Investor-State Arbitration and Australia's Climate Change Act 2022 - Implications for Foreign Investors
On 13 September 2022, Australia enacted the long overdue Climate Change Act 2022 (Cth) and Climate Change (Consequential Amendments) Act 2022 (Cth) (collectively, the Climate Change Act). After nine years of uncertainty in Australia’s environmental policy and amidst growing pressure from the international community, the Climate Change Act enshrines Australia’s greenhouse gas (GHG) emissions reduction targets into law. This is certainly a positive step towards a nationally aligned effort to combatting climate change.
A potential secondary effect of the Climate Change Act however, is its impact on investments in the fossil fuels and renewable energy sectors by way of new or revised environmental requirements to be imposed on businesses. For example, proposed changes to the National Greenhouse and Energy Reporting Scheme, including a new category of carbon credits (‘safeguard mechanism credits’) and more rigorous carbon emissions reporting, will necessitate significant changes in business processes and due diligence to ensure compliance with these requirements.
Nonetheless, foreign investors should take comfort from Australia’s commitments under its various International Investment Agreements (IIAs). Many of these IIAs provide protections for foreign investors by (amongst others) establishing requirements for ‘fair and equitable treatment’ and limiting the expropriation of investments, with some also including Investor-State Dispute Settlement (ISDS) mechanisms which allow a foreign investor to hold the State accountable for its actions.
That said, given the unpredictability of Australia’s climate regulatory framework, investors should ensure they remain agile to respond to any additional legislative amendments. For instance, the Government’s current review of Australia’s Bilateral Investment Treaties (BITs) considers the exclusion of climate related ISDS claims. While the practical effect of these exclusions is uncertain, foreign investors should nonetheless keep themselves abreast of these developments. This will allow investors to effectively manage the implications of further regulatory changes – which are a necessary part of Australia’s efforts against climate change.
What does the Climate Change Act do?
The key purpose of the Climate Change Act is to codify Australia’s updated nationally determined contribution under Art 4 of the Paris Agreement, including its GHG emission targets of net zero by 2050, and 43% reduction against 2005 levels by 2030.
The Act incorporates these targets into several existing Commonwealth acts and associated statutory bodies, providing a means of their practical implementation and the delivery of tangible emissions reduction. This can be seen in, amongst others, the:
- Greenhouse and Energy Minimum Standards Act 2012 (Cth), by amending its objects to “give effect to certain obligations that Australia has under the Paris Agreement”;
- Clean Energy Finance Corporation Act 2012 (Cth), by amending its objects to allow the Clean Energy Finance Corporation to consider “the achievement of Australia’s greenhouse gas emission reduction targets” when making an investment; and
- Infrastructure Australia Act 2008 (Cth), allowing for the emission reduction targets to be considered when conducting audits of nationally significant infrastructure, developing plans and exercising advisory functions.
In embedding the GHG targets into existing legislation and requiring Ministers to consider the climate change impacts of new projects, Australia has moved away from its symbolic gestures and established a solid policy platform on which sector-based reforms are expected to follow. 4 INVESTOR-STATE ARBITRATION AND AUSTRALIA’S CLIMATE CHANGE ACT 2022 – IMPLICATIONS FOR FOREIGN INVESTORS
Implications and Protections for Foreign Investors
While legislation with such a broad scope is necessary to ensure that climate change is properly addressed in Australia, its wide ambit may result in unwelcome impacts on investments in the fossil fuels and renewable energy sectors.
Given foreign investors comprise a significant proportion of investment in Australia’s resources and energy sectors (34%), many impacted investments may be those of foreign investors. Fortunately, foreign investors are accorded protections under various IIAs which may provide recourse where the negative impact on an investment due to the Climate Change Act, breaches certain provisions of an IIA.
For example, foreign investors in the fossil fuels industry may assert that regulatory changes implemented by the Climate Change Act have substantively deprived the economic value of their investment, amounting to ‘indirect expropriation’. In a different vein, investors in the renewable energy sector may claim that new climate regulations contravene the common requirement in IIAs that States provide ‘fair and equitable’ treatment to all investments. Accordingly, investors whose home State is party to an IIA with Australia may use ISDS mechanisms, where available, to enforce the available protections under that agreement. Foreign investors can be assured of the enforceability of such a claim, given Australia has historically upheld its legal obligations under international treaties and agreements.
To this end, if a foreign investor’s project vehicle is correctly domiciled (such that the investor comes within the scope of the IIA) this type of claim may be pursued pursuant to the following Australian IIAs containing ISDS mechanisms:
- Fifteen (15) BITs including with Argentina; China; the Czech Republic; Egypt; Hungary; Laos; Lithuania; Pakistan; Papua New Guinea; the Philippines; Poland; Romania; Sri Lanka; Turkey; and Uruguay; and
- Ten (10) FTAs including with China; Hong Kong; Indonesia; Korea; Peru; Singapore; Thailand; the USA; and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and ASEAN-Australia-New Zealand Free Trade Agreement.
Successful international examples of similar ISDS claims gives credence to foreign investors commencing arbitration in Australia on these grounds. For instance, environmental policy measures introduced by the Dutch Government and aimed at phasing out coal, resulted in two claims being raised against the Netherlands under the ISDS provisions of the Energy Charter Treaty (see RWE v. Kingdom of the Netherlands, ICSID Case No. ARB/21/4). Further, over 60 claims have been brought by investors in Europe’s renewables sector, following changes to investment incentives by European governments which have reduced the profitability of clean energy projects (see for example, PV Investors v. The Kingdom of Spain, PCA Case No. 2012-14). 6 INVESTOR-STATE ARBITRATION AND AUSTRALIA’S CLIMATE CHANGE ACT 2022 – IMPLICATIONS FOR FOREIGN INVESTORS
The protections accorded under these IIAs should give foreign investors in Australia’s resources and energy sector some level of confidence, while Australia importantly pursues its climate change objectives. However, foreign investors should continue to be alert to sudden legislative changes which may be implemented as a result of Australia’s changing approach to its natural resources and energy sectors in the context of climate change pressures.
For instance, the Department of Foreign Affairs and Trade’s current review of Australia’s BITs has considered whether ISDS mechanisms should be removed entirely from BITs to shift the emphasis from investment dispute resolution to investment facilitation. The potential outcome is that current investment protections under BITs would be unenforceable against Australia without external assistance or intervention.
Another proposed policy measure is that ISDS clauses be amended to carve out claims against environmental policies and regulations. This is intended to operate similarly to the way in which some of Australia’s FTAs already exclude ISDS claims being made against public health measures.
Therefore, while the Climate Change Act is a positive and necessary introduction to Australia’s efforts against climate change, foreign investors should remain engaged with Australia’s policy discussions to avoid being caught off guard by further reforms which may have bearing on the protections afforded to their investments under Australia’s IIAs.