The Energy Charter Treaty and Decarbonization of Foreign Investments : Is the Investor Arbitration Warming the World by Chilling the Regulatory Environment

The protection of foreign investment is a central concept of international investment law. Regarded as the core of international investment law, there are more than 2,000 investment treaties or treaties that include investment provisions. In essence, these agreements provide guarantees for the investments of investors from both contracting states when they operate outside of their home state. The investment arbitration system has been described as the “businessman’s court” which interferes on the State’s politico-economic decision-making. The international investment arbitration has faced increasing amount of criticism in the recent decades by political activists, legal scholars and environmental NGOs due to a lack of transparency of the investment arbitration proceedings and the claims that it restricts the sovereignty of the State. The research question of this thesis is linked to a real-world problem – does the investment arbitration slow down the energy transition towards carbon-free economy? In the legal context, this is question on where the investment tribunals have drawn the line of legitimate regulation in an area of strong public interest. What is the difference between genuine climate regulation aimed to mitigate GHG emissions and regulation that is considered to breach the ECT’s investment treaty obligations? In other words, does the investment arbitration based on the ECT and the decreased regulatory space following from investment treaty obligations hinder the creation ambitious climate policies? The sub-questions of this thesis are the following: (1) Does the investment arbitration hinder the state’s right to regulate the climate protection policies that reduce GHG emissions in the energy sector? (2) Does the investor-tate arbitration cause regulatory chill that freezes the regulatory development of climate protection policies reducing GHG emissions in the energy sector? (3) How will the future of the ECT investment arbitration look like? The purpose of this thesis is to evaluate the arguments that the investor-state arbitration hampers the state’s “right to regulate” on creating ambitious climate-friendly energy legislation and whether investor-state arbitration causes the “regulatory chill” effect which freezes the regulatory developments in the field of climate protection laws that aim to reduce GHG emissions in the energy sector. The focus is to evaluate the arguments of “right to regulate” and “regulatory chill” through analysis of relevant investor-state arbitration cases covering different areas of strong public interest such as environment and human health due to the absence of genuine climate disputes concerning GHG emissions. The rationale of this approach is to use these cases as the “closest proxy available” for analysing the outcome of hypothetical climate dispute. The key findings of the thesis include that the European Commission has acknowledged the risk which the possibility of the ECT arbitration poses when it has suggested to carve out the protection of fossil fuel investment from the ECT in the modernization process of the ECT. Ending the investment protection of fossil fuel investments means that the ECT would not pose a threat of investor-state arbitration for the host state when it is enacting climate protection policies. From this perspective, it seems interesting that the ECT arbitration on fossil fuel investments is seen as significant risk even when the jurisprudence related to “right to regulate” and “regulatory chill” does not provide any support for the argument that the foreign investor would have high likelihood of winning the investor-state arbitration against host state’s regulation aimed to mitigate GHG emissions even if the regulation would decrease or destroy the value of foreign investor’s investments. On the contrary, it is a well-established principle of the customary international law known as “state police powers” that a regulation will be deemed non-expropriatory and non-compensable if state adopts bona fide regulation in a non-discriminatory manner, enacted in accordance with due process and has an aim to protect general welfare. Despite the counterevidence, the deception continues to live on the minds of the regulators and the critics.

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