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Draconian Burdens of the Paris Agreement and ISDS

In June 2017, President Trump announced that the United States, the world’s second-largest carbon dioxide (CO2) emitting country after China,[1] would withdraw from the Paris Agreement.[2] Trump claimed that the international treaty of 195 countries with the aim of mitigating climate change through reduction of greenhouse gas (GHG) emissions including CO2 imposes “draconian” financial and economic burdens on the country.[3] The US Department of State officially informed the United Nations in August 2017 of its intent to withdraw from the agreement as soon as it is eligible to do so.[4]

The earliest possible withdrawal date for the U.S., in accordance with Article 28 of the Paris Agreement, is November 4, 2020, since the provision stipulates that a party may withdraw from the agreement by giving written notification after three years from the date on which the agreement has entered into force (November 4, 2016) and it requires one year for such withdrawal to take effect.[5] President Trump, however, already issued an executive order rescinding and withdrawing those presidential orders, agency guidance and agency orders adopted under the Obama administration to address issues of climate change at domestic level.[6]

Regardless of the Paris Agreement, it is worth noting that the Trump administration is obligated to protect not only domestic GHG emitting industries, but also foreign investors. This would include investors in renewable energy sector, who are guaranteed non-discriminatory, fair and equitable treatment according to those bilateral investment treaties (BITs) and free trade agreements (FTAs) with investment chapters concluded by President Trump’s predecessors but are still in force.[7] BITs and FTA investment chapters provide investors from both Parties the right to initiate investor-state dispute settlement (ISDS) procedures through international arbitration, and the U.S. is party to 50 among over 3000 international investment agreements worldwide.[8]

Spain, in response to the global financial crisis in 2008, decided to scale back its feed-in-tariff (FIT) scheme, which initially guaranteed renewable energy producers a set price for their energy over a fixed period of time, and then faced at least 27 investor-state arbitration claims from foreign investors as a consequence.[9] A tribunal at the International Centre for Settlement of Investment Disputes (ICSID) in Washington, D.C. rendered its award for one of these cases last year, ruling that the Spanish government’s drastic changes in its renewable energy regulatory regime “crossed the line” and violated the obligation to accord fair and equitable treatment to two foreign investors incorporated under the laws of the United Kingdom and Luxembourg respectively.[10] The tribunal found that the two investors were entitled to an award of EUR €128 million (US $140 million).[11]

Foreign investors, especially those in renewable energy sector who have relied on the United States’ commitment to the Paris Agreement, will surely be frustrated by the Trump administration’s decision to scale back its domestic climate change laws and regulations. Taking into account those BITs and FTA investment chapters binding the US government, investor-state arbitration cases involving the Spanish government’s regulatory overhaul are extremely suggestive for those foreign investors. The Office of the US Trade Representative, however, has been a leading proponent of ISDS, boasting the fact that the US government has never lost a single ISDS case to a foreign investor and those agreements with ISDS provisions did not inhibit the US response to the global financial crisis in 2008.[12]

The U.S. will no longer be able to maintain this unbeaten streak under the ISDS mechanism if they continue to disturb reasonable expectations of foreign investors by rescinding and withdrawing climate change laws and regulations despite its continuing obligation under the Paris Agreement to “pursue domestic [climate change] mitigation measures” until full withdrawal from the agreement.[13] Perhaps the Trump administration’s decision to withdraw from the Paris Agreement, not the Paris Agreement itself, will impose more draconian burdens on the US economy with a series of investor-state arbitration cases requiring American taxpayers to pay millions or even billions of dollars for compensating foreign investors in the near future.

Yon Jong Yoon is a staff member of Fordham International Law Journal Volume XLII. He worked as a summer legal intern at the United Nations Commission on International Trade Law (UNCITRAL) Regional Centre for Asia and the Pacific.

This post is a student blog post and in no way represents the views of the Fordham International Law Journal.

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[1] Each Country’s Share of CO2 Emissions, Union of Concerned Scientists (Oct. 11, 2018), https://www.ucsusa.org/global-warming/science-and-impacts/science/each-countrys-share-of-co2.html#.W8oSbhNKjOQ.

[2] Statement by President Trump on the Paris Climate Accord, The White House (June 1, 2017), https://www.whitehouse.gov/briefings-statements/statement-president-trump-paris-climate-accord.

[3] Id.

[4] Communication Regarding Intent to Withdraw From Paris Agreement, U.S. Department of State (Aug. 4, 2017), https://www.state.gov/r/pa/prs/ps/2017/08/273050.htm.

[5] Paris Agreement to the United Nations Framework Convention on Climate Change, art. 28, Dec. 12, 2015, U.N.T.S. I-54113, available at https://unfccc.int/sites/default/files/english_paris_agreement.pdf [hereinafter Paris Agreement]. Alternatively, the U.S. may withdraw from the parent treaty to the Paris Agreement (United Nations Framework Convention on Climate Change), which is considered as also having withdrawn from the Paris Agreement, and this process only takes one year. See Stephen P. Mulligan, Cong. Research Serv., R44761, Withdrawal from International Agreements: Legal Framework, the Paris Agreement, and the Iran Nuclear Agreement 19-20 (2018), available at https://fas.org/sgp/crs/row/R44761.pdf.

[6] See Linda Tsang, Cong. Research Serv., R44807, U.S. Climate Change Regulation and Litigation: Selected Legal Issues 1 (2017), available at https://fas.org/sgp/crs/misc/R44807.pdf.

[7] For a list of BITs and FTAs with investment chapters binding the U.S., see Bilateral Investment Treaties and Related Agreements, U.S. Department of State, https://www.state.gov/e/eb/ifd/bit/index.htm (last visited Oct. 18, 2018).

[8] FACT SHEET: Investor-State Dispute Settlement (ISDS), Office of the United States Trade Representative (Mar. 2015), https://ustr.gov/about-us/policy-offices/press-office/fact-sheets/2015/march/investor-state-dispute-settlement-isds [hereinafter USTR Factsheet].

[9] Kyla Tienhaara, Does the Green Economy Need Investor-State Dispute Settlement?, International Institute for Sustainable Development (Nov. 28, 2015), https://www.iisd.org/itn/2015/11/28/does-the-green-economy-need-investor-state-dispute-settlement/#_edn9.

[10] Eiser Infrastructure Limited and Energía Solar Luxembourg S.à r.l. v. Kingdom of Spain, ICSID Case No. ARB/13/36, Final Award, ¶ 458 (May 4, 2017), available at https://www.italaw.com/sites/default/files/case-documents/italaw9050.pdf.

[11] Id. at 473.

[12] USTR Factsheet, supra note 8. Interestingly enough, however, the current US Trade Representative Robert Lighthizer, nominated by President Trump last year, questioned the need for this well-tested ISDS mechanism. See Phil Levy, Critique of NAFTA Provision Highlights Team Trump’s Misconceptions on Investment Abroad, Forbes (Oct. 23, 2017), https://www.forbes.com/sites/phillevy/2017/10/23/should-team-trump-encourage-investment-in-mexico/#1b6c36e370b4.

[13] Paris Agreement, supra note 5, art. 4(2).