Non-Compensable Regulation versus Regulatory Expropriation: Are Climate Change Regulations Compensable?

Abstract

Abstract The global threat posed by climate change calls for increased governmental regulation in various fields of economic activity. New regulations, especially in the carbon-intensive industries, will likely interfere with economic interests and acquired rights of foreign investors. One of the main questions that investment treaty tribunals will have to answer in this context is whether, and to what extent, such regulations should be accompanied by compensation. Investment treaty jurisprudence has yet to come up with comprehensive criteria for distinguishing compensable regulatory expropriation from non-compensable exercise of regulatory powers. This uncertainty is particularly evident from recent cases dealing with issues, such as plain packaging for tobacco, nuclear energy phase-out and solar energy tariffs. The absence of specific criteria causes concern among States, investors and other stakeholders, and contributes to the ongoing backlash against the investor–State dispute settlement system. This article suggests drawing the borderline between non-compensable regulation and regulatory expropriation in reference to inherent limits of property rights that underlie foreign investments. Although the State owes compensation to an investor whose property rights are dispossessed by an increased regulation, it is uncontroversial that property rights are themselves limited by the rights of others. The precise limits change over time, in light of new circumstances and available scientific evidence. Prudent investors, especially those active in hazardous industries, assume the risk of such changes as part of their business risk. A regulation that does no more than to clarify the inherent limits of the investor’s rights in light of newly emerging circumstances does not constitute an interference with such rights and does not therefore qualify as expropriation. Under this approach, bona fide regulations that aim to tackle the emerging threats posed by climate change do not engender a right to compensation.