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*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues
No. 296 January 25, 2021
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Riccardo Loschi ([log in to unmask])
*Room to move: Building flexibility into investment treaties to meet
climate-change commitments*
<https://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=1027b5df2c&e=763bcf158c>
* <#m_4575541046202990769__edn1>
by
Rachel Thrasher** <#m_4575541046202990769__edn2>
Science and society speak loud and clear on climate change. Time is running
out, and a massive transformation is needed to align our economic lives
with the world’s climate needs.
Countries worldwide have adopted new laws to incentivize the renewable
energy sector and encourage energy transitions, while discouraging the
reliance on fossil fuels. Concurrently, developing countries, in
particular, must balance this transition with the development needs of
their constituents. These new laws, often called “green industrial policy,”
are also relevant for foreign investors, prompting them to put their money
in green energy while also contributing to the diversification of the local
economy. The World Bank, the IMF and other international institutions have
begun, albeit inconsistently, to support these laws through institutional
policies prioritizing climate-friendly development projects.
But the international investment regime simply lags behind science, society
and even international financial institutions. The vast majority of
investment treaties focus on protecting investment, while remaining neutral
on the impact of that investment. As a result, these treaties discourage
measures favoring climate-friendly (or discouraging climate-harmful)
investment. New treaty language only marginally increases policy
flexibility. Some new treaties address climate change by reaffirming
commitments in various multilateral climate accords (e.g., Brazil-Chile
<https://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=11f4e741ed&e=763bcf158c>,
Ecuador-EFTA
<https://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=0227359a95&e=763bcf158c>).
These provisions demonstrate an encouraging orientation by governments, but
generally do not allow treaty parties to hold each other accountable to
these commitments. Other new treaties contain investment provisions that
tackle climate-change challenges through investment-facilitation
provisions—seeking to increase investment in environmentally friendly
goods and services (e.g., EU-Japan
<https://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=edcb614824&e=763bcf158c>,
EU-Singapore
<https://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=b8e2b43281&e=763bcf158c>).
Facilitation language, however, only goes part of the way and still puts
liberalized investment regimes over governments’ right to regulate key
sectors. Still others preserve the right to roll back certain investment
incentives, even if investors’ interests are adversely affected (e.g., CETA
<https://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=8c4295e243&e=763bcf158c>,
EU-Vietnam
<https://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=b6674ec5a0&e=763bcf158c>),
but they have yet to be tested and often (paradoxically) omit any direct
mention of climate change.
While recent treaties tinker at the margins of traditional investment
commitments, the current regime continues largely to bind policy-makers’
hands in climate-change policy. Three types of international cases
illustrate the legal obstacles that countries face in this respect:
- When countries tie investment incentives to building up the domestic
renewable energy industry through local content requirements, the WTO has
found them in violation of its rules (e.g., Canada-FIT
<https://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=3da7b6dcf4&e=763bcf158c>,
India-Solar
<https://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=0e145df780&e=763bcf158c>,
US-Renewables
<https://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=0ea5f3d679&e=763bcf158c>
).
- When countries put in place (otherwise treaty-compliant) investment
incentive programs for renewable energy, they have faced investor-state
suits when the incentives are too successful, too quickly, and governments
cannot meet both the demands of investors and needs of their domestic
consumers (e.g., *Foresight v. Spain*
<https://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=ca686b7d28&e=763bcf158c>,
*Antaris v. Czech Republic*
<https://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=45d15d2368&e=763bcf158c>
).
- When countries attempt to phase out traditional energy sources (such
as coal), they have been sued by those companies for violating investment
treaty obligations (TransCanada, Westmoreland).[1]
<#m_4575541046202990769__edn3>
This reality has led some countries to withdraw from investor-state
enforcement mechanisms and investment treaties entirely. However, not all
countries have the political power or will to do so. For those countries, a
different approach is needed. Treaties should allow countries to experiment
with climate adaptation policies that promote green industrial growth, and
discourage such climate “bads” as investment in fossil fuels.
Some modest solutions could make meaningful steps toward that goal. First,
countries could agree temporarily to “greenlight” industrial policies that
increase (long term) global competition in the renewable energy industry.[2]
<#m_4575541046202990769__edn4> This approach, modelled after a phased-out
subsidies rule in the WTO
<https://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=590e612f4d&e=763bcf158c>,
would allow countries to provide domestic supports and implement industrial
policies to encourage renewable energy production, thus building up local
renewable energy sectors and making renewable energy more accessible and
affordable in the long-run.
Furthermore, treaties ought to distinguish between policies and protections
for the renewable energy industry and the fossil fuel sector. This
approach, adapted from a fisheries subsidies rule in the Comprehensive and
Progressive Trans-Pacific Partnership
<https://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=972a6829fc&e=763bcf158c>
,[3] <#m_4575541046202990769__edn5> would require countries to treat
investment in fossil fuels differently, removing traditional supports in
the form of subsidies and discouraging countries from strengthening their
own fossil fuel sector through industrial policies. When combined with the
greenlit policies permitting subsidies and other support in renewable
energy, such provisions could create incentives for fossil fuel companies
(and others) to invest in the energy transition effort as well.[4]
<#m_4575541046202990769__edn6>
The road to structural change is long, and we must begin immediately to
align economic and climate goals. Governments must have room to move and
respond flexibly to the needs of their constituents. New treaties must
reflect this reality, taking an approach that allows countries to evaluate
both the short- and long-term impacts of FDI in their economies.
------------------------------
* <#m_4575541046202990769__ednref1> *The Columbia FDI Perspectives are a
forum for public debate. The views expressed by the author(s) do not
reflect the opinions of CCSI or Columbia University or our partners and
supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed
series.*
** <#m_4575541046202990769__ednref2> Rachel Thrasher ([log in to unmask]) is a
Research Fellow and Trade Policy Coordinator at Boston University’s Global
Development Policy Center. The author wishes to thank Kevin Gallagher and
Bill Kring for comments on an earlier draft and Jesse Coleman, Nikos
Lavranos and Peter Muchlinski for their helpful peer reviews. This
*Perspective* is based on chapters 15 and 23 in Lisa Sachs, Lise Johnson
and Jesse Coleman, eds., *Yearbook on International Investment Law and
Policy* (Oxford: OUP, 2018).
[1] <#m_4575541046202990769__ednref3> Lisa Sachs, Ella Merrill and Lise
Johnson, “Environmental injustice: How treaties undermine the right to a
healthy environment,” Bilaterals, Nov. 13, 2019.
<https://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=b61ab3f00f&e=763bcf158c>
[2] <#m_4575541046202990769__ednref4> Thijs Van de Graaf1 and Harro van
Asselt, “Introduction to the special issue: Energy subsidies at the
intersection of climate, energy, and trade governance,” *International
Environmental Agreements: Politics, Law and Economics,* vol. 17 (2017), p.
322.
<https://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=c3db662fd3&e=763bcf158c>
[3] <#m_4575541046202990769__ednref5> Margaret A. Young, “Energy
transitions and trade law: Lessons from the reform of fisheries
subsidies,” *International
Environmental Agreements: Politics, Law and Economics*, vol. 17 (2017), p.
382.
<https://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=db731b2e53&e=763bcf158c>
[4] <#m_4575541046202990769__ednref6> Sarah Keah-Bright and Steivan
Defilla, “Energy Charter Treaty should end protection for fossil
fuels,” *Energy
Post*, Mar. 20, 2019.
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*The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “Rachel Thrasher, ‘Room to move: Building
flexibility into investment treaties to meet climate-change commitments,’
Columbia FDI Perspectives No. 296, January 25, 2021”. Reprinted with
permission from the Columbia Center on Sustainable Investment (*
*www.ccsi.columbia.edu*
<https://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=3a75b23beb&e=763bcf158c>*).”
A copy should kindly be sent to the Columbia Center on Sustainable
Investment at **[log in to unmask]* <[log in to unmask]>*.*
For further information, including information regarding submission to the
*Perspectives*, please contact: Columbia Center on Sustainable Investment,
Riccardo Loschi, [log in to unmask]
*Most recent Columbia FDI Perspectives*
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- No. 295, Stefanie Schacherer, ‘Facilitating investment through IIAs:
The case of the Regional Comprehensive Economic Partnership Agreement,’
Columbia FDI Perspectives, January 11, 2021
- No. 294, Federico Ortino, ‘Taming the chaos in investment treaty
protections,’ Columbia FDI Perspectives, December 28, 2020
- No. 293, Crina Baltag, ‘From investment promotion and protection to
investment regulation,’ Columbia FDI Perspectives, December 14, 2020
*All previous FDI Perspectives are available at *
*http://ccsi.columbia.edu/publications/columbia-fdi-perspectives/*
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*. *
*Other relevant CCSI news and announcements*
- CCSI announces a *call for papers* for the 2020 edition of
the Yearbook on International Investment Law and Policy. Original
contributions to be considered for publication in the Yearbook will be
accepted on a rolling basis until *February 28, 2021.* More information
can be found here
<https://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=850c2568c9&e=763bcf158c>
.
- *CCSI is accepting applications until March 31, 2021* for its
Executive Training on Sustainable Investments in Agriculture, which will
take place online June 15-25, 2021. Please visit our website
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for more information, including on how to apply.
- *CCSI is accepting applications until February 28, 2021* for
its Executive Training on Extractive Industries and Sustainable Development,
which will take place online June 7-18, 2021. Please visit our website
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for more information, including on how to apply.
Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
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Fax: (212) 854-7946
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*Resident Senior Fellow*
*Columbia Center on Sustainable Investment*
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"Multinational Enterprises and the Global Investment Regime: Toward
Balancing Rights and Responsibilities”, “The *WIR* at 30: Contributions to
National and International Policymaking", "An Inventory of Concrete
Measures to Facilitate the Flow of Sustainable FDI: What? Why? How?", "Note
on the Costs and Financing of an Advisory Centre on International
Investment Law", "Insulating a WTO Investment Facilitation Framework from
ISDS", "Advancing Sustainable Development by Facilitating Sustainable FDI,
Promoting CSR, Designating Recognized Sustainable Investors, and Giving
Home Countries a Role", "Making FDI more Sustainable", "The Case for an
Advisory Centre on International Investment Law", "The Potential
Value-added of a Multilateral Framework on Investment Facilitation for
Development", "International Investment Facilitation: By Whom and for
What?" are available at https://ssrn.com/author=2461782 .
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