1.1.1 Sovereignty over Natural Resources

The principle of sovereignty over natural resources in international law started to crystallize in the wake of decolonization and nationalization of foreign property in Latin America, Africa, Asia and Eastern Europe after World War II. The underlying idea was that newly independent States must be entitled to exploit natural resources they possess to their own benefit.Footnote ² As declared in the United Nations (UN) General Assembly Resolution on Permanent Sovereignty over Natural Resources (1962),Footnote ³ ‘[t]he right of peoples and nations to permanent sovereignty over their natural wealth and resources must be exercised in the interest of their national development and of the well-being of the people of the State concerned’ (paragraph 1). This resolution confirms resource-owning States’ regulatory authority for the exploration, development and disposition of resources as well as the import of necessary foreign capital (paragraph 2). It further elucidates some details on foreign investment treatment. In particular, when authorization is granted, the imported capital and the earnings on it are governed by national legislation and international law, and the profits must be shared as agreed upon by investors and the host State and with due care for that State’s resource sovereignty (paragraph 3). In case of nationalization or expropriation, ‘appropriate compensation’ must be paid in accordance with the host State’s rules and international law, and dispute settlement over compensation accommodates both the exhaustion of local remedies and international adjudication (paragraph 4). Many subsequent investment treaties have, however, downplayed the relevance of national laws by setting out their own rules on compensation and enabling international arbitral procedures with no need for exhausting local remedies.Footnote ⁴ But overall, the 1962 resolution is widely considered as embodying a proper balance between the interests of capital-importing and capital-exporting countries,Footnote ⁵ inspiring subsequent international instruments to reiterate sovereignty over natural resources.Footnote ⁶

The principle of sovereignty over natural resources has already gained universal acceptance, with the legal doctrine ascribing it different legal statuses, such as customary international law or jus cogens.Footnote ⁷ But just as sovereignty in general, resource sovereignty is not absolute. Among other things, it is ‘inherently’ constrained by a State’s obligation not to cause transboundary environmental damage, with this obligation ensuring respect for the sovereign realm of other States.Footnote ⁸ Two declarations, representing important milestones in the evolution of international environmental law, make this point explicit. Principle 21 of the Declaration of the UN Conference on the Human Environment (1972)Footnote ⁹ places sovereignty together with environmental responsibility:

Principle 2 of the Rio Declaration on Environment and Development (1992)Footnote ¹⁰ (hereinafter the ‘Rio Declaration’) reiterates Principle 21 above but with slight changes to the wording regarding the ‘sovereign right to exploit their own resources pursuant to their own environmental and developmental policies’ (emphasis added). The addition of ‘and developmental’, a source of varying interpretations, together with its textual context, appears to emphasize the sovereign right to development, on the one hand, while subjecting national development policies to the duty not to pollute across borders, on the other.Footnote ¹¹ In order for State liability to arise, the transboundary environmental harm must be significant or substantial enough.Footnote ¹²

The duty to avoid international environmental damage represents one aspect of the energy–environment nexus that constrains resource sovereignty. Another aspect – which is rather a State’s own self-constraint in exploiting its natural resources – is embedded in the notion of sustainable use of natural resources when sovereignty mixes with the concept of sustainable development discussed below. This combination is present, for example, under Article XX(g) of the GATT that deals with the conservation of exhaustible natural resources. In interpreting Article XX(g), the WTO panel in China – Raw Materials took into account sovereignty over natural resources as a ‘principle of international law’ and found that such sovereignty could (and should) be exercised in harmony with Article XX(g) as economic development and conservation were not necessarily mutually exclusive.Footnote ¹³ Along the same lines and within the same legal context,Footnote ¹⁴ the panel in China – Rare Earths added:

The ECT (1994) provides another legal context for conceptualizing energy sovereignty and its environmental implications. Article 18 (‘Sovereignty over Energy Resources’), paragraph 1 of the ECT recognizes ‘state sovereignty and sovereign rights over energy resources’ that ‘must be exercised in accordance with and subject to the rules of international law’. The rest of Article 18 elaborates on the associated rights of States without weakening the ECT’s overall policy of facilitating access to energy resources:

The emphasized (italicized) parts of Article 18(3) above point to the rights of States to utilize energy resources in a sustainable and environmentally safe way. Article 18 is not justiciable under the ECT’s investor–State dispute settlement (ISDS) procedures,Footnote ¹⁶ but the sovereignty over energy resources is not without any limits.Footnote ¹⁷ For example, it was clarified that Article 18(2) did not allow any party to circumvent the other ECT provisions and invoke its internal law as justification for its failure to perform treaty obligations.Footnote ¹⁸

1.1.2 Sustainable Development

The term ‘sustainable development’ means ‘development that meets the needs of the present without compromising the ability of future generations to meet their own needs’.Footnote ¹⁹ This concept is broad and covers economic growth, social inclusion and environmental protection. The 2030 Agenda for Sustainable Development, adopted by the UN General Assembly in 2015, represents a global ‘plan of action’ to attain 17 Sustainable Development Goals (SDGs) and 169 associated targets.Footnote ²⁰ While all SDGs and targets are ‘integrated and indivisible’,Footnote ²¹ the SDGs and targets in Box 1.1 appear most relevant to the energy–environment context.

The 1992 UN Conference on Environment and Development in Rio de Janeiro acknowledged a positive role of the GATT 1947-based multilateral trading system in supporting sustainable development.Footnote ²² The preamble of the GATT 1947 spells out its objective of ‘developing the full use of the resources of the world’. The preamble of the later-in-time WTO Agreement made noticeable changes to that objective. Now it reads ‘the optimal use of the world’s resources in accordance with the objective of sustainable development’, with members ‘seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with their respective needs and concerns at different levels of economic development’. Reflecting the intentions of the Uruguay Round negotiating parties, this preambular language gives ‘colour, texture and shading’ to the rights and obligations of members under WTO law and thus informs the interpretation of the WTO’s environment-related provisions, like Article XX of the GATT.Footnote ²³ Further, the WTO Ministerial Decision on Trade and Environment (1994), which created the WTO Committee on Trade and Environment, insists on avoiding ‘any policy contradiction’ between keeping the multilateral trading system and acting for ‘the promotion of sustainable development’.

In RTAs, sustainable development is often referenced in the preamble and less frequently in the main text.Footnote ²⁴ Among trading economies, the EU is probably most active in systematically including detailed provisions on sustainable development in its trade deals. Beginning from the Korea–EU Free Trade Agreement (FTA) (2010), all subsequent EU trade agreements include a dedicated chapter on trade and sustainable development encompassing, inter alia, environmental and climate change issues.Footnote ²⁵ They typically set forth any of the three types of obligations: those based on existing international standards (e.g., the implementation of multilateral environmental agreements), obligations related to domestic legislation (e.g., the ban on lowering domestic environmental standards) or aspirations towards higher levels of protection (e.g., best endeavours to enhance environmental protection).Footnote ²⁶

As for the investment domain, modern investment treaties also tend to include sustainable development provisions. Most of them address environmental issues and in doing so, generally, prevent the race to the bottom in environmental protection, confirm or recognize the parties’ national or international environmental obligations or create policy carve-outs for environmental measures.Footnote ²⁷ Some model bilateral investment treaties (BITs) contain a separate section on sustainable development that elaborates on investors’ social responsibility and the host country’s authority in promoting sustainable development.Footnote ²⁸

1.1.3 Polluter-Pays Principle

The polluter-pays principle essentially says that the cost of pollution should be borne by the polluter itself. Legally binding under many national jurisdictions, this principle appears not to have yet reached the level of customary international law despite its broad international acknowledgement.Footnote ²⁹

The Organization for Economic Co-operation and Development (OECD) was the first to expressly refer to this principle at an international level. According to the OECD Guiding Principles Concerning the International Economic Aspects of Environmental Policies (1972), the polluter-pays principle means that environmental costs should be internalized in the price-setting of polluting goods and services, without being accompanied by subsidies that would create ‘significant distortions in international trade and investment’.Footnote ³⁰

The follow-up OECD Recommendation on the Implementation of the Polluter-Pays Principle (1974) specifically discusses the relationship between subsidies and the polluter-pays principle. In particular, subsidization of the costs of pollution control should be avoided as a general rule. But ‘the rapid implementation of a compelling and especially stringent pollution control regime’ may cause significant socio-economic problems which may necessitate governmental assistance ‘if the environmental policy objectives of a Member country are to be realised within a prescribed and specific time’. Thus, the granting of pollution control assistance should be selective and limited to situations where severe difficulties would otherwise occur, subject to transitional periods and without causing significant trade and investment distortions.Footnote ³¹ At the same time, the following is not considered to be incompatible with the polluter-pays principle:Footnote ³²

• aid for the experimentation with new pollution-control technologies and development of new pollution-abatement equipment; and

• aid for promoting specific socio-economic objectives, such as the reduction of serious interregional imbalances, that causes the incidental effect of aiding pollution-control purposes.

These OECD guidelines are only recommendations and do not extend to non-adhering countries. Nevertheless, they were helpful in informing external regimes. In the GATT case in US – Superfund, the complainant cited the above 1972 OECD’s polluter-pays principle to argue that the United States should have taxed only domestic products for causing domestic environmental pollution but not imported products that could already have paid a pollution tax in an exporting country. The panel held that the GATT did not require the contracting parties to follow the polluter-pays principle although they were free ‘to tax the sale of certain domestic products (because their production pollutes the domestic environment) and to impose a lower tax or no tax at all on like imported products (because their consumption or use causes fewer or no environmental problems)’.Footnote ³³

Furthermore, Principle 16 of the Rio Declaration (1992) mirrors the main contours of the OECD’s conception of the polluter-pays principle:

Likewise, Article 19(1) of the ECT (1994) states that ‘the polluter in the Areas of Contracting Parties, should, in principle, bear the cost of pollution, including transboundary pollution, with due regard to the public interest and without distorting Investment in the Energy Cycle or international trade’.

The polluter-pays principle underlies such measures as carbon taxes, emission permits, environmental standards and so on.Footnote ³⁴ This principle can also be linked to the environmental accountability of investorsFootnote ³⁵ as well as to partial (instead of full) compensation for, inter alia, expropriation of investors’ assets that is set so to reflect environmental damage that the investors have caused in host countries.Footnote ³⁶

1.1.4 Precautionary Principle

The precautionary principle entitles States to take urgent action to address serious environmental threats in spite of scientific uncertainty. It began to appear in international instruments in the mid-1980s.Footnote ³⁷ The essence of this principle is articulated in oft-cited Principle 15 of the Rio Declaration (1992):

Some authors indicate the customary international law nature of this principle,Footnote ³⁸ but this stance still lacks universal acceptance. For example, the Appellate Body in EC – Hormones (and later the panel in EC – Approval and Marketing of Biotech ProductsFootnote ³⁹) noted the diversity of opinions among academics and law practitioners on the international legal status of this principle and refrained from taking a position on this issue, saying that ‘the precautionary principle, at least outside the field of international environmental law, still awaits authoritative formulation’. The Appellate Body found that while the precautionary principle was not written into the Agreement on the Application of Sanitary and Phytosanitary (SPS) Measures as a ground for justifying otherwise illegal SPS measures, it was still reflected in Article 5.7 of the SPS Agreement.Footnote ⁴⁰ Article 5.7 allows WTO members to take provisional SPS measures based on ‘available pertinent information’ where ‘relevant scientific evidence is insufficient’, provided that they will seek ‘additional information’ for a more objective risk assessment and review the SPS measure within a ‘reasonable period of time’.

Under the investment regime, the tribunal in Eco Oro v. Colombia gave weight to the precautionary principle in concluding that a prohibition against mining activities in the region that required environmental protection did not constitute indirect expropriation within the meaning of the Canada–Colombia FTA (2008). There, the Colombian authorities deprived an investor of its right to mine in its concession area because that area overlapped with a high-mountain ecosystem rich in biodiversity and water resources.Footnote ⁴¹ The tribunal held that the precautionary principle, enshrined in the 1992 Convention on Biological Diversity and Principle 15 of the Rio Declaration (1992), was relevant to assessing the effect and proportionality of Colombia’s measure (eventually found not to be unreasonable or disproportionate) as ‘it is … clear that once damaged it is uncertain whether or not [the high-mountain ecosystem] can be restored and, if so, the length of time such restoration will take’.Footnote ⁴²

1.1.5 Common but Differentiated Responsibilities

The principle of common but differentiated responsibilities, embodied in a number of environmental instruments, essentially acknowledges the shared responsibilities of States for preserving and protecting the common environment while placing different compliance burdens on them depending on their circumstances and capabilities. According to Principle 7 of the Rio Declaration (1992), common but differentiated responsibilities are attributable to ‘the different contributions [of States] to global environmental degradation’, so that ‘developed countries acknowledge the responsibility that they bear in the international pursuit of sustainable development in view of the pressures their societies place on the global environment and of the technologies and financial resources they command’.

While developed countries are responsible for the majority of historical carbon emissions, developing countries are responsible for the majority of current carbon emissions.Footnote ⁴³ This creates a difficult dilemma. On the one hand, placing all the burden of decarbonization on developed countries alone will not solve the climate problem. On the other hand, reducing carbon intensity of developing countries’ economies poses a risk of slowing down their economic growth unless they are better equipped with a low-carbon and clean energy infrastructure, which necessitates technical and financial assistance from developed countries. Under the UN Framework Convention on Climate Change (UNFCCC) (1992), climate change is considered as ‘a common concern of humankind’, and developed countries ‘should take the lead in combating climate change and the adverse effects thereof’.Footnote ⁴⁴ The Paris Agreement (2015) recognizes ‘common but differentiated responsibilities and respective capabilities, in the light of different national circumstances’Footnote ⁴⁵ and obliges developed countries to provide climate-related financial assistance and capacity-building support to developing countries.Footnote ⁴⁶

The principle of common but differentiated responsibilities as such is not referenced in WTO agreements although it is not undetectable. The preamble of the WTO Agreement recognizes that the protection and preservation of the environment in the trade context should be sought consistently with members’ ‘respective needs and concerns at different levels of economic development’. Further, under Article XX of the GATT, the Appellate Body in US – Shrimp held that it was unacceptable for a member to apply a trade restriction to force other countries to adopt essentially the same environmental policy as that member’s, without taking into account different conditions that may exist in those countries.Footnote ⁴⁷ There, at issue was a US ban on imports of shrimp from countries that had not used a US-prescribed method of catching shrimp that would avoid killing sea turtles. Moreover, WTO provisions on special and differential (S&D) treatment, like those on technical assistance,Footnote ⁴⁸ as well as the WTO-led Aid for Trade initiative can be used to address differentiated environmental capabilities of developing countries. Most of the current Aid for Trade disbursements for climate change mitigation covers the energy sector.Footnote ⁴⁹

The principle of common but differentiated responsibilities seems to be rarely mentioned by name in RTAs and IIAs. The only example with explicit references we could find is the EU–Colombia–Peru Trade Agreement (2012). The parties to this agreement commit to ‘address global environmental challenges, in accordance with the principle of common but differentiated responsibilities’. In addition, they are ‘resolved to enhance their efforts regarding climate change, which are led by developed countries, … in accordance with their common but differentiated responsibilities and respective capabilities …, and taking particularly into account the needs, circumstances, and high vulnerability to the adverse effects of climate change of those Parties which are developing countries’.Footnote ⁵⁰ Other international economic agreements may still include provisions that reflect the essence of the principle in question without specifically referencing it.

1.1.6 Environmental Impact Assessment

Environmental impact assessments, first introduced domestically by the US National Environmental Policy Act (1969) and required internationally since the 1972 UN Conference on the Human Environment in Stockholm, represent a legal technique of incorporating environmental considerations into a decision-making (or approval) process.Footnote ⁵¹ As stated in Principle 17 of the Rio Declaration (1992), ‘[e]nvironmental impact assessment, as a national instrument, shall be undertaken for proposed activities that are likely to have a significant adverse impact on the environment and are subject to a decision of a competent national authority’. Agenda 21, adopted at the 1992 UN Conference on Environment and Development, makes many references to environmental impact assessments, including also for energy production, calling for governments to adopt necessary procedures.Footnote ⁵² In the 2010 judgement, the International Court of Justice observed that ‘it may now be considered a requirement under general international law’ to undertake an environmental impact assessment where a proposed industrial activity has the potential to cause significant transboundary harm.Footnote ⁵³

As far as international economic treaties are concerned, over thirty RTAs encourage domestic environmental laws and policies to use environmental impact assessments.Footnote ⁵⁴ Besides that and with respect to the energy sector, Article 19(1) of the ECT (1994) obligates parties to ‘promote the transparent assessment at an early stage and prior to decision, and subsequent monitoring, of Environmental Impacts of environmentally significant energy investment projects’, although it leaves it to each party to decide how to run domestic procedures for environmental impact assessments.Footnote ⁵⁵

To the extent that domestic laws mandate environmental impact assessments for investment activities, a foreign investment’s compliance with such domestic laws is often a prerequisite for it to be covered by an applicable IIA.Footnote ⁵⁶ However, an improper manner of applying such domestic laws itself can trigger an investor–State dispute.Footnote ⁵⁷ In Clayton/Bilcon v. Canada, the federal and provincial regulatory framework for investing in Canada’s Nova Scotia included environmental assessment requirements. But a government-adopted environmental assessment of a quarry and marine terminal project at issue was found to violate the NAFTA provisions on minimum standard of treatment and national treatment.Footnote ⁵⁸ The majority of the tribunal decried the domestic environmental assessment for concluding that this project conflicted with ‘community core values’ – a concept that was not envisaged by the Canadian rules, and hence ‘unprecedented and unexpected’ – and for failing to explore any related ‘mitigation measures’ that might have been taken to avoid the significant environmental effects of the project.Footnote ⁵⁹

In addition to environmental impact assessments of business activities or projects, some domestic procedures (e.g., in the EU, the United States and Canada) require environmental or broader sustainability impact assessments of trade agreements.Footnote ⁶⁰ Typically, they are about an ex ante assessment of a trade agreement being negotiated – notably its potential impact on domestic environmental regulations and the state of the environment – with the purpose to give trade negotiators more insight into how environmental considerations could be reflected in trade treaty-making. For example, in response to the results of sustainability impact assessments of certain trade agreements, the European Commission announced that in ongoing negotiations it would, inter alia, work on:

• the inclusion of a robust chapter on trade and sustainable development with dedicated provisions on climate change, sustainable forest management and conservation of forest cover;Footnote ⁶¹

• fast-track trade liberalization for environmental goods and services and the promotion of bilateral cooperation on clean energy, air pollution and environmental monitoring;Footnote ⁶²

• the inclusion of a monitoring mechanism for an ex post environmental and social impact of the trade agreement;Footnote ⁶³ and

• the reduction or removal of tariff/non-tariff barriers in the energy sector.Footnote ⁶⁴

An environmental impact assessment can also pertain to an already concluded trade agreement. More than twenty RTAs deal with such ex post (or post-negotiation) assessments of the agreement. They provide for a joint committee’s consideration of the RTA’s environmental review prepared by each party, the parties’ commitment to conduct domestic environmental/sustainability assessments of the RTA being implemented, cooperation via the exchange of information or experience on RTA-related environmental/sustainability assessments and so on.Footnote ⁶⁵

Notwithstanding methodological challenges,Footnote ⁶⁶ environmental or sustainability evaluations of trade agreements provide an important tool for coordinating trade and environmental policies and greening trade. Unsurprisingly, the WTO Doha Declaration (2001), taking note of ‘the efforts by Members to conduct national environmental assessments of trade policies on a voluntary basis’, has encouraged the sharing of ‘expertise and experience … with Members wishing to perform environmental reviews at the national level’.Footnote ⁶⁷ Yet, such environmental assessments continue to be conducted by a handful of jurisdictions, mainly developed countries, with many others still lacking capacity. In the light of climate change and global environmental degradation, technical assistance to developing countries, including under RTAs, should necessarily embrace the sharing of know-how in this field.

Finally, since environmental impact assessments are mainly domestic procedures, time is ripe for introducing international-level impact assessments of trade and investment agreements at least with respect to their effects on climate change as a pressing global problem. For example, WTO negotiations and treaty-making could be accompanied by ex ante and/or ex post environmental assessments by international experts to help reach more environmentally sound outcomes. Such international impact assessments would focus on the effects on the shared environment and respond to the lack of capabilities of those negotiating/signatory countries that are unable to conduct such environmental impact assessments on their own.

1.1.7 Energy Security and Safety

In addition to serious humanitarian and geopolitical consequences, the outbreak of the war in Ukraine in 2022 has caused widespread energy supply disruptions, re-emphasizing the strategic importance of energy security.Footnote ⁶⁸ The International Energy Agency (IEA) defines ‘energy security’ as ‘the uninterrupted availability of energy sources at an affordable price’ and distinguishes between ‘long-term energy security’ (necessitating timely energy investments in line with economic developments and environmental needs) and ‘short-term energy security’ (i.e., the energy system’s responsiveness to sudden changes in supply and demand).Footnote ⁶⁹ According to the WTO panel’s interpretation in EU – Energy Package, ‘security of energy supply is a fundamental interest of society’ whose protection may serve to maintain ‘public order’.Footnote ⁷⁰ The role of trade and investment in enhancing energy security is internationally recognized.Footnote ⁷¹

Availability of fossil fuel energy has traditionally been seen as a key to achieving energy security. Energy conservation and energy efficiency measures are required to preserve the longevity of such availability.Footnote ⁷² In addition, energy security can also be fostered through the diversification of energy sourcesFootnote ⁷³ via a greater utilization of renewables. But the intermittency, or variability, of some renewables, like solar or wind power, necessitates technological solutions enabling effective power storage and real-time adaptations to minimize supply disruptions associated with the integration of such renewables into the energy mix.

While a country’s self-sufficiency in energy production promotes its energy security, energy product supplies from different international sources can also be supportive. In India – Solar Cells, India’s renewable electricity programme under its Jawaharlal Nehru National Solar Mission required the use of locally produced solar cells and solar modules. India hoped that this requirement would help develop the domestic capacity for manufacturing these solar power generating technologies and hence reduce the risks (i.e., supply-side vulnerabilities and fluctuations) arising from the country’s import dependence on these products. In India’s view, such local solar technologies, if readily available, could serve the objectives of ‘energy security’ and ‘ecologically sustainable growth’.Footnote ⁷⁴ Citing Article XX(j) of the GATT, which allows trade restrictions ‘essential to the acquisition or distribution of products in general or local short supply’, India claimed that its low manufacturing capacity pointed to the existence of a ‘general or local short supply’ of the solar products at issue in the internal market.Footnote ⁷⁵ The Appellate Body admitted that the measure’s policy rationales, such as energy security or sustainable development, could inform the nature and extent of supply and demand on the market. But it rejected India’s claim due to a lack of evidence regarding the inadequacy of both domestic and international sources to meet India’s domestic demand for solar cells and modules and evidence regarding actual disruptions in solar imports that would create supply-related risks.Footnote ⁷⁶

Energy security is to be distinguished from energy safety, which, in this book, is about safeguarding people and the environment from the dangers of energy production, supply or use. Take nuclear safety as an example. It was at the centre of some international tensions in the past. Following the nuclear accident at Chernobyl in the Soviet Union, the European Economic Community in May 1986 suspended food imports from certain East European countries. In a GATT meeting, Hungary argued that the selection of countries within a 1,000-kilometre radius from the place of the accident was unjustified and arbitrary, contrary to Article XX of the GATT. It contended that the radiation level had risen across most of Europe since the accident, and some countries outside that radius had even a greater radiation level than some (like Hungary) within it. But the European Economic Community countered that the measure was temporary to allow for more time to obtain and verify scientific information so that it could calm public anxiety and reassure its population.Footnote ⁷⁷

Twenty-five years later, another tragic occurrence gave rise to similar nuclear safety concerns. The accident at Japan’s Fukushima Dai-ichi Nuclear Power Plant on 11 March 2011 prompted many countries to ban seafood products from this area out of fear of radioactive contamination, which led to a trade dispute in the WTO.Footnote ⁷⁸ The Fukushima accident’s repercussions went beyond the trade domain, triggering policy amendments on nuclear power production in some countries and irritating affected foreign investors as a result.Footnote ⁷⁹

The use of nuclear energy is good for zero-carbon emissions into the atmosphere, but safety must be adequately ensured. Nuclear safety generally deals with the protection of people and the environment from radiation risks as well as with the safety of facilities and activities carrying radiation risks. This notion embraces the safety of nuclear installations, radiation safety, the safety of radioactive waste management and safety in the transport of radioactive material.Footnote ⁸⁰ Nuclear safety is distinct from nuclear security, which is concerned with criminal or intentional unauthorized acts involving nuclear or other radioactive material and associated facilities/activities that could cause or threaten health or environmental harm.Footnote ⁸¹ The main nuclear safety treaties, adopted under the auspices of the International Atomic Energy Agency, deal with the safety of nuclear installations (i.e., land-based civil nuclear power plants), the safety of spent fuel management and radioactive waste management, early notification of a nuclear accident as well as assistance in the case of a nuclear accident or radiological emergency.Footnote ⁸²

While nuclear safety per se has been regulated mainly under the nuclear law framework, the EU–Armenia Comprehensive and Enhanced Partnership Agreement (2017), which covers trade matters, is remarkable for articulating the parties’ commitment to ensuring high levels of nuclear safety and nuclear security and to cooperating in the fight against ‘radiological and nuclear terrorism’.Footnote ⁸³ Their energy cooperation regarding safety and security in the civil nuclear sector focuses on the exchange of technologies, best practices and training aimed at ‘the safe operation of nuclear power plants’ as well as on the closure and safe decommissioning of Armenia’s Medzamor nuclear power plant.Footnote ⁸⁴

1.2.1 WTO

Established in 1995 as a successor to the GATT, the WTO has governed international trade by providing a global forum for lowering trade barriers, setting and administering rules, discussing and monitoring pertinent policies and settling inter-government disputes. While not being tailored to energy per se, the WTO-led multilateral trading system is inclusive enough to regulate energy trade.

Despite its great achievements, the WTO is currently in need of reform. To name some important bottlenecks, the first, and so far the only officially launched, WTO round of multilateral trade negotiations, including on trade and environment issues, has failed to conclude. Consensus-building difficulties have significantly hampered the WTO’s rule-making activities, preventing timely legislative trade responses at the global level to climate change and other emerging challenges. Because of the persistent dysfunctionality of the Appellate Body for the last few years, many panel reports have been appealed into the void.Footnote ⁸⁵ The troubling lack of required notifications of trade measures undermines the credibility of the WTO’s transparency procedures.

Yet, amid this hardship, the WTO has recently progressed on the environmental front. The Twelfth Ministerial Conference in 2022 adopted a first WTO environmental treaty – the Agreement on Fisheries Subsidies, which is designed to preserve ocean sustainability in line with the UN SDG 14.6 mandate for curbing harmful subsidies that contribute to the depletion of global fish stocks. In 2020 and 2021, the WTO launched new initiatives on trade and environmental sustainability, plastics pollution and fossil fuel subsidies (see Table 1.1) to complement the existing work of the Committee on Trade and Environment and other relevant WTO bodies. At the time of writing, these open-ended initiatives did not engage all WTO members yet, but thematic discussions were going on smoothly, leaving hope for concrete actions to be eventually agreed.

The WTO regime does not foreclose the use of trade restrictions for achieving legitimate policy objectives, like the protection of public health or the environment. But policy space here is not unfettered as members have committed to trade liberalization. Thus, the possibility of a tension between trade and non-trade concerns is well recognized.Footnote ⁸⁶ The next sections discuss how such tension can be addressed under the WTO’s general exceptions and other legal contexts.

1.2.2 RTAs

Regional trade agreements – FTAs and customs unions – have accommodated environmental concerns within preferential trade. Roughly 97 per cent of RTAs notified to the WTO include at least one provision mentioning the environment, with RTAs concluded in 1992–2005 containing mainly environment-related exceptions or preambular language, and post-2005 RTAs also incorporating other, more elaborate environmental provisions.Footnote ¹²⁶ The environmental exceptions, usually located in the part of the treaty text that details general and security exceptions, are mainly modelled after GATT Article XX or GATS Article XIV, but some use the amended WTO language or clarify the parties’ understanding regarding the contents.Footnote ¹²⁷

More than 110 RTAs recognize the right to regulate environmental issues in environment chapters, side agreements or chapters on TBT measures, SPS measures, investment and government procurement.Footnote ¹²⁸ To give a recent example, the environment chapter of the New Zealand–United Kingdom (UK) FTA (2022) recognizes ‘the sovereign right of each Party to establish its own environmental priorities and levels of environmental protection relating to the environment, including mitigation of and adaptation to climate change, and those which a Party establishes pursuant to the multilateral environmental agreements to which it is a party, and to establish, maintain, or modify its relevant law and policies accordingly’.Footnote ¹²⁹

At least sixty-nine RTAs contain environment-related provisions on energy and mineral resources. These provisions often deal with cooperation (on renewable energy, energy conservation and efficiency, nuclear safety and so on) and less frequently with the promotion of environmental goods and services, import/export restrictions and internal measures (sometimes in connection with environment-related general exceptions), environmental management and others.Footnote ¹³⁰

1.2.3 IIAs

Close to 3,300 IIAs – BITs and treaties with investment provisions – concluded to dateFootnote ¹³¹ constitute a divergent legal basis for regulating multinational business activities. Because of this large number of agreements, the international investment regime is highly fragmented and inconsistent throughout. Energy investments fall within the subject matter jurisdiction of IIAs unless provided otherwise.

International investment agreements have focused on promoting investment flows and protecting foreign investors and their assets from unwarranted restrictive measures of host countries. Thus, IIAs are typically imbalanced in creating obligations for States but virtually none for investors. Although IIAs are complementary to trade agreements in encouraging cross-border economic activities, they differ from them in several ways. As pointed out by two authors, while the trade regime is ‘about overall welfare, efficiency, liberalization, state-to-state exchanges of market access, and trade opportunities – not individual rights’, the investment regime traditionally concerns ‘fairness grounded in customary rules on treatment of aliens, not efficiency’ and is ‘about protection, not liberalization, and about individual rights, not state-to-state exchanges of market opportunities’.Footnote ¹³²

As of September 2022, all known ISDS cases over State measures dealing with environmental protection or renewable energy were brought on the basis of so-called old-generation IIAs.Footnote ¹³³ Old-generation IIAs – those concluded in the period 1959–2009 and constituting over 85 per cent of all IIAs ever signed – often lack explicit provisions preserving governments’ regulatory space for environmental issues.Footnote ¹³⁴ As a result, tribunals with ‘neo-liberal biases’ have interpreted States’ obligations to foreign investors rather expansively while showing little deference to the regulatory space.Footnote ¹³⁵ Therefore, the right to regulate for protecting public health and the environment is being given greater attention under ‘new-generation’ IIAs as discussed below.

1.2.4 ECT

The ECT (1994) is an international agreement on energy cooperation among fifty-plus parties (including the EU and Euratom), covering both trade and investment elements. It focuses on energy trade and transit, investment promotion and protection, trade and investment dispute settlement and energy efficiency.

The ECT’s trade-related provisions are largely based on, and overlap with, the relevant GATT/WTO rules.Footnote ¹⁶¹ Article 4 of the ECT explicitly states: ‘Nothing in this Treaty shall derogate, as between particular Contracting Parties which are members of the WTO, from the provisions of the WTO Agreement as they are applied between those Contracting Parties’. By incorporating pertinent WTO norms, the trade part of the ECT is especially of importance to regulating energy trade with non-WTO contracting parties – currently, Azerbaijan, Belarus, Bosnia and Herzegovina, Turkmenistan and Uzbekistan – to which the WTO rules do not apply yet.

The investment part of the ECT sets forth legal standards of protecting foreign investors and their investments. It is remarkable that renewable energy cases account for the lion’s share, or 60 per cent, of all 150 known investment arbitration cases brought under the ECT.Footnote ¹⁶²

With respect to environmental and energy efficiency issues, two ECT elements are worth noting. First, Article 19 (‘Environmental Aspects’) of the ECT requires parties to ‘strive to minimise in an economically efficient manner harmful Environmental Impacts’ occurring from all operations along the entire energy chain. Article 19 further lists essentially political commitments of parties to promote, inter alia:

• market-oriented price formation and a fuller reflection of environmental costs and benefits;

• international cooperation;

• information sharing on environmentally sound and economically efficient energy policies;

• environmental impact assessment activities and public awareness of environmental impacts of energy systems;

• R&D and application of energy efficient and environmentally sound technologies; and

• technology transfer.

Second, the Energy Charter Protocol on Energy Efficiency and Related Environmental Aspects (1994) builds on the ECT and pursues the objectives to promote energy efficiency policies ‘consistent with sustainable development’, create framework conditions for inducing producers and consumers towards energy efficiency and foster cooperation in this field.Footnote ¹⁶³ In Parts II and III, the protocol defines policy principles (on cooperation and assistance regarding energy efficiency, promotion of market mechanisms and so on), requires parties to formulate policy aims and strategies for energy efficiency, encourages them to incentivize energy efficiency and related investments and promote energy efficient technologies, mandates the implementation and regular updating of domestic programmes on energy efficiency and indicates possible areas of international cooperation. Article 13(1) of the protocol states that in case of its inconsistency with the ECT, the latter prevails.

Overall, the energy efficiency provisions lack substantive details as to concrete legally binding actions. Therefore, unlike other activities in the Energy Charter process, the work on energy efficiency focuses not on legal obligations but policy discussions. Within their participation in the protocol above, parties share good practices, experiences and policy advice on energy efficiency issues, paying particular attention to such aspects of national energy efficiency strategies as taxation, energy pricing, environment-related subsidies and other financing mechanisms.Footnote ¹⁶⁴

In June 2022, the ECT parties concluded negotiations on modernizing the ECT by reaching an agreement in principle on the modernized treaty text. Remarkably, many textual revisions are closely relevant to the greening of the energy sector, and some correspond to the aforementioned patterns of new-generation IIAs.Footnote ¹⁶⁵

First, the scope of ECT-covered economic activities is extended to include the capture, utilization and storage of CO₂ in order to decarbonize energy systems. The updated list of subject energy materials and products comprises new items, such as hydrogen, biomass, biogas, synthetic fuels and others.

Second, the modernized ECT’s ‘flexibility mechanism’ allows parties to exclude investment protection for fossil fuels in their territories. The EU and the UK have already opted for such exclusions in relation to existing fossil fuel investments after ten years from the entry into force of the relevant provisions as well as in relation to new investments made after 15 August 2023. The underlying rationale is to discourage investment activities related to ‘dirty’ energy.

Third, a new provision is added to the ECT’s investment part to reaffirm the right to regulate for the sake of environmental, climate change, public health, safety or public morals objectives.

Fourth, the modernized ECT provides that non-discriminatory environmental (including climate), public health or safety measures generally do not constitute indirect expropriation.

Fifth, revised Article 19 (renamed from ‘Environmental Aspects’ to ‘Sustainable Development’) of the ECT disallows weakening domestic environmental and labour laws as a means of encouraging energy trade or investment and reconfirms parties’ rights and obligations under multilateral environmental and labour agreements, such as the UNFCCC (1992), the Paris Agreement (2015) and the International Labour Organization’s fundamental conventions. A provision, added to original Article 19, requires parties to encourage investors to adopt principles of responsible business conduct. Any dispute between contracting parties regarding the ECT’s sustainable development provisions will be handled under a new specialized dispute settlement mechanism, including conciliation procedures.

Sixth, a new article (‘Climate Change and Clean Energy Transition’) reaffirms parties’ commitments to: effectively implement the UNFCCC and the Paris Agreement; enhance the mutual supportiveness of investment and climate policies; promote climate-related trade and investment by removing obstacles to low-carbon energy technologies and services; and cooperate on investment-related aspects of climate policies.

Finally, Article 24 (renamed from ‘Exceptions’ to ‘General Exceptions’) in the modernized text contains two environmental exceptions: one already existing exception for the protection of human, animal or plant life or health and one newly introduced exception for the conservation of exhaustible natural resources. Under the current ECT’s Article 24(2), the exception for life/health protection does not apply to the ECT’s investment-related provisions. In contrast, the revised text makes both general exceptions in question applicable to the ECT’s investment part too, except the provisions on compensation for losses (in case of wars or other emergencies) and the provisions on expropriation.

The formal adoption of the modernized ECT was postponed from November 2022 to a later date due to the lack of consensus within the EU as a number of the EU members, including Spain, the Netherlands, France, Germany and others, recently declared their intention to withdraw from the ECT altogether. These countries fear that the ECT regime, even if modernized, would undercut their climate efforts aimed at coal plant closures, oil and gas production reductions and so on.Footnote ¹⁶⁶ Along the same lines, in November 2022, the European Parliament disapproved of the modernized ECT text (including, inter alia, the ten-year guaranteed protection for the existing investments in fossil fuels) as being not aligned with the Paris Agreement and the EU climate law and urged a coordinated exit of the EU and its members from the ECT.Footnote ¹⁶⁷ In February 2023, the European Commission announced that a joint EU exit from the ECT appeared to be ‘unavoidable’.Footnote ¹⁶⁸ However, under the current ECT (1994), its provisions will continue to apply to existing investments for twenty years after a party’s withdrawal (Article 47(3)). The irony is that most ISDS cases under the ECT have actually been brought by renewable energy investors against the scaling-back of support schemes,Footnote ¹⁶⁹ so massive ECT withdrawals could turn out to be a blow to green investments too if no alternative protections are provided instead.