ARBITRATION AND CLIMATE CHANGE: ENVIRONMENTAL DISPUTES

ABSTRACT

Alternative dispute resolution (ADR) is a broad range of conflict resolution procedures that assist parties in resolving disagreements outside of court. It is also known as external dispute resolution (EDR). Environmental law, a field primarily concerned with the effects of human activity on the environment, addresses issues such as pollution, climate change, and overuse of natural resources. These complex and challenging issues affect various groups and individuals, making resolution difficult. However, ADR mechanisms provide a quick and expert-based solution to these disputes. As the complexity of environmental conflicts grows, arbitration becomes increasingly important in resolving these disputes. This article provides a broad explanation of the connection and ever-evolving nature of environmental disputes solved through arbitration. Arbitration has become an increasingly popular means of resolving disputes relating to climate change. This chapter examines the procedural matters in environmental protection-related interstate arbitrations, examining the treaties, protocols, and cases regarding arbitration.

KEYWORDS

ICC, Dispute Resolution, Arbitration, International Arbitration Climate Change, Environmental Disputes, ADR, arbitrator, arbitral tribunal, award, justice, order.

INTRODUCTION

Global warming and climate change are the two most important challenges that require people’s immediate attention. It is becoming more and more apparent that global warming is happening. The need to solve climate change has not decreased but rather increased in urgency even while the world economy has struggled with the consequences of the COVID-19 pandemic. In addition to meeting human needs, environmental conservation must be prioritised. Numerous overlooked strategies have the potential to play a big role in slowing down global warming. Several of the individuals being selected are familiar with arbitration when it comes to certain topics. Arbitration and other alternative dispute resolution procedures are used to determine commercial issues, investment treaties, and many other types of matters. There are currently well over 1,600 cases relating to climate change that have been started, and the number is still growing.

Although we relate climate change to international arbitration, it is not surprising to learn that, similar to business concerns, problems related to climate change are likewise of utmost importance. The arbitral institutions have taken a number of actions that clearly demonstrate how international arbitration is broadening its approach to address the problem of global warming. In addition to the tribunals’ rulings, different accords and campaigns must be implemented in order to reduce the severity of the environmental problems. Because climate change issues are significant to the general public, arbitrators are also interested in them.

Nonetheless, environmental conflict resolution is a suitable stand-in for climate change dispute resolution from an analytical standpoint because to the close relationship between climate challenges and environment legislation, and therefore between related disputes. Empirically, State-to-State arbitration practice attests to arbitration’s ability to settle international disputes including environmental issues. Famous, precedent-setting arbitrations pertaining to environmental damages were held in the Trail Smelter[1] and Lake Lanoux cases[2].

International environmental law principles are taken into consideration in the Indus Waters award[3], while environmental law is heavily referenced in the Iron Rhine matter award[4].

WHAT ARE CLIMATE CHANGE RELATED DISPUTES?

The legal environment is changing in a world where the climate issue is not merely banging on our doors, but shattering them. The confluence of climate change and international arbitration is evolving into a crucial arena of contention.

Climate change is not only a separate issue; it is multifaceted, connected to the economy, trade, science, technology, diplomacy, and politics, and it can be the root of many other problems. Due to the interdependence of our ecosystems and communities, even minor changes have the potential to have an impact on all living things, making it an innately global issue. It is distinct from other issues that humanity has encountered and forces us to adopt new perspectives on a variety of topics. Since the term “climate change” is so wide, disagreements that arise in these situations might take many different shapes.

Climate change is defined by the United Nations Framework Convention on Climate Change (“UNFCCC”).[5]

A shift in climate that is not influenced by natural climate variability brought on by human activity and that can be directly or indirectly connected to human activity. It also changes the composition of the global atmosphere.

The ICC Taskforce 2019 report provided a detailed account of issues pertaining to climate change, stating:

It is possible that disagreements will emerge on how to deal with the consequences of climate change, how policies are implemented in response to it, the UN Framework Convention on Climate Change, and the United Nations Paris Agreement, all of which are affected by it.

These kinds of disputes are for example claims for damages against large oil and gas companies on the basis that these companies produce and distribute products that are directly related to greenhouse gas (GHG) emissions.

Appropriate conflict resolution methods to settle issues that may arise from these initiatives as well as from actions related to the climate change agenda must unavoidably be taken into consideration, especially in light of the growing awareness of and efforts made to address climate change. Accordingly, the following sources have been noted by the ICC Commission Report as potential causes of conflicts pertaining to climate change:

Disputes arising out of specific transition, adaptation or mitigation contracts

Contracts relating to the adoption of new systems to prevent or lessen the consequences of climate change, the concept of “climate-resilient” projects (i.e., adaptation) and the concept of “low emissions” (i.e., mitigation) give rise to certain disputes. These contracts are directly tied to the United Nations Framework Convention on Climate Change. This includes agreements like those about switching to new systems, such as ones with low emissions that are designed to reduce the adverse impacts of climate change.

In the case of RWE AG and RWE Eemshaven Holding II BV v Kingdom of the Netherlands[6], in 2021, RWE, a German investor, filed an arbitration claim under the ECT with the International Centre for Settlement of Investment Disputes (ICSID) against the Netherlands. The RWE alleged that the Netherlands government did not provide sufficient resources and time for shifting out of coal, in contradiction to the ECT regulations. Under the ECT Treaty, foreign investors can arbitrarily recover unjust losses originating from government regulations from governments. The Netherlands wants to phase eliminate all coal-fired power facilities by 2030, but according to RWE, this won’t provide enough money to switch to biomass. The main points of contention are the ECT state’s authority to control environmental matters and the ECT member states’ duty to abide by the terms of the treaty.

Disputes arising out of contracts which do not specifically relate to transition, adaptation or mitigation

Every business activity and contractual relationship can be adversely affected by the environmental effects of global warming, mitigation or adaptation measures, and/or the transition of energy and other systems. Therefore, contracts that do not specifically address climate change or possess no immediate impact on it may exist prior to the Paris Agreement. The Paris Convention has established a correlation that will aid arbitral institutions in achieving their objectives. The Paris Convention’s objective is relevant to the pursuit of “greener arbitration.” Working on both of them would therefore improve the outcome on both fronts. It would not only make things easier, but also inspire other businesses to follow suit.

Disputes where the parties have agreed to submit to arbitration after the dispute has arisen (i.e. Submission Agreements):

The following situation would serve as an example of this kind of dispute: “A local indigenous population of subsistence farmers, the fishermen, and associated small businesses situated within and around a new REDD+ verified forest carbon project location and surrounding coastal region sue the foreign investors in the project and the nation that hosted it in the local tribunals, alleging breach of constitutional, indigenous, and other human rights and in tort against the foreign investor.” A submission agreement may require the parties to reach an agreement to have those disputes settled in a single, specialized venue.

The measures implemented by ICC help the organization achieve its objective on a large scale. It is clear from the task force’s execution that arbitration has made it possible to protect the environment in addition to settling disputes. Reducing global warming is not an easy or complicated procedure. Although it might take some time, the arbitration industry will succeed if everyone works together in various ways.

ARBITRATION AS A TOOL TO RESOLVE ENVIRONMENTAL DISPUTES

Environmental disputes have become increasingly complex and urgent, making traditional courts ineffective. Arbitration is a faster, more effective, and less time-consuming method of dispute resolution, potentially relaxing the burden on constitutional courts. Arbitration can help mitigate environmental damage through contractual obligations and is particularly suitable for environmental-related disputes. Parties can choose their arbitrator, appointing an expert in environmental science, ensuring a more sensitive outcome. The process is speedier, allowing quick action to avoid irreversible damage to the environment. Public participation through amicus curiae and third-party participation ensures public interests are taken care of. Arbitration’s ability to customize itself makes it advantageous for resolving environmental disputes. The virtual nature of arbitration during the Covid-19 pandemic ensures the commitment of mankind towards environmental conservation.

Internationally, there is growing awareness of arbitration as a preferred method for resolving environmental disputes. The Permanent Court of Arbitration has made changes to its rules to incorporate arbitration procedures, while the New York Convention on Enforcement of Arbitral Awards[7] ensures award enforcement. The International Chamber of Commerce (ICC) task force published a report in 2019 examining the potential role of arbitration in climate change-related disputes. The dispute resolution clause of the Paris Agreement refers to the dispute settlement clause in the UN Framework Convention on Climate Change, which enables parties to declare that they accept arbitration in accordance with the procedures to be adopted by the Conference of the Parties of the UNFCCC. Other climate change protocols, such as the Montreal Protocol and the UN Convention on the Law of the Sea, also provide arbitration mechanisms.

According to Article 14 of the United Nations Framework Convention on Climate Change (“UNFCCC”)[8], parties must first attempt to reach a settlement through negotiation or another form of peaceful conflict resolution. Sub article (2) allows parties to announce their agreement to bring the matter to arbitration in line with the processes to be determined by the Conference of the Parties (COP) in an arbitration annex, or to submit it to the International Court of Justice.

In India, arbitration has been used to resolve environment related disputes. The prominent amongst these has been the Kishenganga Hydroelectric Project in the erstwhile State of Jammu and Kashmir. Pakistan took India to arbitration at Permanent Court of Arbitration.

Arbitration’s role in resolving disputes relating to climate change has expanded significantly over time. For instance, over 70% of all new arbitration claims in 2018 had to do with conflicts pertaining to climate change and were scheduled for resolution by the International Chamber of Commerce.

The most impactful instance of using the arbitration process to address an environmental problem is the 2015 Paris Climate Change Agreement[9]. A total of 195 nations participated in the conference on climate change held by the United Nations in Paris, where they negotiated a framework for reducing emissions and taking coordinated action. UN Secretary Ban Ki-moon referred to the signing of the Paris Climate Change Agreement by the signatory countries as a “monumental triumph for people and our planet.” It was a significant step in uniting nations and transforming the earth into a far more ecologically pleasant place.

The International Covenant on the Recognition and Enforcement of Foreign Arbitral Awards (1958)[10], which permits the cross-border recognition and enforcement of arbitral awards, also provides arbitration with global scope, according to the ICC Report. Furthermore, “accessibility of the tribunal, and the expertise and flexibility as to where an arbitration is hosted” would be beneficial in matters associated with climate change.

In November 2019 and January 2020, respectively, Paris and New York hosted the release of the report by the ICC Task Force on the Arbitration of Climate Change Related Disputes. More than a hundred people from various organizations and industries made up the Task Force, among them Kirsten Odynski from White & Case LLP. The Task Force outlines issues connected to climate change in its Report and then examines the role that arbitration can play in resolving those disputes.

CASES BEFORE THE ARBITRATION TRIBUNAL CONCERNING DISPUTES ASSOCIATED WITH CLIMATE CHANGE

In 2023, the Republic of Azerbaijan initiated arbitration proceedings against Armenia under the Bern Convention on the Conservation of European Wildlife and Natural Habitats. The pollution, deforestation, and other injuries to the biodiversity of the Caucasus Mountains that were purportedly perpetrated by Armenia during its “illegal occupation” have given rise to the first documented interstate arbitration under treaty.
Two American investors asserted in the ICSID arbitration case of Latam Hydro LLC and CH Mamacosha SRL v. Peru[11] that Peru had promised to support their foreign investment in the renewable energy industry. Nevertheless, Peru severely damaged the finances of the renewable energy projects they were participating in, thus this did not happen.A 2019-initiated ICSID arbitration in this case, may be interesting to watch as a future precursor of how investment arbitral tribunals could approach cases regarding renewable energy projects in Latin America. An increase in state regulation and investor-state arbitrations may lead to additional commercial disputes, given the interconnected nature of many commercial relationships and projects in the energy sector.
In the case of Eco Oro Minerals Corp v. Republic of Colombia[12], it was decided that, depending on the relevant legislation and the lack of an environmental exception clause, investors may have more room for claiming that the enactment of new, more stringent environmental requirements cannot be justified by legitimate expectations of a stable regulatory framework, rather than the standard of arbitrariness.

RECENT DEVELOPMENTS

In 2022, investor-state arbitration and international commercial arbitration were impacted by the ongoing concern over climate change and newly implemented environmental regulations and norms, including Environmental, Social, and Governance (“ESG”) policies. This trend is expected to continue in 2023 as environmental concerns become more common. In fact, the first known inter-state arbitration under the Bern Convention on the Conservation of European Wildlife and Natural Habitats had been announced by Azerbaijan in early 2023. The arbitration was reportedly sparked by deforestation, pollution, and other damages to biodiversity in the Caucasus Mountains, which Armenia was allegedly responsible for during its “illegal occupation.”

The news headlines surrounding the Energy Charter Treaty (“ECT”) recently serve as one illustration of how environmental issues affect arbitration. Despite the fact that new language for modernising the ECT had been suggested in 2022 (and that a vote on these modifications was delayed until April 2023 due to rumours that EU Member States could not agree on anything), the mass departure of European nations in 2022—including Spain, France, the Netherlands, Germany, and Poland—has raised questions about the future of the ECT and its potential effects on climate change.

CONCLUSION

Simply put, the danger of conflicts relating to climate change is now a reality for corporations. Although national courts have heard the majority of legal challenges to far, arbitration plays a significant role as a forum for resolving issues pertaining to sustainability and climate change. In fact, arbitration may end up becoming a crucial tool for enforcing environmental laws and regulations. Arbitration is becoming a popular means of resolving issues pertaining to climate change. This is a positive trend since arbitration, as a quick dispute resolution method, enables environmental restoration by quickly addressing conflicts pertaining to climate change.

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[1] Trail Smelter Arbitration (United States of America v Canada) (1941) 3 RIAA 1905

[2] Lake Lanoux Arbitration (France v Spain) (1957) 12 RIAA 281; 24 ILR 101.

[3] Indus Waters Kishenganga Arbitration (Pakistan v India), PCA Case No 2011-01, Award (20 December 2013).

[4] Iron Rhine Railway Arbitration (Belgium v Netherlands) (2005) 27 RIAA 35

[5] United Nations Framework Convention on Climate Change – Signing Date 12th June, 1992

[6] RWE AG and RWE Eemshaven Holding II BV v Kingdom of the Netherlands —- ICSID Case No. ARB/21/4

[7] New York Convention on Enforcement of Arbitral Awards Signing date – 10th June 1958

[8] United Nations Framework Convention on Climate Change, Article 14 – Signing Date 12th June 1992

[9] Paris Climate Change Agreement, Signing Date 22^nd April, 2016

[10] The International Covenant on the Recognition and Enforcement of Foreign Arbitral Awards, Signing date- 10th June, 1958

[11] Latam Hydro LLC and CH Mamacosha SRL v. Peru, ICSID Case No. ARB/19/28

[12] Eco Oro Minerals Corp v. Republic of Colombia, ICSID Case No. ARB/16/41

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