According to an RCGI visiting Professor, domestic tension regarding the way in which each country responds to the regulations established for reducing greenhouse gas emissions is more pronounced at the international level

International Energy Law has become increasingly important, as the context of climate change moves forward and demands timely answers, in several countries, which have different legislative frameworks, emissions profiles, and nationally determined contributions to the reduction of emissions as established in the Paris Agreement, in 2015. This is the belief of Professors Carolina Arlota, of the University of Oklahoma, and Hirdan Katarina de Medeiros Costa, project coordinator of the FAPESP Shell Research Centre for Gas Innovation (RCGI) and instructor in the Institute of Energy and the Environment of the University of São Paulo (IEE/USP). Both are lawyers and lectured on the subject on November 27.

“Key issues are faced by society that bring about joint efforts by nations in a commitment to refine useful tools for solving these current or potential problems,” Professor Costa emphasized, adding that global warming is one of those issues. Both of the instructors agree that Energy Law, by itself, cannot deal with the nuances inherent to these issues, whether in terms of the need for specific international arbitration, in certain circumstances, or due the new institutional setting, under the aegis of the Paris Agreement.

“Furthermore, the energy subjects cover highly complex and dynamic territorial issues: one needs only to remember the shale gas revolution in the U.S., which reheated the economy in five years; or the growth of wind energy in China, which is now one of the largest producers of wind energy in the world; or even Brazil’s recent change of an electrical power matrix, which is losing ground to thermoelectric power…,” the RCGI researcher stated.

According to Professor Arlota, the “international” attribution does not refer only to the multiplicity of players involved in energy processes, like NGOs or multinational corporations, which are currently proposing maintaining a minimum observance of non-pollution criteria, for example. “Domestic tension currently exists, within each country, with regard to regulatory stances, including legal traditions, lobbies, etc. If it is difficult to regulate emissions and protect the environment in the local sphere, all of these tensions are worsened at the international level, in light of the difficulty in making the countries find a common denominator within the international context. The main issue is forming such a debate. For that reason, it is necessary to push International Energy Law forward more energetically, at this time.” According to her, less than ten universities, worldwide, are working with International Energy Law as an autonomous discipline and with this specific name.

The visiting Professor, who teaches International Energy Law at the University of Oklahoma, remembered that the basic premise of Law, including International Law, is the principle of the dignity of human beings.

“At the heart of the discussions on International Energy Law are subjects of the utmost importance, like Energy Justice, in its broadest sense: it is not only about people having access to energy, but the attempt to also make energy a sector that contributes to a greater distribution of the wealth. The energy sectors give rise to a large concentration of income; it would be necessary to create legal instruments for achieving distributive justice and to spread the benefits of the energy industry to society as a whole,” Professor Costa added.

Without borders – The IEE Professor also emphasized that pollution and GHG emissions do not stop at the borders between countries and, for that reason, they need to be treated jointly. Thus the attempt to establish treaties and agreements like those of Kyoto and Paris. “The environmental issue transcends physical and legal borders. The latest GHG figures show that humans have been unable to achieve goals for reducing emissions.”

From her point of view, Professor Arlota emphasized the interdependence of countries in the specific case of climate change. “A country could have zero emission levels, and still suffer the consequences of those who do not reduce their emissions. This is what we call a ‘collective action problem’, which is a political dilemma that increases the transition cost in the international sphere: the behavior of one country will not be proportional to the benefits it will receive.”

However, when dealing with strategies for reducing emissions, the borders and the differences make themselves felt, the Professor from the University of Oklahoma stressed, which could be quite worrisome, depending on the regional context.

“For example, let’s take two countries from the European Union that fought on opposite sides during World War II: Germany and France, which are currently important forces of the EU, and have no agreement regarding the energy policy within the bloc, with respect to reducing GHG emissions. Germany decided to banish nuclear energy, even though running the risk of not reducing emissions like it could have, if it continued using that energy source, and put its money on wind and solar energy, as well as renewable sources, in general. France, on the other hand, will not drop nuclear energy, alleging that the UN Climate Change Conference (UNFCCC) recommends the use of a mix of energy options that have lower emission levels, which includes nuclear energy.”

According to Professor Arlota, China now has Carbon Capture, Utilization and Storage (CCUS) plants that are able to capture approximately 90% of the GHG emissions. “This ends up renewing confidence in the use of these technologies for reducing emissions and, I believe it takes away the stimulus for investing in renewable sources and biomass.…”

International agreements and treaties – Both of the lawyers remembered the Kyoto Protocol that contained a list, in Attachment I, of the countries to which mandatory goals were applied for reducing emissions, contrary to such countries as Brazil, China, and India, which had no mandatory commitments to making reductions.

“From the ‘policing power’ of Kyoto, a more negotiated action was taken in the Paris Agreement. The Agreement was severely criticized for not having a mechanism that provided for sanctions. It has none, but that does not mean that there is no reciprocity, or no pressure in the sense of ‘international constraint’, like what happened when the U.S. pulled out of the Agreement, or even regarding industry, which brings no pressure to bear in relation to when and where the investments will migrate,” was the lawyers’ opinion. As they see it, today there is a consensus that the Paris Agreement did what was possible from the institutional standpoint.

Professor Arlota dedicated much of her presentation to discussing the Energy Charter Treaty (ECT) and Bilateral Investment Treaties (BIT). The BITs establish the terms and conditions for the private investment of foreign companies in other countries. A majority of the BITs grants investors a series of guarantees that normally include fair and equal treatment, protection against expropriation, and other items. The first was signed in 1959 between Germany and Pakistan.

However, the ECT, which was signed in 1991, establishes a multilateral framework for border cooperation in the energy sector. The treaty covers all of the aspects of the commercial activities of energy, including trade, transit, investments, and energy efficiency, which are legally binding and include procedures for resolving disputes (arbitration). So far, 66 countries have signed the Charter, including the U.S., Canada, and the EU.

International arbitration – “In March 2018, there was a controversial decision about a BIT between Slovakia and the Netherlands. The decision has to do with the arbitration process begun in 2008 by the Dutch insurance company Achmea against Slovakia,” Professor Arlota reported.

In 2004, Slovakia opened its health insurance market to private investors. The company established a branch there to offer private health insurance. However, in 2006, the country partially revised the liberalization of the health insurance market and prohibited the distribution of profits generated by these activities. In 2012, a court of arbitration, established in Frankfurt, found that Slovakia had violated the BIT and ordered it to pay Achmea an indemnity of about €22.1 million. The country filed an appeal in the German courts to annul the sentence handed down by the court of arbitration. According to Slovakia, the BIT’s arbitration clause was contrary to various provisions of the Treaty on the Functioning of the European Union (TFEU).

“In March 2018, the Court of Justice of the European Union concluded that the Bilateral Investment Treaty usurped the competence of the European courts, and was incompatible with the treaties on the function of the European Union. Therefore, the EU countries agreed to no longer sign BITs among themselves. The decision could be interpreted as a watershed opinion regarding the protection of foreign investments in the EU. That protection would prevail as long as Eastern Europe was still going through the integration process. Now, that prevalence would no longer be permissible in EU countries.”

According to Professor Arlota, in the case of the Energy Charter Treaty, which began with Europe and expanded into Asia, the idea is to continue expanding to Latin America and Africa. Besides providing a type of arbitration mechanism for conflicts similar to the BITs, the ECT is equally as “tough” toward countries that receive foreign capital, and “fair” with outside investors. “After the decision regarding Achmea and Slovakia, we are all waiting to see what will happen in the energy area, since the ECT presupposes the protection of foreign investments.”

The visiting professor stated that it was not by mere chance that Italy asked permission to leave the ECT, in 2015, although it is obligated to honor the Treaty until 2035 for investments already made. “The ECT, like the BITs, has clauses that give much protection to foreign investors, but they can be interpreted as tough on the country: limiting its sovereignty, limiting environmental protection, tax regulations on eventual income that can be used for financing education, research.…”

Market pressures – According to Professor Arlota, pressure brought to bear regarding best practices in agreements that regulate activities linked to energy began with the petroleum and natural gas industry. “The internationalization of petroleum and natural gas contracts forced a common denominator, arbitration clauses, and best practices. This did not begin with an international treaty, but with pressure applied in the demand for more efficiency. Thus, the market decided it would be easier, instead of negotiating each oil and gas pre-investment or pre-exploration contract, to write it up based on a standard contract model, whatever the jurisdiction or the country.”

However, she adds that a good share of the countries located in the southern hemisphere of the globe, most of which are in development, historically tended to be stubbornly opposed to international arbitration and to standardization, because they have a history of suspicion, so to speak – “with or without reason, depending on the country,” the lawyer stated.

 

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