EU Commission interprets CETA's investment protection provisions to advance its climate change agenda

In August the European Commission and Germany published a statement summarising recent discussions on investment protection in the context of the Comprehensive Economic and Trade Agreement (CETA, also unofficially known as the Canada-Europe Trade Agreement).

The statement confirmed discussions were focused on supporting the common objective of climate protection, and that the objective of those discussions was to prepare a text that clarifies certain provisions in the CETA, providing contracting parties a framework to regulate in the climate, energy and health sectors.

The announcement follows hot on the heels of the recently announced modernisation of the Energy Charter Treaty (ECT). As we wrote last month, many have criticised the ECT modernisation process for not going far enough to protect climate-related policy changes in furtherance of States' climate change commitments. So, what's the impact of these latest proposals?

Status of the proposals

The CETA Joint Committee is responsible for the implementation and application of CETA and for furthering its general aims. It's composed of representatives of all parties to CETA and its decisions relating to the interpretation of the provisions of CETA are binding on any arbitral tribunal established pursuant to the treaty (Articles 8.31(3) and 26.1(5)(e)).

The recent statement confirmed that a new draft text has been agreed between the Commission and Germany. It now needs to be agreed to by all other EU Member States, before it's shared with Canada so that the proposals can be adopted by the CETA Joint Committee. Only then will it become binding.

What do the proposals say?

A copy of the draft decision of the CETA Joint Committee was made available by the IA Reporter in September. Notable measures announced include:

• Following in the footsteps of the ECT, the Committee has recommended that the concept of fair and equitable treatment (FET) of investors should be streamlined and an exhaustive list of elements making up the concept of FET has been set out. As with the proposed changes to the ECT, the idea is that States will be afforded more certainty when making policy changes, ensuring there is less confusion as to the meaning of the terms 'fair' and 'equitable', potentially reducing investors' interpretative freedom when seeking to rely on the FET protection.
• The Committee appears to have raised the bar on the meaning of an indirect expropriation and recommended that any indirect expropriation shall only occur if the investor has been 'radically deprived of the economical use and enjoyment of its investments, as if the rights related thereto had ceased to exist'. Specifically, it recommends that measures designed to combat climate change should not constitute indirect expropriation unless the impact of that measure would appear 'wholly disproportionate' because it was 'undeniably unreasonable in light of its purpose'.
• Notably, the Committee recommends that – in view of parties' commitments under the Paris Agreement – an investor should 'expect' that contracting parties will adopt measures designed and applied to combat climate change and that the relevant provisions in the CETA will be interpreted and applied by a tribunal by taking those Paris Agreement commitments into account in a way that 'allows the parties to pursue their respective climate change mitigation and adaptation policies.'

What's next?

The draft decision is still only that: a draft. It remains to be seen whether the text will be amended when going through the internal approval process.

What's clear is that the text of the current draft still leaves considerable room for dispute: for example, what does it mean for an investor to 'expect' States to take decisions that are designed to meet their commitments under the Paris Agreement? Does it mean that all such decisions are automatically legal? This continued lack of clarity will no doubt raise concerns when viewed alongside the doctrine of proportionality which informs the application of the various standards of investment protection.

There has been a palpable move in recent years within the investment treaty sphere to support policy changes by States in pursuit of their climate change commitments. Providing this kind of encouragement is undoubtedly a good thing.

But investors will no doubt be raising alarm in view of this latest trend, at least within Europe, of moving away from the traditional 'investor-bias' often found in investment treaties and towards a more supportive atmosphere for States attempting to reach their net zero targets. Particularly if the changes raise more questions than answers…

Reach out to a member of our Disputes and investigations team if you want to understand more about what this might mean for you.