ICSID Review – Foreign Investment Law Journal Blog Series

Based on the article 'Invoking the Paris Agreement in Investor-State Arbitration'

By Arman Sarvarian

In recent years, there has been mounting interest in the possibility of the Paris Agreement 2015 featuring in investor-State arbitration. This applies particularly to investments connected to nationally determined contributions towards greenhouse gas emission mitigation, insured emissions and other financial investments to be made under the internationally-supervised emission-offsetting mechanism to be activated in accordance with the Glasgow Climate Pact 2021. The Paris Agreement marked a revolutionary change in the climate change treaty regime by moving away from specific and enforceable obligations to mitigate greenhouse gas emissions to ‘nationally determined contributions’ to be defined and enforced by the State Parties themselves.

Whilst the Glasgow Climate Pact explicitly envisages their participation in the voluntary mechanism envisaged by the Paris Agreement for mitigation activity to be supervised by the Conference of the Parties, there remains ‘a big question coming out of Glasgow is to what extent will purely private sector, voluntary carbon markets conform with the new Article 6 rules.’ This question was not yet answered at the latest climate change summit held in Sharm-el-Sheikh in November 2022 with slow progress made on the intricate reporting and verification process for the launch of the Article 6(4) offsetting mechanism.

Over the past two years, litigation has been pursued in multiple jurisdictions (e.g. – France, Brazil and the Netherlands) to enforce the Paris Agreement with respect to administrative decisions taken by executive authorities at the national level. Amidst this mounting impetus towards reliance on the provisions of the Paris Agreement for mitigation measures to interpret substantive obligations under national law and human rights treaties, the question arises whether the same can be done to interpret substantive obligations in investment treaties, contracts and laws.

Today, the Paris Agreement has no direct application in investment arbitration: investor-State arbitral tribunals have no jurisdiction to arbitrate claims concerning breaches of the treaty. Although the exact language of the forthcoming amendments to the Energy Charter Treaty are not yet known, they are likely to be critical to enable disputing parties to invoke the Paris Agreement not as background facts (the experience hitherto) but as applicable law. Although direct references to the Paris Agreement have begun to appear in a few, very recent bilateral investment treaties, the reform of bilateral investment treaties is a slow process.

Although it is more usual to conceive of the applicability of the Paris Agreement in terms of environmental exception defences for host States, the potential exists for investors to invoke it for the protection of green investments. While an arbitral tribunal could not pronounce upon an alleged breach, it could refer to its provisions to interpret the scope of the right of regulation insofar as it concerns investments connected to it. The Paris Agreement could also play a role in construing the duty of due diligence as well as the assessment of damages and other remedies for green investors.

As States prepare their nationally determined contributions towards the collective goal defined by the Paris Agreement, they are likely to increasingly encounter claims by investors affected by regulatory measures intended to mitigate greenhouse gas emissions. As only a small proportion of bilateral investment treaties (estimated at 3,300 today) contain a general exception modelled on Article XX of the General Agreement on Tariffs and Trade or a more limited compliance-measures clause, there is no direct mechanism for the deployment of defences against liability in general. Moreover, an arbitral tribunal, as in the Infinito Gold v. Costa Rica arbitration, might construe a general exemption clause as amounting not to ‘a carve-out from the BIT’s protections, but rather a reaffirmation of the State’s right to regulate.’

As for the general exercise of the right to regulate in international investment law, a critical issue is likely to be the proportionality of the impact on the investor of regulatory measures.  This issue was central to the lawfulness of the retroactive mining ban in the Eco Oro v. Colombia arbitration. In the absence of an environmental exception clause and depending upon the applicable law, there could be greater scope for investors to argue beyond standards of arbitrariness towards legitimate expectations of a stable regulatory framework as precluding the imposition of new and stricter environmental standards.

As States undergo greenhouse gas emissions mitigation to varying speeds and in different economic sectors, the Paris Agreement is likely to become increasingly important as the focus of their efforts. It does not provide a holistic carve-out for investments touching emissions mitigation for international investment law. Rather, the Paris Agreement is likely to provide an additional overlay of applicable law to an already-complex field. In the longer-term, the greater potential for the invocation of the Paris Agreement might well be as an indirect source of law to construe the substantive rights and obligations of the investor and the host State.

About the author: Arman Sarvarian is a Reader in Public International Law, University of Surrey, England, UK.

The opinions expressed in this blog are those of the author. They do not purport to reflect the opinions or views of ICSID.