Will International Investment Law hinder climate change mitigation?

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Will International Investment Law hinder climate change mitigation?

Candidate number: 8010

Submission deadline: 01.12.2021 Number of words: 16858

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1 Introduction

1.1 Will Investor-State Dispute Settlement hinder climate change action?

In 2021, reacting to the then-newly released IPCC Sixth Assessment Report, UN Secretary- General António Guterres declared a "code red" for humanity. Guterres said the Sixth Assess- ment Report was a "death knell for coal and fossil fuels," which could "destroy our planet."¹ Similarly, scientists commenting on the Report have stated that to avoid climate breakdown, greenhouse gas emissions have to peak within four years, and emissions have to be cut by 50% within 2030 and entirely by 2050.² The long term temperature goal of the Paris Agree- ment, which is to limit warming to well below 2°C above pre-industrial levels, and optimally to no more than 1.5°C within 2100³, seems to be in a highly precarious position.

Speaking of emissions, the energy sector (through electricity, heat, and transportation) alone represents 73.2% of all emissions. Agriculture, Forestry, and Land Use represent 18.4% of total emissions, direct industrial processes account for 5.2%, and waste accounts for the remain- der 3.2%.⁴ The profound changes to the global economy by reducing emissions by 50%

within 2030 and entirely by 2050 cannot be understated. Substantial amounts of wealth and shareholder assets would risk becoming "stranded assets"⁵, subject to premature write-downs and direct losses for the shareholders and investors. Would it even be legally permissible to strand so much wealth?

One answer to this question can be International Investment Law (hereafter referred to as IIL).

This treaty-based investor protection system insulates Foreign Direct Investments (hereafter FDIs) from adverse political risks. A primary tenet of IIL is that some governmental regulations can interfere so severely with core property rights that those regulations might violate the standard of no expropriation without compensation or the Fair and Equitable (FET) treatment standard. Such violations will, in turn, trigger obligations for states to compensate the investor. IIL instruments like Bilateral Investment Treaties (BITs) and International Invest- ment Agreements (IIAs) provide the investor with relief against governmental interference through Investor-State Dispute Settlement (ISDS) mechanisms. These ISDS mechanisms allow investors to bring claims of treaty violation to international investment arbitration. The awards of the arbitral tribunals are binding upon the parties and provide for no appeal on the

1 UN (2020)

2 The Guardian (2021)

3 Paris Agreement Art. 2.1(a)

4 Our World in Data (2021)

5 Carbon Tracker Initiative defines ‘stranded assets’ as “those assets that assets that at some time prior to the end of their economic life (as assumed at the investment decision point), are no longer able to earn an economic return (i.e. meet the company’s internal rate of return), as a result of changes associated with the tran - sition to a low-carbon economy”

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merits of the case. In addition, arbitral awards are enforceable against what would otherwise be sovereign states, usually immune from enforcement.

Companies facing substantial losses and write-downs due to governmental interference can be eager to avoid having their assets "regulatory stranded." In addition, they might even consider that legally challenging adverse governmental regulations is an obligation flowing from their fiduciary duty to their shareholders. Furthermore, fossil fuel companies are increasingly challenging environmental regulations in international investment arbitration.

For example, following the revocation of the Keystone XL pipeline permits, TC Energy Cor- poration has sued the US government in investment arbitration and is currently demanding

$15 billion USD in damages.⁶ The German utility RWE has sued the Dutch government over its plans to end coal and is demanding €1.4 billion in damages in investment arbitration.⁷ Uniper, another German utility, has threatened to do the same.⁸ Westmoreland is suing Canada for $470 million CAD over a phase-out of coal-fired power stations in Alberta.⁹ The British company Ascent Resources has initiated investment arbitration against Slovenia, demanding €100 million in compensation over a ban on fracking.¹⁰ Rockhopper, a British fossil fuel company, is demanding $275 million in damages from Italy for over a ban on offshore oil drilling close to the coast.¹¹ Lone Pine is suing Canada $118.9 million in damages over a fracking moratorium in Quebec.¹²

Should these private, carbon-intensive companies prevail in international investment arbitration, the question becomes if it is even possible to reduce emissions by 50% within 2030 and entirely by 2050. The risk is that adverse arbitral awards can create a "regulatory chilling effect" if governments, by merely mitigating climate change, end up having to foot the bill of the energy transition. It could also make the public bag holders of stranded, carbon-intensive assets. Investment protection of carbon-intensive assets under IIL can, in other words, represent a significant roadblock to climate change mitigation and a renewable energy transition.

The question in this thesis is, will it?

6 TC Energy Corporation (2021)

7 Politico EU (2021)

8 Ibid

9 Ibid

10 Total Slovenia News (2021)

11 The Guardian (2021)

12 Government of Canada (2021)

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1.2 Research Question

The overall topic of this thesis is the relationship between the IIL treaty protection of FDIs from governmental interference and the ability of states to mitigate climate change. As such, the research question in its most distilled form is:

Mitigation against climate change could involve the stranding of carbon-intensive for- eign direct investments through regulatory actions. Will states be liable to compensate investors for these losses under the investment protection standards within Interna- tional Investment Law?

In examining this question, this thesis will take a risk-based approach in analyzing IIL instruments and relevant case law. The choice to focus on the risk aspect has been based on a view that risk is relevant in the following aspects:

For the investor, exposure to commercial risk factors drives returns and enables the generation of a profit. For that reason, one could describe carbon-intensive investors as having unique risk profiles. As this thesis will examine in greater detail, what impact has the negative externalities of investments in the energy sectors on the material assessment under IIL? Are stranded assets due to climate change a result of commercial risk or governmental political risk?

For the host state, the risk becomes relevant in regards to drivers of regulatory risk. Further- more, what drives states to mitigate against climate change, thereby possibly exposing themselves to liability? As this thesis will examine in detail, this can be international law itself.

The willingness to accept exposure to IIL liability to comply with international law is how the driver of regulatory risk can be understood. As the core question of this thesis is if mitigating climate change could entail liability for investment host states, how will the international source of regulatory risk driver impact the IIL analysis? Moreover, how will the international nature of some elements of regulatory risk impact the assessment of climate mitigation being compensable?

For those reasons, this thesis will attempt to employ a risk-based approach to answer whether states are liable to compensate carbon-intensive investors for assets that become stranded due to climate change mitigation.

1.3 Scope and Limitations

This thesis consists of essentially two parts. First is aspects of drivers of regulatory risk. Sec- ond is the assessment of the compensable nature of climate change mitigation according to IIL.

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When analyzing some international sources of regulatory risk, like the Paris Agreement and climate litigation, these were chosen because of their actuality and potency as drivers of regulatory risk.

Many additional drivers of regulatory risk could have been included, like the European Green Deal, which will have far-reaching consequences throughout Europe. However, to avoid making this thesis too European-centric and to focus on more "core" international sources of regulatory risk drivers, EU Law was excluded from chapter 2.

In addition, many international environmental law instruments could have been included, like UNCLOS, the Ramsar Convention, CITES, or even the Aichi Targets, as they are all relevant to climate change in some manner. However, depth requires focus, and as the Paris Agree- ment is arguably the number one climate change instrument at the time of writing, the Paris Agreement was considered the most relevant instrument. In addition, the Paris Agreement has found use within climate litigation on the municipal plane. The emerging trends from utilizing the Paris Agreement in climate litigations are proving to influence carbon-intensive investments directly. In the Netherlands, the combination of the Paris Agreement and climate litigation has actualized the problem of regulatory asset stranding and IIL protection standards.

Regarding IIL and the compatibility between climate change mitigation and investment protection standards, this thesis only analyzes the research question according to the standard of no expropriation without compensation and Fair and Equitable Treatment (FET). Within IIL, there are many additional standards than these two. However, investors have had the most significant amount of success by invoking the standards of no expropriation without compensation and FET. In addition, limiting the analysis to expropriation and FET allows for increased analytical depth. The thesis decided to focus on the Energy Charter Treaty (ECT) because many of the carbon-intensive investors that have initiated arbitral proceedings against their host states have invoked this instrument.

1.4 Methodology

This thesis will employ a legal-dogmatic method in presenting the lex lata. The ICJ Statutes, Article 38(1)(a–d) enumerate relevant sources within international law.¹³ These are treaties (litra a), customary international law (litra b), general principles of law (litra c), and as sub- sidiary means of determining the law, judicial decisions and teachings of highly qualified scholars (litra d).

13 Crawford and Brownlie (2019), p. 20

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On the topic of treaty interpretation, this thesis will follow the methodological approach as prescribed by the Vienna Convention on the law of Treaties (VCLT), Articles 31 and 32.

VCLT Art. 31 and 32 codify customary rules on treaty interpretation.¹⁴

The VCLT Art. 31 provides that when interpreting treaties, the interpretation shall be done in good faith, according to the ordinary/lexical meaning of the treaty terms, viewed contextually, and in the light of the object and purpose of the treaty. For that reason, VCLT Art. 31 com- bines the textual, contextual, and teleological approaches into one uniform rule of interpretation.

Should the interpretation according to VCLT Art. 31 provide an ambiguous, obscure, or mani- festly absurd or unreasonable result, VCLT Art. 32 states that treaty interpreters may seek recourse in supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of the conclusion of the treaty.

When it comes to interpreting IIL instruments and their related jurisprudence, two methodological challenges appeared when writing this thesis.

First, as arbitration is a private process, not all of the documents in all cases are available to the public, nor are all cases even made public at all. That has made writing a thesis on this topic more challenging. For example, in chapter 3, the thesis attempts to analyze RWE's claims for compensation due to the Dutch phase-out of coal. Since the case documents have not yet been made public, analyzing RWE's position under IIL has been challenging. The so- lution to this was construing hypothetical arguments RWE might invoke, but this did represent a methodological challenge and increased complexity.

A second methodological challenge that became apparent when writing a thesis about IIL is reconciling lack of stare decisis¹⁵ with a common but also, at times, diverging legal practice.¹⁶ IIL is a large field within international law, comprising over 3246 BITs and IIAs as of writing this thesis.¹⁷ In principle, arbitral tribunals are free to decide each case on its own merits, according to the wording of the applicable instruments, as applied to the facts of the specific case. However, arbitral tribunals will generally consider the rule of law requires treating like cases alike. Arbitral tribunals will usually require good reasons not to follow clear trends that

14 ICJ Judgement, Kasikili/Sedudu Island (Botswana/Namibia), 13 December 1999, para 18 with further refer- ences

15 For example, the ICSID Convention Article 53(1) states, "The award shall be binding on the parties …".

This can imply the exclusion of stare decisis, see Nadakavukaren Schefer (2020), p. 69 69

16 Montt (2012), p. 2

17 https://investmentpolicy.unctad.org/international-investment-agreements is as of 29.11.2021 showing 2826 BITs and 420 IIAs.

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have emerged within the jurisprudence constante, if the cases are similar and the reasoning of the arbitral tribunal persuasive.¹⁸ The near-uniform language within IIL instruments has en- abled this tradition of treating like cases alike. One area within IIL where there is a more di- vergent legal practice is in relation to FET.¹⁹ For that reason analyzing FET jurisprudence has proven more methodologically challenging.

So, when analyzing IIL jurisprudence, this thesis has attempted to mimic as closely as possible the method that the arbitral tribunals themselves use in analyzing the jurisprudence. The reason for this is to keep the lex lata in this thesis as authentic as possible, this by employing a legal-dogmatic method. Methodologically the same will apply to the interpretation of political instruments within a legal context.

At the same time, this thesis will also attempt to supplement the lex lata with critical normative assessments and the lex ferenda. As such, the modality of the method in this thesis can be described as a combined descriptive-normative approach to understanding, analyzing, presenting, and criticizing international law and IIL.

1.5 Structure

In keeping with the risk-based approach mentioned in section 1.2, this thesis begins the analysis by looking at regulatory risk in chapter 2. A central question is what drives regulatory risk? After a brief introduction in 2.1, chapter 2.2 analyses unmitigated climate change as a meta-driver of regulatory risk, modulating the intensity of climate regulations. Chapter 2.3 analyzes the Paris Agreement as a driver of regulatory risk. Section 2.4 contextualizes some trends within climate litigation, the Paris Agreement, and human rights. Why analyze what drives regulatory risks? Arguably, IIL attempts to shield the investor from political risks in a regulatory context.

Chapter 3 contains the main IIL analysis. One aim when writing this thesis has been to make this thesis accessible to a reader with no prior knowledge of IIL and a bare minimum understanding of international law. This thesis aims to reach a wider audience and contribute to the ongoing debate on climate change, regulatory chill, IIL, and ISDS. For that reason, section 3.1 will begin with a short presentation of the history of IIL. Section 3.2 will briefly present the standard of no expropriation without compensation, and examine if the Dutch coal phase-out violates various aspects of IIL regulations on expropriations. Similarly, section 3.3 will briefly present the Fair and Equitable Treatment standard, before examining if the Dutch coal phase- out violates the FET standard in the Energy Charter Treaty.

18 Daimler v. Argentina, Award, para 52

19 Nadakavukaren Schefer (2020), p. 402

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Section 3.4 will analyze some jurisdictional aspects this case raises, namely if jurisdiction in intra-EU cases violates EU law, and what the consequences that can have on annulment and enforcement.

Finally, the thesis will conclude with a summary and conclusion in chapter 4.

2 Drivers of regulatory risk

2.1 Introduction

This section will discuss regulatory risk. What drives regulatory risk, and why does it matter within in an IIL context? Alternatively phrased, the question is: What are some legal reasons states might be interested in interfering with carbon-intensive commercial investment and thereby risk potential IIL liability?

Regulatory risk illustrates the asymmetrical power relationship between the investor and the host state. Prior to the investor making the FDI (Foreign Direct Investment), the host state might induce investors to invest. The inducement can be through promises of regulatory stability, beneficial tax arrangements, and other advantageous commercial conditions under which the investment will operate. Typically these inducements will offer the investor favor- able terms enabling an attractive return on the investment. Once the investment is made and the investment matures, the power dynamic gradually shifts. It is now the investor who has to submit to the decisions of the host state. In addition, foreign investors will typically only have limited political representation in the investment host country by being a foreigner. Moreover, as FDIs are long-term by nature, the investor can find itself in what some have described as a 'hostage situation' or chained to the fate of the host state through a pair of 'golden handcuffs’.²⁰ IIL is the investor's defense against regulatory risk. In the words of the Energy Charter Secre- tariat, IIL instruments will offer

a number of fundamental rights to foreign investors with regard to their investment in the host country. Foreign investors are protected against the most important political risks, such as discrimination, [uncompensated] expropriation and nationalisation, breach of individual investment contracts, damages due to war and similar events, and unjustified restrictions on the transfer of funds²¹

IIL thus represents a method for investors to quantify the threat of regulatory interferences:

Should the host state breach its promises to the investor or even take the investor's property, at least the investor can turn to international investment arbitration for relief. Through IIL instru-

20 Kolo (2004), p. 481

21 Energy Charter Secretariat (2012), p. 6, ‘uncompensated’ added

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ments, investors might even be able to turn the tables on the host state: From the regulation costing the investor money, an investor can demand compensation from that very same state for breaches of IIL instruments.

So the question naturally becomes, why would a state willingly interfere with an investment protected under IIL? This chapter will attempt to provide one answer to this question, in that it can be necessary to comply with Public International Law itself. In addition, there are some emerging trends within climate litigation before municipal courts, where the litigants have successfully managed to integrate the Paris Agreement and human rights to create new obligations for states. Thus, the Paris Agreement and climate litigation have the potential to act as a potent source of regulatory risk for carbon-intensive investors. However, arguably the real driver of regulatory risk is unmitigated climate change itself.

2.2 Unmitigated climate change is a meta-risk

As long as regulators fail to address climate change and align pledges and policies in line with the requirement of the long-term temperature goal of the Paris Agreement, it should not be a stretch to say that climate change is in effect unmitigated. Furthermore, as long as climate change remains unmitigated, this can amplify the intensity of future regulations mitigating climate change. The amplification effect can occur because future regulators will have less time available to space mitigation regulations across. As such, the longer climate change remains unmitigated, the intensity of future regulations will arguably only increase. Therefore unmitigated climate change can be described as a meta risk or risk amplifier.

The Bank for International Settlements (BIS), an international financial institution owned by central banks, has identified several vectors where amplified regulatory risks might manifest.

One of those concerns the transitional risks that especially carbon-intensive energy companies are facing.²² Thus, inaction on mitigating climate change might amplify the transitional risks of carbon-intensive commercial companies and investments. Transitional risks are therefore risks carbon-intensive companies face concerning the transition to a low-carbon economy.

One domain where transitional risk can appear is an ever-increasing legal and regulatory bur- den. In addition, transitional legal risks can arise through litigation and liability costs associated with climate-sensitive investments and businesses.²³

The problem with transitional risks amplified by unmitigated climate change is that regulators have to enact more emissions reductions over a shorter period, making the changes too abrupt for some commercial operators to sustain. For example, with years of no meaningful mitigation of climate change, a sudden imposition of costly emission-reducing measures can create

22 Bank for International Settlements (2021), p. 16

23 Ibid

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costs that exceed the commercial going rate and drive some operators out of business. The transmission channel of transitional risk from unmitigated climate change to states can pass through IIL, as IIL instruments typically will protect against regulatory destruction of investments. The problem is that pollutive commercial operations cannot continue, so the least adaptable companies face a heightened risk of being left behind in the energy transition. The remaining operators who manage to sustain new regulatory requirements can find that achiev- ing compliance can prove excessively burdensome. Furthermore, these costs can transmit to investment host states via IIL.

The scenario that regulatory compliance can be burdensome beyond the going rate represents a risk of 'stranded assets' due to transitional risks.

Especially "pure-play" economic actors, where the revenue streams are particularly carbon-intensive, arguably face significant risks of stranded assets. One example here can be coal ownership. In North America, publicly traded "pure-play" coal mining companies and coal ownership are more intertwined than in Europe. Thus, climate mitigation like coal phase-outs can impact disproportionately, like the example with Westmoreland Coal Company demon- strates.²⁴ In Europe, on the other hand, coal ownership tends to sit with diversified companies or even large-scale utilities like RWE.²⁵ However, as illustrated by RWE initiating investment arbitration against the Netherlands, these companies also resist climate mitigation measures.

Thus there seems to be no inherent relationship between ownership structure and willingness to litigate.

So in one aspect, regulatory action targeting, for example, the coal sector, can hit some companies harder than others depending on ownership structure. Regulatory action on coal in the US could wipe out some companies and shareholder investments completely. In contrast, regulatory action on coal in Europe would arguably spread the losses over more shareholders.

Moreover, the transmission channel of this transitional risk can pass from carbon-intensive investors to investment host states through IIL.

One method carbon-intensive companies and investors can mitigate against transitional risk is reducing their exposure to fossil fuels by investing in renewable energy generation. The result is a more diversified revenue stream. Thus, increased investments in renewable energy can hedge against future transitional risks. One problem is that pure-play carbon-intensive companies typically will have a lower ability to diversify revenue streams. Investments in pure-play carbon-intensive companies can therefore signal a heightened risk of stranded assets. Conse- quently, should the state host many carbon-intensive pure-play companies, this can also signal

24 Government of Canada (2021)

25 Caldecott et al. (2018), p. 118

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increased risk of litigation. In this regard, the differentiated ownership structure of carbon-intensive investments can also signal a heightened risk of a 'regulatory chilling effect' occurring in jurisdictions with many pure-play companies.

Another facet of transitional risk is the concepts of unburnable carbon and carbon budgets.²⁶ A carbon budget is the cumulative atmospheric CO2 emissions allowable for specific levels of anthropogenic climate change.²⁷ At the same time, valuations and credit ratings of fossil fuel companies and investments are highly dependent on the assumption that those reserves are available for full commercial exploitation. However, to exploit all fossil fuel reserves to total capacity would entail catastrophic climate change. So to avoid climate breakdown, fossil fuel reserves (oil, gas, coal) and connected infrastructure simply cannot be commercially exploited to total capacity. Thus, the concept of 'unburnable carbon' points to a disconnect between fossil fuel companies' valuation and the ability to commercialize those assets under strict carbon budget constraints.²⁸

Thus, one could argue that an idiosyncratic risk factor that carbon-intensive investors face is the impossibility of realizing the value of their fossil fuel reserves and infrastructure. More- over, one way that carbon-intensive investors can transmit those inherent losses to the host state is through IIL.

2.3 The Paris Agreement and NDCs as a driver of regulatory risk

In 1988, the UN General Assembly passed resolution 43/3, which stated that climate change is a 'common concern of mankind.'²⁹ This resolution represented the start of the modern international climate change regime and helped pave the way for the 1992 UN Framework Con- vention on Climate Change and subsequent international climate change instruments. The UNFCCC provided the necessary infrastructure for, among other things, the Kyoto Protocol and its extension to a second commitment period, ending in 2020. Furthermore, in 2005 nego- tiations started that culminated in the 2015 Paris Agreement.³⁰ The Paris Agreement attempts to operationalize the UNFCCC's ultimate goal of managing the global risks associated with climate change.³¹ The Paris Agreement attempts to mitigate and manage the risks associated with climate change through internationally legally binding mechanisms that require states to set and review gradually increasing targets on emission reductions and adaptation measures.

For that reason, the Paris Agreement is a global climate risk management instrument.

26 Caldecott et al. (2018), p. 7

27 Ibid

28 Ibid

29 Sands, Peel et al (2018), p. 299

30 Ibid.

31 Klein et al (2017), p. 123

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The goal of the Paris Agreement is in Article 2, where the chapeau opens by proclaiming that the Agreement aims to strengthen the global response to the threat of climate change. This enhanced global goal is to be achieved by keeping global warming averages well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels, cf. Art. 2.1(a). Art. 2.1(a) is the long-term temperature goal of the Agreement. In addition, the Agreement aims to increase measures of adapting to a changing climate (Article 2.1(b)), as well as aims to make finance flows consistent with climate change mitigation and adaptation (Article 2.1(c)).

The profound changes to the global economy that the goals of the Paris Agreement suggest cannot be understated. For example, just by taking to heart the requirement in Art. 2.1(c) of making finance flows consistent with a low carbon development pathway could spell significant changes to, e.g. the subsidy regimes of fossil fuels or even methane-intensive animal agriculture.

In any case, Article 2.1(a) is to be read in conjunction with Article 4.1³², which aims to provide an indicative timetable for peaking and subsequent decline of greenhouse gas emissions, preferably sooner rather than later. The peaking timetable is to speed up the attainment of the Agreement's long-term temperature goal. The Paris Agreement's primary technique in realizing this is through Nationally Determined Contributions (NDCs).³³

Article 4.2 of the Agreement further determines that parties "shall" prepare, maintain, and communicate updated and revised NDCs to mitigate climate change. Article 4.2 further stipu- lates the interval between updates NDCs to be five years which coincides with the global stocktake events (GST) according to Article 14. Further, Article 4.3 provides that each subsequent NDC will represent a progression of each Party, where the communicated NDC is based on its highest possible ambition to mitigate and adapt to climate change, viewed in light of different national circumstances.

The Paris Agreement is a treaty according to VCLT Art 2.1(a). So any interpretation of the Agreement is according to VCLT Art. 31 and 32. One requirement is that treaties are to be in- terpreted "in good faith." One understanding of the NDC regime is that each subsequent NDC is revised, updated, enhanced, and communicated at GST events. This understanding does not mean that the parties are legally required to implement the NDCs as described in their pledges. However, it would arguably violate the requirement of good faith not to provide a best-effort approach in realizing the emission reductions within each updated NDCs. One

33 Ibid.

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could argue that parties communicating NDC with neutral or lower ambitions will violate the obligations emanating from the Paris Agreement.

One could criticize the Paris Agreement regime for not being too ambitious. For example, there are no specific emissions targets (unlike the Kyoto Protocol). Furthermore, current policies and NDCs are insufficient to keep warming within the Paris Agreement's long-term temperature goal. For example, current policies are estimated to cause a warming of 2.5 – 2.9°C.

Pledges and targets are estimated to result in a 2.1°C. Moreover, optimistic scenarios place warming at 1.8°C.³⁴

However, one notable feature of the NDC regime is the requirement of only upwards progression and ambition. In addition, the Paris Agreement functions as an instrument designed to absorb global political momentum on climate change and directly channel that into mitigation and adaptation commitments. Consequently, the Paris Agreement provides for a "ratcheting up" mechanism of commitments. Moreover, new NDCs would be required to provide an upward progression of the ambition of previous NDCs. So if new regulators should prove less interested in mitigating and adapting to climate change than the preceding regulators, the NDC regime attempts to protect against this by ensuring that new commitments must be even more ambitious than the previous. Failure to present more ambitious NDCs could then possibly result in a finding of treaty violation. Thus the Paris Agreement makes sure that new political leadership cannot legally turn the tide of mitigating and adapting to climate change. Fur- thermore, the obligations from from the Paris Agreement can increase exponentially and not on a linear scale due to the ratcheting mechanism.

The European Union provided one example of how regulators can use the NDC mechanism to enhance climate change mitigation. EU enhanced its NDC pledges at the end of 2020. The increased ambition EU communicated was a reduction of emissions by at least 55% by 2030 compared to 1990 and reduce emissions to zero by 2050.³⁵ The European Union transformed those pledges have into binding EU law under the European Climate Law. The European Par- liament and Council then adopted this new law, and the enhanced NDC pledges then came into force in July 2021.³⁶

One criticism often leveled against the Paris Agreement is the lack of "real" or "hard" enforcement mechanisms. For example, the compliance mechanisms in Article 15 explicitly state that the Agreement foresees a "non-adversarial" and "non-punitive" method of ensuring compliance. On the one hand, arguably a necessity for the Paris Agreement to reach near-uni-

34 Carbon Action Tracker (2020)

35 EU (2021)

36 Ibid

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versal adoption. On the other hand, this "soft compliance" method can create in theory a situation where parties to the Agreement could communicate ever-increasingly ambitious NDCs without actually implementing those into mitigatory and adaptive measures.

One response to this can be to view that recent climate litigation trends prove successful in enforcing the Paris Agreement before municipal courts by combining NDC pledges with human rights instruments. The investors who have faced enhanced regulatory risk due to the Paris Agreement and climate litigation have sought relief through IIL, actualizing the power- ful dynamic between the Paris Agreement, climate litigation, and IIL.

For that reason, this thesis will now examine some recent trends within climate litigation and how climate litigation has managed to actualize regulatory risk for carbon-intensive investors.

2.4 Climate litigation as a driver of regulatory risk

One trend within the 'law of climate change is that private citizens and NGOs are increasingly using the courts as a tool to force states into action on mitigating climate change. In this thesis, "climate litigation" will be understood as to how one UNEP report from 2020 defined the term: "cases that raise material issues of law or fact relating to climate change mitigation, adaptation, or the science of climate change."³⁷

The strategy of litigating the question of climate change seems to be in upward trend momentum. The same UNEP report found that by July 2020, there was a record number of 1,550 climate litigation cases in 38 countries (39, if counting EU courts). That number represented an increase from 884 cases in 2017 spread over 24 countries.³⁸

Initially, one observation is that there seems to be a "spill-over" from the politics of climate change into the legal domain. Arguably, this is perhaps because the political discourse on mitigating climate change in line with the goal of the Paris Agreement seems to be in gridlock.

This political gridlock has forced some concerned citizens to take climate change to court to force their governments to enhance mitigation efforts. Furthermore, as the number of cases grows, so do new legal theories, arguments, and litigatory strategies.

First, one of the significant hurdles facing climate litigants is the question of justiciability, i.e., the question of standing and whether the litigant is asking the court to violate the separation of powers between the judiciary and the legislative branch.³⁹

37 UNEP (2020), p. 4

38 Ibid, p. 6

39 Ibid, p. 37

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When it comes to standing, courts will generally require that the litigants demonstrate a gen- uine and current stake in the outcome. For example, in the US, this has been understood as a requirement of the plaintiff in demonstrating that the respondent has injured the plaintiffs, and the court can remedy the injuries. In Juliana v. The United States, this led to a finding of no standing for the plaintiffs. The majority of judges, in that case, considered the remedies asked of the court as exercising competencies belonging to the legislative branch.⁴⁰ Conversely, in Urgenda Foundation v. the State of Netherlands, the District Court found that the plaintiffs had standing and based this, among other things, on a provision in Dutch law specifically al- lowing for class action lawsuits by interest groups. The Court of Appeals upheld this decision, and it was not challenged before the Dutch Supreme Court.⁴¹

The Urgenda case is notable in many other ways as well. First off, the Urgenda plaintiffs successfully invoked the ECHR Articles 2 and 8 to argue that a liveable climate is a pre-condition for human rights to be a reality.⁴² Thus the litigants in Urgenda synthesized climate obligations and human rights obligations into enhanced climate mitigation obligations for the Dutch state. Looking back, the link between climate change and human rights should not be surprising for regulators. The link is even made explicit in the preamble to the Paris Agree- ment.⁴³ Urgenda is notable in that it is one of the first cases that successfully litigated on this point. Moreover, as the Netherlands is a party to the Paris Agreement, it would be strange for the Dutch government to argue against clear wording in their ratified international instruments.

A third factor that makes Urgenda notable is that the plaintiffs successfully invoked the Paris Agreement itself before municipal courts.⁴⁴ The court's reasoning in response is equally notable. As the Netherlands pledged to reduce greenhouse gas emissions between 25-40%, the court found the Dutch state under an obligation to reduce emissions by at least 25%.⁴⁵ Emis- sion reductions above the 25% minimum threshold would be subject to political discretion, but emissions reductions below 25% represented a floor the state could not go beneath.

A fourth reason for considering Urgenda as notable is that it had direct effects. Immediately following the Supreme Court judgment, the Dutch government decided to early retire the

40 UNEP (2020), p. 37

41 Ibid

42 State of the Netherlands v. Urgenda Foundation, ECLI:NL:HR:2019:2007

43 The preamble to the 2015 Paris Agreement states the following: “Acknowledging that climate change is a common concern of humankind, Parties should, when taking action to address climate change, respect, pro- mote and consider their respective obligations on human rights, the right to health ...”

44 State of the Netherlands v. Urgenda Foundation, ECLI:NL:HR:2019:2007, paras. 6.1-7.3.6

45 Ibid, paras 7.4.1-7.5.3

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Hemweg coal-fired power plant, owned and operated by the Swedish utility Vattenfall.⁴⁶. Vat- tenfall is no stranger to IIL and has previously litigated cases to protect non-renewable power generation infrastructure from regulatory interference. In addition, following the Urgenda case, the Dutch government decided to phase out coal. This coal phase-out led the German utility RWE to initiate investment arbitration against the Netherlands, demanding compensation for their losses under the investment protection rules in the Energy Charter Treaty (ECT).

So in this respect, Urgenda can arguably serve as an example of how climate litigation is managing to actualize regulatory risk for the carbon-intensive investor and how these investors are then lifting the case of climate mitigation to the international level via international investment arbitration.

A fifth reason for considering Urgenda notable is that it arguably paved the way for Milieude- fensie et al. v Royal Dutch Shell (pending appeal). In that case, environmental groups and over 17,000 citizens sued Shell over its contributions to climate change.⁴⁷ Plaintiffs successfully argued before the District Court that, among other things, Shell was obliged under an un- written standard of care according to the Dutch Civil Code to reduce its greenhouse gas emissions by 45% at the end of 2030.⁴⁸ The decision was also made provisionally applicable⁴⁹, Meaning the obligation for Shell to reduce its emissions arose instantaneously following the judgment, even though Shell announced they will appeal the judgment.

What is noticeable in Milieudefensie is that the court considers it a violation of Shell's standard of care not to reduce its greenhouse gas emissions in line with the Paris Agreement, pro- viding yet another avenue of applying international law sources before municipal courts.

When it comes to the standard of care, most legal systems provide for fault, negligence, strict liability (some defenses applicable), or an absolute liability (no defenses applicable, and usually reserved for ultra-hazardous activities).⁵⁰ On the question of what standard of care Shell was under, the District Court in Milieudefensie employed a fault- or negligence-based standard of care.⁵¹

The application of a fault-based standard of care is remarkable because, as one of the defenses Shell invoked, was the production of fossil fuels is entirely legal. It is even occurring within the cap and trade framework of the European Union. Despite that, the court concluded that Shell's standard of care entailed even stricter obligations to reduce greenhouse gas emissions.

46 Reuters (2019) “Dutch to close Amsterdam coal-fired power plant four years early - RTL”

47 Climate Case Chart (2019)

48 Milieudefensie et al. v. Royal Dutch Shell plc., District Court, ECLI:NL:RBDHA:2021:5339, para 4.4.55

49 Ibid, para 4.5.7

51 Milieudefensie et al. v. Royal Dutch Shell plc., District Court, p. 4.4.1

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As judge-made law tends to be more elastic than written law, this elasticity provides courts with significant interpretative leeway. So, in reality, the court could have imposed strict or absolute liability, but within the argumentative confines of fault-based liability. Interestingly, this is precisely how absolute liability for ultra-hazardous activities developed in some jurisdictions. Through increasingly heightened standards of care and requiring the tortfeasor to demonstrate its non-negligence, as opposed to requiring the injured Party to demonstrate the negligence of the tortfeasor, absolute liability for ultra-hazardous activities gradually emerged in the early 20'th century in Norway.⁵² Thus, if the trend of imposing liability on fossil fuel producers should continue similarly, perhaps Milieudefensie can be seen as the beginning of an emerging stricter standard of liability for carbon-intensive companies and investors.

As Shell is a Dutch company, it can prove challenging for Shell to seek relief in IIL. How- ever, Milieudefensie also actualizes the question of IIL liability for court judgments. As host states are liable for the actions of their courts, court orders breaching IIL treaties can entail liability for states.⁵³ So if the trend of climate litigation against private parties should continue, with stricter standards of care than provided for by regulators, in theory, climate litigation can also actualize IIL in this context.

As mentioned above, one criticism of the Paris Agreement was its lack of a "hard" enforcement mechanism. Here, one could argue that climate litigation can provide grass-root enforcement of NDCs through municipal courts and NGOs willing to litigate on behalf of the climate.

Both Urgenda and Milieudefensie illustrate successful examples of litigants managing to integrate and translate the climate commitments of states directly into the human rights obligations of these states. Here climate litigation can be seen as an emerging trend where there is feedback from international treaties at the municipal level, perhaps similar to the human rights regime. Moreover, this could allow private parties to force compliance by invoking the Paris Agreement on the municipal level when interpreting human rights.

One inherent weakness in this bottoms-up view on enforcing compliance through municipal courts is that it hedges compliance on the willingness of municipal courts to accept the Paris Agreement as being in a relationship with human rights. Not all judges might accept this kind of reasoning, especially in jurisdictions where the executive branch more tightly controls the judiciary. In addition, a prerequisite for this would be an already highly developed human rights system.

52 Eckhoff (1987), p. 160

53 See for example Sistem v. Kyrgyzstan, Award, p. 118-119, where the arbitral tribunal found Kazakhstan liable for a series of court decisions that the arbiters found was expropriatory.

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As the cases of Urgenda and Milieudefensie show, climate litigation can prove successful in enhancing climate mitigation obligations. However, other legal frameworks which one would not think of as part of the climate litigants arsenal can prove helpful in climate litigation. One example here can be frameworks designed to protect certain groups and interests, like shareholder interests. In ClientEarth v Enea, the plaintiffs purchased a few publicly traded shares in Enea to obtain standing as shareholders. ClientEarth then successfully argued before Polish courts that Enea's plan to build a new coal-fired plant was contrary to shareholder interests.

The increased financial risk from rising carbon prices, stiffer competition from renewables, and EU energy reforms on state subsidies for coal power were so significant that building the coal plant could not be justified.⁵⁴ Although more challenging to frame within an IIL context, ClientEarth can illustrate how regulatory risk can impact climate-intensive commercial opera- tions in more indirect ways.

States and public entities can also pursue climate litigations. The case of People of the State of New York v. Exxon Mobil Corporation can serve as an example. Here the State of New York claimed that Exxon had deceived its shareholders by claiming one cost of carbon externally while using another cost of carbon internally, thus mispricing its carbon reserves. In addition, Exxon has claimed that a 2°C warming scenario presented minor risk to the company.⁵⁵

In addition to the initiatives mentioned so far, there is a possibility that states might wish to pursue climate litigation against other sovereign states. One possibility is IIL itself. There is precedent in the jurisprudence of considering State-Owned Enterprises (SOE) as "investors"

under BITs and IIAs.⁵⁶ Thus some states with significant FDI exposure through their SOEs can use this as litigatory method in pushing the agenda of climate mitigation or adaption. For example, it could be the case that lack of adaptation could potentially enhance the physical risks faced by the FDI.

For example, SOEs could invoke protection standards like Full Protection and Security (FPS) or Fair and Equitable Treatment (FET), which exist within most BITs and IIAs. It would then be possible to follow Urgenda and Milieudefensie's reasoning and argue that the failure of a state to mitigate or adapt to climate change significantly increases the risk of losses and damages to investments. Alternatively, that failure to properly mitigate and adapt to climate change could create an unacceptable risk of frustrating the SOE's legitimate expectation of earning a reasonable rate of return on its investment. This argument would point to the arguments expressed in Urgenda and Milieudefensie that a stable and functional climate is a pre- condition for meaningful human activity, and therefore a stable investment regime.

54 Climate Case Chart (2018)

55 UNEP (2020), p. 27

56 See for example CSOB v. Slovak Republic, Objections to Jurisdiction, para 20

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2.5 Summary

This chapter has examined some possible future drivers of regulatory risk. Unmitigated climate change could amplify future regulatory risk. This amplification could enhance transitional risk, and the transmission channel for those losses onto host states can be IIL. The Paris Agreement is at the heart of the international climate law regime. The most important aspects of the Agreement concern mitigation and adaptation. As exemplified through Urgenda and Milieudefensie, climate litigation shows how litigants can successfully incorporate climate change mitigation obligations into human rights obligations. The idea that a livable climate is a pre-condition for meaningful human activity can also find meaning within an IIL context.

As has been argued, all of the elements that can meaningfully drive risk actualize IIL. The question becomes if the investor is in a position to invoke BITs or IIAs, to what degree must the investor accept adverse regulations from the host state? If the host state should decide to phase out coal as the Netherlands did following Urgenda, can the investor seek compensation through investment arbitration? Furthermore, what about the "phase down" pledges of the international community following COP26? Will those translate into compensable treaty violations?

The thesis will now turn to the material aspects of how IIL protects investments and the ability to regulate within a climate mitigation context.

3 International Investment Law and the environment

One result of the 26th UN Climate Conference (COP26) in Glasgow was the decision to

"phase-down … coal".⁵⁷ Before COP26, countries like the Netherlands started phasing coal out of their energy mixture. Following Urgenda, the Netherlands established a trajectory for phasing out coal with the 2019 Klimaatwet (climate law). This law prohibited generating electricity by burning coal from 2030.⁵⁸ This prohibition affects five remaining coal-fired power plants in the Netherlands. As a consequence of this law, RWE initiated investment arbitration against the Netherlands, invoking the ECT, demanding €1.4 billion in damages.⁵⁹ The question in the following is if the Dutch coal phase-out is compensable according to IIL and ECT.

This question will be answered by briefly presenting the history of home state protection of FDIs to contextualize IIL within international law (3.1). Then two of the perhaps most contro- versial protection standards within IIL will be presented. First is the standard of no expropriation without compensation in chapter 3.2. Concerning the coal phase-out, this standard actual-

57 Decision -/CP.26, Glasgow Climate Pact, IV, para 20

58 Veerbek (2021)

59 Ibid

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izes questions such as if RWE has been indirectly expropriated? If not, have RWE suffered a creeping expropriation even before the climate law came into force? Chapter 3.2 also examines some possible defenses the Netherlands can invoke.

Chapter 3.3 presents some elements of the standard of Fair and Equitable treatment. Questions this standard raises are if the coal phase-out violates the requirement of stability FET. And does RWE have a legitimate expectation in earning a reasonable return on its investment?

Moreover, have the Dutch government created legitimate expectations for RWE by inducing the investments?

Chapter 3.4 examines some jurisdictional aspects the intra-EU nature of this case actualizes.

3.1 A short history of International Investment Law

At the heart of IIL lies an idea that by ratifying BITs or IIAs, host states are willingly giving up the ability to administer certain elements they would otherwise have been able to. As noted by Montt and Wälde, "We should not forget that ... investment treaties as international law disciplines interfere in domestic regulatory and administrative sovereignty; that is their very purpose".⁶⁰ What can plausibly persuade countries to give up their ability to regulate foreign investments and, in essence, to guarantee a better treatment to foreigners than that of local citizens?⁶¹ How did this system develop, and how does this historical backdrop inform the understanding of modern IIL instruments?

One answer to why states are willing to give up regulatory powers is that they are eager to attract FDIs. Some have framed the desire to attract FDIs as that of a prisoner's dilemma.

Emerging countries wanting to import capital and raise living standards through economic development have entered into a bidding contest to provide the highest level of investor protection, to the detriment of all.⁶² Others have framed the myriad of IIL instruments as a network that has been steadily growing and developing since the '50s, delivering positive externalities and network effects.⁶³ Another view is to see IIL as a response to decolonization. Especially in the period from the '50s until the '90s, the BIT network grew steadily. Some have therefore put IIL in the context of the principle of permanent sovereignty over natural resources. And the growing acceptance of the legality of uncompensated expropriations following the New International Economic Order (NIEO) movement.⁶⁴

60 Montt (2012), p. 5, edited slightly

61 Alvik (2020), p. 291

62 Montt (2012), p. 86

63 Ibid, p. 82

64 Dolzer and Schreuer (2012), p. 91

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However, international protection of FDIs is nothing new. One early form of investor protection, now thankfully relegated to the dustbin of history, has been gunboat diplomacy. This approach challenged host state interferences with FDIs through the use or threat of use of mili- tary force. Examples can range from the Chinese Opium Wars to cases of sovereign debt re- covery in Latin America.

As a response to foreign interventions, Latin American jurists developed what became known as the Calvo Doctrine, which stressed equality, not only among nations but also among foreigners and locals. The Calvo Doctrine thus rejected foreign privilege and embraced the Na- tional Treatment (NT) standard. At the heart of NT is the idea that the level of protection ac- corded to foreigners is equal to that offered to locals, with no possibility of diplomatic protection or militarily self-help.⁶⁵

During the 1917 revolution in Russia and agrarian reforms in Mexico, the Calvo Doctrine showed its great weakness when expropriating governments relied on an empty NT-standard to avoid compensating expropriated foreigners. In Mexico, this led to a diplomatic exchange between the governments of Mexico and the USA. In it, the US Secretary of State Cordell Hull formulated what would be known as the 'Hull Formula': under customary international law, and expropriation must be followed by "prompt, adequate, and effective compensation."⁶⁶ Prior to the first BIT concluded between Germany and Pakistan in 1959⁶⁷, Deprived foreign investors had limited recourse for legal redress. As the ICJ stated in Barcelona Traction:

Should the natural or legal persons on whose behalf it is acting consider that their rights are not adequately protected, they have no remedy in international law. All they can do is to resort to municipal law, if means are available, with a view to furthering their cause or obtaining redress [...]⁶⁸

Foreign investors might view municipal courts as the extension of the executive branch. They might have (well-founded or not) concerns about the fairness and impartiality of proceedings in the host state courts. Corruption could impact the fairness of the proceedings. Investors can face courts not willing to enforce contracts, recognize arbitral awards, or even deliberately side with locals over foreigners in disregard of the material aspects of the case.⁶⁹

65 Montt (2012), p. 39

66 Ibid, p. 56

67 Ibid, p. 62

68 Barcelona Traction, Light and Power Company, Limited, Judgment, I.C.J. Reports 1970, p. 44, para 78.

(Belgium v. Spain)

69 Dzung and Nguyen (2018), p. 281

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Prior to BITs, investors subject to denials of justice in the host state courts could, as a last resort, turn to their home state and ask for diplomatic protection through espousal. Here the home state would take on the investor's claim as its own. As the ICJ mentions in Barcelona Traction, one major problem with this is its unreliability:

The State must be viewed as the sole judge to decide [if protection through espousal]

will be granted … the State enjoys complete freedom of action.⁷⁰

So as the state enjoys complete freedom to afford the investor diplomatic protection (or not), a fortiori, the state would also have complete freedom to decide on all other matters relating to the case. For example, the state would decide on all matters relating to the litigatory strategy. Should the state ask for cash compensation? Or would political concessions satisfactorily settle the case in a diplomatic setting? Furthermore, if the investor home state should decide to pursue monetary compensation, it would be under no legal obligation to pass that settlement on to the injured investor.⁷¹ For those reasons, investors might view the prospects of en- gaging in FDIs in emerging countries without IIL protection as potentially too risky.

In 1966, just seven years after the conclusion of the first BIT, the ICSID Convention came into force.⁷² The ICSID regime is remarkable in its own right. It provides a robust infrastructure for investors to invoke ISDS (Investor-State Dispute Settlement) clauses in BITs and IIAs to, in essence, sue host states by initiating arbitral proceedings against the host state over al- leged breaches of protection standards in BITs and IIAs. These arbitral awards will be final, binding upon host states. In the case of non-compliance with the arbitral award, the ICSID Convention provides for a simplified enforcement process against what would otherwise have been a sovereign state.⁷³

BITs, IIAs, and clear trends within the jurisprudence view that a legal expropriation will enti- tle the investor to the investment's Fair Market Value (FMV) immediately before the expropriation became public knowledge.⁷⁴ A finding of illegality will increase the level of compensation for the investor. The value increase is not for punitive reasons. Instead, a finding of illegality will mean the level of compensation follows the rules on state liability instead of the BIT or IIA provisions on compensation.⁷⁵ State liability rules provide that the compensation must as far as possible wipe out all the consequences of the illegal act. For that reason, the

70 Barcelona Traction, Light and Power Company, Limited, Judgment, I.C.J. Reports 1970, p. 44, para 78-79.

(Belgium v. Spain)

72 Montt (2012), p. 62

73 ICSID Convention Article 54(1)

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compensation will include the value of the investment itself and expected future profits, as well as any consequential damages arising from the illegal act.⁷⁶ Within IIL, this has been understood as requiring monetary compensation.⁷⁷

3.2 Expropriations in International Investment Law 3.2.1 Introduction to expropriation within IIL

Expropriation of assets is probably the most severe interference that an investor can experi- ence in a host state, bar naked violence.⁷⁸ Moreover, as was illustrated above regarding empty NT standards, controversies surrounding the expropriation of foreign assets are nothing new within international law. So what constitutes an expropriation in IIL, and is the Dutch coal phase-out an expropriation?

One feature of IIL is that the language used to regulate expropriations is uniform.⁷⁹ Take the ECT as an example. In Article 13, the treaty provides that investments shall not be

"nationalised, expropriated or subjected to a measure or measures having effect equivalent to nationalization or expropriation."

Thus, the ECT does not define what an "expropriation" is but provides for the possibility of it occurring directly, or indirectly through "measures having … effect equivalent". Like customary international law, the ECT allows for legal expropriations if the investor receives compensation. As expropriations are not defined within the ECT, task of determining if a measure is an “expropriation” is to be decided according to the rules of VCLT Art. 31 and 32.

Etymologically, the word "expropriation" will refer to a public taking or transfer of private property or its title, usually under the threat of force in the interest of the state. So it would be unnatural to label a court decision drawing up the exact border between two private properties as an expropriation. The court would only be balancing the interests of two private parties. As such, the word "expropriation" implies a taking of sorts. So not all governmental interventions in private property can naturally be described as expropriation, only those that "take."

Regarding the lexical understanding of measures having "effects equivalent" to a direct expropriation, "equivalent" arguably implies a threshold. Moreover, "effects" arguably imply a requirement of a causal link between the disputed measures and the result or consequences of that measure. Combining the two words, "effects" and "equivalent" implies that some results

77 Sistem v. Kyrgyzstan, Award, para 158

79 Montt (2012), p.

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or consequences of a regulation done in the host state's interest can impact the investor so heavily that the investor has lost its property.

The fact that IIL instruments tend to emphasize the severity of the impact on the investor in regulating indirect expropriations has led to the development of an effects-based expropriation jurisprudence. Scholars have referred to this approach as the sole effects doctrine.⁸⁰ Central in this approach is determining if the investor has suffered a 'substantial deprivation’. This deprivation can occur in the control, use, or enjoyment of the property. Alternatively, a 'substantial deprivation’ can occur if the economic value of the investment is lost or near lost. As the tribunal in AES v. Hungary stated concerning the ECT Art. 13:

For an expropriation to occur, it is necessary for the investor to be deprived, in whole or significant part, of the property in or effective control of its investment: or for its investment to be deprived, in whole or significant part, of its value […]⁸¹

Within the IIL jurisprudence, the sole effects doctrine seems to have nearly universal acceptance as expressing criteria for differentiating between regulations and expropriations.⁸² One problem with this is that the sole effects doctrine fails to properly account for regulatory intent when the sole criterion for expropriation is that the investor has been “substantially deprived”.

Furthermore, within a climate mitigation context, the sole effects doctrine could imply substantial liability for states when enacting costly or asset-stranding regulations to curb emissions.

The question that arises is if the Dutch coal phase-out is an expropriation ECT Art. 13(1), and the sole effects doctrine?

3.2.2 Is the Dutch climate law and the coal phase-out an expropriation?

Since the Climate Law entails no transfer of the title or property ownership, it is natural to examine this through the rules on indirect expropriations.

As pointed out earlier, the leading approach to indirect expropriations within IIL is the sole effects doctrine. To answer this question under the sole effects doctrine, this thesis will examine if the Climate Law and the Dutch coal phase-out imposes a “substantial deprivation” on RWE.⁸³

81 AES v. Hungary, Award, para 14.3.2

82 Montt (2012), p. 256

83 AES v. Hungary, Award, para 14.3.2

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One challenging aspect of the "substantial deprivation" approach is that of a threshold. An effects-based expropriation analysis consists of two elements, one empirical and one normative.

The empirical component would be to assess the actual losses suffered by the investor. The normative component will ask if the empirical quantification exceeds the normative threshold of what one considers substantial deprivation.⁸⁴ What is the threshold, and it the same all the time?⁸⁵ Another unclear factor is the importance of deprivations of value versus deprivations of control. For example, in CMS Gas, the investor was forced to take a 95% write-down of its investment.⁸⁶ When asked if this constituted a “substantial deprivation”, the tribunal said no, because

... The [Respondent] has convincingly argued that the list of issues to be taken into account for reaching a determination on substantial deprivation, as discussed in [previous case-law], is not present in the instant dispute. In fact, the Respondent has ex- plained, the investor is in control of the investment; the Government does not manage the day-to-day operations of the company; and the investor has full ownership and control of the investment.⁸⁷

Similarly, in this case, RWE would still control the day-to-day operations, and RWE would retain all aspects of ownership and control of the coal plants. These factors indicate that the assessment of “substantial deprivation” will be based on the value aspect, and not the control aspect.

As RWE (and other coal investors) are publicly traded on stock exchanges, they must publish certain documents, like financial statements. The NGOs Somo, Ember, and IEEFA analyzed these and found that all of the coal-fired power plants owned and operated by RWE and Uniper have been internally written down long before the Climate Law was passed in 2019. In addition, the NGOs found that the plants were operating at a loss, mainly due to rising carbon prices and increasingly stiff competition from renewable energy sources.⁸⁸

Based on this, one could argue that the RWE's assets had already been stranded before the Climate Law and the coal phase-out. Should that be a correct take, the Climate Law cannot constitute a "significantly deprivation," as what little remains of value existed in the coal investment should not exceed the threshold of "substantial," whatever the threshold. In addition,

84 Montt (2012), p. 258

85 Ibid

86 Ibid, p. 263

87 CMS Gas, Award, para 263

88 Verbeek, Bart-Jaap. “Compensation for stranded assets?”. Centre for Research on Multinational Corpora- tions (SOMO) 2021

Will International Investment Law hinder climate change mitigation?