(BIT)s of Change: An Analysis of The Interaction Between the Climate and International Investment Regimes and Potentials for the Future (Part 1)

By: Tarusi Jain


At COP26, 2021 states across the globe adopted the Glasgow Climate Pact that aims to accelerate phasing out fossil fuels and inefficient subsidies. The private sector, too, made bold commitments to net zero and climate finance. A big economic transformation is expected with the introduction of new regulation globally, that is, converting net-zero commitments into concrete policy. However, international investment law does not seem to be coping with this new reality as it remains at odds with most of these developments. International Investment Agreements (hereinafter ‘IIAs’) do not address climate commitments. Increased regulatory changes worldwide has also been triggering state liability under investor-protection provisions, which is evident from the increase in climate litigation across countries.

As energy transition increases globally, multiple states will be dependent on IIAs to attract the foreign investment necessary to finance the energy transition and mitigate climate change. This would inevitably attract a barrage of investment arbitration claims against states for altering and introducing climate related policy and regulation. States’ laudable efforts in accelerating lower-carbon transition measures such as fossil fuel phase outs and extraction bans may create stranded investments. IIED predicts that multiple fossil fuel companies will resort to investment arbitration proceedings to seek compensation for states’ climate measures’ impact on their investments. Although efforts have been undertaken to update the current investment law regime, the process is slow and the progress is often affected by global politics. The first part of this article aims to look at the inherent conflict between climate and investment law as it stands today. It further looks at the Energy Charter Treaty’s (hereinafter ‘ECT’) jurisprudence and analyses how the current substantive standards used by the tribunals would apply to future fossil fuel phase out cases against states. The second part builds on the analysis of ECT’s jurisprudence and its relevancy to future cases, and how we can use existing IIAs to resolve the conflict until the investment law framework is updated.


The clash between climate and investment regimes is obvious as their objectives are in conflict. IIAs’ objective is to create an environment stable and conducive enough to attract, sustain and promote foreign investment. Whereas, the objective of the climate legal regime is to accommodate drastic changes in national laws to favour sustainable investments. Hence, any measures introduced by states to mitigate climate-change related consequences come with risks as they can trigger claims under international investment law.

The states can bring in climate related measures in two ways: either incentivise investment in low carbon technologies or phase out fossil fuels, and ban extraction and regulate emissions. The former will inevitably create new regulatory regimes that will become the basis of legitimate expectations of profits and stability for investors and trigger future claims under investment law. The latter will change existing law that might diminish foreign investments’ value and trigger claims of indirect expropriation or breach of substantive investment protection standards including the fair and equitable treatment standard (hereinafter ‘FET’). Previously an intentional creeping expropriation where states acted with discriminatory intentions against the investors could only constitute a claim for indirect expropriation. However, IIAs commonly have ‘tantamount to expropriation’ clauses that have been interpreted to extend the concept of indirect expropriation to consequential expropriation too; the intention of the state doesn’t matter now. For example, in Metaclad v. Mexico, the tribunal held that environmental related policy that ‘effectively and unlawfully’ restrict investment related operations is indirect appropriation. This creates conflict because virtually the very existence of national level climate commitments and regulation lowers the value of all related sector wise investments.

To ascertain whether the host state has breached the FET standard or not, the tribunals look at whether the state has violated investors’ legitimate expectations of regulatory stability. The application of other substantive standards like the Most Favoured Nation (hereinafter ‘MFN’) and national treatment clauses could also create conflict as climate commitments would require the states to prefer greener investments over carbon intensive investments.

The next section of this article analyses arbitral awards given under the Energy Charter Treaty (hereinafter ‘ECT’) and looks at how some of the above-mentioned standards could be used in the upcoming fossil-fuel phase out cases. The energy sector is where the climate-investment conflict is most visible. ECT forms the basis of the energy sector; there have been several attempts to reform it, but it continues to protect investors.


Analyzing ECT Decisions: Investor Protection versus State’s Right To Regulate

64 out of 75 awards did not weigh the ECT investor protections against a host state’s right to regulate for climate or energy transition. There is thus no direct precedent under the ECT for future investor claims challenging fossil-fuel phaseout regulations. There are only a few analogous cases that can provide guidance for future cases. The state conduct that is usually challenged under the ECT includes indirect and direct expropriation of investments and the breach of the FET standard. Both the above standards are relevant for future climate and energy transition related cases. The fair and equitable standard (FET) and indirect expropriation are invoked under articles 10 (1) and 13 (1) of the ECT.

Indirect Expropriation

The threshold of indirect expropriation in ECT’s jurisprudence is extremely high. In AES Summit v. Hungary, the tribunal held:

“[A] state’s act that has a negative effect on an investment cannot automatically be considered an expropriation. For an expropriation to occur, it is necessary for the investor to be deprived, in whole or significant part, of the property in or effective control of its investment; or for its investment to be deprived, in whole or significant part, of its value.”

The tribunals in Electrabel v. Hungary and Mamidoil v. Albania have strengthened this threshold. In the latter, the tribunal held that:

“Regulations that reduce the profitability of an investment but do not shut it down completely and leave the investor in control will generally not qualify as indirect expropriations . . . For an expropriation to exist, the investor should be substantially deprived not only of the benefits, but also of the use of its investment.”

With fossil investments, fossil fuels will not disappear overnight as we haven’t found a reliable alternative to oil and gas. These sources are still crucial for fuel intensive sectors like aviation and shipping. Electricity too is heavily reliant on such traditional sources. Therefore, there is not a “virtual annihilation” of such investment’s value. With fossil phase out policies specifically, several big energy companies have been transitioning by using their current business model to engage in carbon capture and storage (CCS) and in producing blue hydrogen from natural gas. Hence, in some cases, investors may not be completely deprived of the use of their investment, not meeting the threshold set by tribunals. Therefore, investor claims of indirect expropriation against fossil fuel regulations are highly dependent on the type of investments and facts of the case. However, as the jurisprudence suggests, as long as the investor has control of their investment that is of use, a claim of indirect expropriation may not be successful.

The next part of the article will analyse the FET standard in ECT decisions and its relevance in future phase out cases. The second part concludes with how we can read in climate goals in current IIAs.

(Tarusi is a law undergraduates at Jindal Global Law School, Sonipat. The author may be contacted via email at tarusijain2704@gmail.com)

Cite as: Tarusi Jain, ‘(BIT)s of Change: An Analysis of The Interaction Between the Climate and International Investment Regimes and Potentials for the Future (Part 1)’ (The RMLNLU Law Review Blog, 6 June 2022) <https://rmlnlulawreview.com/2022/06/06/bits-of-change-an-analysis-of-the-interaction-between-the-climate-and-international-investment-regimes-and-potentials-for-the-future-part-1/>   date of access

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