The impact of ISDS on green policies in Southern Europe

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I have frequently discussed on this blog the effects ISDS is having on nations in the European Periphery. See here for example for a discussion of a wave of investor claims against Spain for changes in the FiT system.

Do the effects of these actions against Spain, and other actions against states in the European Periphery, depend solely on whether the claimants will be successful? It is possible that from an environmental policy perspective, either way, the situation is unlikely to improve (and by improvement we mean renewed emphasis on pushing forward green energy generation). If the investors are successful, the result is likely to be fiscally damaging (for Spain specifically) and unlikely to further the cause of environmental sustainability. Why would this be, one may ask, considering that a win for green energy investors at investment arbitration will offer legal backing to the drive towards sustainable energy production? The answer is that the fiscal impact of solar incentives (to take this one specific example) is so large, that no state in the European Periphery is expected to fund it in the medium term. A win for the investors in this context will not serve to re-establish a tariff system that favours green energy. What it will do instead is weaken the fiscal position of Spain and possibly deter European nations from investing again in sustainable energy through price support systems. Evidence to support this view comes also from the decision of Italy in late 2014 to notify its intention to withdraw from the Energy Charter Treaty. This is rumoured to be due to the impact the solar claims are likely to have in Spain. The proffered reason, from the Italian side, seems to be cutting the costs of its membership in international organizations due to recent budget restrictions. Yet Italy is likely inevitably to be next in line for the lawyers of solar generation companies due to the 2014 so-called “Spalma incentive” decree which changed Italy’s FIT system. Whether Italy withdraws or not from the ECT is indeed irrelevant to any current claims in preparation, as investor rights and access to ISDS survive any withdrawal from the Treaty for 20 years.

It seems possible therefore that neither a win nor a loss for the investors will advance the spread of clean energy generation in Europe for the foreseeable future. Are investors nonetheless projected to win the argument that their investment has been expropriated, or that they have been treated unfairly? Defining what constitutes a violation of the FET standard and expropriation has been a matter of significant controversy both in dispute resolution fora and in national courts. It is important to remember that expanded definitions of expropriation that include regulatory measures that affect profitability (in an effort to protect investor expectations), harm states’ capacity to govern their sovereign territories and are deemed to constitute part of an emerging global constitutional order that rates market freedoms as more important than other social and political objectives. As we saw earlier however, in the European context at least, there are not many examples of successful actions where investors have complained for non-compensated expropriation with reference to loss of profits, or regulatory measures that adversely affect business prospects. Nonetheless, ISDS Tribunals hear disputes even when the alleged violations have led to losses stemming from measures falling short of outright expropriations and there is consistent case law that considers energy infrastructure investments as coming under BIT definitions of protected investments. We already mentioned that arguments based on economic necessity have hardly swayed tribunals in the case of Argentina. Should we extrapolate that investors suing Spain for the cancellation of photovoltaic subsidies are confident that the Spanish economic collapse did not constitute enough of an ‘emergency’ to lead to a legitimate rewriting of their contracts?

I need to re-emphasise here that these actions may not coming to tribunals because investors expect to win substantial amounts in compensation. Rather, they could be surfacing at increasing volumes because of the political leverage they create. Countries battling economic crises, like Greece, Spain, Italy and Cyprus, need investors on their side. As Argentina has discovered, keeping investors complaining for a decade old default, is not conducive to market stability. Perhaps investors are paying their lawyers good money, not to gain compensation, but to keep the shadow of a Griesa type judgement over European policy makers, hoping that this forces settlements. Shifting focus from investors to policy makers, we see the huge challenges investment treaty arbitration can pose for Spain and the rest of the European Periphery. Investment treaties have the effect of locating the sanctity of property and contract (together with definitions of human rights that include the un-assailability of individual property rights) in constitutional-like structures that are impossible -or near impossible- to amend. The market protective framework is then completed by the subsequent creation of ‘politically independent’, international dispute resolution mechanisms that can bypass government legislation that allegedly violates corporate and investor rights. This legal/ institutional framework safeguarded by investor friendly tribunals means that regulatory reforms are very difficult to implement if they offend the basic pro-market politico-economic status quo. This is the case even if reforms aim at fiscal consolidation, shying away from more radical socially targeted reforms.

In short, the investor protection framework is leading to resistance to policies aimed at combating the crisis. It is for this reason why Investor-State Dispute Settlement clauses are so controversial, as evidenced in the widespread reaction against the proposed TTIP. Indeed, governments should be weary of ISDS. As the experience of Spain shows, litigating in Court is not the same as arbitrating at ICSID. The reason is that Courts have to take into account public policy considerations. Investment tribunals do not. One has to ask whether there is a compelling interest in handing dispute resolution over major state-corporate deals to a body that does not have to worry itself with the common good. Would a solar energy firm such as those mentioned in earlier posts, win a case against Spain? It may well do, but perhaps a more pertinent question is to ask what the fiscal impact of a favourable decision will be for the prospects of recovery in the European Periphery.

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@iGlinavos

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2 thoughts on “The impact of ISDS on green policies in Southern Europe

  1. In the cases of Czech Republic and Spain (and Italy but less so as they had fixed Quotas in place), they both enacted retrospective cuts to the FITS (Feed-in-Tariffs) and rather than just reducing profits they actually sent many companies and investors bankrupt overnight. Investors do need protecting against this.

    That said, the FITs were too high and did need reducing, FITs were always intended to provide 8-10% ROI, but due to the massive over-capacity built up by unregulated PV industry growth in China costs were falling rapidly – 5-10% per month, every month. Investors, obviously, saw a massive chance for extra-ordinary ROIs and ramped up their activities. One could (and should) argue that CzRep and Spain should have simply agreed to cover the 8-10% ROIs whilst significantly reducing the FITs for all future PV installations.

    An ROI linked FIT would provide security but would not encourage good fiscal practise (nobody wants government backed licenses to build anything and get a guaranteed profit), as such an absolute and steadily reducing FIT arguably provides a better incentive. Belgium did this successfully.

    Spain, CzRep and Italy should, in this instance, because it provides a positive impulse to their energy network and CO2 reduction targets, be looking to ensure that no investors lose money. Personally I think arbitrators should carry out Due Diligence and examine the books for all the SPVs (Special Project Vehicles) into which all the PV projects were put and make individual FIT recommendations to provide a nominal profit. This would restore faith in the investment regimes of those countries.

    This does not however address examples of policy change (eg. Energiewende in Germany) intended for the better good (Energiewende sought to remove nuclear power from the grid as a direct result of Fukushima). Vattenfall is seeking €4 billion in damages, RWE €2bn etc. from the German government. In Japan the nuclear companies (Tepco) was unable to cover the damage costs and had to be renationalized. It is highly unlikely that Vattenfall or RWE or EDF would survive a Fukushima – but Germany would be unable to renationalize the Swedish Vattenfall or French EDF. As such there is a much wider argument that foreign owned companies should not be permitted to operate nuclear power plants. How would ISDS or any legal system cope with a Fukushima in Europe? Is energy security sufficient legal base to guarantee profits before policy change? In the case of nuclear power, with Chernobyl and Fukushima we have sufficient evidence that the repercussions are so huge that a private company cannot ever be entrusted to manage the fiscal impact, meaning that there is de facto a Government guarantee – is this not a hidden subsidy?

    PV and nuclear as parts of the energy mix, and therefore vital to the security and well-being of the countries, may need a softer – more investor-friendly hand.

    In the case of policy change for health improvement (eg smoking, vehicle CO2 reduction) there is a strong case to remove any investor protection. The concern for me at least is how will TTIP/ISDS affect such aspects with highly contentious developments like neonicotinoids (Bayer) and GMOs (Monsanto). Both argue that they add to food security – although evidence is trickling out that this may not be the case (neonicotinoids kill bees, glyphosate causes cancer in humans). ISDS would afford Bayer and Monsanto protection.

    Governments must always have the ability to legislate against (potentially) harmful substances, irrespective of any financial concerns – ISDS would take this away. The secret TTIP deal of which ISDS is only one part must therefore also be stopped.

    Liked by 1 person

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