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Abstract
Developing countries have more than 1300 investment treaties with developed countries. Investment treaties are often alleged to constrain developing countries' climate policies. This paper examines four treaty reforms that are often suggested as remedies to such regulatory chill. It considers an investment treaty that protects a stranded developed country investment in a developing country. The reforms are compared with regard to whether they can induce the developing country to regulate the investment, and their political attractiveness. The reforms are shown to have features that seem to have gone unnoticed in the debate. Exclusion of investor-state dispute settlement (ISDS) may be ineffective due to a hold-up problem, and if effective requires unlawful regulation by the host country. A shortening of a sunset period applicable to unilateral withdrawal can postpone regulation. A reduction in the amount of stipulated compensation can induce the developing country to phase out the stranded investment, but will require a compensation payment from the developing country to the developed country investor. The reform with best potential to address stranded investment problems appears to be an increase in a carve-out from the compensation requirement for measures with sufficiently positive climate effect.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes
1 The UNCTAD website (https://investmentpolicy.unctad.org) provides information on a large variety of aspects of investment treaties.
2 See e.g. Dolzer and Schreuer (Citation2022) for an introduction to International Investment Law.
3 See e.g. Bernasconi-Osterwalder and Brauch (Citation2019) for references to the huge policy literature on the impact of investment agreements on the climate, and climate policies.
4 The critique has been fueled by a large number of fossil fuel-related disputes. For instance, the UNCTAD Dispute Settlement Navigator reports 118 investment treaty disputes since 1996 in the sectors Mining of coal and lignite, Extraction of crude petroleum and natural gas, and Manufacture of coke and refined petroleum products. 41 of these disputes were initiated 2018 or later. There have also been many disputes regarding withdrawal of a support scheme for renewable energy. See Di Salvatore (Citation2021) for an assessment of the economic magnitudes that have been involved in fossil fuel disputes.
5 Ipp, Annette, and Kjellgren (Citation2022) provide a detailed analysis of Energy Charter Treaty cases from a climate perspective.
6 There is an ongoing discussion, related to the functioning of the sunset provision (see below) in the treaty, regarding whether the withdrawal should be done from the existing agreements, or the renegotiated and yet not fully ratified, agreement.
7 Developing countries that have withdrawn from investment treaties include Bolivia, Ecuador, India, Indonesia, South Africa, and Venezuela.
8 Subscripts on functional operators denote partial derivatives throughout.
9 The agreements do not include any commitments with regard to investment levels, subsidies or taxes.
10 Exceptions clauses such as the one mentioned here are often accompanied with other requirements, for instance, that measures should not constitute ‘disguised protection.’ Disproprotional measures as in the ant example might be found to not fulfill such requirements.
11 Pohl, Mashigo, and Nohen (Citation2012) find that in a sample of 1660 bilateral investment treaties, 93% included ISDS.
12 These include Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the ‘New York Convention’), the United Nations Convention on International Trade Law (UNCITRAL), and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention).
13 Revocations of contested measures are rare, but occasionally happens; see e.g. Grenada Power Limited and WRB Enterprises, Inc, v. Grenada. ICSID Case No. ARB/17/13.
14 It is assumed that the litigation cost is already sunk. But this cost should not affect the choice between the two options here in any event.
15 See e.g. Caldecott, Howarth, and McSharry (Citation2013).
16 Horn and Tangerås (Citation2021) derive a negotiated agreement with in a setting with endogenous investment.
17 See, for instance, Bernasconi-Osterwalder (Citation2021). A recent example is the resolution that the European Parliament (Citation2022) adopted on in November 2022, concerning the adverse impact of ISDS for the climate and the environment.
18 See Alarcon (Citation2023) for a review of recent ISDS reforms.
19 See e.g. Helfer (Citation2012), and Reinisch and Fallah (Citation2022) for overviews.
20 See Kouroutakis (Citation2022) for a comprehensive description of sunset clauses, with a particular focus on the Energy Charter Treaty, which has a sunset period of 20 years.
21 It is less clear if sunset clauses also apply in case of joint decisions to terminate agreements. According to one legal view, investors have acquired or vested rights that cannot be withdrawn through the termination of agreements. But the dominating view seems to be that the parties are effectively the masters of their agreements, and can revoke any protection that the agreements stipulate, including in sunset clauses. For instance, this is argued in the detailed analysis by Reinisch and Fallah (Citation2022). This view also seemed to be relied upon in the Agreement for the termination of Bilateral Investment Treaties between the Member States of the European Union, in May 2020; see Letizia (Citation2022) for a discussion of sunset clauses and this agreement.
22 Art. 70 of the Vienna Convention on the Laws of Treaties.
23 We have thus far assumed that a withdrawal from the agreement has triggered the sunset clause. In the present setting, South cannot lose from withdrawing, since South can achieve the same outcome as with no withdrawal simply by abstaining from regulation. The framework is not adequate for addressing this question, however, since it does not include investment decisions.
24 Horn and Sanctuary (Citation2024) analyze the impact of an investment treaty in a setting with a stranded investment and a possible replacement investment.
25 I am grateful to a Reviewer for suggesting the inclusion of this section.
26 Horn and Tangerås (Citation2021) explore the optimal design of an investment treaty when investment is endogenous, and the host country is subject to stochastic shocks affecting its regulatory preferences.
27 See e.g. Edson and Antohi (Citation2024).