, Marrakesh Agreement Establishing the World Trade Organization, Annex 2, 1869 U.N.T.S. 401, 33 i.l.m. 1226 (1994). 6 The Guidelines and gber (n 2).

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de facto merge into one: the completion of the EU single market by means of extending competition policy to the energy market on the one hand, and introducing and advancing a coherent Union-​wide, increasingly integrated energy policy, on the other.7 The extension of the European single market to the energy sector is progressively realized by breaking up vertically integrated energy companies and introducing competition to the electricity and gas industries where possible.8 The underlying rationale here is interest of the consumer, which is ultimately at the heart of EU competition policy: by ensuring companies compete fairly with one another, efficiency is encouraged, quality and innovation increase, prices decrease, and consumers have an overall broader choice.9 Liberalization and interconnection of network industries were introduced later to the energy sector than to most other goods and services sectors in the EU. One reason for this is that, for decades, the energy sector was considered a purely national matter linked to security of energy supply, industrial policy, and strategic interests of separate EU Member States. Historically, relatively little cross-​border interconnections of electricity grids and gas pipelines existed across Europe. In addition to this, the electricity and gas industry has traditionally either been completely state-​owned and/​or operated by vertically integrated companies, often behaving as a natural monopoly owing to the sunk cost connected to energy production and infrastructure investments.10 Due to this state of affairs, it became evident that the breaking up of these industries would be a challenging process which could only succeed if implemented in phases. During the first phase of implementing the iem in the late 1980s, cross-​border transit opened for both electricity and gas, implying that Member 7

8

9 10

See for an overview Anna Marhold, ‘EU Regulatory Private Law in the Energy Community –​ The Synergy Between the CEER and the ECRB in Facilitating Costumer Protection’, in Marise Cremona and Hans-​W. Micklitz, Private Law in the External Relations of the EU (Oxford University Press, 2016) 249, 250–​254; See also European Commission (dg Energy), ‘Markets and Consumers –​Integrated Energy Markets for European Households and Business’ (accessed 19 June 2018). Pollitt in a brief paper provides a historical overview of the ‘liberalization era’ and its effects: liberalization is characterized by its attention for competition, and unbundling is one of the tools. Privatization is often an effect of liberalization but not always, and part of the reason liberalization is not yet complete is that governments are afraid to lose the control or the power to cross-​subsidize, see Michael G. Pollitt, ‘The Role of Policy in Energy Transitions: Lessons from the Energy Liberalisation Era’, 50 Energy Policy 128 (2012). dg Competition, ‘Why is Competition Policy Important for Consumers?’ (accessed 19 June 2018). See generally on this Terence Daintith and Leigh Hancher, Energy Strategy in Europe –​The Legal Framework (De Gruyter 1986).

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182 Marhold States could no longer oppose transnational flows of energy. In the early 2000s, the Second Energy Package introduced the legal unbundling of gas and electricity sectors, mandating the minimum threshold of legal separation of the production and sale of energy from transmission and distribution activities of energy.11 By 2009, the Commission adopted the Third Energy Package in the form of an Electricity and Gas Directive (2009/​72/​e c and 2009/​73/​e c respectively), introducing the most stringent form of unbundling, known as Ownership Unbundling (ou). This form of unbundling prescribes the complete separation of companies’ electricity generation and sales activities from their transmission network activities, requiring them to be operated by strictly independent entities.12 Although all EU Member States must attain full ou in both their electricity and gas sectors, it remains difficult to realize this in all Member States in a timely manner today and milder forms of unbundling are still accepted (the case in the gas sector in e.g. Hungary, Croatia and Lithuania).13 Unbundling and integrating energy markets is additionally accompanied by significant challenges: for instance, it exposes the need to attract sufficient infrastructure

11 12

13

Directives 2003/​54/​e c for Electricity and 2003/​55/​e c for Gas, oj 2003 L 176. Article 9 of the Electricity and Gas Directives of the Third Energy Package are Directive 2009/​72/​e c concerning common rules for the internal market in electricity and repealing Directive 2003/​54/​ ec (text with eea relevance), oj 2009 L 211/​69, and Directive 2009/​ 73/​e c concerning common rules for the internal market in natural gas and repealing Directive 2003/​55, oj 2009 L 211/​94, both dated 14 July 2009. Ownership unbundling is taken up in Article 9(1) of the Electricity and Gas Directives (2009/​73/​e c); Third Party Access is taken up in Article 32 of the Directives.; Angus Johnston and Guy Block, EU Energy Law (Oxford University Press 2012) 73; ecj, C-​439/​06 Citiworks ag (22 May 2008). In fact, none of Member States has managed to fully transpose the Electricity and Gas Directives (due date for transposition of the Directive was 2011). Note in this respect that while ‘full ownership unbundling’ remains the basic model and target for eu ms, vertically integrated energy companies can resort to two other alternatives: the independent system operator (iso) and independent transmission operator (ito) model. Under the former model, the transmission network can remain in the ownership of the energy company. Nevertheless, the transmission network itself must be managed by an iso, which must perform all day-​to-​day network operator functions and must be completely separate from the energy company. In the ito scenario, the transmission networks can also remain under the ownership of an energy consortium, but the transmission subsidiaries would be set up as independent joint stock companies carrying their own brand name and subject to stringent regulatory control. Most EU Member States whose transmission systems are controlled by vertically integrated undertakings prefer this last scheme of unbundling to comply with the Third Energy Package.

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investments in the European electricity market and the need to manage capacity remuneration mechanisms that Member States have in place.14 Another cornerstone of liberalization of the energy market the EU introduced in the Third Energy Package is the concept of Third Party Access (tpa), taken up in Article 32 of the Electricity Directive.15 tpa ensures that Member States have a system in place where third parties (usually competitors to the natural energy monopoly) can access the transmission and distribution grid under objective, transparent and non-​discriminative terms.16 One of the essential components of tpa is the regulation of tariffs, which have to be published, “applicable to all eligible customers, including supply undertakings and applied objectively and without discrimination between system users.”17 Ownership Unbundling and Third Party Access form the cornerstone legal instruments that mandate the breaking up of previously vertically integrated energy companies and allow for introducing competition in the sector, serving a dual goal by facilitating liberalization as well as promoting the Europe-​ wide integration of energy markets. While the electricity and gas sector differ significantly from one another, the core concepts of Ownership Unbundling and Third Party Access were conceived to apply to both sectors, as the electricity and gas industry have certain characteristics in common: They are each ‘network-​bound’, tied to fixed infrastructures and their operational processes,

14 See e.g. European Parliament Briefing, Understanding the Electricity Markets in the EU (Brussels, November 2016) and Jean-​Michel Glachant et al, ‘Incentives for Investments: Comparing EU Electricity and TSO Regulatory Regimes’ eui Florence School of Regulation Working Papers, June 2013. 15 Article 32 of Electricity Directive. 16 Ibid. See also Article 37(6) on the regulation of tariffs. The European Court of Justice (ecj) in Citiworks confirmed that tpa is paramount and essential for both competition to function in the market as well as completing the internal electricity market, ecj, C-​439/​06 Citiworks ag (22 May 2008), paras 40 and 44. 17 Article 32(1) Electricity Directive 2009/​72/​e c; Transmission System Operators as well as Distribution System Operators are the guarantors of tpa, Johnston and Block (n 12) 75. However, since a right balance must be attained between competition policy and attracting sufficient investments in energy infrastructure, the EU maintains an exemption policy to tpa. In the electricity sector, for instance, there is currently an emphasis on building more cross-​border capacity by direct current interconnectors (Article 17 of Regulation 714/​2009), meaning that these can qualify if it meets certain conditions). Article 17, Regulation 714/​2009/​e c. See for a more in-​depth analysis Tjarda van der Vijver, ‘Third Party Access Exemption Policy in the EU Gas and Electricity Sectors: Finding the Right Balance between Competition and Investments’, in Martha M. Roggenkamp et al., Energy Networks and the Law –​Innovative Solutions in Changing Markets (Oxford University Press, 2012) 333, 336.

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184 Marhold from energy production to transmission and distribution, where traditionally heavily regulated on state level. 2.2 EU Energy Law and Policy since Lisbon Energy remains a shared competence between the Union and its Member States, as stated in Article 4.2(i) of the Treaty on the Functioning of the European Union (tfeu).18 This entails that both the EU and its Member States may legislate in this area, as long as they respect the ‘duty of sincere cooperation’ flowing from Article 4(3) of the Treaty on the European Union (hereafter: teu).19 Since Lisbon, EU energy law policy has been based on Article 194 tfeu.20 The Article in paragraph one sets out the objectives of EU energy policy, while paragraph two subsequently determines that the European Parliament and the Council can establish the measures necessary to achieve these objectives. Paragraph two of this article further emphasizes the shared nature of the competence: the EU may, for instance, not determine the internal energy mix of its Member States.21 This element may be challenging, at minimum, as the Union has set binding targets for shares of renewable energy in its Member States, although justification for this can be partially found in mentioned Article 191(2)(c) tfeu for environmental protection.22 We can nevertheless discern a tension here between the targets and requirements set out in the EU Renewable Energy Directive discussed in this contribution and Member States’ sovereignty (including sovereignty over their natural resources) to decide their energy mix. Regarding renewable energy, we can conclude that while the EU at Union level may prescribe overall renewable energy targets, the Union is not in a position to decide on the actual energy mix of its Member States, nor does it have a say in what 18 19 20 21 22

Consolidated Version of the Treaty on the Functioning of the European Union, 2008 O.J. C 115/​47 (hereinafter tfeu). Consolidated Version of the Treaty on European Union, 2010 O.J. C 83/​01 (hereinafter teu); In short, the duty of sincere cooperation entail that the EU and its Member States must refrain from acting against each other’s respective interests. Article 194 tfeu. Ibid., Art. 194.2: “Such measures shall not affect a Member State’s right to determine the conditions for exploiting its energy resources, its choice between different energy sources and the general structure of its energy supply, without prejudice to Article 192(2)(c).” Ibid., Art. 192(2)(c): “By way of derogation from the decision-​making procedure provided for in paragraph 1 and without prejudice to Article 114, the Council acting unanimously in accordance with a special legislative procedure and after consulting the European Parliament, the Economic and Social Committee and the Committee of the Regions, shall adopt: measures significantly affecting a Member State’s choice between different energy sources and the general structure of its energy supply.”

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energy resources Member States can and should use.23 This is relevant in view of the Clean Energy Package, presented by the Commission in the fall of 2016 and currently under negotiation.24 In its proposals, the Commission recommends to do away with binding renewable energy targets on the national level, instead solely providing a binding target on the EU level, as a possible compromise to Member States in this area.25 EU Energy Market Liberalization: Not Enough for the Scale Up of Renewable Energy The EU has undertaken binding commitments under international climate treaties (most recently under the 2015 Paris Agreement) and must make active efforts to curb emissions to prevent the further heating up of the earth.26 Although liberalizing the EU energy market is one of the cornerstones of the Union’s energy policy, it in itself is not enough to realize a significant decarbonization of the European energy sector by means of scaling up the share of renewables in the market. Additional regulation to mitigate the negative externalities of CO2 emissions is thus necessary. However, it is worth briefly exploring the interplay between liberalization and decarbonization.27 There is some evidence that liberalizing the energy sector does contribute to sustainable development by increasing the share of renewables that can access the grid.28 For instance, various economic 2.3

23 24

25 26 27

28

See on this e.g. Thea Sveen, ‘The Interaction between Article 192 and 194 TFEU’ in EU Renewable Energy Law: Legal Challenges and Perspectives (2014), 157, 167–​168. European Commission, ‘Energy Union Package –​A Framework Strategy for a Resilient Energy Union with a Forward-​ Looking Climate Change Policy’, 25 February 2015, and dg Energy, ‘Commission Proposes New Rules for a Consumer Centred Clean Energy Transition’, 30 November 2016 (both websites accessed 19 June 2018); Also see European Commission, Communication on ‘Clean Energy For All Europeans’ Brussels, 30.11.2016 com(2016) 860 final, 8. European Commission, Proposal for a Directive of the European Parliament and of the Council on the promotion of the use of energy from renewable sources (recast), com/​ 2016/​0767 final/​2 –​ 2016/​0382 (cod), 23.02.2017, under 1.1. Paris Agreement. See for a more in-​depth discussion on this Anna Marhold, ‘The interplay between Liberalization and Decarbonization in the European Internal Energy Market for Electricity’, in K. Mathis and B. Huber (eds), Energy Law and Economics (Springer, 2018) 59–​75. Lionel Nesta et al., ‘Environmental Policies, Competition and Innovation in Renewable Energies’ 67 Journal of Environmental Economics and Management 396 (2014).

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186 Marhold and econometric studies have indicated that innovation in clean energy was more likely to thrive in countries with more liberalized markets, measured by an increase in patents filed for clean and renewable energy technologies.29 Moreover, a causal link was found between the degree of liberalization and the success rate of clean energy policies. Nesta, Vona, and Nicolli, for instance, observe that “In particular, the combination of environmental policies and market liberalization is the most effective method of inducing innovation in renewable energy, particularly near the technological frontier. This finding corroborates the complementarity hypothesis that environmental policies are more effective in competitive markets.”30 Analogous studies have been conducted in the European ‘brown’ electricity sector. In a 2016 study, Cambini, Caviggioli, and Scellato studied EU electricity market regulation and innovation in the period form 1990–​2009 by considering the growing number of patents in the traditional energy sector, based on Eurostat and International Energy Agency Data.31 The authors indeed found an increase in patent activities in the traditional electricity sector as a result of market liberalization, measured along the three factors of entry barriers, public ownership and vertical integration.32 Especially, the econometric results found that policies aimed at reducing vertical integration, i.e. unbundling, have a positive influence on innovation in the European electricity sector.33 However, a further 2014 study by Nicolli and Vona points out that lowering entry barriers is in fact a more significant force in facilitating renewable energy innovation, than privatization and unbundling.34 Notwithstanding, they also conclude that this varies heavily across technologies (e.g. the well-​developed wind industry profits from this).35 Finally, the introduction of a more stable

29

Tooraj Jamasb and Michaelk G. Pollitt, ‘Electricity Sector Liberalisation and Innovation: An Analysis of the UK’s Patenting Acitivies’ 40 Research Policy 309 (2011). 30 Nesta et al., ‘Environmental Policies’ (n 28) 409; Nevertheless, there are also studies that are less confident in the decarbonizing effect of liberalization, see for instance J. Blazqueza et al, ‘The Renewable Energy Policy Paradox’ 82 Renewable and Sustainable Energy Review 1 (2018), 3, arguing that full decarbonization of the power sector is simply not feasible taking into account the current design of the markets. 31 Carlo Cambini et al., ‘Innovation and Market Regulation: Evidence from the European Electricity Industry’ 23 Industry and Innovation 734 (2016). 32 Ibid. 33 Ibid. 34 See generally Francesco Nicolli and Francesco Vona, ‘Heterogenous Policies, Heterogenous Technologies: The Case of Renewable Energy’ 56 Energy Economics 190 (2016). 35 Ibid.

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regulatory framework –​in this particular study the Kyoto Protocol –​is found to amplify the inducement effect of energy policies and privatization.36 The fact that policies promoting vertical unbundling appear to promote innovation in the sector seems to correspond with the reality that most energy industries have been historically vertically integrated. From these observations, one can conclude that liberalization of the EU electricity market inherently does promote innovation, also in the renewable energy industry, measurable in the form of more patents in renewable energy technology. This given is notwithstanding any additional legislation for the scale up of clean and renewable energies. Nevertheless, the evidence also points to the fact that this is the most effective in countries where environmental and liberalization policies are combined. Moreover, while there may be strong indicators that liberalization in se does contribute, at least to some extent, to more clean energy technology innovation in the European electricity sector, this does not mean that it corrects for market failures adequately. Despite liberalization legislation, clean energy is still not on a par with ‘brown’ energy in the electricity grid. There are several reasons for this, two worth mentioning in this context: first, while the number of players in the market is increasing, it remains challenging to change supply side of electricity mix and for clean energy firms to access the market.37 Second, there is a whole string of other, non-​cost barriers that prevent clean energy capacity to compete with fossil fuels on a level playing field. These are comprised of both regulatory and non-​regulatory barriers, e.g. administrative, physical, social (information asymmetry), financial barriers, etc.38 We can conclude that for the EU to meet both objectives of liberalization and decarbonization, legislation supporting the scale up of clean energy is therefore necessary.39 While liberalization legislation may contribute to decarbonizing the grid by facilitating innovation, it has not been enough to correct for the negative externalities of carbon emission and it has not been able to make renewable energy compete with brown energy on the grid on a level playing field.

36 Ibid. 37 Johnston and Block, EU Energy Law (n 12) 304. 38 Ibid,. 320. 39 See on this specifically K. Struckmann and G. Sapi, ‘Energy and Environmental Aid’ in Philipp Werner and Vincent Verouden (eds), EU State Aid Control –​Law and Economics (Wolters Kluwer 2017) 663 ff.

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188 Marhold 3

Legal and Policy Space for the Scale Up of Renewable Energy under EU Law

EU legislation to support renewable energy has been put in place precisely to balance out this inequality between ‘brown’ and ‘green’ energy and promote the share of renewables in the Internal Energy Market. To this end, the Commission has introduced binding targets for Member States for the share of renewables in their energy mix from 2009 onwards through the Renewable Energy Directive, to 20, or even 30 per cent by 2020, and has set higher targets for 2030.40 Since the introduction of these binding targets in 2009, Member States have witnessed a steady rise in the share of renewables in their energy mix, evidenced by data from Eurostat.41 This section will discuss EU law currently in place for the scale up of renewable energy. The purpose of this is to demonstrate that EU law under the existing framework provides significant legal and policy space for Member States to utilize renewable energy support schemes, which has been a relatively successful tool for the scale up the share of renewables in the mix. As we will later understand from the following section, however, if these support schemes fall into the definition of a subsidy in wto law, they stand a significant chance of qualifying as a prohibited or actionable subsidy under the rules of the multilateral trading system.42 The main reason for this is that while such schemes would normally be considered state aid under EU law, the Union has a legislative framework of exemptions in place that legitimizes them. However, if such schemes qualify as a subsidy under wto law, there is much less scope to justify them under the latter legal framework. This section unveils this discrepancy by considering both EU law and case law on the matter. It will first examine the Renewable Energy Directive, followed by state aid disciplines, the Guidelines for state aid in green and renewable energy, and the General Block Exemption Regulation, followed by a discussion of relevant case law.

40

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Directive 2009/​28/​e c of the European Parliament and of the Council of 23 April 2009 on the promotion of the use of energy from renewable sources and amending and subsequently repealing Directives 2001/​77/​e c and 2003/​30/​e c, oj l 140, 5.6.2009, p. 16–​62 (hereafter EU Renewable Energy Directive); the 2030 EU Climate and Energy Framework envisages a forty percent cut in greenhouse gas emissions, a twenty-​seven percent share of renewable energy and a twenty-​seven percent improvement in energy efficiency. See Eurostat, ‘Energy from Renewable Sources’ (accessed 19 June 2018). Article 3 and 5 scm Agreement.

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3.1 No Harmonization of Support Schemes on EU Level From an economic perspective, many subsidies for clean energy are set up as investment subsidies to expand renewable energy capacity.43 Support schemes for the scale up of clean energy in Europe come in a variety of forms, such as investment aid, tax exemptions or reductions, tax refunds, renewable energy obligation support schemes including those using green certificates, and direct price support schemes including feed-​in tariffs and premium payments.44 The Feed-​in Tariff (fit) is arguably the most popular financing mechanism at present, including in the EU.45 Through a fit, the government guarantees to pay a certain set (above-​market) price per kilowatt-​hour to the producers of renewable energy “to feed it into the national energy grid.” fit s are targeted at future investments through offering new producers of clean energy long-​term contracts for this elevated price.46 To make a fit program effective, prices must be set high and be stable enough to provide enough incentives for those investments. In turn, suppliers of electricity are then required to buy electricity generated from these clean energy sources. These programs may be designed in a way that the amount of the subsidy gradually decreases over the years, as the renewable energy in question becomes more profitable and gains more market share in the economy.47 Note that fit s may or may not be transferred 43

Steve Charnovitz and Carolyn Fischer, ‘Canada –​Renewable Energy: Implications for WTO Law on Green and Not-​So-​Green Subsidies’ eui Working Papers, rscas 2014/​09 (2014), 4. 44 Henok Birhanu Asmelash, ‘Energy Subsidies and WTO Dispute Settlement: Why Only Renewable Energy Subsidies Are Challenged’ 18 Journal of International Economic Law 261 (2015), 269 citing Arunabha Ghosh and Himani Gangania, Governing Clean Energy Subsidies: What, Why, and How Legal? (Geneva, International Centre for Trade and Sustainable Development, 2012); Feed-​in Tariffs are a guaranteed price for clean energy by producers. In the US, a clear example of a renewable energy investment subsidy is the Federal Production Tax Credit, which gives a 2.3 cent incentive per kilowatt-​hour for the first 10 years of the operation of a renewable energy facility, see Charnovitz and Fischer, ‘Canada –​Renewable Energy’ (n 43) 4. 45 International Renewable Energy Agency, Renewable Energy Auctions in Developing Countries (Abu Dhabi, irena, 2013) 6; International Renewable Energy Agency, Renewable Energy Auctions: A Guide (Abu Dhabi, irena, 2015) 13 and generally United Nations Environmental Programme, Feed-​in Tariffs as a Policy Instrument for Promoting Renewable Energies and Green Economies in Developing Countries (Geneva, United Nations Environmental Programme 2012). 46 Charnovitz and Fischer, ‘Canada –​Renewable Energy’ (n 43) 5. 47 Through so-​called digression mechanisms. This was for instance the case in Germany, see European Commission, ‘Press release, State aid: Commission Approves German Renewable Energy Law EEG 2014’, Brussels, July 2014, available at: ; See also, European Commission, ‘Press release, State Aid: Commission Approves German Aid Scheme For Renewable Energy (EEG 2012)’,

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190 Marhold by the government directly, or borne by the consumers by an add-​on to their energy bill. There are several reasons why fit programs have been a successful tool in the scale up of clean energy. First of all, these programs usually have a long time frame and are therefore accompanied by long-​term price guarantees, meaning that they provide significant stability for investors.48 Another advantage is that the program design of fit schemes is often flexible and therefore could and should be adapted to the economic needs of the country in question, as well as to the changing market conditions and the advances in technology.49 Additionally, fit s may be beneficial for the development of local production of clean energy.50 The downside in maintaining a fit scheme is that it often ends up being more costly than necessary.51 For this reason, the EU has committed to phase this instrument out over time and ensure that schemes are market competitive.52 As alluded to above, there is presently a multiplicity of support schemes in existence in the EU, differing in design, set-​up and goal. There is no harmonization across Member States of these schemes (yet), resulting in a plethora of successful and less successful examples of the scale up of clean energy in the electricity grid.53 Reasons for the EU to not harmonize schemes in this area are, amongst others, the fact that some schemes as well as the accompanying note 110, and European Commission, ‘Press release, State aid: Commission Approves German Renewable Energy Law (EEG 2014) for Railway Sector, European Commission’, Brussels, available at: (accessed 19 June 2018). 48 unep-​w to Report, Trade and Climate Change (Geneva, United Nations Environmental Programme and World Trade Organization, 2009) 114 ff. 49 Ibid. 50 unep-​w to Report, Trade and Climate Change (n 48) 115. 51 This was a big challenge in Spain, where the fit program turned into a fiasco had to be cut back due to mismanagement and the external shocks of the financial crisis, leading to a string of investment disputes against the country, see e.g. Financial Times, ‘Spain pressed over solar tariffs cuts’ June 23, 2013 and El Pais (English). ‘Spain loses first arbitration claim over cuts to renewable energy subsidies’ 5 May 2017 (accessed 19 June 2018). 52 Johnston and Block, EU Energy Law (n 12) 332. 53 See for an overview of renewable energy support schemes in place across EU Member States the website of the European Commission ‘Legal Sources on Renewable Energy’ < http://​www.res-​legal.eu/​home/​> (accessed 19 June 2018). For instance, the fit scheme in Germany, that was constructed as an add-​on to the consumer’s bill. At the other spectrum there is Spain, where after initial subsidization of the renewable energy sector, the country had to cut back on support and incurred large amounts of debt because of, inter alia, the financial crisis and the design of the scheme (see note 51).

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renewable energy technologies are still in the early stages of development, making harmonization on EU level premature.54 As with other areas, the Union seems to initially prefer soft harmonization and coordination, after which more binding rules at the EU level are developed.55 While this is certainly a valid reason, it results in the schemes being difficult to map and monitor comprehensively at present.56 This, in turn, makes it challenging to assess whether renewable energy policies in EU Member States have been designed to take into account not only EU rules pertaining to state aid, but also subsidies rules as set out by the multilateral trading system under the wto. This is particularly important because such policies are not necessarily always designed on the national level only, but on the (sub-​)regional level as well.57 The question is then to what extent regional clean and renewable energy policy makers are expected to be aware of not only EU law, but also multilateral wto rules. The EU Legal Framework for Renewable Energy: Legitimate Exemptions to EU State Aid Disciplines 3.2.1 The EU Renewable Energy Directive The current EU Renewable Energy Directive 2009/​28/​EC, also known as the Second Renewables Directive, is the central legal instrument in the promotion and scale up of renewable energy in the Union.58 It sets ambitious goals for Member States, for example the requirement that the share of renewables in the overall EU energy mix should be 20, or even 30 per cent by 2020 (Article 3).59 Moreover, among others, it offers a framework for promoting renewable electricity, sets out mandatory national action plans for its 27 Member States to ensure they reach their goals through binding renewable energy targets (Article 4 and 5), and provides for rules to overcome barriers to the development of 3.2

54 55 56

57 58 59

Johnston and Block, EU Energy Law (n 12) 339–​340. This type of regulatory development –​ moving from a voluntary system to mandatory and legally binding regulation –​ is very typical of the way EU law works, as noted by Kim Talus, Introduction to EU Energy Law (Oxford University Press, 2016) 124. The most comprehensive effort is the Beyond 2020 project, (accessed 19 June 2018) researching the design and impact of a harmonized policy for renewable electricity in Europe. Their comprehensive final report discusses pathways and possibilities for the harmonization of renewable energy across Europe, see Beyond 2020, Final Report of the Beyond 2020 project –​Approaches for a harmonisation of RES(-​E) support in Europe (February 2014). E.g. in Spain, see Jan-​Christoph Kuntze and Tom Moerenhout, Local Content Requirements and The Renewable Energy Industry –​A Good Match? (ictsd, Geneva 2013) 23. EU Renewable Energy Directive (n 40). Ibid., Art. 3.

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192 Marhold renewable energy and ensure access to grid (Article 13.16).60 More importantly, the Directive in various provisions recognizes the need for support schemes to ensure that Member States meet their mandatory targets as a legitimate means to an end.61 The 20 percent target of renewable energy in the overall EU energy mix by 2020 that is set by the EU is a complex construct by its conception and design: for example, the 20 target is an aggregate target for the whole EU, not for all the Member States separately.62 Intricate calculations were necessary to reach the overall Union total of 20 percent, which is comprised various shares of each individual Member State. The percentage of renewable energy targets each of the Member States must reach is taken up in their individual national action plans, ranging from 10 per cent (for Malta) to 49 per cent (for Sweden).63 Elements that were taken into consideration was the starting situation of each Member States in 2005, evaluating what percentage was possible to reach considering its fuel mix, economic development, and realistic potential. Some remarks must be made in this respect. First, the targets set by the EU for each of the Member States are binding. Non-​implementation can result in possible infringement proceedings by the Commission. The question remains, however, whether the Commission is willing to take this step –​so far it has not. Member States are required to report on their progress every two years and the Commission itself engages in monitoring and reporting, but the directive itself does elaborate further on any further consequences of non-​compliance and/​or a failure to meet the targets.64 Nevertheless, Member States have taken their commitments seriously: Eurostat has indeed reported a steady increase in the energy mix of renewables.65 60 61

62 63 64 65

Ibid. Johnston and Block, EU Energy Law (n 12) 307–​308. EU Renewable Energy Directive (n 40), Article 2(k): “ ‘support scheme’ means any instrument, scheme or mechanism applied by a Member State or a group of Member States, that promotes the use of energy from renewable sources by reducing the cost of that energy, increasing the price at which it can be sold, or increasing, by means of a renewable energy obligation or otherwise, the volume of such energy purchased. This includes, but is not restricted to, investment aid, tax exemptions or reductions, tax refunds, renewable energy obligation support schemes including those using green certificates, and direct price support schemes including feed-​in tariffs and premium payments.” EU Renewable Energy Directive (n 40), Preamble, para 17. Ibid., Annex i, ‘National overall targets for the share of energy from renewable sources in gross final consumption of energy in 2020’. Apart from infringement proceedings by the Commission. Member States must report of their progress every two years, see Article 22 and the Commission in turn must report on the progress, see Article 23, EU Renewable Energy Directive. See Eurostat news release, ‘Renewable energy in the EU: Share of renewables in energy consumption in the EU still on the rise to almost 17 per cent in 2015’ (14 March 2014) and

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The ‘national’ nature of renewable energy support schemes is expressly acknowledged and even supported in paragraph 25 of the Preamble to the Directive, especially in view of guaranteeing investor stability.66 The paragraph inter alia states that “this Directive aims at facilitating cross-​border support of energy from renewable sources without affecting national support schemes.” This opens the possibility for Member States to behave in a discriminatory manner, e.g. in the form of including local content requirements in their support schemes. In practice, many of the support schemes for renewable energy production EU Member States have in place are indeed either de jure or de facto restrictive as only producers from the Member States in question can participate in and/​or benefit from the scheme. This is arguably discriminatory both under EU law and wto law, however more tolerated and easier to justify under the former, as will become clear below.67 EU Member States which still maintain renewable energy support schemes that are discriminatory and/​ or contain local content requirements, are Spain, Italy, France, Croatia and Greece, Belgium, and Sweden, although it is unlikely they are the only ones.68 This is enhanced by the fact that fiscal policies for support schemes are administered on the Member State level and not on the EU level. 3.2.2 State Aid, the Guidelines, and the Block Exemption Regulation The Renewable Energy Directive forms the legal basis for the scale up of renewable energy in Europe. We have also seen from the forgoing that there is, however, no harmonization of schemes on EU level and that many schemes are national in nature. From the set-​up of support schemes, it comes as no surprise that in the EU, schemes for renewable energy are often realized through government support. They therefore must abide by EU State Aid legislation on EU level, in addition to wto rules on the multilateral level.69 EU State aid legislation may be called ‘the EU counterpart of wto subsidies disciplines’ and is taken up in Article 107–​109 tfeu, elaborated further in content by case law.70 Article 107(1) tfeu sets out that any aid granted by a Member State or through

66 67

68 69 70

detailed Eurostat results at: (accessed 19 June 2018). EU Renewable Energy Directive (n 40), Preamble, para 25. If challenged in a wto dispute, the members having discriminatory schemes in place would need to justify then under gatt Article xx, gatt 1994: General Agreement on Tariffs and Trade 1994, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1867 u.n.t.s. 187, 33 i.l.m. 1153 (1994). See Kuntze and Moerenhout, Local Content Requirements (n 57) 23–​24. Art. 107–​109 tfeu and ascm. tfeu.

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194 Marhold State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.71 In other words, where Member States grant State aid that affects trade between EU Member States, such aid shall deemed to be illegal.72 According to EU State Aid rules, the Treaty generally prohibits State Aid unless it contributes to certain areas of economic development of a Member State.73 For a measure to qualify as state aid in the sense of Article 107(1) tfeu, it must meet four cumulative criteria: first, it must concern an intervention by the state through state resources.74 This includes an advantage granted directly by a Member State, but also those granted by a public or private body established by the state. Second, this intervention must confer a selective advantage on a recipient. Third, the intervention must be liable to affect trade between Member States. It is not necessary to prove that the measure impacts trade in reality, a threat thereof is adequate proof.75 Finally, it must distort or threaten to distort competition between Member States.76 Here, much as with the previous criterion, it is not necessary to prove that the measure affects competition, it is enough to establish that it is liable to distort competition.77 If found to be in violation of EU State Aid law, the Member States in question must abolish the aid.78 When considering the practice of the European Court of Justice (ecj) in connection with renewable energy support schemes, we can conclude the Court has been quite strict in interpreting what constitutes state aid in the sense of transfer of State resources. The ecj in various cases ruled that the mere intention of Member States to control certain resources was enough to fulfil the criterion of a government transfer, even if

71 72

Art. 107.1 tfeu. There are some exceptions, under article 107(2) and (3) of the article, as well as in favor of public service obligations (Article 106(2) tfeu) as affirmed, the cumulative conditions of which are taken up in the Altmark ruling (Case C-​280/​00 Altmark Trans GmbH and Regierungspräsidium Magdeburg v Nahverkehrsgesellschaft Altmark GmbH, judgment of 24 July 2003). 73 Art. 107.3 tfeu. 74 Art. 107.1 tfeu; Also see Talus, Introduction to EU Energy Law (n 55) 106. 75 As decided in T-​211/​05 Italy v Commission [2009] ecr ii-​02777, para. 152; See Talus, Introduction to EU Energy Law (n 55) 118. 76 Ibid. 77 Ibid. 78 Art. 108.2 tfeu (n 18).

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there was an entity involved that was not based on public law.79 Nevertheless, we see that through available legal instruments, namely the Guidelines and Block Exemptions, Member States have often been able to justify the schemes as consistent with state aid. Article 108 tfeu obliges Member States in any case to notify the Commission prior to granting any State aid, on the penalty of the aid being invalid.80 However, some categories of State Aid, specified by decision of the Council, may be compatible with EU law and do not have to abide by the notification requirement, which is especially relevant for support schemes for renewable energy and this contribution.81 Apart from state aid regulation in the EU Treaties, there are more specialized rules regarding granting State aid in the context of the scale up of renewable energy policies. These are taken up in the Commission Guidelines on State aid for environmental protection and energy for 2014–​2020 (the Guidelines) and EU Regulation No 651/​2014, also known as the General Block Exemption Regulation or gber.82 The Guidelines determine that state aid for environmental protection, including those for early adaptation to future Union standards, investment aid for energy efficiency measures, aid for high-​efficiency cogeneration, investment aid for the promotion of energy from renewable sources, operating aid for the promotion of electricity from renewable sources, including those in small scale installations shall be compatible with the internal market and exempted from the notification requirement, provided that it fulfils certain conditions.83 The Guidelines on State Aid for Environmental Protection and Energy set out additional detailed rules that Member States must fulfil for these types of state aid to be compatible with EU law.84 Their underlying goal remains reaching the EU 20/​20/​20 targets. While there are plenty of solid arguments that this is a legitimate policy goal and requirements to meet these exemptions are rather detailed, it is unclear whether the Guidelines have been drafted taking 79

80 81 82 83 84

Essent Netwerk Noord bv supported by Nederlands Elektriciteit Administratiekantoor bv v Aluminium Delfzijl bv (Case C-​206/​06), Judgment of 17 July 2008, para 70; Essent Netwerk, para 70; Vent de Colère and Others (Case C-​262/​12), Judgment of 7 February 2014, para 21; Germany v Commission (T-​47/​1), Judgment of the General Court of 10 May 2016, paras 93 and 95. Art. 108 tfeu, complemented by Council Regulation (ec) No 659/​1999, see Talus (n 55) 106. Art. 107.3 (e) tfeu. The Guidelines and gber. gber, Section 7, Arts. 36–​43. The Guidelines, Preamble, under (3).

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196 Marhold into account the rules of the multilateral trading system, which after careful consideration, in the opinion of the author, seems unlikely. In addition to the Guidelines, the gber, issued in the same year, offers an elaborate list declaring categories of aid which are compatible with the EU internal market in application of Article 107 and 108 tfeu, especially Article 108(4) tfeu.85 Section 7 (Articles 36 to 49) of the gber offers a detailed description of state aid for environmental protection falling under the block exemption, including those for investment aid for the promotion of energy from renewable sources (Article 41), operating aid for the promotion of electricity from renewable sources (Article 42) and in small installations (Article 43). Both the Guidelines and the gber are part of the Commission’s modernization package for state aid.86 The objective of these instruments is to integrate renewable energy sources into the market and remove their subsidization eventually, making them on a par with traditional energy sources.87 This can be achieved gradually by ensuring that new schemes compete for subsidies through a competitive auction process and from switching from feed in tariffs to system of feed in premiums. Both the Guidelines and the gber endorse a market-​based approach with respect to support schemes for renewable energy and ultimately aim to remove any support when renewable energy can compete. Until that time, support schemes, under certain conditions, are deemed to be compatible with State aid law. In this sense, the Guidelines and the gber are in effect ‘exceptions’ to State aid incompatible support in favour of legitimate policy goals such as mitigating climate change. In addition to this, the current framework tolerates the inherently discriminatory nature of schemes, an approach that is echoed by the European Court of Justice. Under wto law, however, support schemes adversely affecting international trade are, at minimum, actionable by another wto Member.88 At maximum, if containing local content requirements, they are prohibited.89 Notwithstanding the actionable or prohibited nature of a scheme, it is safe to conclude that European schemes are sensitive to face a challenge in wto dispute settlement.

85 Ibid. 86 Talus, Introduction to EU Energy Law (n 55) 124. 87 The Guidelines (n 2), under 3.3.1 para 108. 88 Art. 5 acsm (n 3). 89 Ibid., Art. 3.

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3.2.3

The European Court of Justice: Lenient towards Support Schemes for the Sake of Public Interest The previous section has unveiled that EU law provides for several ‘exceptions’ under EU State Aid law for the support of renewable energy schemes, whether on the basis of the Renewable Energy Directive, the Guidelines or the gber. One of the challenges highlighted in these documents is the fact that opening up EU Member States’ schemes to participation by other EU Member States is difficult and it is even emphasized in the Renewable Energy directive that “For the proper functioning of national support schemes it is vital that Member States can control the effect and costs of their national support schemes according to their different potentials.”90 This alludes to the fact that the EU does not deem it particularly problematic that the renewable energy support schemes of the EU are discriminatory in nature and/​or contain local content requirements. The ecj in its case law has moreover been particularly lenient towards Member States administering discriminatory support schemes for renewable energy. In fact, the ecj has systematically allowed Member States to establish support schemes for renewable energy that are restricted to energy produced within a particular Member State.91 One well-​known case in this respect is PreussenElektra, albeit handed down prior to a coherent EU (renewable) energy policy in 2001, but after the establishment of the wto and its accompanying subsidy regulations in 1995.92 The case involved a German fit scheme which obliged supply companies to purchase electricity from local renewable energy sources, exclusively produced in Germany. While the scheme was de facto discriminatory, the ecj was favourable towards the national scheme.93 The ecj in this instance considered the various issues of the case and especially focused on the positive impact of renewable energy in connection with the protection of human, animal and plant life and health set out in Article 36 tfeu and in light of international climate

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The EU Renewable Energy Directive (n 40), Preamble para 25. See a comprehensive description of this in Kim Talus, ‘Renewable Energy Disputes in the European Union –​An Overview of Current Cases’ 135 ff and Angus Johnston, ‘The Impact of the New EU Commission Guidelines on State Aid for Environmental Protection and Energy on the Promotion of Renewable Energies’ 13 ff, both in EU Renewable Energy Law: Legal Challenges and Perspectives (2014) Scandinavian Institute of Maritime Law Yearbook 2014 (Oslo University). PreussenElektra ag v Schleswag ag (Windpark Reußenköge iii GmbH and Land Schles-​wig-​ Holstein intervening) (Case C-​379/​98), Judgment of 13 March 2001. Talus, ‘Renewable Energy Disputes’ (n 91) 148.

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198 Marhold commitments and environmental protection requirements in Article 11 tfeu.94 In subsequent cases, notably C-​573/​12 Ålands Vindkraft and C-​204/​12-​C-​208/​ 12 Essent Belgium nv, cases that emerged after the enactment of specialized EU renewable energy legislation, the ecj essentially followed its earlier case law in PreussenElektra.95 In both cases, the ecj allowed Member States in question (Sweden and Belgium) to establish support schemes for renewable energy that were restricted to subsidizing renewable energy within its territory. The cases involved the desired participation of another EU Member State in a renewable energy support scheme of another EU Member State. In Ålands Vindkraft, it concerned renewable energy produced on Finnish islands that were physically closer to Sweden than to Finland and, more importantly, physically only connected to the Swedish grid, not the Finish one. Nevertheless, the ecj opined that Sweden could refuse participation in the Swedish scheme of Finnish wind energy producers located on the islands. In short, the Court stated that Member States must be allowed to establish a support scheme which provides for the award of tradable certificates to producers of green electricity solely in respect of green electricity produced in the territory of that State and is not considered to be contrary to EU law.96 In the same line of reasoning, the ecj in the Essent Belgium nv case concluded that Member States may indeed provide incentives to domestic producers only to produce green energy. In its opinion, it held that the violation on the free movement of goods that may cause is justified by environmental

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See about the derogation from the free movement on goods and the mandatory requirements doctrine, e.g. Eleanor Spaventa, ‘On Discrimination and the Theory of Mandatory Requirements’ 3 Cambridge Yearbook of European Legal Studies 457 (2000); the tfeu: Article 36, which is the EU equivalent of gatt Article xx, reads: “The provisions of Articles 34 and 35 shall not preclude prohibitions or restrictions on imports, exports or goods in transit justified on grounds of public morality, public policy or public security; the protection of health and life of humans, animals or plants; the protection of national treasures possessing artistic, historic or archaeological value; or the protection of industrial and commercial property. Such prohibitions or restrictions shall not, however, constitute a means of arbitrary discrimination or a disguised restriction on trade between Member States;” Article 11 reads: “Environmental protection requirements must be integrated into the definition and implementation of the Union policies and activities, in particular with a view to promoting sustainable development.” Ålands Vindkraft ab v Energimyndigheten (Case C -​573/​12), Judgement of 1 July 2014; and Essent Belgium nv v. Vlaamse Reguleringsinstantie (Joined Cases C-​204/​12-​C-​208/​12), Judgement of 11 September 2014; PreussenElektra. Ålands Vindkraft ab v Energimyndigheten, paras 1–​3.

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considerations, and, notably, the importance of public interest in the scale up of renewable energy sources.97 More recently, however, in a judgement of 2016, the General Court of the European Union in Germany v Commission T-​47/​15, in contrast to PreussenElektra, dismissed an action brought by Germany and confirmed that the German law on renewable energy from 2012 (the eeg 2012) involved partially prohibited State aid.98 The reasoning of the court was that the funds that were generated by the German support scheme remained under the dominant influence of public authorities, which assimilated the Transmission System Operator (tso) in charge to an entity executing a State concession.99 Additionally, the surcharge passed on to the final consumers of electricity could be assimilated to a levy on electricity consumption in Germany.100 As a result, some of the measures under German law were deemed to be State aid that was deemed incompatible with the internal market and had to be recovered. Other parts of the scheme, had, however, been previously approved by the Commission and were deemed to be consistent with the internal market.101 From the wto law perspective, the practice of limiting a support scheme to your national producers could be justified under gatt Article iii:8 (b).102 Notwithstanding, if such and similar schemes maintained by EU Member States qualify as a subsidy in the sense of Article 1 and 2 of the wto scm Agreement, and they negatively affect cross-​border trade, they can be challenged by other wto Members, notwithstanding their justification under EU State aid law. Nonetheless, it is quite understandable that the ecj made these decisions on the basis of political realities and the Union’s pressing need to curb CO2 emissions.103 97 98 99 100 101

102

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Essent Belgium nv v. Vlaamse Reguleringsinstantie, paras 89–​93; Also see Talus, ‘Renewable Energy Disputes’ (n 91) 151. Germany v Commission, paras 93, 95 and 100 –​101; Also see General Court of the European Union Press Release No 49/​16, Luxembourg, 10 May 2016 ‘The General Court confirms that the German law on renewable energy of 2012 (the eeg 2012) involved State aid’. Ibid., para 94. Ibid., para 95. Commission Decision (EU) 2015/​1585 of 25 November 2014 on the aid scheme sa.33995 (2013/​C) (ex 2013/​n n) (implemented by Germany for the support of renewable electricity and of energy-​intensive users) (oj 2015 L 250, 122; see also Commission press release ip/​ 14/​2122). gatt Article iii:8 (b) reads: “The provisions of this Article shall not prevent the payment of subsidies exclusively to domestic producers, including payments to domestic producers derived from the proceeds of internal taxes or charges applied consistently with the provisions of this Article and subsidies effected through governmental purchases of domestic products.” Talus, ‘Renewable Energy Disputes’ (n 91) 150.

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200 Marhold It is clear from the analysis of EU renewable energy legislation as well of the case law that the both the Commission and the Court are lenient towards support schemes with of EU Member States that would, absent specific legislation, qualify as State aid. The main argument is, and quite understandably so from a policy perspective, that the promotion of renewable energy schemes and the protection of the environment outweighs the discriminatory nature of the schemes. In its new Clean Energy Package proposals, the Commission recognizes this dilemma and vows to ensure EU schemes market competitive in addition to opening the market for renewable energy support schemes to other Members States.104 4

EU Law against the Background of wto Law: Disconnected Paradigms in Decarbonizing the Grid?

The previous sections gave an insight into EU renewable energy policy and exposed that many schemes currently in existence in the EU may justified under State aid law due to existing exemptions in the Guidelines and gber. However, this does not necessarily mean that these schemes are consistent with wto rules on subsidies as set out in the ascm.105 The general dilemma with respect to energy subsidies seems to be that support schemes for clean energy production and consumption are needed to correct market failures. Contributing to sustainable development through the scale up of clean energy, including expanding its trade, are in this sense legitimate policy goals.106 But 104 Proposal for a Directive of the European Parliament and of the Council on the promotion of the use of energy from renewable sources (recast). 105 scm Agreement . 106 See e.g. Luca Rubini, ‘Rethinking International Subsidies Disciplines: Rationale and Possible Avenues for Reform’ The E15 Initiative Overview Paper, November 2015 (Geneva, International Centre for Trade and Sustainable Development and World Economic Forum, 2015) 8; Rubini writes: “Among the various obstacles to green energy and its competitiveness, the existence of significant support to conventional fossil fuel energy (both in terms of subsidies to production and consumption) cannot be overlooked. At the same time, often thanks to public support, green technologies are developing extremely fast. As a result, some types of clean energy, such as solar, are almost on a par with conventional energy. This means that some degree of differentiation is needed in any new disciplines providing for exemptions to subsidies (that is, certain sources need more/​less protection than others).” Also see generally on these issues Joanna I. Lewis, ‘The Rise of Renewable Energy Protectionism: Emerging Trade Conflicts and Implications for Low Carbon Development’ 14 Global Environmental Politics 10 (2014) and Timothy Meyer, ‘How Local Discrimination can Promote Global Public Goods’ 95 Boston University Law Review 1941 (2015).

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while EU law recognizes this in its legislation and case law, wto law leaves less space for considering such objectives.107 Because the EU and its Members States are Members of the wto, all wto rules are binding on them. Moreover, because of the wide presence of energy support schemes in the European electricity sector, wto rules on subsidies automatically become relevant to it. The rules of the ascm influence and bind the choices of wto Members’ governments with respect to their industrial and other policies. The wto has a dispute settlement-​based enforcement mechanism: measures of wto Members can only be contested if other wto Members challenge them in the forum. Notwithstanding, the current state of affairs regarding EU energy support schemes in their nature and design makes Member States and the Union easy targets in wto dispute settlement. For example, another wto Member may start dispute settlement proceedings against the EU and its Member States if its domestic industry is harmed by a renewable energy support scheme maintained by a Member State. In practical terms, one could for example imagine challenges from directly neighbouring countries to the EU that export energy or goods related to renewable energy production to the Union, such as the United Kingdom (after Brexit), Switzerland, and the Russian Federation. But the risk may also be further away: in 2012, China filed a request for consultations under the wto Dispute Settlement Understanding, over local content requirements in the renewable energy support schemes of the EU, Italy, and Greece. However, the request remained in the consultations stage and eventually, a panel was never established.108 4.1 Defining Subsidies under the scm Agreement –​An Overview While the vocabulary and the content of wto subsidy rules differs from European Union rules on state aid, the parallels between the two are easily identified. As mentioned above, wto subsidy rules are no less important for the Union and its Member States than the rules on State

107 See for an elaborate comparative analysis between the EU State aid and wto subsidies regime regarding ‘green’ electricity also Gracia Marín Durán, ‘Sheltering Government Support to ‘Green’ Electricity: The European Union and the World Trade Organization’ 67 International and Comparative Law Quarterly 129 (2018). 108 wto, DS452 European Union and Certain Member States –​ Certain Measures Affecting the Renewable Energy Generation Sector –​Complaint by China (in consultations 5 November 2012); See also in general for an interesting reading of the evolution of trade and environment disputes Mark Wu and James Salzman, ‘The Next Generation of Trade and Environment Conflicts: The Rise of Green Industrial Policy’, Northwestern University Law Review 401 (2014).

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202 Marhold aid.109 wto Members may challenge the EU and its Member States’ schemes under, inter alia, the scm Agreement. Vice versa, the EU and its Members States can trigger subsidy disputes against third countries in the wto forum.110 Note, however, that the scm Agreement is generally understood to only apply to goods, not services –​this is essential to keep in mind as the energy sector for a large part consists of activities that would fall in the category of energy services and not purely trade in (energy) goods.111 4.1.1 Prohibited, Actionable and Non-​Actionable Subsidies Not all subsidies are illegal in the wto context and a distinction is made between prohibited and actionable subsidies. Part ii of the ascm in Article 3 lists prohibited subsidies that a Member should refrain from altogether. These are subsidies contingent on export (Article 3.1 (a) ascm) and those conditional on the use of domestic over imported goods (local content requirements or lcr s) (Article 3.1 (b) ascm). Next, Part iii lists actionable subsidies. These are allowed, but “no Member should cause … adverse effects to the interests of another Member.”112 Thus, if an actionable subsidy causes harm to a Member’s industry, the Member in question may act against it. Members have two methods to seek redress for harm caused by prohibited and actionable subsidies: they can impose Countervailing Duties (cvds) or they can initiate a dispute at the wto Dispute Settlement Body (dsb).113 Originally, a third type of non-​actionable subsidies was taken up in Part iv (Article 8 scm), but expired in 2000.114 Article 8 ascm did consider certain legitimate policy goals and subsidies falling into this category were non-​actionable. However, the major problem is that, Article 8 ascm was temporary and due to various reasons wto Members could not agree on the Article’s renewal.115 Consequently, this

109 See generally on this issue, Luca Rubini, The Definition of Subsidy and State Aid –​WTO and EC Law in Comparative Perspective (Oxford University Press, 2010). 110 The EU has been a complainant in more than 23 cases against other wto Members in subsidies disputes; as a respondent, the EU was targeted in more than 17 cases relating to subsidies and countervailing measures (accessed 19 June 2018). 111 Because the ascm is placed under Annex 1.A of the Agreement Establishing the World Trade Organization, named ‘Multilateral Agreements on Trade in Goods’. 112 Art. 5 ascm. 113 Ibid., Part v –​Countervailing Measures. 114 Ibid., Art. 8 (lapsed). 115 See for a comprehensive discussion on this Mark Wu, ‘Re-​examining ‘Green Light’ Subsidies in the Wake of New Green Industrial Policies’ (icstd and wef E15 Think Piece, Geneva 2015) 3.

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category of subsidies has lapsed and is no longer available under wto law. The consequences of this will be discussed in more detail below. 4.1.2 Contribution by a Government Article 1.1(a)(1) ascm sets out an exhaustive list of conditions under which a governmental support scheme is considered a financial contribution. The term ‘government’ here entails a governmental public body, and includes its regional and local authorities, as well as state-​owned enterprises.116 The Appellate Body (hereafter: ab) in US –​Softwood Lumber iv confirmed that this list of forms of financial contributions is exhaustive but at the same time wide-​ranging and includes measures such as loans and grants, government revenues that are otherwise due forgone, and government provision of goods and services.117 4.1.3 Benefit to the Recipient To qualify as a subsidy, the financial contribution must confer a benefit (Article 1.1 (b) ascm). Demonstrating that this indeed is the case is not always a straightforward exercise. For instance, it goes without saying that it may be easier to determine that a direct transfer of a sum of money confers a benefit, as opposed a scenario in which a government purchases a good, or a guarantees a set price for the good produced.118 In Canada –​Measures Affecting the Export of Civilian Aircraft, the Appellate Body was of the opinion that generally, to assess whether a benefit was conferred, one would have to look whether the financial contribution left the recipient better off than it would have been without the contribution.119 Another benchmark may be to look at Article 14 of the ascm, which deals with calculation of the subsidy.120 In what is known as the ‘private investor’-​test, the Article explains that the term ‘benefit’ refers to ‘benefit to the recipient’, using the market for private investors to help determine the amount and existence of the benefit.121 For example, if the government provides equity 116 Peter van den Bossche and Werner Zdouc, The Law and Policy of the World Trade Organization –​3nd Edition (Cambridge University Press, 2008) 758. 117 Appellate Body Report, United States –​Final Countervailing Duty Determination with Respect to Certain Softwood Lumber from Canada, wt/​d s257/​a b/​r , adopted 17 February 2004, dsr 2004:ii, 571, para 52. 118 Asmelash, ‘Energy Subsidies’ (n 44) 270, 272. 119 wto Panel Report, Canada –​Measures Affecting the Export of Civilian Aircraft, wt/​ ds70/​r , adopted 20 August 1999, upheld by Appellate Body Report wt/​d s70/​a b/​r , dsr 1999:iv, 1443, para 157. 120 Art. 14 scm Agreement. 121 Petros C. Mavroidis et al., The Law and Economics of Contingent Protection in the WTO (Edward Elgar Publishing, 2008) 325.

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204 Marhold capital, it shall not be considered to confer a benefit, lest the investment decision in question can be considered to be incompatible with usual investment practices of private investor in the Member state concerned.122 4.1.4 Specificity To qualify as a subsidy within the meaning of the scm Agreement, the subsidy in question moreover has to be deemed ‘specific’ pursuant to Article 2 of the Agreement.123 The thought behind this requirement was that only specific financial contributions can lead to trade distortions through inefficient resource allocation.124 As the Panel in US –​Upland Cotton put it, a subsidy is not specific if it is “sufficiently broadly available throughout an economy as not to benefit a particular limited group of producers of certain products.”125 The idea is that if a subsidy is available to all producers in the country, there is not one producer or group of producers that can attract such resources at the expense of others.126 Schemes must either be de jure or de facto specific to an enterprise (Article 2.1 (a) ascm), industry (Article 2.1 (b) ascm) or particular region (Article 2.2 ascm), to qualify as a subsidy.127 With regard to prohibited subsidies in Part ii (contingent on export and lcr s), the specificity requirement does not have to be met: Article 2.3 sets out that these subsidies are deemed to be specific a priori.128 Subsidies can be applied to consumers and to producers.129 Note though, that the dividing line is not always clear as producers can be simultaneously consumers. Nevertheless, we can generalize that the first type consists of intermediate (firms) and final consumers (households). One could think of e.g. cheaper inputs for energy intensive industries, or lower energy bills for household consumers due to subsidized energy. The second type subsidizes the producers of a certain product, such as the producers of fuel products, coal, natural gas, and electricity.130 fit s, the most popular instruments in the EU, 1 22 Ibid. 123 Art. 2 scm Agreement. 124 Petros C. Mavroidis, Trade in Goods –​2nd Edition (Oxford University Press, 2012) 549. 125 Panel Report, United States –​Subsidies on Upland Cotton, wt/​d s267/​r , Add.1 to Add.3 and Corr.1, adopted 21 March 2005, as modified by Appellate Body Report wt/​d s267/​a b/​ r, dsr 2005:ii, p. 299, para 7.1142. 126 Mavroidis, Trade in Goods (n 124) 549. 127 Art. 2.1 scm Agreement. 128 Ibid., Art. 2.3; Mavroidis (n 124) 549. 129 Benedict Clements et al. (eds), Energy Subsidy Reform –​Lessons and Implications (International Monetary Fund, 2013) 1, 2. 130 Ibid.

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in place to stimulate the scale up of renewables in the energy mix, can also be an example of producer subsidies. The subsidy disciplines of the wto are relevant for both consumer and producer subsidies. It is important to keep in mind, however, that it is overall much easier to establish specificity in production subsidies than in consumer subsidies.131 The reason for this is that consumer subsidies are often more general in nature. Overall, specificity in producer subsidies is easier to distinguish: clean and renewable energy programs (such as fit s), generally constitute subsidies in the form of regional or national programs to stimulate the production of clean energy and are therefore more clearly defined as ‘specific’.132 4.2 wto Law and Renewable Energy Support Schemes wto rules as set up at present leads to intricate policy outcomes when it comes to support schemes for renewable energy. These support schemes remain sensitive to wto dispute settlement as is evidenced by a recent string of cases before the dsb.133 Due to their policy objectives, support schemes for clean energy generally enjoy broad backing from around the world.134 Their main goal is, or in any case should be, not to be protectionist in nature but rather to mitigate climate change caused by CO2 emissions, which is traditionally associated with fossil 1 31 Asmelash, ‘Energy Subsidies’ (n 44) 273. 132 Ibid., 274 points out that the ‘renewable’ energy market as such could already been seen as specific vis-​à-​vis the energy market as a whole. 133 Examples of cases concerning renewable energy, while not all subsidies related, are, amongst others: Appellate Body Reports, Canada –​Certain Measures Affecting the Renewable Energy Generation Sector /​Canada –​Measures Relating to the Feed-​in Tariff Program, wt/​d s412/​a b/​r /​ wt/​d s426/​a b/​r , adopted 24 May 2013, dsr 2013:i, 7; Panel Reports, Canada –​Certain Measures Affecting the Renewable Energy Generation Sector /​Canada –​Measures Relating to the Feed-​in Tariff Program, wt/​d s412/​r and Add.1 /​ wt/​d s426/​r and Add.1, adopted 24 May 2013, as modified by Appellate Body Reports wt/​d s412/​a b/​r /​ wt/​d s426/​a b/​r , dsr 2013:i, 237; Appellate Body Report, India –​ Certain Measures Relating to Solar Cells and Solar Modules wt/​d s456/​a b/​r , adopted 16 September 2016; Panel Report, India –​Certain Measures Relating to Solar Cells and Solar Modules, wt/​d s456/​r , adopted 24 February 2016; Appellate Body Report, European Union –​ Anti-​Dumping Measures on Biodiesel from Argentina, wt/​d s473/​a b/​r , adopted 6 October 2010; Panel Report, European Union –​ Anti-​Dumping Measures on Biodiesel from Argentina, wt/​d s473/​r , adopted 29 March 2016; DS480 European Union –​Anti-​ Dumping Measures on Biodiesel from Indonesia (Panel composed 4 November 2015) and DS510 United States –​Certain Measures Relating to the Renewable Energy Sector (Panel established 21 March 2017). 134 See in this context also generally Emily Barrett Lydgate, ‘Biofuels, Sustainability and Trade-​Related Regulatory Chill’ 15 Journal of International Economic Law 157–​180 (2012).

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206 Marhold fuel combustion for electricity generation and heat production.135 This wide-​ ranging consensus about the need to promote universal access to sustainable energy through the deployment of renewable energy was confirmed in the Preamble to the United Nations Framework Convention on Climate Change (unfccc) Conference of the Parties (cop) 21 Paris Agreement in late 2015.136 We have also established that producer, as opposed to consumer, subsidies are much more common to support the scale up of renewable energy.137 Since the share of clean energies in the overall energy market is growing but still small, governments –​under pressure to meet their climate targets –​are often eager to design support schemes for the production of clean energies due to their positive effects on lowering greenhouse emissions.138 As we explained above in the case of the EU, we can assert that without government intervention, many of the markets for clean and renewable energy would not exist in the first place. An important element regarding renewable energy subsidies here is that the government, through its policies, may sometimes be ‘creating’ the market for renewable energy. It can be complex to determine the amount of the subsidy and find the proper ‘market benchmark’ to test against, in particular if that market was non-​existent prior to governmental involvement. This was one of the issues in the Canada-​Renewable Energy/​Feed in Tariff case.139 According to the wto Appellate Body in that case, a distinction should be made between instances where the government intervenes in an existing market and when the government creates a market through its interventions.140 135 International Energy Agency, CO2 Emissions from Fuel Combustion: Highlights (Paris, International Energy Agency, 2013). 136 The Paris Agreement. 137 Ronald Steenblik, ‘Subsidies in the Traditional Energy Sector’ in Joost Pauwelyn (ed), Global Challenges at the Intersection of Trade, Energy and Environment (Centre for Trade and Economic Integration, the Graduate Institute Geneva, 2010) 186. 138 See e.g. the 2030 Energy Strategy by the European Commission (accessed 19 June 2018) and the Paris Agreement. 139 Canada –​Renewable Energy /​Canada –​Feed-​in Tariff Program. 140 This is one of the most controversial passages of the ab’s reports, see e.g. elaborate discussions on the issue by Aaron Cosbey and Luca Rubini, ‘Does It FIT? An Assessment of the Effectiveness of Renewable Energy Measures and of the Implications of the Canada-​ Renewable Energy/​FIT Disputes’ (ictsd and wef E15 Think Piece, Geneva 2013); Aaron Cosbey and Petros C. Mavroidis, ‘A Turquoise Mess: Green Subsidies, Blue Industrial Policy and Renewable Energy: The Case for Redrafting the Subsidies Agreement of the WTO’ eui Working Papers, rscas 2014/​17, Robert Schuman Centre for Advanced Studies, Global Governance Programme 82; Asmelash, ‘Energy Subsidies’ (n 44) 273 and Appellate Body Reports Canada –​Renewable Energy /​Canada –​Feed-​in Tariff Program, paras 5.118. and 5.169: In this instance, the Appellate Body found that the relevant market for solar

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With respect to wto subsidy rules, support schemes for clean energy such as feed in tariffs, have a large chance of qualifying as a subsidy in the sense of the scm Agreement. This understandably depends on the design of the scheme in question, and to what extent a government is involved in financing the scheme. But the crucial element is that renewable energy subsidies are quite clearly specifically designed and targeted to boost the production of clean energy; it is their inherent policy goal. Therefore, such subsidies will likely be limited to ‘certain enterprises’, namely the producers of clean energy and meet the ‘specificity’ requirement of Article 2.1 ascm, thereby making it easier to fit the definition of a subsidy in Article 1 ascm. This, in turn, would make such schemes actionable subsidies in the sense of Article 5 ascm by means of Article 1.2. That in and of itself may be not be a major problem, if the actionable subsidies in question do not cause injury to another Member and are not challenged before a wto Panel. Nevertheless, they can have cross-​border effects, especially when the subsidized energy is traded abroad over a grid, or when it is competing domestically with imported energy. Consequently, once such subsidies do cause harm to the industry of another wto Member, a dispute may be triggered in the Dispute Settlement System. This leads to the conclusion that the fact that these schemes in general, and those present in the EU in particular, have a large chance to fall into the actionable subsidies category, making them immediately more sensitive to wto dispute settlement proceedings. The Appellate Body in Canada-​Renewable Energy/​Feed in Tariff must have been aware of this policy paradox, realizing that labelling the fit in question as such would have adverse implications for renewable energy schemes around the world. Perhaps for that reason, it strategically decided that it was “unable to complete the analysis” whether the feed in tariff in question was a subsidy or not.141 fit schemes may be beneficial for the development of local production of clean energy. Yet, it is this element that is particularly problematic in wto subsidy legislation: In wto law, local content requirements are contrary to the scm Agreement by means of Article 3.1(b) and Article 2.1 of the trims.142 The and wind power electricity are the competitive markets for wind and solar-​generated electricity that results from the specific energy supply-​mix set by the government, but not the single market for electricity generated from all sources of energy. See Ibid., para 5.174. where a government creates a market, it cannot be said that the government intervention distorts the market, as there would not be a market if the government had not created it. 141 i.e. whether the Feed-​in Tariff conferred a benefit in the sense of Art. 1.1(b) ascm, ab report para 5.246 of the Canada –​Renewable Energy /​Canada –​Feed-​in Tariff Program case. 1 42 Art. 3.1 (b) scm Agreement and Art. 2.1 trims Agreement trims Agreement: Agreement on Trade-​Related Investment Measures, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1868 unts 186.

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208 Marhold consequence is that under wto law, fit policies should in no case include any local content requirement elements. If we test this against the reality of support schemes in the EU, we see that there is a disconnect in terms of EU law, as well as of practice, as we established that there are still EU Member States that have lcr s in their schemes.143 lcr s were also a central issue in the wto Canada-​Renewable Energy/​Feed-​In Tariffs case.144 In that instance, the Canadian Province of Ontario instituted a Feed-​in Tariff Programme implemented by the Ontario Power Authority (opa) in 2009. In its rules, the Authority in Article 2.1 stated that “the fit Contract will require that wind-​power Projects and solar Projects achieve a Minimum Required Domestic Content Level.”145 The law demanded a minimum of component parts and services from producers in Ontario, Canada, that was challenged in the wto over this regional (and not national) policy. The involvement of the Ontario province was extensive, meaning for instance that the Ontario Power Generation was responsible for the majority supply of energy. Additionally, Ontario almost completely owned the high voltage transmission system, as well as the Independent Electricity System Operator. Through its fit program, Ontario not only wanted to replace coal by cleaner options through adding wind and solar energy to the mix, but it simultaneously intended to provide incentives to enable new green industries and investments in the production of clean energy technologies.146 To this end, Ontario did not limit itself in utilizing a fit scheme only, but added another policy instrument to the mix, the lrc.147 Interestingly, the EU was one of the wto Members (together with Japan) that challenged the Canadian measure (an exemplary case of ‘the pot calling the kettle black’ in view of this contribution). The EU and Japan did not directly attack the fit scheme as a violation of Article 5 ascm (Actionable Subsidies). Instead, they based their claim against Canada on discrimination due to the local content requirement in the Rules of the Ontario Authority, invoking Article 2.1 on Trade Related Investment Measures (trims) (which is by nature inconsistent with General Agreement on Tariffs and Trade, Article iii:4).148 If fit schemes qualify as a subsidy in the sense of

1 43 See Kuntze and Moerenhout, Local Content Requirements (n 57). 144 Canada –​Renewable Energy /​Canada –​Feed-​in Tariff Program, paras 5.78–​79. 145 Ontario Feed-​In Tariff Program Rules, Version 1.3.2, 29 October 2010, Section 6.4(a). 146 Charnovitz and Fischer, ‘Canada –​Renewable Energy’ (n 43) 2. 147 Ibid. 148 Article 2.1 trims (n 142), Article iii:4 General Agreement on Tariffs and Trade (gatt) 1994, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1867 u.n.t.s. 187, 33 i.l.m. 1153 (1994).

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the ascm additionally contain local content requirements, they become prohibited subsidies in the sense of Article 3.1(b) scm Agreement per se, leading to a de facto trade barrier.149 There was also a stand-​alone claim on the basis of General Agreement on Tariffs and Trade (gatt), Article iii:4, as well as claim of violation of Article 3.1(b) and 3.2 of the ascm, depended on whether the Feed-​in Tariff could qualify as a subsidy in the first place.150 As we have seen in the preceding paragraph, the Appellate Body managed to duck that question, in a way that some call ‘legal acrobatics’.151 Returning to the issue of local content requirements, the wto Appellate Body decided that Canada’s lcr s were indeed a domestic requirement in the sense of Article 2.1 trims and thus automatically a violation of gatt Article iii:4.152 This again goes on to show that while fit schemes, even if they may qualify as an actionable subsidy, may be relatively unproblematic, if they are not challenged by another Member under Article 5 ascm. However, as soon as additional elements such as local content requirements are added to such schemes, the matter becomes more challenging as they easily fall into the prohibited subsidies category of Article 3 ascm. This does not mean that wto Members, whilst knowing that local content requirements are contrary to wto law, shy away from them. As is reiterated in this piece, there are ample countries that impose local content requirements and domestic assistance on renewable energy nevertheless.153 In fact, it is realistic to assume that a large share of wto Members having support schemes for renewable energy in place are likely guilty of this, judging e.g. by the recent wto disputes between the US and India.154 A negative externality of this state-​of-​play is that clean energy policies are often instituted on regional and local, and not on national level (as was indeed the case in Canada-​Renewable Energy and likely the case in the EU).155 Because 1 49 See Cosbey and Rubini, ‘Does It FIT?’ (n 140). 150 Ibid. 151 See Cosbey and Mavroidis, ‘A Turquoise Mess’ (n 140) 82 and Canada –​Renewable Energy /​Canada –​Feed-​in Tariff Program, Report of the ab, para 5.246. 152 ab in Canada –​Renewable Energy /​Canada –​Feed-​in Tariff Program (n 133) para 5.33. 153 Fischer and Charnovitz, ‘Canada –​Renewable Energy’ (n 43) 4 and oecd Joint Working Party on Trade and Environment, Domestic Incentive Measures for Renewable Energy with Possible Trade Implications (Paris, Organisation for Economic Cooperation and Development, 2011) 46. 154 DS456 India –​Certain Measures Relating to Solar Cells and Solar Modules and DS510 United States –​Certain Measures Relating to the Renewable Energy Sector (n 133); Also generally see Meyer, How Local Discrimination’ (n 106). 155 Timothy Meyer, ‘Energy Subsidies and the World Trade Organization’ (2013) Volume 17, Issue 22 asil Insights (10 September 2013).

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210 Marhold of this, national governments, while responsible for the actions of regional governments, may not always be in a position to oversee the design of regional subsidy programs.156 Consequently, climate friendly subsidies are also at a greater risk of being targeted at the wto for this reason, as local policymakers in the EU may be even less aware of the design of wto rules in addition to EU rules on state aid. More successful fit policies avoid using risky local content requirements. One way is, for instance, to design programs in a way that the costs for the support are divided between electricity supply undertakings, buying clean energy, and private electricity network operators.157 The network operators can additionally manage the implementation of the of the fit program by means of supplier contracts.158 This was, as opposed to the Canadian example, the government, rather than being directly connected to the generation and supply of energy itself, has a mere regulatory role. Inadequate Policy Space for Legitimate Policy Goals under wto Subsidies Disciplines The major disconnect between EU State aid law and wto subsidies disciplines is that the former provides for exemptions, while the latter does not. Unlike is the case under EU State aid law, where the Guidelines and gber provide for policy space for renewable energy support schemes, there are no straightforward exceptions under wto law with regard to subsidies that further a particular policy goal. Originally, a third type of non-​actionable subsidies was taken up in Part iv (Article 8 scm).159 Article 8 ascm did take into account certain legitimate policy goals for subsidization and they were deemed non-​actionable of the basis of this article, even if they caused harm to another Member’s industry. Thus, there was an attempt to consider the underlying wider policy objectives for subsidization in the Agreement to a certain extent. It concerned three types of subsidies: 1) those for research and development (Article 8.2(a) ascm); 2) regional aid within the territory of a Member (Article 8.2(b) ascm) and; 4.3

1 56 Ibid. 157 Marie Wilke, ‘Feed-​In Tariffs for Renewable Energy and WTO Subsidy Rules –​An Initial Legal Review’ (Geneva, International Centre for Trade and Sustainable Development, 2011) 6. 158 Ibid. 159 ascm Art. 8 (lapsed).

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3)

last but not least, environmental subsidies (“assistance to promote adaptation of existing facilities to new environmental requirements imposed by law and/​or regulations which result in greater constraints and financial burden on firms,” Article 8.2(c) ascm).160 The category of environmental subsidies was and remains especially relevant for the scale up in clean and renewable energies, as one could easily see how such subsidies would fit this classification, despite containing problematic lcrs or discriminatory elements. The problem is that the non-​actionable subsidies in Part iv were to last for an initial period of five years only, subject to renewal.161 Due to a lack of agreement on that renewal among developed and developing wto Members, this category of subsidies under the ascm ceased to exist as of 2000.162 The result is that environmental subsidies that originally fell in this non-​actionable category, are today either actionable or prohibited subsidies in the sense of the scm Agreement. This is much to the discontent of many proponents of such subsidies in the context of climate change mitigation.163 It must be said, however, that during the existence of this category in Article 8 ascm, subsidies of this kind were, interestingly enough, not notified to the wto.164 This does not mean that there is no need for such a category or at least some form exceptions for such subsidies. Both Rubini and Howse, for instance, argue that in case non-​actionable subsidies will not be reinstated in 160 Ibid., Art. 8.2(c) (lapsed): “Notwithstanding the provisions of Parts iii and v, the following subsidies shall be non-​actionable: (c) assistance to promote adaptation of existing facilities to new environmental requirements imposed by law and/​or regulations which result in greater constraints and financial burden on firms, provided that the assistance: (i) is a one-​time non-​recurring measure; and (ii) is limited to 20 per cent of the cost of adaptation; and (iii) does not cover the cost of replacing and operating the assisted investment, which must be fully borne by firms; and (iv) is directly linked to and proportionate to a firm’s planned reduction of nuisances and pollution, and does not cover any manufacturing cost savings which may be achieved; and (v) is available to all firms which can adopt the new equipment and/​or production processes.” 161 Mavroidis, Trade in Goods (n 124) 566. 162 Pursuant to Article 31 scm Agreement; Mavroidis, Trade in Goods (n 124) 566. 163 See notably Luca Rubini and Robert Howse, ‘Climate Mitigation Subsidies and the WTO Legal Framework: A Policy Analysis’ (Geneva, International Institute for Sustainable Development, 2010). See also Chapter 2 [Espa] and 8 [Cima] in this volume. 164 Mark Wu, ‘Re-​examining ‘Green Light’ Subsidies in the Wake of New Green Industrial Policies’ E15 Initiative Think Piece (August 2015) 3.

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212 Marhold the ascm, gatt Article xx (General Exceptions) should be available to justify them, although this proposal is not without problems itself.165 While this scenario would offer an alternative solution in case Article 8 ascm is not reinstated, there are also opponents to this view. Mavroidis, for instance, is of the opinion that the whole idea of Article 8 of the scm Agreement was that no recourse to gatt Article xx exceptions would be necessary.166 In his view, this was the underlying reason for negotiating the Article 8 ascm in the first place.167 Although there is a certain overlap between the lists of gatt Article xx and Article 8 ascm (‘green’ subsidies could be placed under subparagraphs (b) and (g)), ascm negotiating history indicates that the idea was to deal with ‘green’ subsidies in a self-​contained manner in the scm Agreement context.168 Moreover, Mavroidis argues that if gatt Article xx exceptions to the scm Agreement would be allowed, such exceptions would not meet the chapeau of the Article, since the chapeau calls for absence of discrimination.169 To add to this, nowhere does the ascm establish a link with the gatt and not one panel has accepted this view so far. Nonetheless, the frustration of those who advocate in favour of reinstating the expired Article 8 scm or alternatively seek recourse in gatt Article xx Exceptions can be well understood from looking at the initial problem that the ascm does not consider the (policy) reason and the context of a subsidy.170 Under current wto subsidy rules, Members having in place support schemes for renewable energy that are prohibited or actionable thus only have one hope left: They trust that they will not cause injury to another wto Member. And in case they do, that the affected Member in question will abstain from acting against them in wto Dispute Settlement. The policy paradox is, however, that actionable subsidies (if they are not contingent on export or containing local content requirements), often is the only legally available policy instrument for governments to promote the production and increase the market share of 165 Rubini and Howse, ‘Climate Mitigation Subsidies’ (n 163); However, Mavroidis believes allowing this would be complicated, see Mavroidis, Trade in Goods (n 124) 365. 166 See Mavroidis, Trade in Goods (n 124) 365 ff, arguing that allowing gatt Article xx to function as an exception to the scm Agreement would put into question the idea of establishing a so-​called ‘trichotomy’ between prohibited, actionable and non-​actionable subsidies. 167 See Petros C. Mavroidis, The Regulation of International Trade –​Volume 1: The GATT (Cambridge, Massachusetts and London, England, The mit Press, 2015) 476–​477. 168 See Mavroidis, Trade in Goods (n 124) 365 ff. 169 Ibid. 170 Petros C. Mavroidis et al., The Law of the World Trade Organization –​Documents, Cases and Analysis (New York, west Publishing, 2010) 567.

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clean energy. This makes renewable energy support schemes, even in absence of lcr s, sensitive to a dispute under wto law. When testing EU renewable energy law and practice against wto law, we discover that the Union’s leniency towards discriminatory support schemes may be effective for reaching climate goals, but, in many instances, may be contrary to wto subsidies disciplines if these schemes fit the definition of a subsidy under the ascm. On the other hand, it also becomes clear that wto law offers too little space for subsidies pursuing legitimate policy goals at present. At minimum, the wto and its Members should strive to permit subsidies for the scale up of clean energy under wto law. The most thorough way to do this would be to drastically amend and expand wto subsidy rules or reinstate the expired ascm Article 8. The wto could, for instance, take inspiration from EU existing legislation on renewable energy as set out in the Guidelines and gber.171 Whatever the form, it is unavoidable that wto subsidies rules are in need of some sort of reform. While this is easier said than done, the wto Membership should look beyond direct obstacles and remind themselves what they committed to in the Paris Agreement in late 2015.172 In absence of this, the applicability of gatt Article xx defences and their applicability to the ascm could be put to the test in dispute settlement. 5

Conclusion

It is evident from the analysis of EU renewable energy legislation as well of the case law that the both the European Commission and the ecj are lenient towards discriminatory support schemes of EU Member States. The main argument is, and quite understandably so from a policy point of view, that the promotion of renewable energy schemes and the protection of the environment outweighs the discriminatory nature of the schemes. However, this does not diminish the dilemma that if such schemes fit the definition of a subsidy under current wto law, this opens additional legal dimensions and challenges for the EU and its Member States. It becomes clear from the above that the EU and the wto indeed operate in disconnected paradigms regarding support schemes for clean and renewable energy. The EU legal system is actively liberalizing its energy markets and has 171 See Michael Blauberger and Rike U. Kramer, ‘European Competition vs. Global Competitiveness –​Transferring EU Rules on State Aid and Public Procurement Beyond Europe’ 13 Journal of Industry Competition and Trade 171 (2013), 181 ff. 172 The Paris Agreement.

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214 Marhold elaborate renewable energy policies in place. Present wto subsidies regulations, on the other hand, make support schemes for renewable energy particularly sensitive to dispute settlement and provides no exceptions for clean and renewable energy support schemes that serve legitimate policy goals such as decarbonization of the grid. This can lead to challenging outcomes as it is highly questionable to what extent EU rules on State aid in the renewable energy sector were drafted with wto subsidies disciplines in mind. What is clear is that the support schemes for clean and renewable energy that the EU has in place at present are easy targets for other wto Members in wto dispute settlement. In the opinion of the author, there are three possible, not necessarily mutually exclusive, explanations why EU and wto law are disconnected legal paradigms concerning decarbonizing the grid through the legal scale up of renewable energy support schemes. First, it is plausible that EU State aid rules tailored towards renewable energy were not consciously drafted against the backdrop of wto rules. Second, as the EU did not harmonize renewable energy support schemes and does not have the fiscal competence to administer them, another possibility is that the EU intentionally left this aspect unregulated and did not actively engage with it, leaving it to the discretion of Member States. This scenario is also conceivable considering the by the EU highly valued positive effect support schemes have on the scale up of renewables and therefore the environment and climate goals. Third is a scenario where the EU is well-​ aware that its policies are contrary to wto law, but believes the Union’s stance towards ‘exceptions’ to State aid is more progressive and therefore legitimate. In addition, it may perceive the risk of challenges under wto law relatively minor. It is true that wto subsidy rules are in need of reconsideration and currently leave very little to no space for exceptions regarding the rationale of a subsidy at present, sometimes to the detriment of the legitimate policy goals behind them. In this sense, the EU legal framework for renewable energy goes further than wto rules by taking into account the policy rationale of the subsidy. If wto Members were to take seriously any reform of the ascm, or considering explicit exceptions for pursuing legitimate policy goals, a framework inspired by EU state aid exemption rules and guidelines for clean and renewable aid, may serve as a valuable starting point of the discussion.173

173 See further on this Anna Marhold, ‘Fossil Fuel Subsidy Reform and Climate Change Mitigation: Options for Constraining Dual Pricing in the Multilateral Trading System’ ictsd (October 2017) 16–​21.

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References

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­c hapter 9

Greening International Investment Arbitration Makane Moïse Mbengue and Elena Cima 1

Introduction

This chapter tells the story of the transformation of investment arbitration from an environment-​blind system, concerned solely with the protection of foreign investors, to a system capable of actively contributing to environmental protection. Given the abundance of investment arbitration cases in the energy sector and the environmental concerns that investment projects in this sector raise, this transformation can significantly influence existing and future energy-​related disputes.1 For a long time, environmental considerations have played a marginal role –​ if any –​in investment arbitration. This dispute settlement mechanism had been created and designed specifically to allow for the protection of foreign investors’ rights, and even when investors operated in environmental markets or their activities had an impact on the environment, the ‘environmental component’ of these disputes was not taken into account. States would seldom raise environmental protection as an attempt to justify the alleged violation of investment provisions, and tribunals would turn a blind eye to these arguments, declaring their irrelevance and dismissing any related evidence. In other words, as an investment forum, investment arbitration was committed solely to investment law. More recently, however, it seems to have become a forum where environmental voices can be heard and where compliance with and enforcement of environmental norms can be ensured. This contribution will argue that three drivers of change have paved the way to this transformation. First, the way in which the parties have used environmental considerations and environmental law has substantially changed. If the increase of investment disputes with an environmental component in the last few decades is undeniable (only two claims had been brought before 1990, while more than 1 For an overview of the interaction between foreign investment and environmental law in the energy sector, see Makane M. Mbengue and Deepak Raju, ‘Energy, Environment and Foreign Investment’, in Eric de Brabandère and Tarcisio Gazzini (eds), Foreign Investment in the Energy Sector. Balancing Public and Private Interests 171-​191 (Martinus Nijhoff Pub., 2014).

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60 have been filed since 2012), it is not simply a matter of numbers: not only more disputes dealing with environmental law, or environmental concerns more broadly, have been filed, but the way in which environmental law has been invoked by the parties has substantially changed.2 As a matter of fact, it is possible to distinguish two partially overlapping generations of disputes: in the first generation, environmental law was used in what we could define as ‘classical’ or ‘traditional’ way, merely as an exception, as a way for the respondent state to justify the alleged violation of provisions contained in international investment agreements (iia s). In the second generation of disputes, instead, environmental law is invoked by both states and investors not solely as an exception, but rather to ensure its enforcement and compliance. On the one hand, states are bringing environmental counterclaims in proceedings initiated by investors to try to enforce environmental law against them; on the other, investors are increasingly denouncing the state’s failure to comply with environmental obligations and claiming damages when such failure causes damage to their protected investment. Second, investment tribunals, which used to disregard environmental considerations altogether, have started giving them increasing room and importance when interpreting investment norms. Traditionally, whenever states raised environmental justifications to the alleged violation of iia provisions, tribunals refused to take environmental considerations into account, discarding them as simply irrelevant. This kind of attitude would end up frustrating the attempts of the parties to bring environmental claims as part of an investment dispute. A certain openness towards environmental considerations would, on the other hand, facilitate the contribution of investment arbitration towards environmental protection goals. Finally, investment chapters in free trade agreements are getting richer in environment-​related provisions, and they are contained in agreements that often feature an ‘environment’ chapter.3 As a result, tribunals are directly confronted with environmental norms, and even when such norms do not fall under their immediate jurisdiction, they have a certain weight in the final decision.

2 Kate Parlett and Sara Ewad, ‘Protection of the Environment in Investment Arbitration: A Double-​Edged Sword’ 20 Essex St. Bulletin (2017). Jeff Sullivan and Valeriya Kirsey, ‘Environmental Policies: A Shield or a Sword in Investment Arbitration’ 18 Journal of World Investment & Trade 100 (2017). 3 Elena Cima, ‘Promoting Renewable Energy Through FTAs? The Legal Implications of a New Generation of Trade Agreements’ 52(4) Journal of World Trade 663 (2018).

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The next two sections will tell the story of the interface between environmental and investment law in two acts, aiming the spotlight on the way in which parties and tribunals have treated environmental law throughout the years. Section 2 will describe the attitude of both the parties to a dispute and tribunals towards environmental concerns in the ‘first generation’ of disputes’, while Section 3 will conduct a parallel analysis in the context of the ‘second generation’ of cases. Section 4 will attempt to ‘scratch the surface’ and explore the forces underlying this evolution and Section 5 will conclude. 2

The Early Years: No Room for the Environment in Investment Arbitration

The Use of Environmental Law by the Respondent State: Environmental Protection as a Shield In February 1973, the Organization for Economic Cooperation and Development (oecd) adopted a Council Decision urging member countries to limit the use of pcb s and to control them in a manner designed to minimize risk to human health and the environment.4 The term ‘pcb’ is an abbreviation for a synthetic chemical compound known as polychlorinated biphenyl, which biodegrades slowly and remains in the environment for a long time. Canada, as a Member of the oecd, added pcb s to the toxic substances listed under the Environmental Contaminants Act, signed the Basel Convention on hazardous waste,5 and in 1995 introduced an export ban on pcb. The ban heavily affected the activity of an American corporation, S.D. Myers Inc. (S.D. Myers), which had established a subsidiary in Canada to obtain pcb waste there and export it in the United States (US) for treatment in their US facility. In the arbitral proceedings initiated by S.D. Myers, Canada justified the measure arguing that is was based on the Basel Convention,6 and that it was a 2.1

proper exercise of Canada’s sovereign power under international law (the ‘police power’) to regulate in the public interest, based on legitimate concerns, for the preservation or protection of the environment, public 4 See (accessed 23 July 2019). S.D. Myers Inc. v. Canada, nafta Arbitration (uncitral Rules), Partial Award (13 November 2000) (hereinafter S.D. Myers. v. Canada), para 99. 5 Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal, 1673 unts 126, entered into force 5 May 1992 (hereinafter Basel Convention). 6 S.D. Myers. v. Canada, Statement of Defense (18 June 1999), para 14.

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health and safety, in accordance with Canada’s international obligations and Articles 1101(4) and 1114 of nafta and thus non-​compensable.7 S.D Myers v. Canada represents an excellent example of the traditional way in which respondent states have raised environmental issues in investment disputes, namely, to justify the alleged breach of a wide variety of investment provisions. The classic argument relied on by states, as Canada’s position above shows, is that measures adopted pursuing environmental policies or more broadly for the protection of the environment, do not amount to a violation of treaty standards.8 2.1.1 Justifying Alleged Expropriations Very often, like in the dispute just described, environmental issues and norms are invoked by states against expropriatory claims.9 Expropriation is not prohibited per se and international law acknowledges the host state’s right to expropriate alien property, provided that certain requirements are met: i) the measure must serve a public purpose; ii) must not be arbitrary and discriminatory; iii) must follow principles of due process; and iv) must be accompanied by prompt, adequate, and effective compensation. An expropriatory measure aimed at protecting the environment would most likely be characterized as “serving a public purpose” and therefore deemed a “lawful” expropriation, although it would nevertheless trigger the obligation to provide for compensation.10 In a number of disputes, the respondents have instead relied on the police powers doctrine to argue that their environmental-​protection measures were not tantamount to expropriation, as they reflected the right of the state, as a guardian of the public interest, to regulate economic activities in its territory. 7 8 9

S.D. Myers. v. Canada, Statement of Defense, para 55. Sullivan and Kirsey, ‘Environmental Policies’ (n 2) 102. See e.g. Southern Pacific Properties (Middle East) Limited (spp) v. Arab Republic of Egypt, icsid Case No. arb/​84/​3, Award (20 May 1992) (hereinafter spp v. Egypt), para 165; Metalclad Corp. v. United Mexican States, icsid Case No. arb(af)/​97/​1, Award (25 August 2000) (hereinafter Metalclad v. Mexico), para 103. Compañía del Desarrollo de Santa Elena S.A. v. Republic of Costa Rica, icsid Case No. arb/​96/​1, Award (17 February 2000) (hereinafter cdse v. Costa Rica), para 72. 10 See spp v. Egypt, para 158, where the Tribunal stated that “as a matter of international law, the Respondent was entitled to cancel a tourist developmnent project situated on its own territory for the purpose of protecting antiquities. This prerogative is an unquestionable attribute of sovereignty. The decision to cancel the project constituted an exercise of the right of eminent domain. The right was exercised for a public purpose, namely, the preservation and protection of antiquities in the area.”

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This line of defence has been traditionally invoked with reference to general environmental regulatory measures, and more recently even with respect to targeted environmental measures. In Methanex v. USA, the respondent argued that the March 1999 order by the State of California to ban the use of mtbe (methyl tertiary butyl ether) by the end of 2002 was a general regulatory measure to protect the environment and was not tantamount to indirect expropriation:11 “if States were held liable for expropriation every time a regulation had a mere impact on an investment, governments could not regulate.”12 The respondent referred to the decision of the tribunal in Feldman v. Mexico, observing that “governments must be free to act in the broader public interest through protection of the environment” and that not every change in law “that makes it uneconomical to continue a particular business, is an expropriation.”13 Both in Methanex and S.D Myers, the respondent had challenged the existence of ‘legitimate expectations’ on the part of the investor. As a matter of fact, not every change in the host state’s legal system affecting foreign investors automatically violate their legitimate expectations: “[n]‌o such violation will occur if the change remains within the boundaries of normal adjustments customary in the host State” or/​and “if it is predictable for a prudent investor at the time of the investment.”14 In these two cases, precisely because of the characteristics of the activity or sector and of the environmental concerns involved, the respondents argued that the investor should have foreseen substantial government activity and control:15 Methanex, like all investors, assumed the risk that there could be changes in the economic and political conditions in the United States, including in the regulatory requirements concerning the sale of mtbe in gasoline. mtbe, like many chemicals and like any component in gasoline, is a highly regulated product. mtbe producers thus necessarily operate with

11

Methanex Corporation v. United States of America, nafta (uncitral), Amended Statement of Defense (5 December 2003) (hereinafter Methanex v. USA), para 398. 12 Methanex v. USA, Amended Statement of Defense, para. 398. 13 Marvin Roy Feldman Karpa v. United Mexican States, icsid Case No. arb(af)/​99/​1, Award (16 December 2002) (hereinafter Feldman v. Mexico), para 112. 14 Rudolph Dolzer and Christoph Schreuer, Principles of International Law (Oxford University Press, 2012). 15 S.D. Myers. v. Canada, Statement of Defense, para 55.

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the knowledge that their product is regulated and may be further regulated in the future.16 Besides measures of general application, states have also relied on the police power doctrine –​more or less successfully –​to justify the adoption of targeted environmental measures. In Tecmed v. Mexico, for example, the respondent defended the decision not to renew a license necessary to the investor to operate a landfill of hazardous industrial waste, characterizing it as “a regulatory measure issued in compliance with the state’s police power within the highly regulated and extremely sensitive framework of environmental protection and public health.”17 Similarly, in Chemtura v. Canada, Canada argued that “the decision to de-​register lindane was not taken arbitrarily but was instead based on valid scientific considerations. … [and on] good faith attempts to re-​ evaluate [its safety] based on a broad spectrum of scientific issues. … grounded in valid scientific method and sound policy.”18 Another case where the respondent relied on the police power doctrine to justify the adoption of a targeted environmental measure is Gold Reserve v. Venezuela. According to Venezuela, the revocation of the claimant’s construction permit and subsequent termination of the mining concessions was “an act in exercise of the State’s policy to promote only environmentally sustainable mining. … out of bona fide concern of the impact of Claimant’s mining activities.”19 Along the same line of reasoning, the respondent in Al Tamimi v. Oman maintained that “the application of existing environmental laws lies at the core of a state’s police power, and that

16

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Methanex v. USA, Amended Statement of Defense, para. 406. Here the tribunal sided with the respondent, when it observed that “Methanex entered a political economy in which it was widely known, if not notorious, that governmental environmental and health protection institutions at the federal and state level. … continuously monitored the use and impact of chemical compounds and commonly prohibited or restricted the use of some of those compounds for environmental and/​or health reasons. … Methanex entered the United States market aware of and actively participating in this process. It did not enter the United States market because of special representations made to it.” Methanex v. USA, Award (3 August 2005), paras 9–​10, part iv, chapter D. Técnicas Medioambientales Tecmed S.A. v. United Mexican States, icsid Case No. arb(af)/​ 00/​2, Award (29 May 2003) (hereinafter Tecmed v. Mexico), para 97; Counter-​memorial (11 January 2002), 160–​162, 550; Respondent’s closing statement (31 July 2002), 24–​25, 56. Chemtura Corporation ( formerly Crompton Corporation) v. Government of Canada, uncitral, Canada’s Counter-​memorial (20 October 2008) (hereinafter Chemtura v. Canada), para 632. Gold Reserve Inc. v. Bolivarian Republic of Venezuela, icsid Case No. arb(af)/​09/​1, Award (22 September 2014) (hereinafter Gold Reserve v. Venezuela), para 565.

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any application of those laws that leads to the loss of property constitutes a non-​compensable regulatory action as opposed to a compensable taking.”20 2.1.2 Justifying Alleged Breaches of Other Investment Clauses Besides defences against expropriatory claims, environmental protection has often been invoked by respondent states to fight alleged claims of non-​ discrimination clauses (Most-​Favoured Nation and National treatment). The analysis of an alleged breach of any of these clauses requires, first, determining whether the foreign investors or the foreign investor and the local competitor are placed in ‘like circumstances’, and second, assessing whether (one of) the foreign investor(s) has been treated less favourably. The first element has been used as an entry point for respondent states to invoke environmental differentiation as one of the criteria to define likeness. In Parkerings v. Lithuania, Lithuania argued that the claimant’s project and that of another foreign investor were not ‘in like circumstances’ because the claimant’s project had a higher environmental impact on Vilnius’ old town, which was included in the World Heritage List. Similarly, in Methanex v. USA, the state argued that the claimant and local competitors could not be considered in ‘like circumstances’ because, among others, of their environmental impact of the respective activities. In another instance, a state has raised environmental justifications is the case of alleged breach of the prohibition of performance requirements. In sd Myers, Canada invoked environmental concerns to challenge the claims of breach of Article 1106 of nafta, which prohibits the imposition and enforcement of a number of performance requirements, claiming that, even if the challenged measure were to have violated the provision, the Article’s exception would apply because it was a measure “necessary to protect human, animal or plant life or health or was necessary for the conservation of living or non-​living exhaustible natural resource.”21 Finally, in Vivendi v. Argentina, the respondent pleaded the defence of necessity, arguing that it took the actions that ultimately affected the claimants’ investments22 “out of necessity [and] in order to safeguard the human right to water of the inhabitants of the country” further stating that “[b]‌ecause

20 21 22

Adel A Hamadi Al Tamimi v. Sultanate of Oman, icsid Case No. arb/​11/​33, Award (3 November 2015) (hereinafter Al Tamimi v. Oman), para 177; Oman’s Counter-​memorial (5 June 2013), paras 340, 347–​8; Oman’s Rejoinder (11 March 2014), para 13. S.D. Myers. v. Canada, Partial Award, para 155, with reference to nafta Article 1106(2). These actions –​motivated by the economic and financial crisis which Argentina experienced during 2001–​2002 –​included the failure to revise the tariffs as required by the Concession Contract and ultimately the abrupt termination of the Concession.

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of its importance to the life and health of the population. … water cannot be treated as an ordinary commodity.”23 2.2

The Attitude of Tribunals Towards Environmental Considerations: Turning a Blind Eye While an expropriation or taking for environmental reasons may be classified as a taking for a public purpose, and thus may be legitimate, the fact that the Property was taken for this reason does not affect either the nature or the measure of the compensation to be paid for the taking. That is, the purpose of protecting the environment for which the Property was taken does not alter the legal character of the taking for which adequate compensation must be paid.32 The international source of the obligation to protect the environment makes no difference.24

This excerpt of the Arbitral award in cdse v. Costa Rica perfectly sums up the traditional approach of tribunals towards environmental considerations brought into investment disputes. In this dispute, which involved the tension between Costa Rica’s creation of natural preserves and real estate development by the investor for touristic purposes, the parties agreed that the measure at stake constituted lawful expropriation. What they could not agree on was the amount due for compensation. The claimant, on the one hand, requested an award in the amount of usd 41,200,000, as fair and full compensation, on the basis of the current fair market value of the property expropriated. On the other, the respondent, having initially offered usd 1,900,000, argued that the amount of compensation had to be reduced due to the environmental purpose of the expropriatory act. As the excerpt above suggests, the tribunal sided with the claimant, adding that “expropriatory environmental measures –​no matter how laudable and beneficial to society as a whole –​are, in this respect, similar to any other expropriatory measures that a state may take in order to implement its policies.”25 For these reasons, the tribunal refused to analyze the detailed evidence submitted by the respondent pointing to Costa Rica’s international obligation to preserve the unique ecological site that is the Santa Elena property. 23 24 25

Suez, Sociedad General de Aguas de Barcelona, S.A. and Vivendi Universal, S.A. v. The Argentine Republic, icsid Case No. arb/​03/​19, Decision on liability (31 July 2010) (hereinafter Vivendi v. Argentina), paras. 250 and 252. cdse v. Costa Rica, Award, para 71. cdse v. Costa Rica, Award, para 72.

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Along the same lines, tribunals have traditionally rejected the applicability of the police power doctrine to targeted environmental measures. In Tecmed, for example, the tribunal rejected the respondent’s argument holding that there is no principle stating that regulatory administrative actions are per se excluded from the scope of the Agreement, even if they are beneficial to society as a whole –​such as environmental protection –​particularly if the negative economic impact of such actions on the financial position of the investor is sufficient to neutralize in full the value, or economic or commercial use of its investment without receiving any compensation whatsoever.26 Moving to non-​discrimination standards, for a long time, tribunals have not been receptive to the respondents’ arguments that environmental differentiation be taken into account in determining whether two players are in ‘like circumstances.’ They rather opted for an application of the notion of ‘likeness’ as interpreted and applied by the dispute panels and Appellate Body of the World Trade Organization (wto). In international trade fora, the main conclusion has been that wto rules do not allow for environmental differentiation as they do not allow for taking into account so-​called ‘process and production methods’ (ppm s) in the definition of likeness.27 In S.D. Myers, the tribunal relied precisely on the interpretation of the notion of ‘like products’ in wto law and concluded that the claimant and local competitors were in ‘like circumstances’, finding that the primary purpose of the ban was to protect the interests of the Canadian waste disposal industry and not the environment.28

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Tecmed v. Mexico, Award, para 121. In Gold Reserve v. Venezuela, the Tribunal rejected the respondent’s defense on the basis the real motive behind the measure was political rather than a genuine concern for the environment. Gold Reserve v. Venezuela, Award, para 590. See in general C.R. Conrad, Process and Production Methods (PPMs) in WTO Law (Cambridge University Press, 2011). S.D. Myers. v. Canada, Partial Award, paras. 244–​251.

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The Environment Strikes Back: Investment Arbitration as a Forum for Environmental Protection?

Environmental Law Invoked by Both States and Investors: From Protective Shield to Double-​Edged Sword29 3.1.1 The Investor’s Edge: Ensuring States’ Compliance with Environmental Law In at least two recent cases –​Allard v. Barbados and Clayton Bilcon v. Canada –​ the investors have used the forum offered by investment arbitration to claim the state’s violation of environmental norms, whether international or domestic. In 1994, Mr. Allard acquired a land in the Graeme Hall Swamp in Barbados –​ the ‘Sanctuary’ –​to develop it for an eco-​tourism attraction. During several years, Mr. Allard undertook construction and improvement works on the land, while obtaining all the necessary environmental permits. Once construction was completed, the Sanctuary opened to the public in the Spring of 2004. Not even a whole year had passed, that this idyllic picture became indelibly tainted: because of a failure at a sewage treatment plant nearby, operated by the Barbados Water Authority, raw sewage was discharged into the Sanctuary, forcing Mr. Allard to shut down the project. The investor claimed damages for the state’s failure to comply with environmental obligations under the United Nations Convention on Biological Diversity and the Ramsar Convention, in accordance with which Barbados designated Graeme Hall Swamp “wetland of international importance”30 because such failure caused damage to his investment. By doing so, Mr. Allard attempted to enforce international environmental treaties, as incorporated in Barbados’ domestic law, relying on the existence of a damage to his investment, protected under the Canada-​Barbados Bilateral Investment Treaty (bit). Despite all of Mr. Allard’s efforts, the tribunal was not receptive to his claim, holding that “the fact that Barbados is a party to the Convention on Biological Diversity and the Ramsar Convention does not change the standard under the bit.”31 In Clayton Bilcon v. Canada, instead, the investor had better luck. Rather than claiming the breach of an international environmental treaty, the investor in this case pursued the very same goal –​trying to enforce the State’s environmental obligations –​couching the claim of breach of an environmental norm in the broader claim of breach of a standard of protection. In 2001, Bilcon of 3.1

29 30 31

This expression is borrowed from Parlett and Ewad, ‘Protection of the Environment’ (n 2). Peter A. Allard (Canada) v. The Government of Barbados, pca Case No. 2012-​06 (hereinafter Allard v. Barbados), para 178. Ibid., para 244.

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Delaware Inc. (‘Bilcon’), a member of the Clayton Group, began to consider a project at White Points, in Digby County, Nova Scotia. The project involved the development of a quarry and marine terminal, and White Points seemed like the perfect location, given Nova Scotia’s publicly stated policy of encouraging investment in its mining industry. The overall regulatory framework in place in Nova Scotia and federal Canada includes requirements for environmental assessment and approval, the core of the underlying philosophy being to encourage and promote economic development while conserving and promoting environmental quality.32 After applying for an environmental permit and after several years of failed attempts to reach common grounds with the regulatory authorities, the project was referred to a Joint Review Panel (jrp), which, entrusted with assessing the environmental impact of the project, recommended against its implementation. The investor argued in front of the arbitral tribunal that its legitimate expectations “created by the regulatory framework and specific expressions of encouragement by governments”33 had been frustrated and that Canada had breached, among others, Article 1105 of nafta (fair and equitable treatment). More specifically, the allegations of breach focused on the handling of the lengthy environmental review conducted by the jrp. In this context, Bilcon argued that the respondent had breached and failed to properly implement its own environmental law, and by doing so Canada had demonstrated a lack of due process, natural justice, fairness and reasonableness, falling short of the international standard for treatment of foreign investors. According to the investor, breaches of Canadian environmental law had characterized the whole environmental assessment process, which had been “perverted” by political motivations.34 Allegations include, among others, the appointment of inadequate persons as members of the jrp, as the appointees lacked “the requisite professional credentials and experience and. … were not ‘comfortable’ with standard environmental assessment processes and proceedings in the Province of Nova Scotia and Canada;”35 the departure from a number of requirements and standards required by Canadian environmental law;36 the

32 33 34 35 36

William Ralph Clayton, William Richard Clayton, Douglas Clayton, Daniel Clayton, and Bilcon of Delaware, Inc. v. Government of Canada, nafta (uncitral) Award on Jurisdiction and Liability (17 March 2015) (hereinafter Clayton Bilcon v. Canada), para 10. Stefan Dudas, ‘Bilcon of Delaware et. al v. Canada: A Story About Legitimate Expectations and Broken Promises’ Kluwer Arbitration Blog (11 September 2015). Clayton Bilcon v. Canada, para 363. Ibid., para 370. Ibid., para 373.

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complete disregard of important scientific information provided by the investors;37 and the failure to apply the legal and regulatory requirements of the environmental scheme for an assessment in the final report.38 The Tribunal accepted Bilcon’s argument, further clarifying that In arriving at its conclusion in this case, the Tribunal is not suggesting that there is the slightest issue with the level of protection for the environment provided in the laws of Canada and Nova Scotia. Each is free under nafta to adopt laws that are as demanding as they choose in exercising their sovereign authority. Canada and Nova Scotia have both adopted high standards. … The Tribunal’s concern is. … that the rigorous and comprehensive evaluation defined and prescribed by the laws of Canada was not in fact carried out.39 3.1.2

The State’s Edge: Environmental Counterclaims 71. All persons, communities, peoples and nations can call upon public authorities to enforce the rights of nature … . 396:2. Liability for environmental damage is strict. Any harm to the environment, in addition to the corresponding penalties, shall also give rise to an obligation to fully restore the ecosystems and compensate the individuals and communities affected. (Constitution of the Republic of Ecuador, 2008)40

The 2008 Ecuadorian Constitution does not only recognize that environmental protection is a matter of public interest but further prescribes a regime of strict liability for environmental damage.41 It was precisely on the basis of this instrument that Ecuador brought its environmental counterclaims against two foreign investors: Perenco Ecuador (Perenco) and Burlington Resources (Burlington). The two corporations, registered in France, created a consortium and obtained an oil drilling concession in the Amazon region of Ecuador in 2002. A few years later, in 2006 and 2007, the Ecuadorian government enacted several amendments to its Hydrocarbon Law with the effect, among others, of 37 Ibid., para 377. 38 Ibid. 39 Ibid., para 598. 40 Ecuador 2008 Constitution, Arts. 71 and 396:2. 41 Perenco v. Ecuador, Interim Award on Jurisdiction, para 36. Burlington v. Ecuador, Decision on Counterclaims, para 81.

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increasing the revenues to be paid to the Ecuadorian government.42 Failing any attempt of negotiations, the two foreign investors launched two separate arbitral proceedings claiming the state’s breach of certain provisions contained both in the concession agreement and in the France-​Ecuador bit. What is relevant for our purposes is the fact that in both proceedings, Ecuador presented an environmental counterclaim against the investors, “on the basis that its experts had determined the existence of an ‘environmental catastrophe’ in the two oil blocks situated in the country’s Amazonian rainforest that had been worked by the consortium under Perenco [and Burlington]’s operatorship.”43 The counterclaims “largely concerned the alleged failure of [the investors] to comply with Ecuadorian law during the time in which [they were] responsible for the oil drilling operations.”44 Moreover, because of the strict liability regime prescribed by the 2008 Ecuadorian Constitution, the respondent State argued that it was only necessary for Ecuador to prove that damage had taken place, without having to prove causation or negligence.45 Finally, Ecuador claimed that both Perenco and Burlington had adopted the strategy of concealing and failing to report the existence of environmental harm, and had later tried to rely on a set of environmental audits, whose results Ecuador deemed not credible, to evade their liability for environmental damages.46 The way in which Ecuador has been using environmental law in the two cases mentioned stands in stark contrast with the way in which it has traditionally been invoked by states in investment disputes. Rather than ‘hiding’ behind the shield of environmental protection, the respondent state is now wielding environmental norms within its Constitution, as well as its domestic environmental law, as a sword, denouncing the investor’s allegedly environmentally harmful conduct and requesting compliance and enforcement with said environmental norms.47 42 43 44 45 46 47

James Harrison, ‘Environmental Counterclaims in Investor-​State Arbitration’ 17 Journal of World Investment & Trade 479 (2016), 480. Perenco v. Ecuador, Interim Award on Jurisdiction, para 34; Claimant’s Counter-​Memorial on Counterclaims dated 28 September 2012, para. 1. See also Burlington v. Ecuador, Decision on Counterclaims, para 80. See Chapter 5 [Rudall] in this volume. Harrison, ‘Environmental Counterclaims’ (n 42) 481. Perenco v. Ecuador, Interim Award on Jurisdiction, paras 36–​42. Perenco v. Ecuador, Interim Award on Jurisdiction, para 36; Burlington v. Ecuador, Decision on Counterclaims, paras 81–​82 and 93–​98. Burlington v. Ecuador, Decision on Counterclaims, para 87; Perenco v. Ecuador, Interim Award on Jurisdiction, paras 38–​40. In a recent case, involving not environmental protection but the human right to water, Urbaser v. Argentina, the respondent raised a counterclaim based on the alleged violation, on the part of the investor, of international human rights law. See Urbaser S.A. and

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3.2 Environmental Considerations Guiding Tribunals’ Interpretation As second driver of change, investment tribunals, which had for a long time discarded any environmental consideration raised by the states as simply irrelevant, have started giving them increasing room and importance when interpreting investment provisions. Coming a long way from the decision in cdse v. Costa Rica, where environmental law was deemed to fall outside the scope of the tribunal’s jurisdiction, recent awards show the tribunals’ efforts to rely on environmental considerations to shape and guide the application of investment clauses, at least to a certain extent compelled by the introduction of environmental provisions in investment agreements. 3.2.1 Ruling on Environmental Counterclaims Perenco and Burlington are not the first attempt of respondent states to present environmental counterclaims in proceedings initiated by the investors. A few years earlier, in the 2007 case of Paushok v. Mongolia, the respondent had raised an environmental counterclaim arguing that the claimants had violated their environmental obligations towards Mongolia.48 However, in this instance the state was unsuccessful, while Perenco and Burlington represent the first two disputes were the tribunals seem to have adopted a more favourable approach towards the admissibility of environmental counterclaims.49 While in Paushok v. Mongolia the tribunal held that it had no jurisdiction over the counterclaim,50 the situation has been different in the two cases involving Ecuador. In particular, in the case of Burlington, while the proceedings were still pending and after Ecuador presented its counterclaims, the investor agreed not to contest jurisdiction over the counterclaim by a separate agreement entered into with the state.51 In both Perenco and Burlington, the

48 49

50 51

Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic, icsid Case No. arb/​07/​26. Sergei Paushok, cjsc Golden East Company and cjsc Vostokneftegaz Company v. The Government of Mongolia, uncitral Rules, Award on Jurisdiction and Liability (28 April 2011) (hereinafter Paushok v. Mongolia), para 678(5). Whether a State is entitled to bring a counterclaim is a complex question and in many instances states have been unsuccessful. For an analysis of these issues, see Jôrge E. Viñuales, Foreign Investment and the Environment in International Law (Cambridge University Press, 2012), 92–​94; Pierre Lalive & Laura Halonen, ‘On the Availability of Counterclaims in Investment Treaty Arbitration’ Czech Yearbook of International Law 141 (2011); Anne K. Hoffman, ‘Counterclaims in Investment Arbitration’ 28 ICSID Review 438 (2013); Dafina Atanasova et al, ‘The Legal Framework for Counterclaims in Investment Treaty Arbitration’ 31 Journal of International Arbitration 357 (2014). Paushok v. Mongolia, Award on Jurisdiction and Liability, paras. 694, 699. Parlett & Ewad, ‘Protection of the Environment’ (n 2).

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tribunal found it had jurisdiction over the environmental counterclaims and proceeded examining domestic environmental law to assess whether there had been a violation thereof by the investor. Environmental considerations guided the tribunals throughout the analysis: Ecuador viewed [the environmental catastrophe caused by the investor] as an extremely serious matter deserving the most careful consideration by the Tribunal. On this point, the Tribunal cannot but agree. Proper environmental stewardship has assumed great importance in today’s world. The Tribunal agrees that if a legal relationship between an investor and the State permits the filing of a claim by the State for environmental damage caused by the investor’s activities and such a claim is substantiated, the State is entitled to full reparation in accordance with the requirements of the applicable law.52 Moreover, despite siding with the investor in the reading of the Ecuadorian Constitution, the Tribunal in Perenco held that the “Constitution’s focus on environmental protection means that when choosing between certain disputed (but reasonable) interpretations of the Ecuadorian regulatory regime, the interpretation which most favours the protection of the environment is to be preferred.”53 One example of this presumption in favour of environmental protection is evident in the way in which the tribunal has assigned the burden of proof. While Perenco submitted that the burden, first and foremost, remained on Ecuador to affirmatively prove the existence of a causal link, the tribunal decided to employ “a strong rebuttable presumption that if there is a regulatory exceedance, that in itself is evidence of fault [as] any alternative approach would make it too onerous for a claimant because it would likely lack sufficient evidence to demonstrate that the operator failed in its duty of care in many if not most instances in which regulatory exceedances have occurred.”54 As a result, in Burlington, the tribunal awarded usd 39.2 million to Ecuador for environmental harm caused by the investor in breach of the Ecuadorian statutory environmental regulation regime.55 In Perenco, despite being inclined to hold the company liable for some environmental contamination, the tribunal preferred to appoint its own expert to investigate the relevant sites, in the 52 Perenco v. Ecuador, Interim Award on Jurisdiction, para 34. 53 Perenco v. Ecuador, Interim Award on Jurisdiction, para 322. 54 Ibid., para 374. 55 Parlett & Ewad, ‘Protection of the Environment’ (n 2). Ecuador has applied to annul the award and its application, and the annulment proceedings are still pending to this date.

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light of the significant disagreement between the party-​appointed experts on the extent of contamination and Perenco’s responsibility for it.56 3.2.2 The Interpretation of Standards of Protection Environmental counterclaims are not the only example of an increasing openness of tribunals towards environmental considerations. Another example is the interpretation of the police power doctrine. In sharp contrast with earlier decisions –​i.e. cdse v. Costa Rica or Tecmed v. Mexico –​where the applicability of the doctrine to targeted environmental measures had traditionally been rejected, the tribunal in Chemtura v. Canada did apply the doctrine to shield a targeted environmental measure,57 setting, among others, a very demanding standard to prove the existence of ‘legitimate expectations’, and explaining that the claimant should have been better aware of the industry’s regular patterns to be able to anticipate changes. Similarly, tribunals’ attitude seems to have changed with regard to the interpretation of the notion of ‘like circumstances’ under the Most-​Favoured Nation and National Treatment principles. While initially tribunals have not been receptive to the respondents’ arguments that environmental differentiation be taken into account in determining whether two players are in ‘like circumstances,’ relying heavily on the ‘likeness’ test applied in trade law, their approach seems to have changed more recently. It has become clear that the trade-​law-​‘likeness’ test cannot be automatically extended to investment law, mainly because these two disciplines have a different subject and object. While trade disciplines are directly concerned with cross-​border movement of goods and services and only indirectly with production processes, “investment 56

57

Ibid. The aforementioned cases concern counterclaims presented by states to argue the breach by the investor of domestic environmental law. No case has been brought to an arbitral Tribunal yet concerning a possible violation of an international environmental norm and therefore the chances of success of such a counterclaim would be hard to assess a priori. Nevertheless, a recent case, involving not environmental protection but the human right to water, Urbaser v. Argentina could serve as a useful example. “The Tribunal considers. … that the measures challenged by the Claimant constituted a valid exercise of the Respondent’s police powers. … The pmra took measures within its mandate, in a non-​discriminatory manner, motivated by the increasing awareness of the dangers presented by lindane for human health and the environment. A measure adopted under such circumstances is a valid exercise of the State’s police powers and, as a result, does not constitute an expropriation.” Chemtura v. Canada, Award (2 August 2010), para 266. See Jorge E. Viñuales, ‘Foreign Investment and the Environment in International Law: The Current State of Play’, c-​e enrg Working Papers 2016-​1, Cambridge Center for Environment, Energy and Natural Resources Governance, University of Cambridge (2016).

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disciplines are directly concerned with the treatment of foreign producers based in the host state’s territory and only indirectly with cross-​border movement.”58 The result is that differentiation based on ppm s is central to investment regulation. As a matter of fact, in the investment context, one important consideration in assessing whether two investors are in ‘like circumstances’ is whether they face similar regulatory frameworks or, in other words, whether they face the same constraints. As a result, in two cases, tribunals have accepted the respondents’ use of environmental differentiation in defining ‘like circumstances’. In Methanex v. USA, the state argued that the claimant and local competitors could not be considered in ‘like circumstances’ because, among other things, of the environmental impact of the respective activities, and the tribunal did differentiate between methanol and ethanol producers in determining the proper comparator for the analysis, precisely because of their environmental impact.59 Similarly, in Parkerings v. Lithuania, Lithuania argued that the claimant’s project and that of another foreign investor were not alike because the claimant’s project had a higher impact on Vilnius’ old town, which was included in the World Heritage List. The tribunal sided with Lithuania and held that environmental protection could indeed be a ground for the refusal of a project and that the two projects were not in ‘like circumstances’: …. the fact that bp’s mscp project in Gedimino extended significantly more into the Old Town as defined by the unesco, is decisive. … The historical and archaeological preservation and environmental protection could be and in this case were a justification for the refusal of the project. The potential negative impact of the bp project in the Old Town was increased by its considerable size and its proximity with the culturally sensitive area of the Cathedral. Consequently, bp’s mscp in Gedimino was not similar with the mscp constructed by Pinus Proprius.60

58

59 60

Jorge E. Viñuales, ‘The Environmental Regulation of Foreign Investment Schemes under International Law’, in Pierre M. Dupuy and Jorge E. Viñuales (eds), Harnessing Foreign Investment to Promote Environmental Protection: Incentives and Safeguards (Cambridge University Press, 2013), 293. Methanex v. USA, Award, paras. 15–​38, part iv, chapter B. Parkerings-​Compagniet as v. Republic of Lithuania, icsid Case No. arb/​05/​8, Award (11 September 2007), para 392.

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3.2.3 The Greening of iia s Often, environmental considerations are entering tribunal’s interpretation of investment provisions because of the content of the agreements themselves. Investment chapters in free trade agreements, in particular, feature more and more environment-​related provisions, and they are contained in agreements that equally feature an ‘environment’ chapter.61 The result is that tribunals are directly confronted with environmental norms, and even when such norms do not fall under their immediate jurisdiction, being part of the same agreement they have a certain weight in the tribunal’s decision. A particularly good example is provided by the interpretation of the minimum standard of treatment by the tribunal in Al Tamimi v. Oman, an investment dispute raised under the US-​Oman free trade agreement (fta).62 The dispute, which arose with respect to the enforcement of environmental laws against a limestone quarry project, required the definition by the arbitral tribunal of the exact content of the minimum standard of treatment, as set out in Article 10.5 of the fta.63 In doing so, the tribunal referred to both Article 10.10 and Chapter 17 of the agreement. Article 10.10 is an environmental provision within the investment chapter of the US-​Oman fta, which provides for the protection of the right of both parties to adopt, maintain, and enforce any measure to ensure that “investment activity in [their] territory is undertaken in a manner sensitive to environmental concerns.”64 As part of the investment chapter, Article 10.10 falls under the jurisdiction of the tribunal, who relied upon it to construct Article 10.5.65 Chapter 17, entitled “Environment,” on the other hand, does not fall directly within the tribunal’s jurisdiction.66 Nevertheless, the tribunal gave substantial weight to this chapter in interpreting the content of the minimum standard of

61 62 63

64 65 66

Cima, ‘Promoting Renewable Energy’ (n 3). Al Tamimi v. Oman, Award. See Cima, ‘Promoting Renewable Energy’ (n 3) and Viñuales, ‘Foreign Investment and the Environment’ (n 57). According to Article 10.5: “1. Each Party shall accord to covered investments treatment in accordance with customary international law, including fair and equitable treatment and full protection and security [and] 2. For greater certainty, paragraph 1 prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to covered investments.” US-​Oman, Art. 10.10. Al Tamimi v. Oman, Award, para 387. Al Tamimi v. Oman, Award, para 388. According to Article 17.8.5, which provides for a consultation mechanism, “[n]‌either Party may have recourse to dispute settlement under this Agreement for any matter arising under any provision of this Chapter …”.

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treatment, as it “provides further relevant context in which the provisions of Chapter 10 must be interpreted.”67 In the exact words of the tribunal, … the very existence of Chapter 17 exemplifies the importance attached by the US and Oman to the enforcement of their respective environmental laws. … When it comes to determining any breach of the minimum standard of treatment under Article 10.5, the Tribunal must be guided by the forceful defence of environmental regulation and protection provided in the express language of the Treaty.68 This reasoning is perfectly in line with Article 10.21 of the US-​Oman fta, entitled “Governing Law,” which states in the relevant part that “the tribunal shall decide the issues in dispute in accordance with this Agreement and applicable rules of international law.”69 Thus, while the tribunal’s jurisdiction is limited to the provisions within Chapter 10, it must read them in the context and purpose of the Agreement as a whole.70 4

Scratching the Surface: The Forces behind This Evolution

4.1 The Green Economy and Investment Arbitration The history of international environmental law, since its inception in the early 1970s, has witnessed a rather dynamic and constantly evolving struggle between environmental protection and the need to integrate growth and development concerns. To understand the evolution of the relationship between environmental and investment law, it is important to firefly sketch the underlying changing dynamics between environmental protection and investment schemes. While in the late 19th and early 20th centuries, environmental problems were tackled from a purely economic perspective, and the focus was not the protection of the environment per se but rather its economic exploitation,71 nowadays economic tools, including investment schemes, seem to have become instrumental to environmental protection. 67 68 69 70 71

Ibid., para 388. Ibid., para 389. US-​Oman, Art. 10.21. Ibid., Fn. 776. See e.g., Convention for the Protection of Birds Useful to Agriculture, March 19, 1902, Clive Parry, ed., Consolidated Treaty Series, Vol. 191, p. 91; Treaty for the Preservation and Protection of Fur Seals, June 7, 1911, Statutes at Large of the United States of America, Vol. 37, 1542. See also Bering Sea Arbitration, Award, (15 August 1893), riaa, vol. xxviii, 263;

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Over the last decade, new concepts have emerged, trying to reconcile the two terms, such as that of ‘eco-​efficiency’, which emphasizes the potential economic gains from reducing pollution and better managing natural resources. It follows that protecting the environment is no longer a matter merely of ‘responsibility’ but rather ‘profitability’ and states are now urged to build their economic models on environmental considerations in order to do better in economic terms.72 The underlying idea is that it is not sufficient to integrate environmental considerations in existing patterns of economic activity but rather to design a whole new economic paradigm to fit new environmental imperatives. This is summarized by the notion of ‘green economy’, which has had a strong impact on the private sector as it translates into the need to abandon certain modes of production, and sometimes to pursue new ‘greener’ business opportunities. Through what Daniel Esty calls an ‘environmental lens’, moving from brown to green means moving from green to gold, as going ‘green’ “is not just a nice strategy tool or a feel-​good digression from the real work of a company [but rather] an essential element of business strategy in the modern world.”73 In this context, foreign investment in sectors with strategic importance for environmental protection is a key component towards a green economy. Investment schemes, just as much as trade policies, can thus be seen as instrumental to environmental protection, as it is clearly framed in the United Nations (U.N.) 2030 Agenda for Sustainable Development. The Agenda spells out 17 goals, where environmental and social concerns are framed as ultimate goals, while investment and trade merely as ‘means of implementation’ of such goals.74 4.2 The Changing Role of Environmental Law in Investment Arbitration This brief snapshot of the changing dynamics between environmental protection and economic concerns illustrates a visible shift from an economic-​based to an environmental-​centred approach: from looking at environmental problems from a purely economic perspective (i.e. protecting natural resources

Trail Smelter Case (United States v. Canada), Ad Hoc International Arbitral Tribunal, March 11, 1941, United Nations Reports of International Arbitral Awards, Vol. 3 (1949), p.1938; Lake Lanoux Case (France v. Spain), Ad Hoc International Arbitral Tribunal, November 16, 1957, United Nations Reports of International Arbitral Awards, Vol. 12. 72 Viñuales, Foreign Investment (n 49). 73 Daniel C. Esty and Andrew S. Winston, Green to Gold (Yale University Press, 2006), 4. 74 See Goal 7(a) and para 67. See Chapter 5 [Rudall] in this volume.

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solely to preserve their economic exploitation) to assessing economic tools (trade policies and investment schemes) through an environmental lens. What about the bodies of law the govern environmental protection and foreign investments? The traditional approach has been investment-​law-​centred, asking to what extent a given environmental measure is consistent with investment disciplines, an approach similar to the one that has characterized the interface between the international trade and environmental regimes.75 The primacy of economic legal regimes vis-​à-​vis environmental ones can be traced back to the relatively late emergence of environmental law as an area of regulation and a field of study, and to its distinctive features, being a highly fragmented regime (both in terms of norms and institutions) and lacking a dispute settlement system. As a result, disputes that show an environmental component, or where domestic or international environmental law is at stake, are constantly brought to different dispute fora, depending on a variety of concurring factors.76 Either way –​whether a dispute is brought to a wto panel or to an investment tribunal –​the framework of reference is either trade or investment law and the ‘object’ to be evaluated is the environmental measure at stake.77 The evolution described in this chapter, however, reflects a change in this equilibrium, in parallel with the changing dynamics between environmental protection and economic concerns as embodied in the concepts of ‘green economy’ and ‘green industrial policy’. It is not anymore simply a matter of environmental measures being assessed against the framework provided by investment law but investment projects themselves are being judged on the basis of their environmental performance, and the legal framework of reference is no longer solely formed of investment norms but environmental norms as well.

75 76

77

Cima, ‘Promoting Renewable Energy’ (n 3). The same applies to disputes that have both environmental and human-​rights components. Lacking an environmental court, individuals have attempted to bring environmental claims to human rights courts. The latter, in turn, have under certain circumstances agreed to identify specific human rights as entry points to establish their jurisdiction over such claims. See e.g. Case of Lopez Ostra v Spain, European Court of Human Rights, 1994; Mayagna (Sumo) Awas Tingni Community v Nicaragua, Inter-​American Court of Human Rights Judgment of 31 August 2001; Social and Economic Rights Action Center (SERAC) and others v. Nigeria, African Commission Application no. 155/​96 (2001–​2002) (Ogoni). For an analysis of this phenomenon with relation to trade disputes, see Joost Pauwelyn, Conflict of Norms in Public International Law (Cambridge University Press, 2003), 23.

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Conclusions

This chapter has relied on the shift in power-​dynamics between foreign investment and environmental protection to argue that a similar shift can be observed in the relationship between the international investment and environmental legal regimes. Before the 1970s, the environment was protected solely to ensure its economic exploitation and preserve its commercial profitability; today, economic tools, including investment schemes, are asked to serve as means to advance environmental goals. Along these very same lines, a number of signs point to investment arbitration, where the environment has for a long time played a marginal role, potentially becoming a forum to ensure the compliance with and enforcement of environmental norms. To develop this argument, this contribution has given special attention to three concurring factors, namely the role of the parties to a dispute, of the arbitral tribunal, as well as of a new generation of iia s Most of the disputes analysed in the course of this chapter involve investment projects in the energy sector and the ‘greening’ of investment law and arbitration outlined in the previous sections can indeed have an impact on energy-​related disputes as evidenced, for instance, by the recent Perenco and Burlington arbitration, as well as by the Al Tamimi arbitration. Combined, the way in which the parties have used environmental considerations and environmental law, the increasing room and importance given to such considerations and laws by tribunals when interpreting investment norms, and the introduction of environmental provisions in the text of iia s, could open the door to a new generation of energy-​related arbitrations: a generation where the environmental implications of energy investment project become an integral part of the arbitrations themselves.

References

Atanasova, Dafina et al. 2014. ‘The Legal Framework for Counterclaims in Investment Treaty Arbitration’ 31 Journal of International Arbitration 357. Cima, Elena. 2018. ‘Promoting Renewable Energy Through FTAs? The Legal Implications of a New Generation of Trade Agreements’52(4)Journal of World Trade 663. Conrad, C.R. 2011. Process and Production Methods (PPMs) in WTO Law (Cambridge University Press). Dolzer, Rudolph and Christoph Schreuer. 2012. Principles of International Law (Oxford University Press).

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Dudas, Stefan. 2015. ‘Bilcon of Delaware et. al v. Canada: A Story About Legitimate Expectations and Broken Promises’ Kluwer Arbitration Blog. Esty, Daniel C. and Andrew S. Winston. 2006. Green to Gold (Yale University Press). Harrison, James. 2016. ‘Environmental Counterclaims in Investor-​State Arbitration’ 17 Journal of World Investment & Trade 479. Hoffman, Anne K. 2013. ‘Counterclaims in Investment Arbitration’ 28 ICSID Review 438. Lalive, Pierre and Laura Halonen. 2011. ‘On the Availability of Counterclaims in Investment Treaty Arbitration’ Czech Yearbook of International Law 141. Mbengue, Makane M. and Deepak Raju. 2014. ‘Energy, Environment and Foreign Investment’, in Eric de Brabandère and Tarcisio Gazzini (eds), Foreign Investment in the Energy Sector. Balancing Public and Private Interests 171-​191 (Martinus Nijhoff Pub). Parlett, Kate and Sara Ewad. 2017. ‘Protection of the Environment in Investment Arbitration: A Double-​Edged Sword’ 20 Essex St. Bulletin. Pauwelyn, Joost. 2003. Conflict of Norms in Public International Law (Cambridge University Press). Sullivan, Jeff and Valeriya Kirsey. 2017. ‘Environmental Policies: A Shield or a Sword in Investment Arbitration’ 18 Journal of World Investment & Trade 100. Viñuales, Jôrge E. 2012. Foreign Investment and the Environment in International Law (Cambridge University Press). Viñuales, Jôrge E 2013. ‘The Environmental Regulation of Foreign Investment Schemes under International Law’, in Pierre M. Dupuy and Jorge E. Viñuales (eds), Harnessing Foreign Investment to Promote Environmental Protection: Incentives and Safeguards (Cambridge University Press). Viñuales, Jôrge E 2016. ‘Foreign Investment and the Environment in International Law: The Current State of Play’, c-​e enrg Working Papers 2016–​1, Cambridge Center for Environment, Energy and Natural Resources Governance, University of Cambridge.

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­c hapter 10

Concluding Remarks Elena Cima and Makane Moïse Mbengue International trade and investment in energy have never been greater than at present. Yet, the international trade and investment legal frameworks are not expressly tailored for the energy sector and often overlook the potential repercussions of energy activities in other contexts. The chapters in this book have highlighted two sets of challenges the international trade and investment regimes are currently facing in the context of energy: accounting for the specificities of the energy sector and for the environmental and human rights impact of energy trade and investment activities. As the chapters in this volume suggest, non-​economic considerations have already begun to shape trade and investment policies and decisions with regards to the energy sector. It is therefore no longer possible to turn a blind eye to this close connection, and it is the time for international law to adopt an integrated approach to energy trade and investment question. In these concluding observations, we would like to identify three main approaches to bridge the gap between economic and non-​economic considerations in the treatment of international energy trade and investment. A first approach relies on treaty-​making, as one possible avenue to adapt international trade and investment norms to the energy sector could involve the drafting of energy-​specific treaties or energy-​specific provisions within existing treaties. This was the approach followed by the negotiators of the ect in the early 1990s. It was precisely the strategic importance of the energy sector, its economic and geo-​political repercussions, and its unique characteristics that led to the signing of a multilateral treaty offering investment protection and access to investment arbitration to international investors in the energy industry.1 While the ect remains a unique example of a treaty tailored entirely to capture the essence of the energy industry, regional and bilateral trade agreements have been featuring an increasing number and variety of provisions dealing more or less directly with energy.2 Moreover, recent agreements 1 Elena Cima, ‘Investment Arbitration in the Energy Sector: Past, Present, and Future’, in Thomas Schultz and Federico Ortino (eds), The Oxford Handbook of International Arbitration (Oxford University Press, 2020). 2 See Chapter 7 [Cima] in this volume.

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tend to include chapters on the environment (or sustainable development more broadly), with the result that tribunals are directly confronted with environmental norms, and even when such norms do not fall under their immediate jurisdiction, being part of the same agreement they have a certain weight in the tribunal’s decision. Although free trade agreements may provide the ideal breeding ground for new energy-​related provisions, the multilateral route is far from being left behind, as evidenced by the rich scholarly debate around the most suitable approach to reforming the wto subsidies discipline to allow for environmental differentiation.3 A second approach is adjudication and relies on the role of international adjudicating bodies in the interpretation and application of general rules of international law. International courts and tribunals have played an important role in the development of international law since their proliferation.4 An analysis of the wto Appellate Body jurisprudence, for instance, can point to a certain evolution of the content and scope of a number of multilateral trade norms and principles, from non-​discrimination to differential treatment.5 Inter alia, the Appellate Body has provided the gatt environmental exceptions with new meaning –​even the fact that we currently define Article xx(b) and (g) ‘environmental’ exceptions is entirely ascribable to the Appellate Body’s interpretation of the clause. The notion of ‘exhaustible natural resources’ now indisputably includes living organisms, and the ‘necessity requirement’ under subparagraph (b) has been stretched and twisted over the years, dispute after dispute.6 In the context of the more recent renewable energy disputes, however, the Appellate Body seems to have refrained from taking a stance and allowing for such an evolutionary interpretation with regards to the subsidies agreement, causing the frustration of many commentators and motivating their focus on amending treaty rules rather than expecting a future report to advance the renewable energy agenda. Investment tribunals, on the other hand, seem to be contributing to a ‘greener’ interpretation and application of several standards of protection in the context of disputes involving a wide variety of energy projects. After discarding environmental considerations raised 3 See Chapters 2 [Espa] and 8 [Marhold] in this volume. 4 Karen J. Alter, The New Terrain of International Law: Courts, Politics, Rights (Princeton University Press, 2014); Cesare P. Romano et al. (eds), The Oxford Handbook of International Adjudication (Oxford University Press, 2014). 5 See Joel P. Trachtman, ‘WTO Trade and Environment Jurisprudence: Avoiding Environmental Catastrophe’, 58(2) Harvard Journal of International Law 273 (2017). 6 See e.g. Gabrielle Marceau & J. Wyatt, ‘The WTO’s Efforts to Balance Economic Development and Environmental Protection: A Short Review of Appellate Body Jurisprudence’, 1(1) Latin American Journal of International Trade Law 291 (2013).

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by the states as simply irrelevant for a very long time, tribunals have recently started to rely on them to shape and guide the application of investment clauses.7 Moreover, several of these ‘greener’ decisions have been compelled –​ at least to a certain extent –​by the introduction of environmental provisions in investment agreements, pointing to a significant connection between the ‘adjudication’ and the ‘treaty-​making’ approach. A third approach consists of informal law-​making, intended as “cross-​border cooperation between public authorities”8 involving new actors, drawing on procedures that do not involve traditional intergovernmental deliberations, and not resulting in a legally binding output. Such informal international law is especially emerging in areas where formal international law is stagnating or struggling to develop and evolve, and one of these areas is precisely the regulation of energy.9 The energy sector is characterized by an extreme dynamism: because of technological, technical, and economic advances, as well as scientific progress, new energy sources may be discovered, new techniques to conduct energy activities may be developed, and new environmental and social impacts may occur. Because of its dynamic nature, the energy sector might be best served by an exercise of authority at the international level that cannot be classified under traditional notions of international law-​making. This raises the question of whether informal international law can help address a number of energy-​related issues that seem to have largely evaded legally binding disciplines up until this very day.10 Each of these three approaches presents its own qualities and shortcomings, advantages and pitfalls. The goal of this volume was not to provide a univocal solution to the challenges faced by international trade and investment law in the energy context. The very assumption of this project is that we are currently still far from finding a magic answer to all these thorny questions. Its goal, on the other hand, was to provide the reader with a menu of options, a range of possible avenues, roads, pathways, and alleys that may allow us to ‘bridge’ the gap between different areas of international law, and ultimately pave the way to a multi-​faceted and comprehensive approach to the subject matter.

7 See Chapter 9 [Mbengue & Cima] in this volume. 8 Joost Pauwelyn, ‘Informal International Lawmaking: Framing the Concept and Research Questions’ in Joost Pauwelyn et al (eds), Informal International Lawmaking (Oxford University Press 2012) 13, 22. 9 Joost Pauwelyn et al., ‘When Structures Become Shackles: Stagnation and Dynamics in International Lawmaking’, 25 European Journal of International Law 733 (2014). 10 See Chapter 5 [van Asselt & Verkuijl] in this volume.

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References

Alter, Karen J. 2014. The New Terrain of International Law: Courts, Politics, Rights (Princeton University Press, 2014). Cima, Elena. 2020. ‘Investment Arbitration in the Energy Sector: Past, Present, and Future’, in Thomas Schultz and Federico Ortino (eds), The Oxford Handbook of International Arbitration (Oxford University Press). Marceau, Gabrielle and J. Wyatt. 2013. ‘The WTO’s Efforts to Balance Economic Development and Environmental Protection: A Short Review of Appellate Body Jurisprudence’, 1(1) Latin American Journal of International Trade Law 291. Pauwelyn, Joost. 2012. ‘Informal International Lawmaking: Framing the Concept and Research Questions’ in Joost Pauwelyn et al (eds), Informal International Lawmaking (Oxford University Press). Pauwelyn, Joost et al. 2014. ‘When Structures Become Shackles: Stagnation and Dynamics in International Lawmaking’, 25 European Journal of International Law 733. Romano, Cesare P. et al. (eds). 2014. The Oxford Handbook of International Adjudication (Oxford University Press). Trachtman, Joel P. 2017. ‘WTO Trade and Environment Jurisprudence: Avoiding Environmental Catastrophe’, 58(2) Harvard Journal of International Law 273.

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Index Aarhus Convention 136 access to justice 138 actionable subsidies 25, 102, 174, 176, 188, 196, 202, 207–​209, 212 Africa 46–​7, 67, 135 African Charter of Human and People’s Rights 127–​129, 133–​135 Agreement on Anti-​dumping (ada) 25, 34, 36, 38–​39 Agreement on Safeguards 31 Agreement on Sanitary and Phytosanitary Measures (sps) 157 Agreement on Subsidies and Countervailing Measures (ascm)  discipline 7, 18, 28, 101–​103, 157, 174, 179, 191, 199–​210 reform 19, 36–​38, 40, 80, 104, 175–​176, 211–​213 Agreement on Technical Barriers to Trade (tbt) 157, 168, 171 Agreement on Trade-​related Investment Measures (trims) 28–​29, 36, 207–​209 American Convention on Human Rights 129, 139 anti-​dumping duties 10, 18, 23–​24, 32, 34 Appellate Body (ab) 27–​28, 30, 77–​78, 168, 170–​173, 203, 206–​207, 209, 226, 242 Article xx, gatt exceptions see exceptions benefit (subsidies discipline) 102, 204 definition 203 test 28, 203, 206–​207 biofuels 24, 81 bilateral investment treaties (bit s) 47, 49, 62, 64, 66 (alleged) violations 62, 65, 227, 230 environmental provisions 49, 84 interpretation 87  see also international investment agreements burden of proof 28, 169–​171, 176, 232 business and human rights 44, 48, 54, 142

carve-​outs 158–​159, 167–​173, 175–​176, 195–​ 196, 210–​211 Clean Development Mechanism (cdm) 79 climate change  diversity of policies 108, 204 regime 72, 100, 106, 109, 185–​186 phenomenon 3, 71, 92, 106, 107 climate targets 72, 109, 185 compensation  for environmental damage 87 in case of expropriation 43, 48, 50, 58–​59 contracts  claims 57 clauses 43, 61 internationalization 59–​60 corporate social responsibility (csr) 84, 87 counterclaims  general 85 environmental 88–​89, 229–​231 human rights 86 countervailing duties 18, 24, 32, 34, 202 decarbonization 180, 185, 187, 200, 214 developing countries 11, 45, 72–​77, 79, 92, 107, 109–​111, 113, 163 dispute settlement body (dsb) 35, 70, 80, 86, 202, 207 domestic law 59, 143, 169, 227 domestic litigation 140 due process 64, 221, 228 eco-​efficiency 6, 166, 237 eco-​labelling 17, 166 electricity 7, 20–​21, 27, 71–​72, 81, 181–​183, 186–​187, 189–​191, 196–​199, 206 energy  access to 27, 71–​72, 75–​76, 141, 162, 206 cooperation 71, 74–​75, 79–​80, 126, 159–​160 efficiency 2, 7, 71–​72, 74–​75, 79–​80, 155, 166, 195 fossil see fossil fuels investments 1, 4–​5, 43, 76–​77, 126

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246 Index market 1, 30, 180, 182–​183, 187, 206 renewable see renewable energy trade 1, 4, 79, 149 transit 4, 126, 141, 181 security 3, 5, 126, 142, 154–​155, 179–​181 Energy Charter Treaty (ect) 5–​6, 51, 74–​5 environmental differentiation 7, 13, 226, 234 environmental goods 34–​35, 78, 153, 162 Environmental Goods Agreement 39 environmental impact assessment (eia) 83 environmental protection 2, 44, 78, 82, 89–​90, 148, 150, 155, 161, 165, 167, 223–​ 227, 23–​239 environmental subsidies 174–​175, 211 environmental takings see expropriation European Commission 24, 148, 182, 185, 188, 192, 195–​196, 199–​200, 213 European Community/​Union 24, 39, 102, 149–​151, 154–​155, 179–​201 competition policy 180–​181, 194 energy legislation 179, 181–​185, 188, 191–​ 197, 213 internal energy market 180–​181, 183, 185, 188 international commitments 185 State Aid rules 194–​197 treaties 184, 193–​196 European Court of Human Rights (ECtHR) 135 European Court of Justice (ecj) 194, 196–​200 exception clauses 7, 29–​30, 36–​38, 78, 82, 84, 156–​159, 166–​176, 197, 210–​213, 219, 224, 242 exemptions see carve-​outs exhaustible natural resources 78, 84, 158, 224, 242 exploitation of natural resources 12, 126, 143, 238 export subsidies 202–​204, 212 expropriation 43, 54, 58–​59, 62–​63, 139, 221 compensation for 43 environmental 89, 221, 225 indirect 86, 88, 222 lawful v. unlawful 63, 221, 225 Fair and Equitable Treatment (fet) 63, 65, 67, 86, 89

feed-​in tariff (fit) 20–​22, 28, 30–​31, 81, 189–​ 190, 205–​210 financial contribution 102, 203–​204 foreign direct investment (fdi) 82 fossil fuels  as a resource 107 governance 95, 101 subsidies 73, 76–​77, 92–​94, 96–​97, 101–​ 107, 109, 113–​120, 162–​163 subsidies reform 73, 92, 96–​97, 101, 104, 108–​117, 121 fragmentation 94–​95, 97 free trade agreements (fta s) 39–​40, 105, 149–​150 and renewable energy 152–​153, 160 dispute settlement 164–​165 environmental provisions 79–​80, 105, 150, 154, 155, 157–​166, 175–​176, 235 investment chapter 158, 235 General Agreement on Tariffs and Trade (gatt) 3, 28–​30, 36, 77–​78, 84, 102–​103, 148, 156–​158, 167–​168, 171–​172, 175–​176, 199, 209, 212–​213 General Agreement on Trade in Services (gats) 157–​158, 167, 175 general exceptions see exceptions government procurement 159, 173 greenhouse gas emissions 16, 71, 74, 77, 105–​ 109, 163, 206 green economy 6, 16–​17, 20, 236–​238 green industrial policy 9, 17–​20, 25, 27, 35–​ 36, 40, 238 green subsidies see environmental subsidies human rights 6, 9, 44, 48–​49, 83–​88, 127–​ 136, 138, 140–​144 indigenous peoples 88, 128–​130, 136–​140, 143 industrial policy 10, 16, 17, ​20, 27, 36, 181  see also green industrial policy informal law-​making 95–​96, 110, 113, 119, 121, 243 Inter-​American Court of Human Rights 132, 139

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Index International Centre for the Settlement of Investment Disputes (icsid) 87 International Covenant on Civil and Political Rights (iccpr) 127, 136, 138 International Covenant on Economic, Social and Cultural Rights (icescr) 127, 129 International Energy Agency (iea) 93, 106, 115, 117, 119–​120 international investment agreements (iia s) 47, 70, 81–​85, 87, 90, 219, 235, 239  see also bit s (bilateral investment treaties), free trade agreements (fta s), investment treaties International Labour Organization (ilo) 87–​88, 129, 137, 139–​141 International Monetary Fund (imf) 97, 116–​117, 120 International Renewable Energy Agency (irena) 74 international trade law   see also wto (World Trade Organization), fta s (free trade agreements) investment contracts 45, 51, 55 investment treaties   see bilateral investment treaties (bit s), free trade agreements (fta s), international investment agreements (iia s) investors  conduct 230 obligations 83, 85, 90 jurisdiction 56–​7, 86, 140–​141, 219, 231–​232, 235–​236, 242 Kyoto Protocol 74–​75, 107–​108, 155, 164, 186 legitimate expectations 63, 65, 86, 222, 228, 233 ‘like circumstances’ 224, 226, 233–​234 likeness 224, 226, 233 local content requirement (lcr) 21–​22, 25, 27–​30, 193, 202, 204, 207–​211, 213 low-​carbon  economy 8, 17, 72 fuel 105, 163 technology 75, 166

247 Millennium Development Goals 73, 76 most-​favoured nation (mfn) 47, 103, 224, 233 Multilateral Environmental Agreements (mea s) 155, 164 multinational corporations 3, 49, 142–​143 mutual supportiveness 19–​20, 27–​28, 30–​31, 36, 39, 78 nationally determined contributions (ndc s) 73, 109–​110, 121 nationalization see expropriation national security 136 national sovereignty see sovereignty national treatment 29, 36, 103, 157, 168, 224, 233 natural resources 128, 135, 137–​138, 224 non-​actionable subsidies 36, 38, 102, 174, 202, 210–​211 non-​discrimination standard 28, 56–​57, 89, 226, 242  See also mfn (most-​favoured nation) and national treatment clause non-​governmental organizations (ngo s) 50, 95, 115–​116, 119 non-​market economies 25 non-​state actors 141–​142 North American Free Trade Agreement (nafta) 153, 161, 165, 221, 224, 228–​229 oil  exploration/​exploitation 43, 45, 53, 88, 139, 229–​230 pipeline 49, 51 Organization for Economic Cooperation and Development (oecd) 49, 93, 115–​117, 119–​120, 143, 220 Organization of the Petroleum Exporting Countries (opec) 107, 115 Paris Agreement 72, 74–​75, 107, 109–​110, 121, 185, 206, 213 Participation 130, 135–​138, 161 peoples, rights 127–​139  see also indigenous peoples performance requirements 158, 224

Elena Cima and Makane Moïse Mbengue - 978-90-04-46348-6

248 Index permanent sovereignty over natural resources 127–​128, 130, 143  see also sovereignty police powers doctrine 221, 223, 226, 233 process and production methods (ppm s) 7, 226, 233–​234 precautionary principle 83 prior informed consent 136–​139 prohibited subsidies 28, 102, 105, 176, 188, 196, 199, 202, 204, 211–​212 renewable energy  definition 74 disputes 18, 27 electricity generation 20, 71, 81 subsidies 7–​8, 20–​21, 27, 36–​38, 40, 81, 173, 189, 196–​200, 205–​210 technologies 17, 20, 22, 31, 34–​35, 39, 71, 81 transition 7, 71, 76, 186 right to regulate 52, 84, 156, 161 Rio Declaration 88 self-​determination 127–​128, 130, 136 soft law 38, 85, 87–​88, 90, 113 solar  cells 23–​24, 27–​29, 32, 81 technologies 23, 31 sovereignty 5, 47, 50, 58, 154, 161, 184 specificity (of subsidies) 102–​103, 204, 207 stability 43, 55–​57, 61, 65–​66, 190, 193 stabilization clauses 43–​53, 55–​63, 65 State aid 13, 180, 188, 191, 193–​201, 210, 214 subsidies   see also actionable subsidies, green subsidies, non-​actionable subsidies, prohibited subsidies sustainable development goals (sdg s) 2, 6, 70–​71, 76–​80, 85–​90, 112–​113, 118–​121 tariffs 17, 23, 26, 32, 34–​35, 39–​40, 78 technology  environmentally friendly 163 transfer 74, 163 third party access 183 trade remedies 10, 19, 31–​32, 40 trade remedy cases 19, 23–​26, 31, 34, 39

transparency 38, 62, 75, 96, 100, 104, 109–​110, 114–​116, 119–​121 treaties/​treaty law 242 conflicting provisions 154 interpretation 77, 87, 155, 164, 172–​173 preamble 65, 75, 77–​78, 82, 155 tribunals 57 avoidance of controversial issues 28, 54 bias towards own regime 7 failure to consider environmental issues 7, 8–​9, 225–​226 introduction of environmental considerations 84, 86–​7, 89–​90, 197, 232, 234–​236 jurisdiction 56, 86, 231–​232, 235–​236 problems with scientific evidence 232–​233 use of external sources 87–​88, 232 umbrella clause 62, 64 United Nations (UN) 95, 112 United Nations Conference on Trade and Development (unctad) 23, 77 United Nations Convention on the Law of the Sea (unclos) 74–​75 United Nations Declaration on the Rights of Indigenous Peoples (undrip) 128, 137 United Nations Framework Convention on Climate Change (unfccc) 72, 74–​75, 100, 106–​107, 109, 155, 164, 206 United Nations 2030 Agenda for Sustainable Development 6, 16, 71, 104, 112, 121, 237 Universal Declaration of Human Rights (udhr) 131 Vienna Convention on the Law of Treaties (vclt) 77, 87, 90, 164, 172 wind  energy 74, 81, 198, 208 technologies 23–​24, 76 turbines 24, 31, 75 World Bank 97, 115–​116, 141 World Trade Organization (wto) 4, 17, 38, 40, 70, 77, 100, 104, 148, 179

Elena Cima and Makane Moïse Mbengue - 978-90-04-46348-6

249

Index Committee on Trade and Environment (cte) 78, 104 dispute settlement see Appellate Body (ab) and dispute settlement body (dsb)

disputes 81, 168, 170–​173, 203–​204, 206–​210 Doha Ministerial Declaration 78

Elena Cima and Makane Moïse Mbengue - 978-90-04-46348-6