Investment Arbitration and Environmental Protection: A Double-Edged Sword

Recently, Joseph Stiglitz, a Nobel Prize-winning economist and Columbia University professor, warned about the dangers of TPP (Trans-Pacific Partnership). “We know we’re going to need regulations to restrict the emissions of carbon,” Stiglitz said. “But under these provisions, corporations can sue the government, including the American government, by the way, so it’s all the governments in the TPP can be sued for the loss of profits as a result of the regulations that restrict their ability to emit carbon emissions that lead to global warming.”

Stiglitz echoes the often-heard but so far unproven “regulatory chill”-argument that has been touted loudly by anti-ISDS groups. The argument being that States would avoid adopt measures for the protection of the environment, health or other public goods because of possible investment arbitration claims by affected foreign investors. However, so far no evidence has been shown, which proves that a State has decided not to adopt a measure because of the fear of a claim for damages. On the contrary, a recent example shows that the “regulatory chill”-argument is only of theoretical nature and unconvincing.

In the recently initiated investment arbitration case by Canadian mining company Gabriel Resources against Romania, the Romanian government refused to issue the environmental permit required to start exploitation of a controversial mining project which uses cyanide to extract precious metals. The threat of a USD 4 billion claim against Romania by Gabriel Resources, which indeed has now materialized in an ICSID procedure, apparently did not impress Romania to change its mind. It is fair to say that a potential claim of USD 4 billion must be considered a significant amount of money for a country like Romania, nonetheless, the “regulatory-chill”-argument did not play a role.

Turning back to TTP, it should be noted that Annex 9-B TPP regarding indirect expropriation contains the following provision:

“Non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety and the environment, do not constitute indirect expropriations, except in rare circumstances.”

Accordingly, measures adopted for the protection of the environment, such as for example for the reduction of CO2 emissions, cannot – in principle – be considered to constitute “indirect” expropriation, which makes an ISDS claim under TPP practically useless. Hence, the fear of Prof. Stiglitz is unfounded.

Instead of fearing that ISDS could undermine existing environmental protection legislation or prevent the adoption of new measures, ISDS could actually be used as an effective tool to enforce environmental protection provisions in case a State fails to effectively enforce them. This line of argument is not new, but has been put forward regularly by Annette Magnusson, the Secretary General of the Arbitration Institute of the Stockholm Chamber of Commerce (SCC).

Indeed, the massive haze that has been caused by fires, which are set to burn forests in order to create land for palm oil crops, and has been massively affecting several neighbouring countries of Indonesia could be the next test case. Reportedly, this practice, which takes place every year, seems to have been condoned by Indonesia and the respective provincial governments. If that is indeed the case, this would constitute a breach of Indonesia’s international treaty obligations relating to both environmental protection and investment protection.

Firstly, Indonesia has ratified several international environmental treaties such as most recently the ASEAN Transboundary Haze Pollution Agreement of 2002.
Art. 3 formulates the following principles:

  1. The Parties have, in accordance with the Charter of the United Nations and the principles of international law, the sovereign right to exploit their own resources pursuant to their own environmental and developmental policies, and the responsibility to ensure that activities within their jurisdiction or control do not cause damage to the environment and harm to human health of other States or of areas beyond the limits of national jurisdiction.
  2. The Parties shall, in the spirit of solidarity and partnership and in accordance with their respective needs, capabilities and situations, strengthen co-operation and co-ordination to prevent and monitor transboundary haze pollution as a result of land and/or forest fires which should be mitigated.
  3. The Parties should take precautionary measures to anticipate, prevent and monitor tranboundary haze pollution as a result of land and/or forest fires which should be mitigated, to minimise its adverse effects. Where there are threats of serious or irreversible damage from transboundary haze pollution, even without full scientific certainty, precautionary measures shall be taken by Parties concerned.

Article 4 imposes the following general obligations:
In pursuing the objective of this Agreement, the Parties shall:

  1. Co-operate in developing and implementing measures to prevent and monitor transboundary haze pollution as a result of land and/or forest fires which should be mitigated, and to control sources of fires, including by the identification of fires, development of monitoring, assessment and early warning systems, exchange of information and technology, and the provision of mutual assistance.
  2. When the transboundary haze pollution originates from within their territories, respond promptly to a request for relevant information or consultations sought by a State or States that are or may be affected by such transboundary haze pollution, with a view to minimising the consequences of the transboundary haze pollution.
  3. Take legislative, administrative and/or other measures to implement their obligations under this Agreement.

It seems that Indonesia has neither prevented the fires and the resulting haze, nor has it responded to these fires in a promptly and effective manner with a view of minimizing their negative effects. Thus, prima facie, Indonesia seems to have been breaching these obligations.

Secondly, Indonesia could also be violating relevant investment agreements, which it has concluded with its neighbouring countries. Most of these treaties impose the obligation on the Contracting Parties to provide for “full protection and security”.

For example, the ASEAN Investment Treaty, which entered into force in 2012 for Indonesia, contains the “full protection and security”-standard. The provision adds that “full protection and security requires each Member State to take such measures as may be reasonably necessary to ensure the protection and security of the covered investments.” Also, the Indonesia-Thailand BIT of 1998 provides for “full protection and security”, whereas the Indonesia-Singapore BIT of 2006 contains an arguably more limited standard by providing only for “adequate physical security and protection”.

Arguably, the “full protection and security”-standard encompasses the obligation that the host state exercises sufficient “due diligence” to protect the investor’s physical assets and persons. It is not difficult to argue that this obligation also includes that the host state takes all necessary steps to prevent or effectively mitigate damages caused by egregious pollution.

This line of argument is in fact currently tested in an ISDS case, which has been brought by Peter Allard, a Canadian owner of an eco-tourist facility in Barbados against Barbados for an alleged breach of the “full protection and security” provision of the Canada-Barbados BIT. Allard claims that Barbados breached its treaty obligations by failing to enforce its domestic environmental laws, which he alleges led to the environment being spoilt and a loss of tourist revenues at his eco-resort.

Considering the fact that – unfortunately – many States around the world fail to effectively implement applicable environmental legislation – be it international or domestic -, causing not only damages to the environment and the health of their citizens but also to the property of foreign investors, ISDS claims could turn out to be a very effective tool to compel States to take the necessary steps to prevent environmental damages.

Seen from this perspective, anti-ISDS critics in general and environmental NGOs in particular should seriously reconsider their position and start acknowledging that effective ISDS procedures can actually be a useful tool in enhancing the actual implementation of and compliance with environmental obligations.

Indeed, this is yet another argument – next to the well-known and generally accepted – arguments that investment treaties and ISDS promote the Rule of Law, legal certainty and the flow of FDIs – for including easily accessible, effective and fair ISDS rules in all trade and investment agreements.


  1. You may want to address the issue of the minimum standard of treatment/fair and equitable treatment. That’s the man basis of concern for those worried about regulatory chill.

  2. Dear Simon,
    thanks very much for your quick reply!
    I think within TPP (as within CETA, TTIP and NAFTA), the minimum standard of treatment of aliens (as it is referred to) is so minimal, that non-discriminatory environmental measures would in my view not lead to any viable claims and therefore the regulatory chill argument simply does not fly. In particular, if the umbrella clause has not been included. So, any CO2 measure under TPP does not create a regulatory chill effect. This may be different for my favourite old-school BITs, although the Gabriel case I referred to in my piece, is based on such a BIT. In addition, arbitral tribunals are increasingly receptive to environmental measures. States simply need to do it right, so not retroactively, proportional and de facto and de jure non-discriminatory. You know the Art.20 GATT jurisprudence which can be applied in analogy.

  3. Indeed, the new claim against Romania did not alter the state’s position. On the contrary, it did not even seem willing to ‘mock’ a negotiation or trying to reach an agreement. Where states politically have the upper hand, they cannot be ‘forced’ by ISDS – or any other legal instrument – to behave in a certain manner. ISDS only serves to mitigate damages for the aggrieved investors, not to ‘prevent’ the state from exercising its sovereignty.

  4. Indeed this is probably the best argument for an ISDS system, however, it fails to appreciate that the regulatory chill argument is possibly more nuanced. It is in fact impossible to prove an absence, and evidence of regulatory chill is available only when a regulation is repealed and/or never implemented fully because of the potential, not explicit, threat of investment arbitration. A better metric would be a comparative study of effective implementation of environmental regulation (not simply ratification of environmental treaties, but concrete embedding of environmental standard at the national and sub-national level) against the presence of IIAs and a total (including all the stages, including the pre-official notification to arbitration bodies) of all the investment disputes. I am sure the writer appreciates the difficulties of such an exercise, which gives easy ammunition to the deniers of the regulatory chill phenomenon. The Romania case is an outlier, and it might just go to show that even little countries might take a combative approach when they are within the EU umbrella but admittedly I am not familiar with the details of the case.
    Finally, and to go back to the beginning, it is true that the ISDS system might be use not as a shield against environmental regulation, but as a sword to guarantee its effective implementation, when this conforms to the interest of the investor. I am not sure that from a legitimacy standpoint, this is as good as an argument as it appears to be, and I leave it to the readers to consider why.

    1. Dear Alessandra,
      thank you for you comment.
      If you cannot prove “regulatory chill”, why used this argument? Just to scare the public and for political gains? Using ISDS to force a State to implements its international environmental obligations, is something you should appreciate as a viable option – whether it is done investors, neighbouring States through State-State dispute settlement or NGOs through other means really does not matter much time. What matters is the result! And if as in our example, Indonesia finally acts in order to stop the fires because of potentially ISDS claims, so be it.
      My point is, that one should stop characterizing ISDS as evil. It’s a cheap, simple approach, which fails to see the benefits of ISDS for enforcement of the Rule of Law!

      1. Hello Nikos,
        thanks for the reply.
        I am not sure anyone on this site would characterise ISDS as ‘evil’ and I do not think I did either. I just meant to say that regulatory chill is difficult to prove, and it is in many ways a red herring. We know that the problem is not regulation, but effective implementation, both at the national and international level.

        1. dear Alessandra,
          you are of course right! You did not mention evil, but many who use the regulatory-chill-argument do make this suggestion.
          I agree, it is difficult to prove and therefore the argument should not be used any more as an example. In any case, under the TPP the policy space is so broad that practically any measure adopted to protect the environment is allowed, unless it is done in an discriminatory manner. My point is, it is time to aknowledge the good side of ISDS for the protection of the environment.

  5. Um, Lori Wallach describes an example of possible regulatory chill (the Renco case) on this very blog ( And there are plenty of others — e.g., the PacRim/OceanaGold, where a national mining ban that was gaining momentum before the arbitration has still not (last I checked) re-emerged. By contrast, the Gabriel Resources case is way too new to serve as an example either way. All you are saying is that in the opening moments of the process Romania has not thrown up its hands in surrender and given way — obviously it could change its mind if it finds itself locked in years of litigation and sending tens of millions to U.S./Euro arbitration firms. It could also have an affect on other projects in Romania, or on projects in other countries.

    The reality is that no one on either side of this question is going to be able to establish causation, these are societal processes way too complex for that. The regulatory chill argument is compelling because it is based on the logic of economic incentives and human nature. Remember that the concept didn’t begin with the arbitration backlash crowd, it is the basis of the argument against regulatory takings generally, and has been appropriately considered in those debates in probably every national jurisdiction. If the jurisprudence from int’l arb tribunals reflected even half the nuance of Penn Central and Tahoe, well, we’d probably still havea problem but it would be less of a problem…

    1. dear Aaron,
      thank you for comment. We agree that it is difficult to peove whether or not there has been regulatory chill. All I am saying as long as there is no proof that argument is simply not convincing to me. The other point I am making is that TTP as well as CETA and TTIP contain very extensive policy space for states to adopt measures for the protection of the environment without having to fear any claims. At the same, if states fail to adopt such measures and therefore cause damage to investors, such states should be confronted with investment arbitration claims. So, to me investment treaties with ISDS are a perfect win-win situation for both protecting the environment as well as investors. That makes perfect sense to me.

  6. Some editorial comments, Nikos. The Stiglitz quote talks about a paradox, that…’we are going to need regulations to restrict the emissions of carbon’ – an essential good – but these might provoke investment treaty lawsuits. Stiglitz is not saying that governments will need to avoid adopting environmental regulations in order to escape the evil of investment treaty arbitration – that’s taking his quote too far. Secondly, Romania and cyanide emitting gold mines aren’t illustrative of governments avoiding adopting good environmental regulations. Gabriel could presumably capture the cyanide tailings with new technology (therefore having no negative environmental impact – if you believe what engineers say) and Romania may indeed have refused the permit in order to expropriate the mine in favour of a local interest (Romania could be the bad guy, using a so-called environmental protection power to disguise a state-sponsored gold heist). Not a neutral example. In addition, as an investment treaty outsider, I didn’t immediately get what you meant by the unhelpful euphemism “regulatory chill”. Surely the vivid and fair label for that argument would be regulatory paralysis, not the dumbed-down-for-an-American-audience “regulatory chill”. And Nikos, there’s no environmental regulatory paralysis going on in Indonesia – it’s not as though forests are burning there because Indonesia didn’t implement regulatory measures because it was afraid of being sued by foreign investors. One good thing I can say about the article is that you did engage with the commenters. I’m not convinced that you’ve shown us the good side of ISDS for protecting the environment though.

    1. dear James,
      thank you too for your comments.
      Regardimg Stiglitz, my point exactly proves wrong his point: states will simply not face claims because of CO2 measures because they are practically excluded. As to Romania, my point is that whatever the background amd detaila of the case are, the fact remains that it revoked the permit claiming to have done so in order to protect the environment and not having been scared to do so in view of a 4 billion dollar claim. To me that is a good example and there more as the German Vattenfall case regardimg nuclear energy. In shorts, states do what tehy consider necessary amd they are not prevented by a potential of claims. Regardimg the term regulatory chill, well that is the usual term we use in investment law, so I prefer using that one. As regards Indonesia, I frankly do not care why the fires are burning, but what I care about is that Indonesia failed to act to prevent or to fight them so far. Not only this year, but every year. And so if investment claims can force Indonesia to act, that would be great.
      may be it is worth re-read my post and get more into investment law to understand my point. Or to read the posts of Annette Magnussen who is even more eloquent to make the point of how ISDShelps protecting the environment.

  7. Nikos, thanks for your suggestions. I am trying to learn about isds but I’m afraid I’m still a long way from understanding all of its benefits. Thanks again for your remarks.

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