NEED FOR ARBITRATION WITH INCREASING CLIMATE CHANGE DISPUTES

This article has been authored by Dhruv Chhajed, a current third year student at Gujarat National Law University, Gandhinagar.

“Conflict is inevitable, but combat is optional.”

— Max Lucade

Introduction

Climate Change is real. With no further delay in stating the obvious, the world of commerce needs to strategies the best-case scenarios and gear up for facing the worst. Our aims are not miniscule. We aspire for Mission Possible, an aim for Net-zero carbon emission by the mid-century.

With recent Intergovernmental Report of Climate Change (“IPCC”) Special Report, our aspirations and hope only increases where, it is firmly believed that through better land management we can further our efforts in dealing the Climate Change conundrum. With such goals comes costs to achieve them & with money comes disputes, compromise and need for oversight. We must understand what substantiates as dispute in the realm of Climate Change and Arbitration to better understand why arbitration provides the perfect fit in Climate Dispute. At this juncture it is pertinent to note that the primary disputes are of enforcement and cross-border jurisdiction issues.

What categories as disputes ?

International Chamber of Commerce (“ICC”) Task Force on Arbitration of Climate Change Related Disputes, defined the scope of Climate Dispute as “any dispute arising out of or in relation to the effect of climate change and climate change policy, the United Nations Framework Convention on Climate Change (“UNFCCC”) and the Paris Agreement”.

Further the Task Force categorised the dispute on the basis of contractual terms and parties in 3 categories

A. Specific transition, adaptation or mitigation contracts;

B. Contracts not specifically related to transition, adaptation or mitigation;

C. Submission agreements (agreement entered post the dispute has been arisen or crystallised)

Such classical division of disputes help in critically addressing each with its own intricacies. For illustration the category C i.e. Submission agreement includes claims from third parties or impacted groups and populations which eventually furthers the cause of justice for the public. Therefore such classification is very critical.

Expectation of Increase in Financial Distress and Disputes

Keeping in mind that a paradigm shift is required to achieve the complex goals of countering climate change, the financial sector is keeping pace to provide the required investment to meet changes in production methods and technology. The International Energy Agency (“IEA”) alone estimated the requirement of about $ 53 Trillion of additional investments over and above the current investment profile by the year 2035 to achieve the target of 2 ºC emission path in global temperature increase.

The Global Commission on the Economy and Climate points out that the upcoming decade is one of the most critical periods in the global economy. There is an inevitable need for structural shift and transformation in financial & heavy industry. The Report of Global Commission on Economy and Climate estimated an investment requirement of about $ 90 Trillion in world’s urban, energy and land resources. Therefore it is conclusive that the portfolios that shall be the subjects of initial transition would remain to be Energy, Finance and Technology which in turn would therefore require a reliable, cost effective dispute mechanism .

More importantly, every shift in the system is supported by national and international laws. Graham Research Institute of Climate Change and the Environment, estimated over 1,500 climate change-related laws and policies worldwide. It is indisputable that environment conscious laws are finding more prevalence in national growth strategies post the Paris Agreement. Commercial disputes with a climate change related genesis are even more likely to be brought by businesses as they adjust to increasing regulation of emissions following the entry into force of the Paris Agreement.

This Static state of Financial Law in context of cross-border disputes in investments and commerce will soon be hit by Climate conscious dynamic laws. This threat of a rapid system-wide adjustment that could destabilise the financial stability is also coined as ‘Climate Minsky moment’ by Governor Carney (Governor of Bank of England).

The above facts are a mere representation of what is ahead in the future. Commercial disputes are inevitable in future. With more and more businesses gearing up and adjusting to the regulations in force such as those of the Paris Agreement, arbitration and other modes of Alternative Dispute Resolution must remain at the forefront of the ongoing transition.

Traditional Forums

Domestic litigation has been establishing a strong base in terms of global standards enforcement and domestic claims. In a recent case of Germany LLuyia vs. RWE, the Peruvian farmer sued the largest energy company in Germany for increased emission of greenhouse gas and threats of polar caps melting. The farmer is seeking compensation for the expenses against the water rise from increased melting in glacial lake. NGO’s of all capacities are coming forward to combat the regulatory challenges. Furthermore in the case of Friends of the Earth Netherlands and Milieudefensie v. Royal Dutch Shell, the environmental NGO demanded reduction in emissions and adherence to Paris Agreement from the a petroleum company named Royal Dutch Shell.

However, there lies a problem. Governments across the world are reconstructing their national laws in compliance to multilateral agreements such as the ‘Paris Agreement’. If one opts to litigate in climate change disputes seeking justice, he/she if forced to initiate action in number of jurisdictions. This is a troubling issue when it comes to time and costs. Thus the specific limitation of litigation not being multi-jurisdictional causes concerns while applying in disputes such as climate change that are bound to be multi-jurisdictional.

Litigating alone would bear a shackle on the entire process of shifting to a green economy. The need for moving cross border is yet another requirement when it comes to environment friendly law. Unlike the other principal and fundamental subject matters of legal fraternity, environmental problems are not restricted to boundaries and its impact can be cross-border or even cross-continental. In such situations national laws and traditional litigation fails to create an impact worth the cost. The problems are indeed ‘multi-scalar’ and contains regulatory problems beyond one nation state.

Benefits of International Arbitration over Others

Arbitration is known for its flexibility and effectiveness. To let the records, speak for itself, White & Case along with Queen Mary University of London Surveyed, that around 97% of respondents show a preference to international arbitration, with upto 99% recommending the same in future. It has shown promise in enforceability of awards with considerably lower costs.

One of the biggest convenience in Arbitration is its ability to enforce the claims which is made possible through the International Conventions like the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (known as the New York Convention ). This convention requires the courts of the signatory nation to enforce the arbitral awards and amazingly more than 150 nations are its signatories. To counter the most critical of cross-border disputes including multiple jurisdictions, arbitration seems a very encouraging option to justice.

Few additional advantages can also be cited for preferring arbitration. It provides a neutral forum with coverage to multiple nations. Article 14 of UNFCCC provides that the presence of States and State-entities provide a more robust and committed approach to solving a variety of such disputes. This in turn keeps the practicality of tackling climate change a feasible goal. Multiple states and state entities are already registered claimants in the ICC Arbitration against suppliers in energy and construction sector.

There is a sharp increase in the popularity of Arbitration for solving commercial and Investor State Dispute Settlement. The ICC Commission report provided that the range and spectrum of subject matters being resolved is sharply increasing. In the year 2017, ICC matters of construction and engineering provided for 23% of all new cases, however the same sector’s case inflow went from 23% to 26.6% in the year 2018. The disputes in the energy sector amounted to 19% of overall new caseload in 2017 remaining the second highest. Other segments such as general trade and distribution, industrial equipment’s, health, pharmaceuticals, financing and insurance are showing distribution of roughly 6 % each.

Coming to the matters of Environmental Law, the ICC report provides that since 2007 on an average 3 news cases are registered with ICC for dispute resolution every year with the number going upto 6 in few years. This a slow but steady start, the preference of Arbitration in successfully resolving and settling disputes is increasing steadily.

This data is more than encouraging to continue the efforts in strengthening the arbitral approach of resolving disputes.

Conclusion

With the tremendous pressure and responsibility of containing Climate Change, the problems must be dealt with all hands-on deck. Lubricating this transition period is one of the most effective solution that can help us transit to a green economy with minimal costs to human and capital.

Losses can be mitigated; claims can be enforced and justice can be served with more efficiency with the help of arbitration and its dispute settlement mechanisms. There should not be any haste in addressing the importance of the issues that impact our survival as a species.