Power clash

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.