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Scottish Centre for International Law Working Paper Series Climate Compatible Investment Treaty Law: The Role of Legitimate Expectations Laura Isotalo Working Paper No. 6 The purpose of the Scottish Centre for International Law Working Paper Series is to promote the dissemination of international legal scholarship produced by researchers associated with the Scottish Centre for International Law. The material contained in the papers will often be work in progress. Authors of the working papers would welcome comments and suggestions on the content of their papers. This text may be downloaded for personal research purposes only. Any additional reproduction for other purposes, whether in hard copy or electronically, requires the consent of the author(s). This paper may not be cited or quoted without the permission of the author. Scottish Centre for International Law Working Paper Series – Do not cite without the consent of the author Climate Compatible Investment Treaty Law: The Role of Legitimate Expectations Laura Isotalo* Abstract: This paper considers the interplay between investment treaty law and climate change regulation, recognising both the need to allow sufficient space for States to take measures against climate change as well as the role investment law has in protecting low- carbon investment. A particular point of focus is the principle of legitimate expectations as it appears in the standard of fair and equitable treatment. An attempt will be made to provide a coherent and suitable framework for the application of this principle, which also promotes compatibility with climate law. 1. Introduction It has been a growing concern for a while that the legal instruments adopted for the purpose of climate change mitigation are in tension with certain other areas of international law.1 International investment law is one such an area of tension, as the economic interests of investors may be affected by measures taken in an effort to reduce greenhouse gas emissions. One aspect that makes the tension with investment law particularly prevalent is the practice of investor-State arbitration which allows individual investors to protect their interests at the international level by challenging the treatment they have received in the hands of capital- importing states. There is a wealth of literature concerning the potential for foreign investors to challenge domestic climate laws in investment treaty tribunals and thus severely undermine the battle against climate change. 2 Sometimes this concern has resulted in recommendations that investment protection should be scaled back.3 * LL.M (Law School, University of Edinburgh); LL.B (University of Hull). This working paper is based upon a dissertation written for the LLM in Law and Chinese at the University of Edinburgh School of Law. Contact email: [email protected]. 1 See e.g. T. Cottier et al (eds), International Trade Regulation and the Mitigation of Climate Change (Cambridge University Press, 2009); R. Leal-Arcas, Climate Change and International Trade (Edward Elgar, 2013); S. Humphreys (ed.), Human Rights and Climate Change (Cambridge University Press, 2009). 2 See e.g. K. Miles, 'Arbitrating Climate Change: Regulatory Regimes and Investor-State Disputes' (2010) 1 Climate Law 63; Freya Baetens, 'Foreign Investment Law and Climate Change: Legal Conflicts Arising from Implementing the Kyoto Protocol through Private Investment,' Sustainable Development Law on Climate Change Legal Working Paper Series 01 (December 2010). 3 See e.g. F. Marshall, 'Climate Change and International Investment Agreements: Obstacles or Opportunities?,' IISD Trade, Investment and Climate Change Series (March 2010) 66. 2 Scottish Centre for International Law Working Paper Series – Do not cite without the consent of the author On the other hand, some commentators have recognised the role of investment treaty law in protecting climate friendly investment.4 The current investment climate for low-carbon projects is not always stable and transparent but may be subject to high levels of uncertainty and risks of policy changes. Many climate friendly investments also operate in the field of energy production or may involve other long-term, high-risk projects such as carbon capture and storage. Investors are likely to rely on government incentives and favourable policies when making calculations of risks and profit and deciding to invest. International investment law certainly has an important role to play in increasing investor confidence. This paper looks into one particular principle of international investment law that has been the subject of much controversy: the doctrine of legitimate expectations. This principle is generally seen as the dominant element of one of the most widely invoked treaty provisions: the standard of fair and equitable treatment (FET). Whilst the exact contents of FET are not completely clear, it is a provision that could potentially be applied to a vast number of situations.5 In addition to legitimate expectations, it is frequently interpreted as encompassing other elements such as stability, transparency, due process, prohibition on denial of justice, arbitrariness and abusive treatment.6 The view adopted in this paper is that legitimate expectations are the key element of fair and equitable treatment and perform an important role in the balancing of investor and host State interests. Yet its application in current arbitral practice suffers from incoherence, resulting in legal uncertainty. At the same time, the whole institution of investor-State arbitration is said to suffer from a legitimacy crisis, resulting from the failure of tribunals to take into account non-investment related political and social goals of host States.7 In the light of the dual function of climate change law in both introducing legal constraints on carbon-intensive industries, as well as incentivising low-carbon investment, it is submitted that the best way for international investment law to support the achievement of these goals is to adopt a balanced, consistent and predictable interpretation of the relevant investment treaty provisions. To this end, the aim of this paper is to clarify the functioning of 4 A. Boute, 'Combating Climate Change Through Investment Arbitration,' Fordham International Law Journal 35 (2012 2011): 613; A. Boute, 'Combating Climate Change and Securing Electricity Supply: The Role of Investment Protection Law,' 16(8) European Environmental Law Review (September 2007) 227. 5 In general, see e.g. R. Klaeger, Fair and Equitable Treatment in International Investment Law (Cambridge University Press, 2011); I. Tudor, The Fair and Equitable Treatment Standard in International Investment Law (Oxford University Press, 2008); M. Paparinskis, The International Minimum Standard and Fair and Equitable Treatment (Oxford University Press, 2014). 6 United Nations Conference on Trade and Development, 'Fair and Equitable Treatment,' UNCTAD Series on Issues in International Investment Agreements II (2012) xvi; Tudor (n5) 154-180. 7 See e.g. discussion in E. M. Leonhardsen, 'Looking for Legitimacy: Exploring Proportionality Analysis in Investment Treaty Arbitration,' 3(1) Journal of International Dispute Settlement (March 1, 2012) 95, 110. 3 Scottish Centre for International Law Working Paper Series – Do not cite without the consent of the author the principle of legitimate expectations under the FET standard, so that it may be used to protect low-carbon investments from undue interference but still maintain sufficient regulatory space for governments to adopt suitable climate legislation to control greenhouse gas emissions. Section 2 will justify the use of legitimate expectations in the interpretation of FET. For the purpose of separating investor expectations deserving of judicial protection from those that are merely subjective and unjustified, section 3 will then highlight the conditions required for expectations to be considered ‘legitimate’. In light of the deference due to sovereign regulatory powers of States and the balance required by the goals of climate change laws, section 4 will discuss a suitable balancing method, taking some inspiration from the common law treatment of legitimate expectations. It will be suggested that proportionality analysis is the best and most analytically sound option. Finally, this paper will suggest some ways to improve the application of proportionality analysis by investment treaty tribunals, with a particular regard to the climate change context. 2. Legal basis for legitimate expectations in FET 2.1 Preliminary issue: FET and the international minimum standard This paper is primarily concerned with fair and equitable treatment as an independent treaty standard. However, as a preliminary matter, the connection between fair and equitable treatment and the ‘customary international law minimum standard of treatment of aliens’ must be clarified. FET clauses appear in investment treaties in a number of different formulations. Most treaties merely provide for an obligation of fair and equitable treatment without further guidance.8 Some include that this treatment must be in accordance with ‘the principles of international law’9 and some further refer to ‘customary international law.’10 According to an OECD summary, 11 the debate on the meaning of these formulations concentrates mainly on whether the conduct of the host State is measured against: i) FET as an autonomous treaty standard; 8 See e.g. Article IV(1) of the Spain-Argentina BIT; Article 2 of the United