Public Benefits versus Private Harms

Investor-State Dispute System in Climate Change Mitigation

Climate policy has direct implications for the investor-state dispute settlement system (ISDS) because of the tension between rising energy demand and greenhouse gas (GHG) reduction targets, and its potential effect on the financial incentives and risk profiles of energy infrastructure projects. Large infusions of capital remain needed to meet an expected 50 percent increase in worldwide energy demand over the next two decades, much of which is likely to come through foreign direct investment (FDI). At the same time, deep and rapid reductions in GHG emissions are required to mitigate the most severe effects of climate change. Meeting increasing energy demand while simultaneously reducing GHG will require both large-scale removal of existing high-emissions energy infrastructure from service and massive investment in renewable energy technology and infrastructure. This represents a systemic transformation of the global energy sector that will have significant lasting impacts on existing energy systems as governments around the world attempt to balance these competing demands.

The ISDS system will increasingly face this tension. As international tribunals weigh the legal underpinnings and validity of regulatory promises, they will in effect have to adjudicate among potential public benefits of projects that mitigate climate change and private harms to investors in existing conventional energy assets. Large-scale global investment in renewable energy and retirement of existing fossil fuel–based generation are crucial elements of a meaningful climate response. As discussed below, such investments can negatively impact the value of existing conventional energy infrastructure. This could undermine the guarantees that underlie many FDI-funded energy projects and may have a chilling effect on the willingness of both the global investment community and individual nations to undertake the necessary transformation.

Read the full paper from BRG’s Kenny Grant and Jamie Donovan from Monument Economics Group.