Climate change is one of the biggest challenges of the 21st century, and it has received increasing attention from the international community in global meetings such as the 2022 UN Climate Change Conference (COP27). Following the rise of environmental litigations with the filing of high profile cases against States and companies around the world, it has been suggested that international arbitration, whether commercial or investment arbitration, could also play a larger role in resolving environmental and climate change-related disputes.

In the context of investment arbitration, foreign investors could for instance try to challenge States’ environmental policies by claiming that they were adopted in breach of the standards of protection included in the applicable investment treaty or domestic legislation. This was the case in Rockhopper v Italy, in which a claim for compensation was filed against Italy over its refusal to grant a production concession for an offshore oilfield near the country’s Adriatic coast. The tribunal found that there had been an unlawful expropriation under the Energy Charter Treaty (ECT) and required Italy to pay €190 million plus interest to the investors. More specifically related to climate change is the RWE v Netherlands case (currently pending) stemming from the Dutch ban on coal-based power generation introduced to achieve emission reduction targets under the Paris Agreement. Conversely, investors may also seek to challenge States’ failure to enforce environmental laws and combat climate change, and cases such as Peter Allard v Barbados and Zelena v Serbia may serve as an inspiration for such claims.

As for States, recent arbitral practice suggests the progressive emergence of environmental counterclaims in investment arbitration, although these remain relatively rare. Examples of successful environmental counterclaims filed by States include Burlington v Ecuador and Perenco v Ecuador. States have also taken steps to address environmental considerations in the latest generation of investment treaties, mainly through “Right-to-regulate” and general exception clauses, as well as the integration of express investor obligations. For instance, the 2017 Colombia Model BIT states that investors “shall respect the prohibitions established in international instruments […] pertaining to human rights and the environment.” Although the effects of these clauses still need to be assessed in practice, environmental protection and climate change could potentially become an integral part of the international investment regime as both investors and States consider these circumstances in their claims and counterclaims.

Similarly, commercial arbitration may also become an increasingly popular choice for environmental and climate change disputes. First, the building of a global renewable energy industry can be a source of direct disputes, i.e. disputes directly arising from contracts relating to climate change transition, mitigation, and adaptation projects, in line with Paris Agreement commitments. Second, indirect disputes involving environmental issues and climate change may also arise in a broad range of sectors including energy, infrastructure, and transport. For instance, any commercial contract with a force majeure clause referring to climate change could generate such indirect disputes. Further, companies and individuals or groups of individuals affected by business activities may consent to submit their disputes to arbitration by entering into a submission agreement. In all of these scenarios, various features of commercial arbitration may have to be adapted in order to better assist in resolving these environmental and climate change disputes which frequently involve public interests (e.g., transparency, third-party participation, and use of experts).

Authored by Melissa Ordonez and Julia Caudal.

This article was published in the first edition of the Legal Industry Reviews France (December 2022). Full publication available here.