UNCTAD | 30 August 2023

Energy transition calls for faster investment treaty reforms

Sweltering heatwaves each year underline the need for a faster energy transition and speedier reform of International investment agreements (IIAs) to support the shift away from fossil fuels.

To reach net zero emissions by 2050, annual clean energy investment worldwide needs to more than triple to $4 trillion by 2030.

But many investment treaties, especially older ones, can hinder the transition. As countries try to cut ties with fossil fuels, oil and gas firms might use these treaties to challenge policy changes. An example is a coal phase-out claim against the Netherlands.

"Governments and the international investment community should intensify their efforts to reform investment treaties in support of the energy transition and to minimize risks of expensive legal disputes," says Hamed El-Kady, who heads UNCTAD’s international investment agreements section.

UNCTAD has developed a toolbox to help countries transform IIAs to better support the energy transition.

Old agreements hinder regulation

Most IIAs belong to the “old regime”, as more than 89% of the 2,584 treaties currently in force were signed before 2012.

These old-generation IIAs are behind almost all publicly known investor–State dispute settlement (ISDS) cases, according to a new UNCTAD report.

Investors in both fossil fuels and renewable energy often turn to investment arbitration, together accounting for about 25% of ISDS cases.

The ISDS mechanism was designed to protect foreign investors from “excessive” government action. But it is also limiting countries’ abilities to regulate, even when pursuing legitimate public policy objectives, such as promoting renewable energy.

Fossil fuel and renewable energy cases

Fossil fuel investors have initiated over 15% of all known treaty-based ISDS cases.

A recent high-profile example is the RWE v. Netherlands case. German energy company RWE, the owner of coal-fired power plants in the Netherlands, has brought claims against the government following its decision to ban the burning of coal for electricity by 2030 in line with the country’s Paris Agreement commitments.

Renewable energy is also in the legal spotlight. At least 8% of cases relate to cuts in clean energy incentives. These often concern feed-in-tariffs – a policy mechanism used to make renewable energy prices more competitive – like those used to boost solar energy investments. One such case is Infracapital v. Spain.

While the cases cited were brought against developed countries, the same risks exist for developing nations.

About 85% of the IIAs that are in force involve at least one developing country and create binding obligations for their governments that are enforceable through ISDS.

A new toolbox

UNCTAD’s new toolbox centres on four action areas.

• Promoting and facilitating sustainable energy investment: Novel IIA provisions that actively pursue such investment don’t need to be subject to investor–State arbitration. Countries could commit to measures such as removing obstacles for technologies and services in the renewable energy sector and offer preferential terms for such investments.

• Technology transfer and diffusion: States can cooperate on the transfer of sustainable technologies by explicitly including such provisions in IIAs. Regarding the protection of intellectual property rights, treaty parties should ensure that flexibilities available under the World Trade Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) can be used under IIAs and in ISDS cases.

• The right to regulate for climate action and the energy transition: Countries can refine investment protection standards to provide regulatory flexibility and exceptions for climate and energy concerns.

• Corporate social responsibility (CSR): IIAs can include binding CSR guidelines and help foster CSR compliance, particularly by requiring energy investors to adopt sustainable investment practices.

“To utilize the new toolbox effectively, countries can amend or renegotiate current treaties,” Mr. El-Kady says.

Countries can also terminate an IIA without replacing it, and it’s possible to do so on a unilateral basis. The toolbox says that countries can pursue the option of termination alongside attempts to negotiate a new agreement.

World Investment Forum

The toolbox will be in the spotlight at UNCTAD’s World Investment Forum to be held from 16 to 20 October in Abu Dhabi, alongside other concrete solutions to reform the IIA regime to increase investment in sustainable energy and tackle the global climate crisis.

The outcomes of the forum will feed into negotiations at the annual climate summit (COP28) scheduled to start in late November in Dubai.