The Energy Transition and Climate Change-Related Disputes

This article originally appeared in Jus Connect’s 2023 Industry Insight Report on Energy Arbitration published on Daily Jus with thanks to Jus Connect & Jus Mundi. Download the full Report at: https://bit.ly/Jus-Connect_2023-Energy-Arbitration-Report_SM

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Globally there is a shift underway to transition to greener forms of energy. As a result of that energy transition, there is a corresponding rise in related disputes and climate change-related disputes. Disputes addressing issues of climate change – climate litigation or climate arbitration – are used as tools against governments and companies to accelerate the energy transition. These disputes are complex and challenging – they occur in a landscape where the regulatory, legislative, and contractual regimes are unclear and often developing. In addition, by virtue of the very nature of these types of disputes they involve multiple parties and jurisdictions. 

Accordingly, international arbitration is a well-suited forum for resolving many of these disputes, given the flexibility and expertise that can be offered. For those interested in this area, the ICC Arbitration and ADR Commission Report on Resolving Climate Change Related Disputes through Arbitration and ADR is useful reading. However, much has changed since 2019, both in terms of the subject matter of these disputes but also the number of disputes being brought. 

This article will discuss some of the key types of energy transition and climate change-related disputes that are likely to arise in the coming years. 

Types of Energy Transition and Climate Change-Related Disputes

Defining ‘climate change litigation’ or ‘climate change arbitration’ is an area of discussion. However, for the purposes of this article the scope given to it by the Grantham Institute – Climate Change and Environment (pg 6) is used, namely disputes involving “material issues of climate change science, policy, or law”. Particularly the latter two aspects – climate change policy and law – are likely to give rise to increasing disputes in the area of energy transition. 

There is a wide range of disputes prompted by the energy transition and driven by concerns surrounding climate change. Two common types of disputes to focus on are those that arise in the contractual arena and those in the arena of Investor-State:

Contractual Disputes

These disputes can arise from a variety of contractual relationships, such as power purchase agreements, joint development agreements, and of course construction contracts. As just one example, by way of illustration, a dispute can arise between two companies over the construction of a carbon capture and storage facility. An increasing issue that can arise in the context of contractual disputes is around the expertise of contractors. 

Generating power from renewables is of course one part of the energy transition. However, disputes can arise in many different ways as that project makes its way to realisation. There are related issues such as mass electric transportation infrastructure, energy storage, and technologies to improve energy efficiency. All of these projects demand expertise and, in some cases, new engineering solutions to be realised. In turn this increases the risk that disputes will arise. Equally, parties may increasingly use ‘carbon penalties and incentives’ under contracts – to encourage a reduction in carbon output. Keeping the Grantham Institute’s definition of climate change disputes in mind, particularly “material issues of climate change…policy…or law” one can appreciate the potential for disputes as parties come to terms with what these newly developed contractual clauses and mechanisms. 

Investor-State Disputes

Since the signing of the Paris Agreement, governments around the world have taken action through various means to curb the effect of climate change. These actions have included phase-out timelines of fossil fuels, along with introducing policies to incentivise the development of renewable forms of energy. As such, these disputes arise not only in the context of those seeking to transition to greener energy but also by parties that have been negatively affected by the transition to green energy. For example, an investor could claim that its investment has been damaged by a government decision to phase out oil and gas exploration. See, e.g. Lone Pine Resources Inc. v. Canada, ICSID Case No. ARB(AF)/13/2. Equally there have been several claims against host states to date pursuant to the Energy Charter Treaty. For example, investors have filed claims against foreign governments as a result of the repeal or reduction of feed-in tariffs that were promised to investors who invested in the renewable energy sector. There are many such examples, see e.g. Eiser Infrastructure Ltd. and Anor v. Spain, ICSID Case No. ARB/13/36; Greentech Energy Systems and Anor v. Italy, SCC Case No. 095/2015; and AES Solar Ampere Equity Fund and Ors v. Spain, UNCITRAL 2012-14. As governments seek to meet their obligations under the Paris Agreement and other international obligations, such disputes are only set to increase.

In addition to these specific types of disputes, there is also potential for more general conflicts to arise in the context of the energy transition and climate change. For example, there could be disputes over the allocation of costs and benefits associated with the transition, or over the distribution of liability for climate change-related damages.

Recommendations for Lawyers Working in International Arbitration

Lawyers working in international arbitration should be aware of the following trends and developments in the area of energy transition and climate change-related disputes:

The number and complexity of these disputes is increasing as the global energy transition accelerates.

There is a growing trend of investors using investor-State arbitration to challenge government policies related to the energy transition and climate change.

Arbitral tribunals are becoming more familiar with the technical and legal aspects of energy transition and climate change disputes. That trend must continue and increasing expertise must be developed. 

Conclusion

The energy transition is not a new phenomenon, but it has gained increasing importance. The energy sector is a key contributor to climate change and so the energy transition is a key component in the fight against climate change.

For that reason, disputes will continue to rise in this rapidly changing and important landscape.