With strong commitments to climate change and phasing out fossil fuels in favour of renewable energy, Asia is set to be a key arena for related disputes, writes Bao Chiann
Global commitments on climate change have proliferated since the Paris Agreement. Accounting for almost 80% of global coal consumption, and 77.3% of its production, Asia will play a key role in the clean energy transition. In this fast-evolving and technically complex context, international arbitration and alternative dispute resolution (ADR) are well-positioned to resolve the myriad of disputes that may arise.
In the wake of the 2022 UN Climate Change Conference, commonly referred to as COP27, countries across the Asia-Pacific region reaffirmed their commitment to the clean energy transition. China and the US resumed their co-operation on climate change. India announced a decarbonisation plan to achieve net zero by 2070. Indonesia and Vietnam secured Just Energy Transition Partnerships mobilising public and private financing to achieve their respective net zero goals.
According to a database maintained by the Grantham Research Institute on Climate Change and the Environment, the cumulative number of climate change-related disputes has more than doubled since 2015, bringing the total number of cases identified to more than 2,000, with about one-quarter of these filed between 2020 and 2022.
The International Chamber of Commerce (ICC) Court of Arbitration and other major arbitral institutions have also witnessed a steady increase in disputes that arguably involve, or might involve, climate change-related issues. In March 2022, Squire Patton Boggs and Sciences Po Law School announced the establishment of the Climate Change Arbitration Monitor, aiming to further understand how climate change is affecting commercial relationships and generating disputes submitted to arbitration.
Disputes during phaseout
As of 2021, the Asia-Pacific region accounted for almost 80% of global coal consumption and 77.3% of production. To meet global commitments to achieve net zero, countries in the region will have to take action such as stopping the construction and financing of new plants, retiring plants early, and/or repurposing existing plants. Government action to phase out fossil fuels is anticipated to trigger a high volume of investor-state disputes. International investment law generally protects investors equally, irrespective of whether they are fossil fuel-based or renewables-based.
In the face of project cancellations or limits imposed on production, it is anticipated that investors will seek compensation for “lost future profits”. Recent examples include the USD15 billion case filed by a Canadian company, TC Energy, against the US government over its cancellation of the Keystone XL Pipeline, as well as German energy companies Uniper and RWE’s claims against the Netherlands government for its phaseout of coal-fired power plants. These kinds of claims are anticipated to proliferate globally, and in Asia specifically, where there are currently 1,200 bilateral investment treaties involving Asian states.
A 2022 study published in Climate Policy by the Boston University Global Development Policy Centre estimates that the energy transition could prompt USD340 billion in investor-state claims, based on its survey of a dataset of assets protected by investor-state dispute settlements in the upstream oil and gas sector.
The most vulnerable countries identified included Russia (up to USD34 billion), Kazakhstan (USD18 billion), and Indonesia (USD4 billion). Over time, countries may seek to terminate investment treaties and develop rules to cap compensation for investors. Nevertheless, investors will seek to exert increasing pressure on governments in the short term via investor-state dispute settlement mechanisms.
Renewable energy disputes
Renewable projects present new opportunities, but also greater risks. In the first half of 2022, China was the world’s largest solar market, investing USD41 billion, while Japan was the third-largest, at USD3.9 billion. In the same period, the Asia-Pacific recorded its highest total in wind investments to date at USD66.8 billion, up 72% from the previous year.
Renewable projects can give rise to complex disputes relating to performance issues with new technologies, disputes on licensing, permissions and consents, delays in connecting to the grid, and raw material price and supply disputes.
A notable trend in Asia is the growth of offshore wind projects. Taiwan, for example, has an estimated wind capacity of 10.5GW, the second-highest in the region after mainland China. Taiwan’s first offshore wind turbine was installed in 2017 and, in December 2022, the government awarded offshore wind capacity to seven new projects forecasted to add 3GW of new capacity, to come online in 2026 and 2027.
With the increase in offshore wind projects, we expect to see a surge in disputes. The complexity and scale of offshore wind disputes are often greater than that of other construction disputes due to the risks of harsh weather environments, the use of complex new technologies, and the interface risks of disaggregated procurement.
Additionally, the withdrawal of state support mechanisms and incentives to attract investment in renewables has led to a rise in disputes brought under investment treaties or pursuant to contractual stabilisation clauses in long-term contracts between investors and states or state-owned entities.
Prominent examples include the Energy Charter Treaty claims that arose out of Spain’s reforms to its renewable energy incentives in November 2022, where Japanese wind farm investor Eurus Energy won EUR106.2 million (USD114 million) in damages out of its claim to the International Centre for Settlement of Investment Disputes.
Meanwhile, Mitsui’s case against Spain relating to its investments in the construction and operation of renewable power facilities remains ongoing – the arbitral tribunal held a hearing on jurisdiction and the merits in Washington in early October 2022.
This trend has also emerged in Asia. In March 2021, a Hong Kong-based investor brought the first known investment treaty claim against Japan over cuts to renewable energy subsidies.
LNG on demand
Concurrent with the growth in renewable energies, it is anticipated that the demand for liquefied natural gas (LNG) as a transitional energy source will continue to grow in Asia. In 2021, the region accounted for 72% of LNG imports and 34.2% of LNG exports. China was the world’s largest importer and accounted for close to 60% of global LNG demand growth.
In Australia, the rush to build up the LNG industry has led to a number of disputes. In 2016, Chevron initiated a UN Commission on International Trade Law arbitration against CPB Contractors, an Australian construction company, and Saipem, its Italian counterpart, regarding a disputed request for USD1.5 billion in extra costs for constructing a jetty for an LNG project in the state of Western Australia.
In 2021, Japanese Inpex settled an ICC dispute with a Japanese-US consortium, JKC Australia, relating to the USD45 billion construction of an LNG project, also in Western Australia. This project has been subject to a number of related disputes including a claim by the Japanese-US consortium against a subcontractor, and South Korean Samsung Heavy Industries’ USD600 million ICC arbitration against Inpex, which has now also been settled. The growing demand for LNG is expected to continue driving disputes in the coming years.
In 2019, an ICC task force issued an ICC commission report examining the key role that arbitration and ADR will play in climate change disputes. The report highlighted that the sectors impacted by the transition of energy, urban and infrastructure, land use and industry systems account for the majority of the ICC cases and awards. Additionally, in 2021, the ICC statistics confirmed that cases involving Asia-Pacific parties accounted for about 26% of the cases registered with the ICC.
Within the fast-evolving and technically complex context of climate change disputes, the ICC expedited procedure and the ICC expert rules are some salient examples of the solutions that the ICC offers.
Urgency and avoidance of delay can be critical for the resolution of climate change disputes. The ICC provides specific guidance on case management techniques for climate change disputes, including bifurcating proceedings according to key climate change-related scientific, technical or specialised issues, and the use of witness and/or expert conferencing to focus and narrow issues. Additionally, under the ICC’s expedited procedure, a final award is rendered within six months of the case management conference.
Recourse to appropriate expertise is another key issue for climate change dispute resolution. This can be achieved through expert arbitrators, party-appointed experts, or tribunal-appointed experts.
In the Indus Waters Kishenganga arbitration between Pakistan and India, which raised technical engineering and environmental issues relating to the construction and operation of a hydroelectric project in India-administered Jammu and Kashmir, one of the arbitrators appointed was an engineer who was a non-lawyer.
In a South China Sea arbitration, the tribunal commissioned an independent expert on the coral reef environment. Under its expert rules, the ICC offers various services relating to the proposal or appointment of experts, as well as the administration of expert proceedings.
It is clear that climate-related contractual and regulatory disputes are on the rise globally and in Asia. In this fast-evolving and technically complex context, many parties are already starting to engage in arbitration and ADR.
Parties and practitioners need to be informed about the types of disputes that might arise, and what possible mechanisms are available to prevent and resolve the disputes from escalating.
BAO CHIANN is a vice president of the ICC Court of Arbitration, chair of the ICC Commission Task Force on arbitration and alternative dispute resolution, a member of the ICC Belt and Road Initiative Commission, and an independent arbitrator in Singapore
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