International arbitration and climate change

Introduction

International arbitration will probably be an important dispute-resolution mechanism (DRM) for climate-change disputes, but recent developments under two multilateral instruments point in a different direction for now. Only two countries have recognized arbitration as a DRM under the United Nations Framework Convention on Climate Change (UNFCCC) and an expert panel of the International Council for Commercial Arbitration (ICCA) will be focusing on conciliation rather than arbitration in developing a draft annex. At the same time, some states are concerned that the investment-protection regime of the Energy Charter Treaty (ECT) – notwithstanding recent modernization initiatives – restricts their flexibility to implement measures to address climate change and have announced their withdrawal from the instrument, which will no doubt exclude certain disputes related to climate change from its investment arbitration mechanism.

The UNFCCC and Paris Agreement

The UNFCCC entered into force in March 1994, and today has near-universal membership – 198 states have ratified the treaty. Its ultimate objective is to prevent ‘dangerous’ human interference with the climate system.

Article 14 of the UNFCCC sets out rules to govern disputes between two or more parties on the interpretation or application of the Convention, including a step-wise dispute resolution framework. More specifically, in the event of a dispute:

• The parties shall first seek a settlement through negotiation or other peaceful means of their choice. (Article 14(1).)
• Parties may opt in and declare that they recognize that a dispute may be submitted either to the International Court of Justice (ICJ) or to arbitration in accordance with the procedures to be adopted by the Conference of the Parties (COP) in an annex on arbitration. (Article 14(2).)
• Parties that have not opted in may, if their dispute is not settled within twelve months through negotiation, submit the dispute to conciliation. In such a case, a conciliation commission is constituted to render a ‘recommendatory award’ which the parties must consider in good faith. (Articles 14(5) and 14(6).)
• Additional procedures relating to conciliation shall be adopted by the COP as soon as possible in an annex on conciliation. (Article 14(7).)

The Paris Agreement was adopted at the UN Climate Change Conference in December 2015 (COP21) and came into force in November 2016. Its objective is to strengthen the global response to the threat of climate change, including by holding the increase in the global average temperature to below 2°C above pre-industrial levels and pursue efforts to limit the temperature increase to 1.5°C. To that end, the Parties to the Paris Agreement have agreed to prepare and publicly share national climate action plans (called nationally determined contributions, or NDCs) and to update them every five years.

The Paris Agreement incorporates, under its Article 24, the dispute settlement provision (Article 14) of the UNFCCC.

Thus far, only two states (the Netherlands and Solomon Islands) have recognized arbitration as a dispute resolution mechanism under Article 14(2) of the UNFCCC, and only one state (the Netherlands) has done so under Article 24 of the Paris Agreement. No annex on arbitration or conciliation has been adopted by the COP under the UNFCCC or the Paris Agreement.

The Paris Agreement incorporates Article 14 of the UNFCCC by reference thereby allowing Parties to opt-in to arbitration as a dispute resolution mechanism, but it does not expressly set out the types of inter-parte disputes that can be resolved through arbitration. This leads to questions as to what remedies could be obtained through arbitration. For instance, it is unclear whether arbitration be used to enforce another party’s obligation to submit an NDC or update it every five years; whether arbitration can be used by one party to claim damages for breach of an obligations under the Paris Agreement. These questions may have to be answered before Parties are willing to opt in to the ICJ or arbitration DRM under Article 14.

On February 10, 2023, ICCA announced the launch of a new project to develop and promote a draft conciliation annex to the UNFCCC and the Paris Agreement. This will address procedural questions as well as the likely characteristics of disputes concerning climate change. The expert panel will present its draft for inclusion on the agenda at COP28 in Dubai later this year.\

Absent clear guidelines as to the types of substantive disputes that could be addressed through arbitration, it is unlikely that the COP will move towards adopting an arbitration annex under Article 14. Instead, parties may favour a non-binding DRM like conciliation, in keeping with ICCA’s initiative.

The Energy Charter Treaty

The ECT entered into force in April 1998, and has been signed by more than fifty parties (being states or regional economic integration organisations). The purpose of the ECT is to establish a legal framework to promote long-term cooperation in the energy field, and it includes investment protection of certain energy investments as well as conditions for the expropriation of such investments.

The ECT also contains provisions for the settlement of disputes between investors and contracting parties and disputes between contracting parties through binding international arbitration. According to the International Energy Charter Annual Report for 2022, as of January 10, 2023, the Secretariat of the Treaty was aware of 157 investment arbitration cases commenced under the ECT.

In recent years, contracting parties negotiated amendments to modernize the ECT, reaching a preliminary agreement on June 24, 2022. The modernized ECT would include adopting a novel ‘flexibility mechanism’ allowing contracting parties to exclude investment protection for fossil fuels in their territories, considering their individual energy security and climate goals, and introduce a new stand-alone article on the right to regulate in the interest of legitimate public policy objections, including the protection of the environment. The Energy Charter Conference, composed of signatories to the ECT and observers, expects to meet in April 2023 to discuss the adoption of the amendments to the ECT.

In parallel, and notwithstanding the modernization changes that have been agreed in principle, the European Parliament adopted a resolution in November 2022 calling for the withdrawal of the EU and its member states from the ECT. France, Germany and Poland have already withdrawn effective December 2023. Several other EU states have announced their intention to withdraw, including Spain, the Netherlands, Slovenia and Luxembourg, citing concerns over inconsistencies between the ECT and efforts to combat climate change and implement the Paris Agreement.

Conclusion

Based on these developments, there appears to be a trend by states to divert climate-change related disputes away from arbitration. Whether that is ultimately a good thing for states, investors, and the planet very much depends on one’s perspective on the efficacy and wisdom of arbitral panels.