How Evolving Investment Law is Contributing to Climate Change
Aila Herenda
As governments increasingly adopt aggressive climate policies to accelerate the energy transition, international investment law has emerged as a potential constraint on regulatory action. The standards used by arbitral tribunals to determine unlawful expropriation under bilateral investment treaties may, and indeed has, discouraged states from implementing otherwise beneficial environmental regulations. These disputes have become increasingly litigated; 41% of International Center for Settlement of Investment Disputes (ICSID) disputes up to 2015 stemmed from conflicts over oil, gas, mining, and energy resources.[1] Expansive interpretations of indirect expropriation that require compensation when enacted environmental measures substantially affect the value of foreign investment create a regulatory chilling effect, severely undermining effective climate governance.[2] When states face the possibility of a substantial damage award for implementing measures such as fossil fuel phaseouts, carbon taxes, or cancellation of extraction permits, policymakers may delay or dilute climate action to avoid investor-state disputes.[3] Through analyzing arbitral jurisprudence and recent climate related disputes, this blog demonstrates how the current framework of expropriation disproportionately favors investor expectations over urgent environmental imperative. Recalibrating the expropriation doctrine is imperative to aligning international investment law with the realities of the climate crisis.
- The Importance of International Investment
The international investment regime is made up of the principles, norms, rules, and decision making procedures associated with actors’ expectations of coverage in a given area of international relations.[4] The regime is largely governed by bilateral investment treaties (BITs), which establish legally binding terms and are designed by states themselves.[5] The primary purpose of the regime is to provide protections for foreign investors, such as safeguards against expropriation and guarantees of fair and equitable treatment, while also establishing a standard formalized procedural framework for resolving disputes between investors and host state, generally through arbitration.[6] These protections are intended to incentivize foreign investment by depoliticizing investment and reducing regulatory risk.[7] However, there is increasing debate about whether BITs increase overall levels of investment. Empirical evidence suggests that investment occurs even in the absence of BITs, indicating that BITs may not determine whether the investment takes place so much as influencing the structure of the investment by shaping protections and jurisdictions.[8] The U.S. and China, for example, have never negotiated and signed a BIT. However, U.S. foreign direct investment (FDI) in China was $126.9 billion in 2023, exemplifying that a BIT and FDI are not always correlated.[9]
- Expropriation
Expropriation is the act of a host state seizing (indirectly or directly) the investor’s property, either by nationalizing the assets or through other means, but ultimately depriving the investor of the investment’s value.[10] Fear of expropriation is one of the primary reasons that BITs exist; investors’ principle worry is that their property will be nationalized by the host state.[11] BITs do not categorically prohibit expropriation. Instead, customary international law and BITs preserve the state’s right to lawfully expropriate, as long as it is done for a public purpose, in a nondiscriminatory manner, in accordance with due process; and on payment of prompt, adequate, and effective compensation.[12] Unlawful expropriation most often occurs when states fail to meet the fourth requirement of prompt, adequate, and effective compensation. International investment law distinguishes between direct and indirect expropriation, though the boundary is blurry. Direct expropriation occurs when a host state formally nationalizes an investor’s property through an explicit transfer of title or outright confiscation. In Crystallex International Corp. v. Bolivarian Republic of Venezuela, for example, Venezuela revoked a mining concession from a Canadian company and subsequently nationalized their property. The tribunal found direct expropriation, evidenced by President Chavez’s announcement, “if we are going to exploit gold, we have to nationalize all of it.”[13]
By contrast, indirect expropriation arises when the host state does not take formal ownership but instead adopts measures that substantially deprive the investors of the use, value, or control of their investment. Indirect expropriation is the most common claim an investor brings to recover the value of their investment when they believe it has been unlawfully taken by the host state.[14] Expansive interpretations of unlawful indirect expropriation creates regulatory chill, discouraging and even penalizing governments from adopting aggressive policies such as fossil fuel phaseouts or permit cancellations.The doctrinal challenge for indirect expropriation lies in defining the threshold of “substantial deprivation” which is a standard that tribunals have interpreted inconsistently. In recent decades, tribunals have expanded what they will accept as “substantial” by placing greater weight on an investor‘s initial expectations and economic impact of state measures, even at the expense of the regulatory purposes underlying those measures. By finding that enacting certain climate policies “substantially deprive” the investor of their investment, states are required to compensate the investor to ensure lawful expropriation or risk facing a claim for unlawful exportation. Placing greater weight on investors’ expectations has generated debate as to whether tribunals have tilted the balance too far toward investor protection, thereby constraining states’ ability to regulate in the public interest.
- Climate Regulation Triggers
Regulatory chill occurs when governments delay, weaken, or abandon policy initiatives out of concerns that such measures will provoke costly investor–state arbitration claims. New climate policies, such as carbon taxes, fossil fuel phase outs, and cancellation of extraction permits expose states to significant litigation risks under investor–state dispute settlement (ISDS).[15] Investors commonly pursue claims arising from the cancellation of mining permits and environmental conservation measures, as was done in Eco Oro Minerals Corp. v. Republic of Colombia where Colombia restricted mining activities in a sensitive high altitude ecosystem to protect water resources. The court found indirect expropriation, despite the public policy carve-out exceptions in the treaty.[16] Regulatory chill following tribunals’ narrow interpretations and high awards for enacting environmental measures leads to policy reversals and settlements that favor investors as states often prefer to modify or abandon contested regulations rather than face prolonged arbitration and damages. In Metalclad Corp. v. United Mexican States, local authorities canceled a construction permit for a landfill after it obtained federal approval because the state governor later declared the area an ecological preserve.[17] The tribunal concluded that this cancellation deprived the investor of the use and economic benefit of their investment and amounted to an indirect expropriation, awarding MetalClad $16 million in damages, a high cost. to protect an ecological preserve.[18] This decision resulted from a broad interpretation of indirect expropriation, where the tribunal emphasized the economic impact of the canceled permit over the environmental purpose of the cancellation.
The prospect of such awards may discourage governments from enacting ambitious environmental policies, particularly where the financial consequences of an adverse award could significantly strain public resources. The structure of investment treaties can directly shape regulatory behavior and incentivize governments to prioritize avoiding arbitration over the adoption of beneficial and robust environmental policies.
- Reform
Reform initiatives include explicit environmental or climate carve outs in BITs, which would remove certain categories of environmental measures, such as those discussed above, from the states’ scope of treaty obligations and from tribunal jurisdiction.[19] These carve–outs could ensure that measures adopted in good faith to reduce, for example, greenhouse gas emissions cannot give rise to expropriation claims, thereby safeguarding the states’ ability to pursue climate mitigation policies.[20] Other reforms focus on clarifying the scope of indirect expropriation and including treaty language that specifies that nondiscriminatory regulations enacted for legitimate public welfare purposes, such as environmental protections, do not ordinarily constitute expropriation.[21] Interpretative reforms call for greater deference to environmental regulation, including express recognition of the states’ police powers, which permit governments to regulate in the public interest without triggering compensation obligations. Currently, police powers are limited to national security and public safety.[22] On the extreme side of the spectrum, reforms that shift authority back to states or limit the jurisdiction of tribunal have also been explored. These reforms seek to calibrate the balance between investor protection and regulatory autonomy, ensuring that investment treaties do not unduly constrain states’ ability to adopt ambitious and beneficial environmental and climate policies.
[1] Kyle Tienhaara, Regulatory Chill in a Warming World: The Threat to Climate Policy Posed by Investor – State Dispute Settlement, 7 Transnat’l Env’t L. 229, 231 (2018).
[2] Ctr. for Int’l Env’t L., Investors v. Climate Action: What Recent Case Law and Treaty Reforms May Mean for the Future of Investment Arbitration in the Energy Sector 1 (2022), https://www.ciel.org/investors-v-climate-action/.
[3] Tienhaara, supra note 1, at 232.
[4] See generally Rudolf Dolzer, Ursula Kriebaum & Christoph Schreuer, Principles of International Investment Law (3d ed. 2022).
[5] Id.
[6] Id.
[7] Ibrahim F.I. Shihata, Towards a Greater Depoliticization of Investment Disputes: The Roles of ICSID and MIGA, 1 ICSID Rev. 1, 5 (1986).
[8] Jason Webb Yackee, Do Bilateral Investment Treaties Promote Foreign Direct Investment?, 51 Va. J. Int’l L. 397, 400 (2010).
[9] U.S. Dep’t of State, U.S. Relations with China. U.S. Embassy & Consulates in China, https://china.usembassy-china.org.cn/u-s-relations-with-china/ (last visited Mar. 12, 2026).
[10] Expropriation, JUS MUNDI (Feb. 17, 2026), https://jusmundi.com/en/document/publication/en-expropriation.
[11] Andrew T. Guzman, Explaining the Popularity of BITs, 38 Va. J. Int’l L. 639, 658-660 (1998).
[12] Crystallex Int’l Corp. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB (AF)/11/2 Award, ¶ 56 (Apr. 4, 2016).
[13] Crystallex, Award, at ¶660.
[14] AMY SANDER & DR. TIBISAY MORGANDI, CLIMATE CHANGE, INTERNATIONAL INVESTMENT LAW AND ARBITRATION 4 (Essex Ct. Chambers 2023).
[15] Arijit Sanyal & Eshan A. Chaturvedi, To Carve or Not to Carve: India’s Investment Treaties Must Look Beyond GATT-Inspired Environmental Carve-Outs to Avoid Regulatory Chill, Harv. Int’l L.J. Online (Mar. 24, 2024), https://journals.law.harvard.edu/ilj/2024/03/to-carve-or-not-to-carve-indias-investment-treaties-must-look-beyond-gatt-inspired-environmental-carve-outs-to-avoid-regulatory-chill/.
[16] Eco Oro Minerals Corp. v. Republic of Colombia, ICSID Case No. ARB/16/41, Decision on Jurisdiction, Liability and Directions on Quantum, ¶ 635 (Sept. 9, 2021).
[17] Metalclad Corp. v. United Mexican States, ICSID Case No. ARB(AF)/97/1, Award, ¶¶ 28–60 (Aug. 30, 2000).
[18] Id. ¶ 131
[19] Ariq Hatibie, Craving Climate Carveouts, Harv. Int’l L.J. Online (Feb. 19, 2024), https://journals.law.harvard.edu/ilj/2024/02/craving-climate-carveouts/.
[20] Wolfgang Alschner & Julia Lebedeva, The Green Chill: International Investment Agreements and Climate Change, 15 J. World Inv. & Trade 1 (2024).
[21] Id.
[22] Dionysios Koutshibelas, The Limits of the State’s Police Power in International Investment Law, 62 Revue Hellénique de Droit Int’l 215, 224 (2009).