International Investor-State Disputes Arbitration Through Energy Justice Lenses: Opening the Case for “Greening Through Free Trade” Narratives

Abstract

This chapter focuses on international investment arbitration through the lens of energy justice. It unfolds against the backdrop of a growing intersection between international trade, investments, and the urgent need for climate action. Recently, trade and investment agreements have included environmental provisions, but their effectiveness remains controversial. Concurrently, the energy and mining sectors account for a significant 40–50% of the disputes brought before the International Centre for Settlement of Investment Disputes each year. In this context, investor-state dispute settlement (ISDS) is a particularly controversial instrument and raises strong questions related to its influence on energy governance. The chapter underscores how energy justice can offer a powerful vantage point for evaluating the functioning of ISDS. Then, it argues for the urgent need to reform the architecture of ISDS to bring it into line with the principles of energy justice, in view of considering international investments as an appropriate lever for global energy-climate transitions. This includes a call for improved transparency and active engagement with local actors to redress the procedural, distributive, and restorative imbalances that currently characterise ISDS awards.

1 Introduction—Investor-State Dispute Settlement Read Through Energy Justice Lenses: Why It Matters, and Why Now

While trade and environment are tightly linked,¹ the question of institutionalising this link and operationalising it for climate action remains an open arena if not a battleground amongst legal practitioners, academics, and wider society. The issue is acute for energy, where fundamental and systemic transformations towards a zero-carbon transition affect market distances, material flows, and investment regimes, in the hope of building a new, sustainable, and just system. Could international investment law be a platform to diffuse and improve environmental standards? Or are comprehensive trade agendas practically incompatible with net-zero transformations?

Recent years have shown a mounting number of environmental provisions in trade agreements.² Yet, seminal research on large datasets has shown that their promotion answers a range of offensive and defensive narratives, largely expanding environmental protection.³ Entering such enquiry thus reveals that, while such legal mechanisms could help escaping an international “carbon entanglement”,⁴ they also manifest a “legal entanglement” as they refrain from proposing path-breaking regulatory innovations, and partake in a fossil status quo lock-in. This is one clear reason why it is high time to convene energy justice analyses.⁵ This chapter links with the growing literature considering concrete pathways to implement energy justice tenants across society and disciplines,⁶ building on a whole systems approach of energy matters.⁷ It investigates the Investor-State Dispute Settlement (ISDS) system, as found in bilateral and multilateral treaties. ISDS raises sharply contrasting views: considered either a potential solution to prompt sustainable investment,⁸ or an environmental threatening bargain.⁹ Highly controversial, it poses a major conundrum: are dispute-settlements just, and if yes, to whom?

ISDS originated from a demand for legal protection of foreign investors when entering agreements with less developed countries. Its initial purpose was to secure investors’ rights by enabling them to seek legal protection outside national courts, in the event of impetuous State actions jeopardising previous investments. The first agreement with ISDS was the Energy Charter Treaty (ECT) in 1994.¹⁰ However, gradually, these mechanisms entered into agreements between equally developed countries, companies claiming financial compensation for stranded assets, even before the start of projects.¹¹ Consequently, investors have filed under NAFTA, the ECT or bilateral treaties to oppose environmental impact assessments (Clayton/Bilcon v. Canada; Gabriel Resources v. Romania) or new environmental legislations (Lone Pine Resources Inc. v. Canada, Vattenfall v. Germany). Mining infrastructures have caused many lawsuits, 20% of which were fossil related in 2022. Moreover, while more renewable-related cases¹² could lead to ISDS being seen as an effective countermeasure to political risk, prompting sustainable acceleration, there is little evidence of such uptake. Whether ISDS money would be reinvested in renewable energy is also “not guaranteed to occur.¹³”

Underpinning (re)production of injustices in energy decisions, ISDS marks asymmetries amongst State and non-State actors and outlines a questionable upscaling of energy governance through external arbitration, and the use of international law as a tool for energy transition. The energy justice angle thus provides a powerful framework for critical assessment and to propose necessary directions for change, just as the European Commission discusses the modernisation of the ECT, criticised for its climate inadequacy and tacit inducement of extractive investments.

2 How Can the Power of Energy Justice Transform Investor-State Dispute Settlement Issues? Outlining Current Injustices in the Arbitration System

Energy justice provides a powerful kaleidoscope for examining ISDS workings. Three main dimensions are mapped here.

Firstly, it calls for a holistic understanding of ISDS effects, across sectors, time, and space. Injustices can be termed under a “lower-delay-abandon” triptych, inducing environmental regulatory chills. Although not formally defined, regulatory chill refers to the threat of financial sanctions and the lengthy process that investors impose on states, as intimidating. Accordingly, States tend to postpone legislation to avoid trials and fees. Such finding is significant, as it suggests that arbitration mechanisms practically affect domestic legislation, whereas trade law should guarantee the States’ right to regulate. Furthermore, countries are not equally vulnerable to financial risk, particularly in the Global South, also more dependent on foreign investments to develop renewable energy.

Secondly, ISDS challenges procedural justice through embedded power and regulatory asymmetries, and tangled access to justice. While ISDS offers protection to investors, it does not impose obligations on them nor allow States to prosecute. Moreover, cases revolve around an elite, limited number of arbitrators also allowed to represent claimants in other cases. Furthermore, while dealing with localised energy projects, ISDS mechanisms belittle the voice of local and regional entities by standardising procedures at a higher administrative level. For instance, in Canada, the Clayton/Bilcon case revealed that because local and provincial environmental assessments were not conducted according to a standard procedure validated by the federal government, their information could not be used in ISDS arbitration, thus challenging democratic values of participation, transparency, and accountability. Campaigning against CETA, several Canadian municipalities passed anti-ISDS motions, but without binding force, such were not considered. Finally, by removing disputes from national jurisdictions, ISDS questions the rationale of bringing energy governance to deterritorialised jurisdictions.

Thirdly, ISDS undermines distributive justice through investment allocation, territorial siting of projects, and disproportionate bearing of social and environmental costs, particularly associated with energy production infrastructures. Still, the cases are decided without a multi-scalar and territorial perspective, and the sanctions could lead to divert public funds away from climate action. Subsequently, ISDS judgements question the recognition, cosmopolitan, and restorative dimensions of justice, whether in terms of communities’ access to advocacy during litigation, or compensation after harmful decisions.

3 Conclusion—Ensuring Energy Justice in Investor-State Dispute Settlement System

While changes are needed, several challenges need to be addressed to transform these injustices. It is essential to clarify the normative links between trade and environment to avoid vagueness and labile interpretations of treaties. For example, in CETA, the same investment chapter was used to defend oil trade with Europe and to advance Canada’s green economy by favouring European assets over provincial anti-windfarm decisions.¹⁴ There should be no creeping uncertainty about the climate allegiance of these mechanisms, which means repoliticising and respatialising their operation.

Then, better transparency and reporting are needed as ISDS remains a largely behind-closed-doors process making it difficult to know cases or their content.¹⁵ Alternatively, in the view of taking ISDS as effective sustainable solutions, social acceptability is key,¹⁶ and one way for that is to strengthen citizens’ role and access to information.¹⁷ For critical scholars, the question yet remains whether ISDS should be the primary tool and international arenas the right scale for governing foreign investments with significant territorial implications.

Finally, drastic innovation claims are expressed as to move away from old visions of State overreach through ISDS and out of a system inducing “implicit [fossil] subsidies¹⁸”, such as a multilateral termination agreement.¹⁹ Building an energy justice vision into this system would be crucial for the overall evolution of society towards a just transition to a low carbon economy. It points out to regulating investments while in free trade systems and challenging all existing legal mechanisms to effectively participate into curbing extractive economic routines. This is why ISDS reform must contribute to building a new social contract around energy, involving fundamental economic and governance issues,²⁰ starting with disclosure of information and fair access to justice.