Climate change poses a fundamental threat to humanity,Footnote ¹ representing “an unprecedented challenge of civilisational proportions.”Footnote ² The causes and effects of climate change are now well understood. However, although feasible, effective and low-cost options to mitigate it are available, current global policies are insufficient to keep global warming below 1.5°C.Footnote ³

Climate change is a truly global problem. While all countries contribute to climate change to a greater or lesser extent, it is the totality of these emissions that leads to the current threat of climate change. At the same time, while some countries are more vulnerable than others and some have greater capacity to manage the risks, climate change affects and harms all countries. Ultimately, no country can address this challenge alone. The international community is faced with a classic prisoner’s dilemma that requires international cooperation.Footnote ⁴

While greenhouse gas emissions generally originate from private actors rather than states, states have the responsibility and obligation to prevent, reduce and control greenhouse gas emissions from all sources.Footnote ⁵ At the same time, states are also obliged to implement and promote adaptation policies to mitigate the adverse effects of climate change. This involves regulating activities that lead to or reduce greenhouse gas emissions, as well as activities that hinder or promote adaptation. Private investments can have a negative impact on climate change by leading to additional greenhouse gas emissions, or a positive impact by promoting activities that reduce such emissions. And they can either advance or impede adaptation. This directly affects the relationship between investors and states, and potentially investor-state disputes.

Therefore, it is critical to understand the responsibilities of states under international law with regard to climate change,Footnote ⁶ as this provides an important context for the investor-state relationship—and possibly investor-state disputes.

Considering the development of the modern era of investor-state arbitration since the APPL award in 1990 alongside the conclusion of the UNFCCC in 1992, Anna Joubin-Bret has rightly noted that the two regimes progressed as “two parallel straight lines with little chance to ever cross or meet.”Footnote ¹ Despite the settlement of the RWE arbitration,Footnote ² multiple pending proceedings provide the distinct possibility that they will meet and thus test the applicability of climate law in investor-state arbitration.

The function of interpretation “to give rise to a single set of compatible obligations,” in the words of the ILC, is far from unique to the problem of international investment disputes. Though citing Article 31(3)(c) of the VCLT, tensions can be seen both in the KlimaSeniorinnen v. Switzerland judgment of the European Court of Human RightsFootnote ³ and the COSIS advisory opinion of the ITLOS,Footnote ⁴ both rendered in May. Insofar as international investment agreements are concerned (comprising 81 percent of the ICSID case load), it is readily understandable that very few of the 3,291 agreements in the ICSID database have been concluded after the 2015 Paris Agreement. In those few, direct references to climate law have begun to be included in substantive provisions, as in paragraph (b) of Article 19bis of the modernized ECT as adopted by the Energy Charter Conference in December.Footnote ⁵

Despite ongoing initiatives at the OECD,Footnote ⁶ the notorious difficulty of modernizing existing treaties means that, for the vast majority of IIAs currently in force, the entry of climate law into the arbitration to construe the substantive investment protections rests upon Article 31(3)(c). This rule of treaty interpretation, as customary law, does not depend on the participation in the VCLT of each counterparty: see, for example, the CIERD Case (Qatar v. United Arab Emirates) of 2021.Footnote ⁷

As Professor Campbell McLachlan KC observed in 2005, there were at that time relatively “few recorded instances of State practice or of judicial use of subparagraph 3(c).”Footnote ⁸ Starting with the Pope & Talbot arbitration,Footnote ⁹ however, references to the provision to interpret IIAs have gathered pace; see, for example, the considerable use made of it in the TC Energy Corporation v. United States of America award on the cancelled Keystone XL pipeline rendered in July.Footnote ¹⁰ While we await the advisory opinion of the Court, the path is open for climate law to be applied as law to construe IIAs.

However, the terms of Article 31(3)(c) only require the “relevant rules of international law” to be “taken into account.” Consequently, the “variable geometry” ingrained in the system, whereby the contours and content of investment relationships necessarily diverge according to the highly variegated terms of IIAs, continues to apply: the construction of the modernized ECT, for example, might differ from that of the NAFTA—should, for instance, the pending legacy case of Alberta Petroleum Marketing Commission v. United States of America (also concerning the aforementioned Keystone pipeline decision) proceed to the merits.

This potential fluctuation in the scope of climate law according to the terms of each particular investment treaty could also apply to investment contracts and national investment laws. Though providing but 14 percent and 5 percent respectively of the ICSID case load, both bases of jurisdiction have featured in significant arbitrations in recent years, particularly in the continent of Africa. In an arbitration founded upon contract, a question could be whether climate law, as a branch of international law, applies to the investment protections under its applicable law provisions or they are to be determined according to the “four corners of the contract.” As for national investment laws, however, domestic legislation on climate change or the environment might indirectly “bring in” climate law even if the climate treaties not directly apply.

Whereas this question of applicable law principally concerns the “standard” scenario of a host state purporting to take decarbonization measures that allegedly breach the investment rights of an investor—a question for the merits—climate law can play a role concerning threshold questions of jurisdiction and admissibility. This principally concerns what I loosely term “green investment,” namely interests arising from the commitment of capital to projects and programs aimed at the mitigation of greenhouse gas emissions by a host state.

On the one hand, whether a commitment of capital qualifies as an “investment” primarily derive from international investment law itself; for example, climate law did not feature at all in the Koch Industries v. Canada award rendered in March concerning the novel issue of the acquisition of emission trading allowances.Footnote ¹¹ On the other hand, disputes could well arise in future concerning mitigation projects and programs that resemble the “classical” examples from the mining, transport and energy sectors.

Early pilot projects under the new Paris Agreement Crediting Mechanism to be operationalized this year have regularly featured foreign companies executing mitigation projects and programs to generate such credits, such as the Bangkok E-Bus Program done by Swiss and Thai companies that generated the first Paris Agreement carbon credits in 2024. Other examples of projects already in existence and generating carbon credits include “direct air capture” plants as a form of carbon capture and storage in Iceland by a Swiss investor and the conservation of forestry in Guyana under a Guyana-Norway MOU.Footnote ¹² The role of climate law would be less to determine whether a particular commitment of capital qualifies as an “investment” than to provide the context for investment law to answer that question.

While awards dealing directly with these questions of applicable law and jurisdiction have yet to be rendered, I do not believe it to be a matter of hope but simply a matter of time. Even if the multiple disputes currently pending not take up these issues—for example, due to dismissal on jurisdictional grounds—current trends point clearly toward a significant expansion of investment activity (and, by extension, disputes) that engage with climate law. For various reasons, there is every possibility that investor-state arbitration will thus again serve as a “laboratory” for novel and critical intersections of international law.

States require new and potentially far-reaching measures to meet their climate-related obligations. But such measures, however necessary and beneficial, may harm foreign investors and trigger international investment disputes, including under the 2,200 or so international investment agreements (IIAs) currently in force. Even the threat of such disputes may dissuade states from pursuing necessary climate-protection measures.

States’ newer IIAs seek to give governments greater authority, flexibility, and discretion to regulate in the public interest without incurring liability. These agreements increasingly:

• affirm states’ right to regulate to achieve legitimate policy objectives, including to address climate change;

• preserve greater regulatory discretion, including by exempting from arbitration certain core government activities and excluding treaty protections for certain measures or sectors;

• recognize the need to avoid reducing environmental standards to attract investment, to prevent “a race to the bottom”; and

• require investors to comply with domestic laws and international standards; identify, prevent, and mitigate environmental harm; and conduct environmental impact assessments.

But most IIAs pre-date such reforms and thus lack these features. What can states do about their vast stock of older IIAs? For many states, terminating or amending these agreements is not feasible. Practically, it can be difficult for states to agree on amendments or mutual termination. Most IIAs also have long survival clauses, ensuring that treaty protections extend for many years post-termination. Politically, terminating IIAs may send a negative signal to foreign investors. States may consider robust IIAs indispensable to attracting foreign investment, including the massive investment required to transition to more environmentally sustainable economies.

The ASIL Task Force will explore various challenges investment treaty obligations may pose for climate-related regulation. I highlight three developments for further exploration.

First, states are developing “interpretive guidelines” in IIAs that aim to clarify substantive standards without changing their content.Footnote ¹ These guidelines facilitate the interpretation of new treaties and may provide an interpretive gloss on existing treaties. States have developed guidelines, for example, for determining whether there has been an “indirect expropriation.” IIAs commonly require states to pay compensation when expropriating covered investments, including when effected indirectly through measures equivalent to a direct expropriation. In practice, it is not always easy to distinguish an indirect expropriation from a non-compensable regulatory measure. To help arbitrators draw that distinction, IIAs often identify three factors for determining whether government measures constitute an indirect expropriation: (1) the economic impact of the regulation on the claimant; (2) the extent of interference with the claimant’s reasonable investment-backed expectations; and (3) the character of the government action.Footnote ² Some IIAs have taken this further, identifying certain types of government measures warranting additional guidance. Modern Korean IIAs, for example, identify four further considerations for determining whether taxation measures are expropriatory, including “internationally recognised tax policies, principles, and practices.”Footnote ³ States similarly may consider adding additional guidance for climate-related measures.Footnote ⁴

Second, states are seeking to elevate certain policy preferences in their treaties through “interpretive indicators.” Interpretive indicators can tilt the interpretive balance toward the treaty parties’ policy preferences, such as environmental protection and climate mitigation. Like interpretive guidelines, such indicators can guide the interpretation of new treaties and potentially provide an interpretive gloss on existing treaties.

The case Al-Tamimi v. Oman highlights the potential importance of interpretive indicators.Footnote ⁵ The claimant in that case alleged that the respondent breached the Oman-U.S. free trade agreement by unlawfully blocking the development and operation of a limestone quarry. The claimant argued that the respondent’s right to enforce its environmental laws did not give it “carte blanche to violate basic principles of fair and equitable treatment.”Footnote ⁶

The tribunal sought to balance the host state’s right to enforce its environmental laws against the investor’s right to fair and equitable treatment under the treaty’s minimum standard of treatment provision in Article 10.5. The tribunal first turned to Article 10.10 of the FTA, which recognized the need for each treaty party “to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns.” The tribunal recognized that, by these terms, the treaty “places a high premium on environmental protection.”Footnote ⁷ As relevant context for interpreting Article 10.10, the tribunal looked to the agreement’s environment chapter, which affirmed that neither party should “fail to effectively enforce its environmental laws, through a sustained or recurring course of action or inaction, in a manner affecting trade between the Parties, after the date of entry into force of this Agreement.”Footnote ⁸ The text of Article 10.10, read in context, informed the standard by which the tribunal reviewed the state’s environmental enforcement measures. The tribunal found it “clear that the State Parties intended to reserve a significant margin of discretion to themselves in the application and enforcement of their respective environmental laws ....”Footnote ⁹ Investment tribunals, it recalled, “do not have an open-ended mandate to second-guess government decision-making,” particularly “in light of the express terms of the present Treaty relating to environmental enforcement.”Footnote ¹⁰ The tribunal further determined that the text, read in context, “qualifies the construction” of the treaty’s substantive obligations: “When it comes to determining any breach of the minimum standard of treatment under Article 10.5, the Tribunal must be guided by the forceful defence of environmental regulation and protection provided in the express language of the Treaty.”Footnote ¹¹ The Al-Tamimi award thus shows the powerful influence that interpretive indicators may have on a tribunal’s interpretation and application of key substantive obligations, including fair and equitable treatment and minimum standard of treatment.

Third, states are increasingly concluding joint interpretive statements, which may constitute subsequent agreements of their agreements under Article 31(3) of the Vienna Convention on the Law of Treaties. The United States and Colombia recently adopted a joint interpretation of the U.S.-Colombia trade promotion agreement.Footnote ¹² One of the provisions addressed was Article 10.11 of the agreement, which provides:

Article 10.11 appears contradictory. It affirms a party’s right to take measures deemed appropriate for environmental protection, but requires that such measures be “otherwise consistent with this Chapter,” including its substantive investment protections. This suggests that government measures “undertaken in a manner sensitive to environmental concerns” could nevertheless breach the state’s investment treaty obligations, requiring the state to pay compensation.

The U.S.-Colombia interpretive statement seeks to make sense of the apparent contradiction in Article 10.11 and give it practical importance. The statement provides that Article 10.11 “informs the interpretation of other provisions” of the treaty’s investment chapter, including the minimum standard of treatment and expropriation provisions, and protects the states’ right to take environmental measures. The interpretation of Article 10.11 endorses the approach taken in Al-Tamimi—a rare case in which a tribunal interpreted an IIA’s substantive obligations in light of the treaty parties’ policy preference for environmental protection. Further, under Article 20.1.3(c) of the agreement, the interpretation of Article 10.11 is binding on arbitral tribunals, and “any decision or award issued by the tribunal must be consistent with that decision.”Footnote ¹³ The interpretation thus provides a rule going forward for all investment tribunals to apply under the treaty.

These three techniques are among the many ways that states might seek to control the development of international investment law, ensuring states’ ability to develop and implement climate-related measures while affording sufficiently strong investor protections to attract and retain much-needed investment.