On 5 September 2022, the United Nations Conference on Trade and Development (UNCTAD) released a new IIA Issues Note analysing climate change-related provisions in existing treaty practice and offering various reform policy options for drafting climate-responsive International Investment Agreements (IIAs).
The Issues Note further refers to the 24 June 2022 Agreement in Principle on the modernisation of the Energy Charter Treaty (ECT) and its provisions relevant for the protection of the environment, climate action and sustainable development, concluding that it is “of systemic relevance for IIA reform and climate action”. The ECT, with more than 50 Contracting Parties including the EU/Euratom, is not just an investment agreement (considered as a risk mitigation mechanism for investments in the energy sector by institutions such as the World Bank Multilateral Investment Guarantee Agency, MIGA) but also regulates energy transit, transfer of technology, environment, and other key aspects of international energy cooperation.
The Agreement in Principle not only implements most of the reform policy options suggested by UNCTAD as relevant for climate action, but it could also be considered the first coordinated multinational effort to successfully implement a comprehensive review aligned with the Paris Agreement. Some of the relevant provisions of the Agreement in Principle (in addition to the application of the UNCITRAL Rules on Transparency and provisions on security for costs, frivolous claims and valuation of damages) are:
Agreement in Principle
· Additional wording in the Preamble and throughout the Treaty on the Contracting Parties’ right to regulate in the interest of legitimate policy objectives.
· Introduction of the “Flexibility Mechanism” based on the Principle of “Common But Differentiated Responsibilities” underpinning the Paris Agreement, allowing the Contracting Parties to exclude investment protection of some energy materials and products, or activities, based on their energy security and climate goals.
· As of 15 August 2023, no new Investments in fossil fuels will be protected in the territory of some Contracting Parties.
· Scope of protected investments under the ECT reviewed every five years to update it to the evolving needs of Contracting Parties and society as well as to technological developments.
Right to regulate for climate action
· Stand-alone article on the right to regulate in the interest of legitimate policy objectives, including climate change mitigation and adaptation.
· A list of which measures or series of measures constitute a breach of the Fair and Equitable Treatment, providing more legal certainty and clarifying the scope of legitimate expectations.
· As a general rule, non-discriminatory measures that are adopted to protect legitimate policy objectives, including climate change mitigation and adaptation, do not constitute indirect expropriation.
· The current non-derogation clause from any other agreement more favourable to Investors is removed.
Investor obligations and responsibilities
· Contracting Parties will promote adherence to international standards and principles of responsible business conduct among the Investors.
· Further clarifies and strengthens the provisions on environmental impact assessment of energy investment projects, ensuring higher level of environmental protection and wider public participation.
· An Investment must be made or acquired in accordance with the applicable laws of a host Contracting Party, and protects only Investors with substantial business activities in a Contracting Party.
Climate change and investment governance
· Contracting Parties reiterate their commitment to promoting international trade and investment in the energy sector in a manner that would contribute to the objectives of sustainable development and responsible business practices.
· Contracting Parties will not encourage international trade and investment in energy by lowering their respective environmental and labour protection laws and standards.
· Reaffirms the respective rights and obligations of the Contracting Parties under multilateral environmental agreements, such as the UNFCCC and the Paris Agreement.
· The first dedicated dispute settlement mechanism for disputes between Contracting Parties regarding the provisions on sustainable development.
· Transparency of environmental regulations.
Promotion and facilitation of sustainable investment
· Reaffirmation of Contracting Parties’ commitment to clean energy transition, promotion of low-carbon technologies in energy trade and investment, and cooperation in implementing climate change-related policies, where appropriate.
· Promoting access to and transfer of technology
Following the completion of an editorial and legal review, the draft text has been communicated to the Contracting Parties and is expected to be adopted by the Energy Charter Conference on 22 November 2022.