Introduction

Charged with the task of resolving disputes between sovereign states and foreign investors, arbitral tribunals face a complex balancing act. Investors understandably seek a fair and consistent regulatory environment for their investment, but host states must retain the right to enact legal and regulatory changes when it is in the public interest to do so. In early cases, investors could seemingly rely on any subjectively held expectation about the profitability or longevity of their investment to succeed in their claims. However, recent decisions have seen arbitral tribunals narrow the parameters of investors’ expectations and increasingly uphold the state’s right to regulate for legitimate purposes, such as environmental protection or to address public health concerns.

It is foreseeable that investors in the highly regulated energy sector will increasingly be held responsible for undertaking far-reaching assessments of the political, economic and social landscape in which they plan to invest. A key feature of this landscape will be the host state’s commitment to mitigating the effects of climate change. This will be highly relevant in the context of claims brought by ‘traditional’ energy investors, i.e. in the coal, oil and gas industry, where states have implemented measures designed to reduce carbon emissions or promote renewable energy production. Conversely, investors in ‘green’ energy production, i.e. from solar, wind, geothermal or other renewable sources, must also have regard to the possibility of regulatory and legislative change, and – absent a clear commitment by the host state – cannot expect stability by virtue of global trends alone.

I. The evolution of legitimate expectations

To understand the role of legitimate expectations in current energy investment disputes, it is necessary to first explore how the principle has evolved within the relatively nascent field of investor-state dispute settlement (‘ISDS’). Foreign investors are accorded certain protections through the provisions of fair trade agreements, multilateral and bilateral investment treaties (‘BITs’), collectively referred to as international investment agreements (‘IIAs’). One of the essential obligations enshrined in IIAs is that the host state must accord foreign investors fair and equitable treatment (‘FET’). The principle of legitimate expectations has come to constitute the ‘touchstone’ of the FET standard. ¹

1) The interplay between legitimate expectations and the FET standard

In determining whether a change to the state’s legal or regulatory framework constitutes a breach of the FET standard, tribunals have, inter alia, turned their minds to whether the investor had an expectation as to ‘the consistency, predictability, stability, and non-arbitrariness of the host state’s conduct with respect to the claimant’s investment’.² If so, further questions are raised: What was the scope of this expectation? On an objective analysis, did the host state actively encourage or instil it in the mind of the investor? Was the state’s conduct in this respect equivalent to a promise, whether express or implied? Were the investor’s expectations rigid and unrealistic, or did they allow for reasonably foreseeable changes?

Only by considering these questions can a tribunal determine if the investor’s expectations were legitimate and, as a result, deserving of protection under the FET standard. It follows that there is no universally applicable standard of ‘legitimacy’; it must be evaluated by analysing the allocation of risk between host state and investor in each particular case.³ For this reason, it has been noted that use of the term ‘legitimate expectations’ in a self-defining or tautological sense should be avoided.⁴ It would be inaccurate, for example, to state that ‘an investor has a legitimate expectation to be treated fairly and equitably’, since such a statement does not define what exactly the investor is entitled to expect from the host state in the specific circumstances of the case.⁵ It is, however, possible to surmise that even under a narrow construction of the FET standard, a breach will likely be found where the host state has fostered objective expectations in order to induce foreign investment and subsequently repudiated those expectations.⁶

2) Early pro-investor interpretation

An early conception of the legitimate expectations principle emerged in the case of Tecmed v Mexico, which concerned an alleged breach of the FET standard pursuant to the Spain-Mexico BIT.⁷ The tribunal found that the FET clause conferred an obligation on contracting states to ‘provide to international investments treatment that does not affect the basic expectations that were taken into account by the foreign investor to make the investment’.⁸ Further, the tribunal stated that the investor could reasonably expect to know in advance ‘any and all rules and regulations that will govern its investments, as well as the goals of the relevant policies and administrative practices or directives to be able to plan its investment’.⁹ The breadth of this expectation - and the limitation imposed on the host state - was extreme. It effectively rendered the FET clause tantamount to a freezing clause, preventing the state from making any kind of legislative or regulatory modification which might adversely affect the investment. In a string of subsequent cases, the focus remained squarely on safeguarding stability for investors.¹⁰ For example, the tribunal in Occidental Exploration and Production Co. v Ecuador noted that the state was under an obligation ‘not to alter the legal and business environment in which the investment has been made’.¹¹ From such statements, it would have appeared to many that the sovereign mandate of the host state, to legislate and regulate in the public interest, was being steadily eroded for the sake of guaranteeing foreign investors total stability.

In contrast to the above-mentioned awards, claims arising from the North American Free Trade Agreement (‘NAFTA’) demonstrated a much narrower interpretation of the notion of legitimate expectations. The case of Glamis v United States centred upon the host state’s retraction of development approval for a gold mine, on the basis of environmental concerns and new legislation enacted to protect sacred Native American sites.¹² The tribunal rejected the claimant’s conception of its legitimate expectations, noting that such expectations would need to be based on ‘definitive, unambiguous and repeated’¹³ commitments by the host state, and finding that the state’s conduct did not amount to active inducement of a ‘quasi-contractual’ expectation.¹⁴ Importantly, the tribunal held that ‘a claimant cannot have a legitimate expectation that the host country will not pass legislation that will affect it’.¹⁵ This reasoning was echoed in subsequent cases, where tribunals held that investments would only be protected against legislative changes if such changes were ‘arbitrary or grossly unfair or discriminatory’.¹⁶ In Methanex v United States, the tribunal went further, finding that it was the responsibility of the investor to pre-empt legislative changes designed to protect the environment.¹⁷ The conclusion to be drawn from the early NAFTA examples is a strict one; legislative and regulatory changes might well have been detrimental to the investment in question, but in most cases, the host state did not fall short of the FET standard for enacting them.

3) The current state of play

Recent awards have indicated a levelling out of the disparate positions outlined above. In the NAFTA case of Clayton/Bilcon v Canada, the tribunal expressly distanced itself from the approach taken in Glamis v United States, observing that the contemporary minimum standard is not limited to ‘outrageous’ conduct by host states, rather, it involves a more significant measure of protection.¹⁸ Notwithstanding the softening of the approach adopted by early NAFTA tribunals, it is possible to observe a general trend towards a more restrictive interpretation of the types of expectations that qualify as ‘legitimate’, and a more generous approach towards the state’s right to regulate. For example, in Arif v Moldova the tribunal succinctly concluded: ‘Quite simply, not every expectation of an investor is protected; rather it must be an expectation recognized and protected in international law’.¹⁹ The tribunal also drew from the reasoning expressed in Saluka v Czech Republic that ‘no investor may reasonably expect that the circumstances prevailing at the time the investment is made remain totally unchanged’.²⁰

The case of Philip Morris v Uruguay (‘Philip Morris’) provides an illustrative example of recent trends in the interpretation of legitimate expectations. ²¹ In Philip Morris, the tribunal drew a clear distinction between misplaced expectations derived from the general laws or regulations in place at the time of investment, and legitimate expectations derived from a specific representation made by the host state. In 2008 and 2009, Uruguay enacted a series of measures which were designed to reduce tobacco consumption; first, by preventing the marketing of more than one variant of cigarette under the same brand, and second, by requiring that health warnings take up 80% of the cigarette packet.²² In asserting its right to regulate, Uruguay emphasised the public health benefit of these measures and highlighted its obligations under the World Health Organisation’s 2003 Framework Convention on Tobacco Control.²³ In rendering its decision, the tribunal noted that the requirement for legal stability espoused by the FET standard did not affect ‘the State’s right to exercise its sovereign authority to legislate and to adapt its laws to changing circumstances’.²⁴ The tribunal attached significant weight to the intention behind the regulatory measures, noting that their adoption was based on ‘strong scientific consensus as to the lethal effects of tobacco’.²⁵ The relevance of the public health objective was linked back to the claimant’s expectations at the time of investing, with the tribunal finding that, in light of ‘widely accepted articulations of international concern for the harmful effect of tobacco’, investors in the tobacco industry ought to have expected increasingly stringent regulations.²⁶ Here, the onus was largely placed on the investor to have considered the social and economic conditions of the host state, and to have ‘inquired in advance’ with regard to the likelihood of a change to the regulatory framework.²⁷

II. Claims by renewable energy investors under the Energy Charter Treaty

The Energy Charter Treaty (‘ECT’), which has been in force for over 20 years and is ratified by over 50 states, is a multilateral IIA designed to encourage cross-border cooperation, ensure investment protection, and promote sustainable development in the energy sector.²⁸ Through the dispute resolution clause, an investor from a contracting state may bring a claim against a contracting host state for an alleged breach of an ECT obligation. Article 10(1) of the ECT requires contracting states to create ‘stable, equitable, favourable and transparent conditions for investors’, and further provides that the FET standard forms part of these conditions.²⁹

Over the past decade, there has been an influx of claims brought by renewable energy investors against European states under the ECT, with over 40 claims filed against Spain alone.³⁰ The claims centre upon Spain’s implementation of generous incentives to attract solar energy investors, only to scale back the favourable regulatory framework in response to a deficit in the market (exacerbated by the global financial crisis). Incentive regimes were also implemented – and subsequently modified – by other European states, resulting in similar claims by renewable energy investors against Italy, the Czech Republic, and Bulgaria.³¹ In Charanne v Spain (‘Charanne’), which was the first decision of the dozens of pending claims, the tribunal upheld the legitimacy of Spain’s 2010 amendments to the incentive regime.³² This outcome appeared to be in line with the general trend towards limiting investor’s expectations and upholding the state’s mandate to enact legislative and regulatory change. However, several claims challenging later, and more dramatic, regulatory modifications have since been decided in favour of the claimant investors.³³

1) The Charanne case

In 2007, Spain launched a promotional campaign headlined ‘The sun can be yours’, designed to attract investment in its solar energy sector, in line with EU Directive 2001/77/EC on the promotion of electricity from renewable energy sources.³⁴ The campaign introduced a special legislative and regulatory incentive regime, including a feed-in tariff for a 25-year period and a reduced tariff beyond that period (‘Special Regime’).³⁵ The Special Regime achieved its aim of attracting foreign investors, transforming Spain into a global leader in the green energy investment market.³⁶ However, it soon became apparent that the feed-in tariffs paid to energy producers were disproportionality high, creating a deficit.³⁷ This issue was not unique to the Spanish model; tariff deficits began to occur in many European states that had enacted similar solar energy schemes.³⁸ Without taking action to modify the Special Regime, the deficit would only worsen, to the detriment of the end consumer and to the market as a whole. In 2010, Spain enacted reforms to the Special Regime, inter alia establishing a transmission fee, eliminating the feed-in tariff beyond the 25-year period, and capping the number of annual operating hours that would be eligible for the feed-in tariff.³⁹

The co-claimants, Dutch company ‘Charanne B.V.’ and Luxembourg company ‘Construction Investments S.á.r.l.’ were key shareholders of ‘Grupo T-Solar’, which owned a number of solar plants in Spain.⁴⁰ In addition to claiming that Spain’s actions were tantamount to indirect expropriation, the claimants alleged that the 2010 amendments to the Special Regime had destabilised the framework, in breach of the FET standard set on in Article 10(1) of the ECT.⁴¹ The claimants argued that the Special Regime constituted a specific commitment by Spain, reasonably relied upon by the investors, and that the modifications to the Special Regime amounted to a frustration of their legitimate expectations.⁴² The fundamental expectation, as asserted by the claimants, was that Spain would maintain a stable and predictable regulatory framework, based on that which existed at the time of the decision to invest.⁴³ This expectation was said to have been reasonable and legitimate because of the interpretation of the Special Regime as a specific commitment, in light of the limited group of investors to whom the State had directed its promotion.⁴⁴

The tribunal found that, on an objective analysis, the Special Regime could not be interpreted as having an effect akin to a stabilisation clause, nor could it be held to constitute a legitimate basis for the co-claimants’ purported expectations.⁴⁵ Although enacted with a particular class of investors in mind, the Special Regime was general in nature and could not be construed as a specific commitment to individual investors.⁴⁶ To interpret it as such ‘would constitute an excessive limitation on [the] power of states to regulate the economy in accordance with the public interest’.⁴⁷ In its reasoning, the tribunal made reference to the principle expounded in Electrabel v Hungary, that while an investor is guaranteed protection against unfair changes, the state is entitled to maintain a reasonable degree of regulatory flexibility to respond to changing circumstances.⁴⁸ Following this line of reasoning, the tribunal found that in the absence of a specific representation to the contrary, the possibility of changes such as those implemented in 2010 ought to have fallen within the scope of the claimants’ expectations.⁴⁹ Consequently, the claim for breach of the FET standard failed, as did the claim alleging indirect expropriation.

While each claim necessarily turns on its own facts, the decision in Charanne serves as a ‘litmus test’ with respect to the scope of FET obligations in the context of ECT claims. A key question in Charanne was the extent to which general legislation, enacted to promote investment in a specific market – in this case, solar energy – formed the basis of legitimate expectations for foreign investors. On this point, the language used by the tribunal was clear: to establish legitimate expectations, an investor cannot simply rely on the legal and regulatory framework that existed at the time of investment. Absent an explicit commitment that the framework will not be modified, or conduct amounting to a promise, changes which are reasonable and foreseeable should be contemplated by investors and incorporated into their expectations accordingly.⁵⁰ Of practical significance, the tribunal found that as investors in a ‘highly regulated’ sector, the claimants ought to have undertaken a diligent analysis of the legal and economic climate, which extended to considering how the Special Regime might be modified in the future.⁵¹ The evaluation of legitimate expectations was framed in such a way that the onus fell to the claimants to establish that the level of regulatory stability they sought to rely on was in fact guaranteed by Spain, in any binding sense. This reasoning was largely mirrored in Blusun v Italy, where the tribunal considered legislative amendments to a similar solar energy regime and found that Italy had made no ‘special commitments’ to the claimant investor.⁵² These decisions are to be distinguished from previous cases in which states faced an uphill battle to prove the legitimacy of their regulatory acts, in the face of generously interpreted expectations of investors.⁵³

The outcome of Charanne should not be read as a green light for states to freely exercise their regulatory powers in all circumstances. Even without a specific commitment, the legitimacy of Spain’s conduct was constrained by clear parameters: first, the exercise of regulatory powers had to be reasonable and foreseeable, and second, the measures in question could not be ‘incompatible with a criterion of economic reasonableness, with public interest, or with the principle of proportionality’.⁵⁴ In this respect, the tribunal placed considerable weight on the objective and actual effect of the 2010 amendments, finding that those changes did not undermine the essential elements of the Special Regime.⁵⁵ The 30-year limitation on the regulated tariff corresponded to the anticipated lifespan of the technology, and to the term of the land leases for the solar plants.⁵⁶ Further, the cap on eligible operating hours was based on objective factors, such as the solar radiation level in the relevant region.⁵⁷ As a result, while the measures had a negative effect on the profitability of the solar plants, they could not be said to be arbitrary or irrational, nor did they eliminate the essential characteristics of the Special Regime.⁵⁸ Finally, the positive public interest objective was considered, with reference to the need to limit the deficit in the solar energy sector, which had been worsening year by year.⁵⁹ This combination of factors pointed to an overall legitimacy of the measures, establishing them as proportionate, reasonable, and motivated by a rational public interest objective.

The decision in Charanne makes clear that investors cannot necessarily rely on the legal or regulatory framework as it exists at the time of investing, or on subjectively held beliefs as to the future profitability of their investment, even if the state has alluded to this generally. However, the tribunal’s reasoning in the later decision of Eiser v Spain (‘Eiser’) will likely offer a degree of reassurance to investors, for having demarcated where the host state ‘crossed the line’ and for distinguishing the impact of the regulatory measures from those challenged in Charanne.⁶⁰

2) The Eiser case

The claim in Eiser is significant because it addresses regulatory changes beyond 2010, which were ruled as falling outside the scope of the Charanne tribunal’s jurisdiction. It was made clear in Charanne that, in the absence of a specific commitment, the state was under no obligation to maintain the feed-in tariffs unchanged once granted. However, any modification of the regime, as was deemed necessary in that case to stabilise the market, had to have been implemented in a non-discriminatory and proportionate manner.⁶¹ For proportionality, changes could not be capricious or unnecessary, and could not amount to a sudden and unpredictable elimination of the ‘essential characteristics of the existing regulatory framework’.⁶²

A breach of the FET standard can take many forms; it may be a single transformative act, or a series of minor measures having the overall cumulative effect of a breach.⁶³ From 2012 onwards, Spain’s efforts to scale back the Special Regime became increasingly dramatic in effect, culminating in its elimination in 2013.⁶⁴ The government issued a decree imposing a tax of 7% on electricity production, and the feed-in tariffs (which had been reduced in 2010) were eliminated altogether.⁶⁵ An entirely new regime governing renewable energy was established in 2014, which calculated the rate of return for investors based on the standard of hypothetical ‘efficient’ solar energy plants.⁶⁶ The claimants’ position in Eiser was that these regulatory changes had the cumulative effect of destroying the value of their investment.⁶⁷

In concluding that Spain had indeed breached the FET clause, the tribunal in Eiser distinguished the facts at issue from those considered in Charanne, stating that the cases were fundamentally different.⁶⁸ The measures challenged in Charanne were said to have been ‘far less dramatic’, with the effect of having only marginally decreased the profitability of the investment, rather than constituting a ‘total and unreasonable’ change in the regulatory framework.⁶⁹ The tribunal adopted the reasoning in Parkerings v Lithuania, that ‘any businessman or investor knows that laws will evolve over time. What is prohibited, however, is for the State to act unfairly, unreasonably or inequitably in the exercise of its legislative power’.⁷⁰ In Eiser, Spain was found to have ‘crossed the line’ by dismantling the entire regulatory framework upon which the claimant had relied, and by applying a new regime to existing solar plants in a manner which undermined their value.⁷¹ The focus was squarely on the ‘drastic’ and ‘abrupt’ nature of the regulatory measures, which the claimant could not reasonably have expected, and which therefore amounted to a breach of the FET standard.⁷² This approach was echoed in three subsequent cases, all of which have been decided in the past year, in favour of the claimant investor.⁷³

It is noteworthy to mention that the tribunal in Eiser upheld Spain’s jurisdictional objection in relation to the 7% tax on electricity introduced in 2013.⁷⁴ The objection was based on the ‘carve-out’ mechanism contained in Article 21(1) of the ECT, which provides that ‘nothing in this Treaty shall create rights or impose obligations with respect to Taxation Measures of the Contracting Parties’.⁷⁵ Such provisions are common in IIAs, in recognition of the principle that taxation is a particularly important exercise of a state’s sovereign prerogative, and should therefore be shielded from treaty claims.⁷⁶ However, the carve-out mechanism is limited, in that host states may not use taxes to discriminate between or expropriate foreign investments.⁷⁷ The ECT further provides that if a tax is alleged to be discriminatory or constitute expropriation, the issue must first be referred to the tax authorities of the host state.⁷⁸ In the landmark case of Yukos v Russia, the respondent state sought to rely on the taxation carve-out.⁷⁹ However, the claimant investors successfully argued that the state’s actions were not bona fide taxation measures, but rather part of a specific, punitive campaign against the investor, carried out ‘under the guise of taxation’.⁸⁰ In Eiser, the claimants raised a similar argument, asserting that the tax was adopted in bad faith and was therefore not eligible for the ECT taxation carve-out.⁸¹ The tribunal did not accept this objection, applying the exception and noting that the state’s sovereign prerogative to tax should not be unduly questioned.⁸² This outcome may be of relevance in potential claims by traditional energy investors relating to the imposition – or escalation - of a ‘carbon tax’ or similar fiscal measures by many states, which will be explored in the next chapter.

3) The upcoming Vattenfall II decision

An award in the high-profile nuclear energy dispute is yet to be rendered, but there are already notable distinguishing features between Charanne and Vattenfall AB and others v Federal Republic of Germany (ICSID, Case No ARB/12/12) (‘Vattenfall II’). In Charanne, the Special Regime was found not to constitute, of itself, legitimate grounds for the claimants expectations of regulatory stability. However, the possibility of a general legislative framework creating legitimate expectations, even without an express commitment to stability by the state, has not yet been ruled out altogether. Vattenfall II may be just the case to demonstrate this possibility. This is primarily because of the nature and timing of the legislative amendment in question, which was implemented suddenly and in direct contradiction to a previous enactment by the state.

Germany began to phase-out nuclear energy production in 2002, albeit in a relatively steady manner, by allocating decreasing production volumes to each producer.⁸³ The phase-out process was slowed by legislative amendments in 2010, which extended the production volumes that had previously been allocated.⁸⁴ However, only months later, in the wake of the Fukushima nuclear disaster, the government declared a nuclear moratorium.⁸⁵ The phase-out was dramatically accelerated by further legislative amendments enacted in 2011, which set fixed shutdown dates for the nuclear facilities, regardless of whether the production quotas specified in 2002 (and extended in 2010) had been filled.⁸⁶

It appears that the claimant investors have not formulated their claim upon the state’s decision to phase out nuclear energy itself.⁸⁷ In a public statement issued before the 2016 hearing, the claimant company asserted: ‘We fully accept the German decision to phase out nuclear power. But when Germany decides to reorient its energy policy, foreign investors should not have to pay the price for such a decision and its immediate consequences’.⁸⁸ If a claim had been initiated in response to the phase-out process as commenced in 2002, alleging a breach of the FET standard, it would likely have been treated in a similar way to Charanne or Philip Morris. With no specific promise to the contrary, in light of public interest considerations, and given the gradual nature of the initial phase-out process, the investors would face an uphill battle to establish a breach. In a highly politicised industry such as nuclear energy production, decisions such as that announced by Germany in 2002 would be a reasonably foreseeable possibility. However, it is arguable that the 2011 legislative amendments were impossible for investors to predict, since such amendments contradicted the extension of production volumes only a matter of months prior. An award is yet to be rendered in this case.

4) The relevance of the public interest objective

Tribunals have emphasized that a valid and proportionate exercise of regulatory power, motivated by rational public policy objectives, will not trigger state liability. In Philip Morris, Uruguay sought to maintain the tribunal’s focus on the public health objectives of its regulatory measures. In rendering its decision, the tribunal urged other investment tribunals to ‘pay great deference to governmental judgments of national needs in matters such as the protection of public health’.⁸⁹ In Charanne, on the other hand, Spain was forced to defend its efforts to scale back subsidies that had been designed with the objective of fostering renewable energy development. These decisions raise the question: To what extent should the subjective intention behind the regulatory action be taken into account, when examining the scope of a state’s right to regulate? It is arguable that focusing on the purported ‘morality’ of the measures might muddy the waters or distract from the key issue at hand, being the scope of representations made to investors, and any subsequent divergence from those representations.

However, an analysis of the reasoning applied in Charanne and Philip Morris suggests that tribunals have not upheld a state’s right to regulate simply because the measures in question carry abstract progressive or ‘moral’ connotations. The policy goal pursued by the state was relevant, but not in the sense of determining whether its merits defeated the legitimate expectations of the investor. Rather, an assessment of the public interest objective was relevant because, in the specific circumstances of each particular case, the investor ought to have anticipated it. In this regard, investors may ask to what extent they will be required to predict public opinion or pre-empt a state’s future policy aims. The answer is, absent a stabilisation clause or specific promise to the contrary, to the greatest possible extent. Given the dramatic changes taking place in the global energy market, and in light of the unique relationship between geopolitics and energy production, investors in this sector must be especially attuned to the likelihood of political and regulatory change.⁹⁰

III. In search of certainty: What should states and traditional/green investors reasonably expect, and how to better delineate expectations?

As economies gradually transition from fossil fuel dependency towards a low-carbon future, the already complex landscape of the energy market will need to adjust to new technology, new regulations and new risks.⁹¹ While the traditional energy sector continues to bear the brunt of measures implemented by states to meet emissions reduction targets, the renewable energy sector has experienced a rapid acceleration in growth, with many states implementing supportive schemes to attract foreign investment in the field. However, Charanne and other ECT claims offer a striking illustration of the fact that an investor cannot necessarily base their expectations on an existing regulatory framework, and much less on general trends, domestic or global, or aspirational policy goals. Despite the best efforts of states to establish attractive legislative and regulatory environments – in line with global and regional objectives – such frameworks are not of themselves a guarantee of stability. Investors in all sectors of the energy market must therefore undertake comprehensive due diligence in order to garner far-sighted and realistic expectations about the future of their investment.⁹²

Notwithstanding the vicissitudes of the global energy sector, there are certain key interests of states and investors which are unlikely to change. Investors will seek clarity, certainty, and protection from being taken on a legal and regulatory rollercoaster ride. States will seek to retain their mandate to legislate and regulate in pursuit of public interest objectives. It follows that the pursuit of greater certainty in their dealings with one another is something of a common interest between states and investors. However, the principle of legitimate expectations is typically raised after a dispute has arisen, once the effects of adverse regulatory measures have been observed. Consequently, the legitimacy of investors’ expectations is evaluated retrospectively, through the prism of an existing dispute. There is much to be gained from clearly and consciously establishing the expectations of investors, and the scope of the state’s regulatory mandate, at the earliest possible juncture. In addition to refining contractual terms and addressing these issues specifically in negotiations, there is considerable room for improvement in the drafting of the IIAs themselves.

1) The changing landscape of the energy industry

The threat of climate change has put pressure on states to focus their efforts on two key tasks: fostering the development of renewable energy production and reducing the output of carbon. It is widely recognised that to transition towards a low carbon economy, states cannot simply target and penalize traditional energy producers, but must also encourage development in new sources of energy production. A 2017 report prepared by the Organisation for Economic Cooperation and Growth (‘OECG’) calls on states to combine emission-reduction policies, such as carbon pricing, with incentives to drive growth in ‘climate-resilient infrastructure’.⁹³ The report asserts that integrating ‘strong fiscal and structural reform’ with ‘coherent climate policy’, rather than treating climate change as a separate issue, would significantly aid economic growth.⁹⁴

Mitigating the effects of climate change will also require a shift towards a more inclusive energy market, with private investment needed to stimulate alternative energy production in all countries, including emerging economies.⁹⁵ Foreign investment will play a significant role in these developments, not only in projects to harness renewable energy sources, such as wind and solar plants, but also in energy storage technology and transmission infrastructure.⁹⁶ While traditional energy sources continue to dominate the industry, the worldwide push to reduce carbon output and expand investment in renewable sources will have a significant impact on the expectations of investors, across the entire spectrum of the energy industry.⁹⁷

The Paris Agreement, entered into force on 4 November 2016, lays out an ambitious blueprint for the global challenge of tackling climate change.⁹⁸ By ratifying the Paris Agreement, states are making a commitment on the global stage to give effect to its goals through domestic measures. To achieve its overall aim of limiting the global temperature rise to below two degrees, the Paris Agreement requires the implementation of national carbon-reduction schemes, coined ‘nationally determined contributions’, each more ambitious than the last.⁹⁹ For example, the nationally determined contribution provided by the USA in March 2015 was a regulatory framework designed to reduce methane emissions in the oil and gas sector.¹⁰⁰ As part of the climate action agenda, the ‘Clean Power Plan’ set specific targets for emissions reduction, which would affect existing coal-fired power plants.¹⁰¹ In 2017, the USA signalled its intention to withdraw from the Paris Agreement and cancel a number of related programs initiated by the previous administration.¹⁰² However, it is foreseeable that individual states within the USA will continue to take steps in transitioning towards low-carbon energy production, while on the global stage, China and India – two of the biggest carbon emitters – are anticipated to ‘take the lead’ in developing renewable energy technology.¹⁰³

2) The key interests of investors and host states

It is apparent that the overarching concern for investors is not preferential or even favourable policy decisions, but rather consistency, and the ability to operate within a clear legislative and regulatory framework. The CEO of Shell, Ben van Beurden, recently expressed his desire for the USA to adhere to the Paris Agreement, stating that: ‘One of the biggest concerns that I have around climate change is the unpredictability in which governments will go about it’.¹⁰⁴ The CEO of ExxonMobil similarly expressed support for the aims of the Paris Agreement, describing it as ‘an effective framework for all countries to address rising emissions’.¹⁰⁵ It follows that an energy investor’s need for stability does not necessarily stem from rigidness or an inability to adjust to changing circumstances, but rather from the need to predict the substantial costs and risks that will arise at each stage of an energy project.¹⁰⁶ Complex agreements must be entered into along the way, from exploration to development and operation, and the success of each step largely depends on the clarity of the applicable legislative and regulatory framework.¹⁰⁷

While energy investors seek certainty and a stable environment for their investment, the establishment of an attractive framework for energy investment is just one of many factors that host states must consider. Other key considerations include the public perception of private investment in utilities, fluctuating energy prices, public safety (particular where nuclear energy is concerned), national security, and environmental protection.¹⁰⁸ An overarching concern of the host state is therefore its ability to exercise legislative and regulatory discretion without breaching its obligations to foreign investors. As discussed in the preceding chapters, measures taken to protect the environment will often have sudden and potentially adverse impacts on investments.¹⁰⁹ By their very nature, IIAs do not set out – in a positive sense – the types of actions that host states can legitimately take, since the provisions are generally geared towards protecting the rights of investors. However, it is foreseeable that IIAs will evolve to include precise exception clauses for sensitive policy areas, such as public health and the protection of the environment.¹¹⁰ Such clauses may be valuable in providing states with the requisite certainty to implement far-reaching environmental policy goals, just as investors require a base level of stability to plan costly long-term investments.

a) What can traditional energy investors legitimately expect?

Coal, oil and natural gas remain the ‘big players’ of the global energy sector.¹¹¹ However, in recent years the oil industry has experienced a significant price collapse, stemming from oversupply, a decline in demand, and increased costs driven by carbon-reduction policies.¹¹² It is anticipated that traditional markets for oil will continue to decline as the electricity sector rises, driven by investment in new technologies and renewable sources.¹¹³ States will continue to cut carbon emissions, through the reduction of subsidies or export credits available to carbon-intensive industries, by the imposition of a carbon tax, emissions trading schemes, or a combination thereof.¹¹⁴

The state of California, the world’s sixth-largest economy, provides a concrete example of the types of measures which are being implemented in an effort to reduce carbon emissions.¹¹⁵ The current ‘cap-and-trade’ system, which has been in effect since 2013, imposes a cap on carbon emissions, while allowing companies to buy and sell pollution credits - formally called allowances - for every ton of carbon dioxide or other greenhouse gas emitted.¹¹⁶ Incentive to reduce emissions is added by reducing the number of available allowances each year, along with the cap on emissions, and raising the price of purchasing allowances.¹¹⁷ Similar cap-and-trade systems have been implemented by the European Union, Quebec, and the states of New York and Massachusetts, while Ireland, Sweden and British Columbia have opted to impose a carbon tax rather than a trading scheme.¹¹⁸ In addition to the cap-and-trade system, California has committed to increasing electricity from renewable energy sources to 50% of total procurement by 2030.¹¹⁹ Given the size and influence of California’s economy, it is anticipated that such actions will be mirrored in the wider region and across the globe, despite the opposing direction taken at the federal level.¹²⁰

The cap-and-trade mechanism has not yet been challenged through the avenue of ISDS, nor has the imposition of a carbon tax. However, one may look to the outcome of the awards in EnCana Corporation v Ecuador (‘EnCana’),¹²¹ and Nations Energy v Panama (‘Nations Energy’)¹²² to anticipate how a tribunal may deal with tax measures generally.¹²³ In both cases, considerable deference was afforded to the host states’ right to exercise their fiscal mandate. The claim in EnCana, brought under the Canada-Ecuador BIT, centred upon the entitlement of the investor claimant (an oil company) to value added tax (‘VAT’) refunds under Ecuadorian law.¹²⁴ As in the ECT, the Canada-Ecuador BIT excludes taxation measures from the application of the FET standard.¹²⁵ The claimant could therefore only bring the claim under the expropriation provisions, which could be applied to fiscal measures.¹²⁶ In dismissing the claimant’s allegation of indirect expropriation, the tribunal emphasized Ecuador’s right to determine the future of its tax regime and noted that a claim would only arise in circumstances where the impugned tax law was ‘extraordinary, punitive in amount or arbitrary in its incidence’.¹²⁷

How tribunals will assess the legitimacy of carbon taxes or equivalent measures, which are likely to become increasingly stringent, remains to be seen. However, the decisions of both EnCana and Nations Energy illustrate the high threshold for disputing the legitimacy of tax measures. This deference was echoed by the tribunal in Eiser, in relation to the renewable energy investor’s challenge to the 7% tax on energy production imposed by Spain. The partial victory for Spain in that case suggests that investors will need to overcome a high threshold where their claims relate to taxation measures, and that the purpose of the investment will not afford certain investors ‘special treatment’ if discrimination or expropriation cannot otherwise be established. This outcome may prove relevant should traditional energy investors argue that a carbon tax, for example, is discriminatory, arbitrary or punitive in nature by virtue of its adverse effect on carbon-emitting energy producers.

Recent cases have emphasized the need for investors to undertake comprehensive due diligence before deciding to invest, looking to the political, economic and social realities of the host state, and considering future developments which might precipitate regulatory or legal changes.¹²⁸ There is arguably no area of investment in which this task is presently more important than in the field of traditional energy production. Prospective foreign investors in the coal, oil and gas industry must take note of the host state’s environmental policies and any existing carbon-reduction measures as one of many considerations in the due diligence process. An investor cannot discount the possibility that the host state will implement new measures or increase their effect, provided that such actions are non-discriminatory and in accordance with a legitimate public interest objective. In this regard, an investor’s expectations should not be considered ‘frozen’ at the time of the decision to invest; in Perenco v Ecuador, the tribunal found that oilfield operators could be held to higher environmental standards than those contemplated when undertaking the initial investment, and that this possibility ought to have been factored into their initial expectations.¹²⁹

Despite concerns about a ‘regulatory chill’ constraining a state’s mandate to protect the environment,¹³⁰ the current momentum behind global efforts to combat climate change will underscore most related regulatory measures with a clear and rational public policy objective. Investors in the traditional energy sector will be hard-pressed to establish that such measures were reasonably beyond the scope of their expectations. In Philip Morris, the level of worldwide concern about the effect of tobacco smoking on public health was such that investors in the industry could not reasonably exclude from their expectations the possibility of harsh regulatory measures. Just as Uruguay heavily relied on the Framework Convention on Tobacco Control to justify its broad regulatory mandate,¹³¹ states may similarly rely on the Paris Agreement, and other global efforts to tackle climate change, as justification for ambitious regulatory reforms.¹³² It follows that traditional energy investors must broaden the scope of their expectations to include the regulatory effects of more dramatic environmental policies than they would have had to foresee in the past.

b) What can green energy investors legitimately expect?

While the energy sector may still be dominated by oil, gas and coal power, the field of alternative energy production – from wind, solar, geothermal, and hydropower sources – is rapidly expanding.¹³³ It has been recognised that private investment in the renewable energy sector is critical for the transition from a fossil fuel ‘brown’ economy to a green economy.¹³⁴ In addition to reducing emissions through carbon pricing, fossil fuel subsidy reforms and other mitigating polices, the recent OECD report recommended that G20 states ‘scale up efforts to mobilise private investment in low-emission and climate resilient infrastructure’.¹³⁵ Two of the biggest carbon emitters, China and India, are moving towards developing renewable energy technologies at an ever-increasing pace.¹³⁶ China is already the global leader in solar energy capacity, and recently unveiled a capital expansion of over US$ 360 billion in new solar, wind and hydropower projects.¹³⁷ It is anticipated that withdrawal of the USA from the Paris Agreement will pave the way for China to assert its dominance in the field of renewable energy development.¹³⁸

With worldwide hunger for energy showing no signs of abating, growth in emerging economies has sparked particularly high demand.¹³⁹ The International Energy Agency has estimated that US$48 trillion of investment will be needed to supply the world’s energy needs up to the year 2035.¹⁴⁰ It is projected that two thirds of this investment will take place in emerging economies.¹⁴¹ Indeed, an estimated 620 million people in Sub-Saharan Africa have no access to electricity.¹⁴² The executive director of the International Energy Agency has called for regulatory reform to alleviate the ‘energy poverty crisis’ by allowing for investment of approximately US$ 500 billion in Africa’s power sector.¹⁴³ Private investment will necessarily play a key role in meeting this demand, and as the energy sector continues to evolve and diversify, there is an opportunity for private investors in renewable energy production to rise to the fore in these developing economies.

However, investing in an emerging sector already involves a high degree of risk. Renewable energy projects typically involve expensive technological requirements, and significant sums of initial capital when compared to the lower upfront costs of fossil fuel based infrastructure.¹⁴⁴ As such, investors in this field will naturally seek out host states which offer favourable regulatory regimes or incentive schemes to support their initiatives and assist in recovering the initial capital outlaid.¹⁴⁵ Yet even the most generous incentive schemes will fail to attract investors if the host state does offer an acceptable degree of stability or cannot protect the investor against unfair treatment. The outcome of Charanne is illustrative of the risk of states scaling back favourable incentive schemes without necessarily breaching the FET standard, although the Eiser decision shows that a total retroactive withdrawal of a regulatory framework may overstep the mark.

The current political situation in the USA provides an example of a developed nation which appears to be in the process of engineering a dramatic turnaround in domestic environmental and energy policies.¹⁴⁶ The impact of the current administration’s policies, and the likelihood of such policies giving rise to ISDS claims, will largely depend on the nature of the legislative and regulatory measures that are put in place to implement them. However, the underpinning philosophy appears to be not only at odds with geopolitical trends, but also in stark contrast to the policies implemented by the previous administration. In relation to the Paris Agreement withdrawal, it has been observed that ‘the US is failing to act in accordance with international policy and norms in relation to climate change’, creating the circumstances in which treaty mechanisms ‘become critical’.¹⁴⁷ It is important to note that individual states within the USA may mitigate the effect of destabilising federal policies by maintaining consistency in their legislative and regulatory frameworks at a state level. The ‘California Solar Initiative’, for example, has been in effect since 2006 and has contributed significantly to the growth of the solar energy production.¹⁴⁸ Through the so-called ‘US Climate Alliance’, the states of New York, California and Washington, DC, have already pledged to uphold the commitments of the Paris Agreement.¹⁴⁹ The extent to which states can offset the adverse effect of dramatic regulatory changes at a federal level, thereby reducing the likelihood of claims, remains to be seen.

3) Clearer delineation of the state’s regulatory mandate in IIAs

There has been a great deal of political and academic discussion about how best to delineate the state’s right to regulate, and by extension, the parameters of legitimate expectations, in the express terms of IIAs. For example, in a public consultation paper on investment protection in the Transatlantic Trade and Investment Partnership (‘TTIP’), the European Commission stressed the need to ensure that the FET standard is not read as a ‘stabilisation obligation’ or as a ‘guarantee that the legislation of the host state will not change in a way that might negatively affect investors’.¹⁵⁰ The European Commission’s concerns reflect a wider apprehension about the interpretation of legitimate expectations by arbitral tribunals, and a perceived need to define it in concrete terms.

The FET standard assures foreign investors that it is legitimate for them to expect ‘that the rules will not be changed without justification of an economic, social or other nature’.¹⁵¹ For this reason, critics of ISDS have likened the FET standard to ‘quasi-comprehensive insurance for investors’¹⁵² or described it as a ‘vague provision’ which ‘entitles an investor to receive compensation for lost profits resulting from the enactment of a new emissions regulation’.¹⁵³ However, arbitral jurisprudence clearly demonstrates that no reasonable investor can have an expectation of a static regulatory framework, unless specific and direct commitments have been made to that effect.

Therefore, a key question is what exactly constitutes such a commitment by the host state.¹⁵⁴ In the bilateral agreement between Canada and the European Union (‘CETA’), Article 8.10 provides:

4. When applying the above fair and equitable treatment obligation, the Tribunal may take into account whether a Party made a specific representation to an investor to induce a covered investment, that created a legitimate expectation, and upon which the investor relied in deciding to make or maintain the covered investment, but that the Party subsequently frustrated.¹⁵⁵

It has been suggested that a specific commitment should be defined more narrowly in IIAs as a ‘specific written obligation’.¹⁵⁶ However, the effect of this definition would be to exclude verbal representations of a promissory nature, direct endorsements and public announcements, regulatory frameworks designed to target a specific group of investors, and many other types of commitments which have the ultimate effect of inducing a particular investment. The question of whether state conduct amounted to a specific and direct commitment, generating reasonable expectations, is a question which necessarily turns on the facts. It is arguable with force that such a question is best dealt with by arbitral tribunals, charged with the task of conducting an objective analysis of the specific circumstances of each case.

Similarly, there would be little utility in attempting to define the parameters of legitimate expectations in an abstract sense, since an assessment of the legitimacy of an investor’s expectations must necessarily turn on the facts of the particular case. A comparative view of the decisions in Charanne and Eiser demonstrates why the legitimacy of expectations must be assessed on a case-by-case basis. Two key issues were (inter alia) analysed in each case; the objective effect of the state’s conduct on the formation of the investor’s expectations, and the objective effect of any subsequent regulatory or legislative changes on the investment in question. In Charanne, Spain was found not to have frustrated the investor’s expectations, having scaled back the incentive regime (in pursuit of a rational public interest objective) whilst maintaining its essential characteristics. However, in Eiser, more dramatic regulatory changes which ‘completely destroyed’ the regime were found to constitute a breach. It would be nearly impossible to assess the ‘legality’ of Spain’s actions by predicting their impact on a hypothetical investment, without undertaking a factual inquiry of the kind carried out by the tribunal in each of the above cases.

To provide greater certainty about the state’s mandate to regulate in key policy areas, such as environmental protection, a declaration which shields certain regulatory measures from claims may achieve greater clarity for both parties than an attempt to define ‘legitimate expectations’. It has been asserted that the ‘new generation’ of IIAs will provide reservations and exclusions for certain types of claims, for example by inserting a clause affirming the right of the host state to make changes for environmental matters.¹⁵⁷ Such a clause could take the form of a general ‘environmental exception clause’, or could provide specific examples of climate-related measures which would be exempt from application of the investment protection provisions.¹⁵⁸ An example of this type of clause may be found in the US Model BIT 2012, which excludes claims relating to financial services, providing that: ‘no party shall be prevented from adopting or maintaining measures relating to financial services for prudential reasons’.¹⁵⁹ A similar provision for climate change-related regulations could allow a state to ‘defend’ an ISDS claim, by establishing that the regulatory measure in question was a ‘good-faith climate mitigation or adaptation measure’.¹⁶⁰ Such a mechanism may alleviate concerns about arbitral tribunals engaging in a quasi-judicial review of state conduct, at least in relation to environmental protection policies,¹⁶¹ and provide states with sufficient certainty to implement far-reaching environmental policy goals, just as investors require a base level of stability to plan costly long-term investments.

4) The role of stabilisation clauses

In negotiating long-term energy contracts, investors will necessarily be cognisant of the state party’s power to modify the legal and regulatory regime applicable to the contract. To secure the investment, the host state will often need to reassure the investor that it can provide a stable investment environment, particularly if the state is prone to political or economic volatility.¹⁶² This may be achieved by inserting a stabilisation clause into the contract, which has the effect of predetermining (to varying degrees) the legal and regulatory regime applicable to the contract in question. Stabilisation clauses range from strict ‘freezing’ clauses which, as the name suggests, freeze the law of the host state (as it applies to the contract) at the point of contract completion, to economic equilibrium clauses which do not freeze the applicable law but rather provide for the renegotiation of contract terms to deal with changes as they arise.¹⁶³ An example of a ‘traditional’ freezing clause, the likes of which were common in contracts of the 1970s and 1980s, may be found in the 1989 Tunisian Model Production Sharing Contract:

The Contractor shall be subject to the provisions of this Contract as well as to all laws and regulations duly enacted by the Granting Authority and which are not incompatible or conflicting with the Convention and/or this Agreement. It is also agreed that no new regulations, modifications or interpretation which could be conflicting or incompatible with the provisions of this Agreement and/or the Convention shall be applicable.¹⁶⁴

Strict freezing clauses are now relatively uncommon, and have been criticised for contributing to a perceived ‘regulatory chill’ by impeding the host state’s ability to implement legal and regulatory change.¹⁶⁵

Economic equilibrium clauses, sometimes referred to as renegotiation, adaptation or rebalancing clauses, provide a more nuanced solution for sharing the ‘regulatory risk’ between investors and host states.¹⁶⁶ Such clauses do not directly impede the state’s legislative or regulatory mandate, but rather provide the parties the option of renegotiating essential terms of the contract, to restore the ‘economic balance’ as it existed before the change in circumstances.¹⁶⁷ While the wording of such clauses varies widely, most provide that if the parties cannot reinstate the original economic balance through negotiation in good faith, the investor will be entitled to compensation for the cost of compliance with the new regime.¹⁶⁸ The following is an example of such a stabilisation clause, from the 1997 Model Production Sharing Agreement for Petroleum Exploration and Production in Turkmenistan:

Where present or future laws or regulations of Turkmenistan or any requirements imposed on Contractor or its subcontractors by any Turkmen authorities contain any provisions not expressly provided for under this Agreement and the implementation of which adversely affects Contractor’s net economic benefits hereunder, the Parties shall introduce the necessary amendments to this Agreement to ensure that Contractor obtains the economic results anticipated under the terms and conditions of this Agreement.¹⁶⁹

It is expected that equilibrium clauses, rather than freezing clauses, will continue to be the preferred stabilisation solution, given that states are increasingly wary of commitments which may be seen to erode their sovereign discretion.¹⁷⁰

There is a natural tendency to associate stabilisation clauses with a restriction or erosion of a state’s legislative and regulatory mandate. However, it has been asserted that such clauses do not represent a concession, but rather a calculated exercise of sovereignty by states ‘that have a self-interest in offering undertakings that will encourage investors to make long-term commitments to challenging projects in their territory’.¹⁷¹ Indeed, where states have offered stability undertakings, tribunals have been firm in expecting them to ‘shoulder the contractual consequences’, rather than attempting to eschewing the burden through undue formalism.¹⁷²

Conclusion

The legitimate expectations principle may be encapsulated as follows: To qualify as ‘legitimate’, an investor’s expectations must be based on an objective analysis and must be reasonable in the specific circumstances. Reasonable expectations cannot be based on the notion that a regulatory and legal framework will remain unchanged, since states have a mandate to adapt their laws and regulations to changing circumstances. However, that mandate is not without parameters; the FET standard imposes a requirement that legislative and regulatory changes be proportionate, in pursuit of a genuine public interest objective, and carried out with regard for due process. Viewed through the prism of legitimate expectations, the ‘catch-all’ safeguard for investors is that state conduct which is discriminatory, capricious, and incompatible with notions of economic reasonableness will always fall outside the scope of their expectations. States, too, have a catch-all safety net, since investors cannot rely on expectations that are based on the idea that states should be prohibited from adapting their laws and regulations in the public interest.

The overarching purpose of the FET standard, as expressed by the tribunal in Mamidoil v Albania, is not to elevate the investors’ interests over other economic and social interests, but rather to bring foreign investors into the ‘normative sphere of rational policy in the general interest’.¹⁷³ Given that economic, environmental, and social considerations are necessarily dynamic, an investor must exercise due diligence in appraising the investment environment and forming reasonable expectations. In this vein, the tribunal characterised the FET standard as being ‘addressed to both the State and the investor’, since ‘fairness and equitableness cannot be established adequately without an adequate and balanced appraisal of both parties’ conduct’.¹⁷⁴ In recent years, efforts to reduce carbon output and encourage renewable energy production have dominated the global discourse. Regulatory changes enacted by states are often the direct result of commitments made on the global or regional stage, underpinned by coherent and pressing public interest objectives. As the energy industry evolves towards to a low-carbon future, investors must be cognisant of the ‘predictability of change’.¹⁷⁵ The investment protection provisions enshrined in IIAs cannot, and should not, be relied upon by investors as a blanket insurance policy against all political, social and economic shifts.¹⁷⁶ For investors in traditional energy markets, expectations should take into account measures which may be implemented to reduce carbon emissions, as well as any applicable ‘carve-outs’ in the relevant IIA. For green energy investors, an expectation that the energy industry will move seamlessly towards a stable, renewables-focussed future will not be sufficient, and specific commitments - such as stabilisations clauses - should be sought to avoid the adverse effects of states ‘back-pedalling’ from ambitious environmental policies.

Critics of ISDS have warned of states being forced into a regulatory freeze to avoid claims by investors, blaming the system of ISDS for chipping away at the state’s mandate to implement beneficial policies, such as those enacted to combat climate change.¹⁷⁷ Energy investment disputes in particular have been characterized as a battle between states seeking to protect the environment and corporations seeking to retain, or be compensated for, their right to pollute it.¹⁷⁸ However, those who blame the system of ISDS for impeding environmental protection perhaps overlook the fact that investors in the renewable energy sector also need protection. It is anticipated that private investment will play a major role in efforts to combat climate change, particularly in developing economies. Consistency by host states, coupled with investment protection provisions in IIAs, is essential for attracting investment, particularly in developing energy markets. A sound understanding of the laws and regulations applicable to an investment may be ‘the foundations on which the industry can successfully build’, but investors also need mechanisms which will allow them to obtain ‘prompt, impartial and independent determination of issues that arise’.¹⁷⁹ The legitimate expectations principle plays a crucial role within the mechanism of ISDS, as the moving part which allows the FET standard to evolve, and which empowers tribunals to strike the right balance between – on the one hand – the investors’ desire for a fair and consistent regulatory framework, and on the other, the host states’ right to enact legal and regulatory change in the public interest. Withdrawing from IIAs and ISDS may appear to be the obvious solution for states seeking to preserve their sovereign right to regulate. However, the long-term consequence will be a reduction in foreign investment, including in those fields that are needed most acutely to mitigate climate change.