Standards of Protection in Investment Arbitration for Upcoming Climate Change Cases

Although climate change is a global scale question, some concerns have been raised that principles of investment arbitration may not adequately address the domestic implementation of climate change measures. A recent ICSID investment arbitration of Vattenfall v. Germany with regard to the investor’s alleged damages from the phase-out of nuclear plants is a salient climate change case. The 2005 Kyoto Protocol was made to reduce greenhouse gas emissions and it provides a number of flexible mechanisms such as Joint Implementation (JI) and Clean Development Mechanism (CDM). Implementation of the Kyoto Protocol allows dispute settlement through investor-state arbitration. Any initiation of stricter emission standards can violate the prohibition on expropriations in investment agreements, regardless of the measures created to reduce greenhouse gas emissions. The effect-based expropriation doctrine can charge changes to existing emission standards as interference with the use of property that goes against the legitimate expectation of a foreign investor. In regulatory chill, threat of investor claims against the host state may preclude the strengthening of climate change measures. Stabilization clauses also have a freezing effect on the hosting state's regulation and a new law applicable to the investment. In the fair and equitable standard, basic expectations of investors when entering into earlier carbon-intensive operations can be affected by a regulation seeking to change into a low-carbon approach. As seen in the Methanex tribunal, a non-discriminatory and public purpose of environmental protection measures should be considered as non-expropriation in the arbitral tribunal unless its decision would intentionally impede a foreign investor’s investment.