Journal of International Dispute Settlement, Vol. 1, No. 2 (2010), pp. 447–473
doi:10.1093/jnlids/idq004
Published Advance Access July 13, 2010
International, Mixed, and Private
Disputes Arising Under the Kyoto Protocol
CHESTER BROWN*
In the relatively short time since the Kyoto Protocol’s entry into force, many types
of disputes have arisen which have resulted in the commencement of a variety of
dispute settlement proceedings. In addition to the international adjudicatory bodies
charged with deciding disputes arising under the Kyoto regime, domestic courts
and tribunals have also found themselves seized of such litigation. The purpose of
this article is to survey the complex terrain of climate change litigation, and review
the experience that States and non-State entities have had to date with the
settlement of disputes arising under, and out of, the Kyoto Protocol. These include
inter-State disputes, mixed disputes and private disputes. We have reasonably good
knowledge of the international and mixed disputes that have arisen, but in contrast,
comparatively little is known about the number of private disputes that have
occurred, although the complexity and novelty of transactions under the Kyoto
Protocol’s flexibility mechanisms, combined with fact that such transactions are
subject to national regulation and international oversight, means that such disputes
are likely to arise. In sum, experience to date indicates that the many methods of
settling the range of disputes are being used effectively, and it is important for the
future of the climate change regime that this multi-layered approach to dispute
settlement is maintained.
1. Introduction
The Kyoto Protocol has now been in force for over 5 years. A major innovation
of the Kyoto Protocol was the establishment of a complex regime under which
States parties can seek to meet their emission reduction obligations either
‘individually or jointly’,1 by approving, and participating in, projects and
transactions under the ‘Kyoto flexibility mechanisms’, which consist of ‘joint
implementation’ (JI), the ‘clean development mechanism’ (CDM) and ‘international emissions trading’ (IET). These projects and transactions involve not
* Associate Professor, Faculty Law, University of Sydney; Barrister (New South Wales); Door tenant, Essex
Court Chambers, London. Email: [email protected]. Many thanks to Tim Stephens, Audley Sheppard
and Dane Ratliff for their comments on an earlier draft. The views expressed in this article are personal.
1
Kyoto Protocol to the United Nations Framework Convention on Climate Change (opened for signature
16 March 1998, entered into force 16 February 2005) (1998) 37 ILM 22, art 3. See, eg Chester Brown, ‘The
Kyoto Protocol Enters into Force’ ASIL Insights (February 2005) <http://www.asil.org/insights/2005/03/
insights050301.html> accessed 15 March 2010.
ß The Author 2010. Published by Oxford University Press. All rights reserved. For permissions,
please e-mail: [email protected]
448
Journal of International Dispute Settlement
only States, but also private parties, many of which have emission limitation
and reduction obligations of their own, as many States have implemented the
Kyoto Protocol in domestic law, such as the European Union Emissions
Trading Scheme (EU ETS), which commenced operation on 1 January 2005,
and which has been transposed in national legislation.2
In light of this milestone in the operation of the Kyoto Protocol, it is timely
to take stock of one aspect of the Protocol, namely the regime for the
settlement of disputes arising under the Protocol. In the relatively short time
since the Protocol’s entry into force, many types of disputes have arisen which
have resulted in the commencement of a variety of dispute settlement
proceedings; as Stephens has noted, proceedings related to climate change
‘may be initiated within a multiplicity of courts, tribunals and quasi-judicial
bodies that operate on the international plane’.3 This is one of the
consequences of the proliferation in international courts and tribunals,
including in the environmental field, which took place in the latter part of
the 20th century.4 In addition to international adjudicatory bodies charged
with deciding disputes arising under the Kyoto regime, domestic courts and
tribunals have also found themselves seized of such litigation. The purpose of
this article is to survey the complex terrain of climate change litigation, and
review the experience that States and non-State entities have had to date with
the settlement of disputes arising under, and out of, the Protocol.
This article commences by explaining the key provisions of the Framework
Convention and the Kyoto Protocol, and noting the obligations on States that
2
Council Directive (EC) 2003/87 of the European Parliament and of the Council of 13 October 2003
establishing a Scheme for Greenhouse Gas Emission Allowance Trading within the Community (‘EU ETS
Directive’). For the implementation of the Council Directive (EC) 2003/87 into UK law, see the Greenhouse Gas
Emissions Trading Scheme Regulations 2005 (SI 2005/No 925), which revoked and replaced the Greenhouse
Gas Emissions Trading Scheme Regulations 2003 (SI 2003/No 3311), and the Greenhouse Gas Emissions
Trading Scheme (Amendment) Regulations 2004 (SI 2004/No 3390). These Regulations have been subject to a
number of amendments. In addition to the EU ETS Directive, Council Directive (EC) 2004/101 of
13 November 2004 (the ‘Linking Directive’) amends the EU ETS Directive to enable EU Member States to
permit operators to use credits obtained through the Kyoto flexibility mechanisms (certified emission reductions
and emission reduction units) to comply with their obligations under the EU ETS. The Linking Directive was
implemented into UK law by the Greenhouse Gas Emissions Trading Scheme (Amendment) and National
Emissions Inventory Regulations 2005 (SI 2005/No 2903). On the UK legislation, see especially Tim Stephens,
‘The United Kingdom’s Carbon Emissions Reduction Legislation’ (2007) 24 EPLJ 249. Cf the fate of the
Australian draft emissions trading legislation, the Carbon Pollution Reduction Scheme Bill 2010 (Cth), which did
not successfully pass through the Australian Commonwealth Parliament, and whose reconsideration has now
been deferred until at least 2012: Joe Kelly, ‘Kevin Rudd Delays Emissions Trading Scheme until Kyoto Expires
in 2012’, The Australian (27 April 2010) <http://www.theaustralian.com.au/news/kevin-rudd-delays
-emissions-trading-scheme-until-kyoto-expires-in-2012/story-e6frg6xf-1225858894753> accessed 15 March
2010.
3
Tim Stephens, ‘International Courts and Climate Change: ‘‘Progression’’, ‘‘Regression, and
‘‘Administration’’ ’, in Rosemary Lyster (ed), Revelling in the Wilds of Climate Change Law (forthcoming 2010)
2, <http://ssrn.com/abstract=1487866> accessed 15 March 2010.
4
Ibid; see also Tim Stephens, ‘Multiple International Courts and the ‘‘Fragmentation’’ of International
Environmental Law’ (2006) 25 Aust YBIL 227; and Chester Brown, ‘The Proliferation of International Courts
and Tribunals: Finding Your Way Through the Maze’ (2002) 3 Melbourne J Int’l L 453.
Disputes Under the Kyoto Protocol
449
arise under these instruments (Section 2). It then identifies the three categories
of disputes that might arise in the course of flexibility mechanism transactions.
These can be placed into the following broad categories: (i) international
disputes, which comprises disputes between States, disputes between States
and supranational organizations, and disputes between States and international
organizations; (ii) mixed disputes, which include disputes between States and
private entities, disputes between supranational organizations and private
entities, and disputes between international organizations and private entities
and (iii) private disputes, being disputes involving only private entities
(Section 3). The article then considers some of the particular circumstances
which have given rise to disputes under the Kyoto Protocol. These include:
(i) non-compliance by States parties with their obligations, resulting in activity
by the Kyoto Protocol’s Compliance Committee; (ii) disputes between the EU
and some of its Member States over the operation of the EU ETS;
(iii) disputes between the EU and private entities over the operation of the
EU ETS; (iv) disputes between States and private entities, including challenges
to the decisions of national authorities; (v) the possibility of claims being
brought by investors under bilateral investment treaties (BITs) or multilateral
investment treaties (MITs) and (vi) private disputes concerning, for instance,
the non-delivery of contracted emissions allowances or other Kyoto units under
flexibility transactions (Section 4).
This analysis demonstrates that although we have reasonably good knowledge of the international and mixed disputes that have arisen, comparatively
little is known about the number of private disputes that have occurred.
Inevitably, there is potential for difficulties to arise in transactions under the
Kyoto flexibility mechanisms, taking into account the fact that they are subject
to national regulation and oversight by an international bodies, and also
considering the volatility in the price of EU emissions allowances, and the likely
failure of some private entities to meet contractual obligations to deliver Kyoto
units. In addition, significant uncertainty attends the future of the Kyoto
Protocol regime, given that the ‘First Commitment Period’ for the emissions
limitation and reduction obligations will come to an end in 2012, with the
post-2012 regime yet to be negotiated.5 In sum, experience to date indicates
that the many methods of settling the range of disputes are being used
effectively, and it is highly likely that more disputes will arise.
5
On the first ‘commitment period’, and the need to negotiate for subsequent ‘commitment periods’, see
Kyoto Protocol, art 3(1), (7) and (9). See especially Tim Stephens, ‘Kyoto is Dead, Long Live Kyoto! A New
Era for International Climate Change Law’ (Paper presented at the Australian and New Zealand Society of
International Law Conference, 28 30 June 2007) <http://ssrn.com/abstract=1121605> accessed 15 March
2010.
450
Journal of International Dispute Settlement
2. Outline of the Legal Regime Under the Framework
Convention and the Kyoto Protocol
The Framework Convention was adopted at the UN Conference on
Environment and Development at Rio de Janeiro in 1992. The objective, as
stated in the Convention, was to achieve the stabilization of greenhouse gas
(GHG) concentrations in the atmosphere ‘at a level that would prevent
dangerous anthropogenic interference with the climate system’.6 The
Framework Convention recognized that developed States should take the
leading role in combating climate change,7 and that the specific needs and
special circumstances of developing countries should be given full consideration, especially those that are particularly vulnerable to the effects of climate
change.8 All States parties to the Framework Convention (of which there are
193, plus the European Union) have certain qualitative duties, including the
following: to develop, periodically update and publish national inventories of
anthropogenic GHG emissions and removals by ‘sinks’; to have national and
regional programmes on measures to mitigate climate change; to develop and
transfer technologies to reduce GHG emissions in all relevant sectors; to
promote sustainable management; to cooperate and prepare for adapting to the
impacts of climate change; and to take climate change considerations into
account in the formulation of social, economic and environmental policies.9 In
addition, consistent with the principle that developed States should take the
leading role in combating climate change, the States listed in ‘Annex I’ of the
Framework Convention (being developed country parties, and the parties
which are emerging market economies) accepted additional quantitative
obligations.10 These were to adopt measures and policies to limit their
‘anthropogenic emissions of greenhouse gases’ and to protect and enhance
their ‘greenhouse gas sinks and reservoirs’, in order to modify longer-term
trends in GHG emissions consistent with the objective of the Framework
Convention.11 These measures and policies should recognize that ‘the return
by the end of the present decade to earlier levels of anthropogenic emissions of
carbon dioxide and other [GHGs] would contribute to such modification’.12
Importantly, the Framework Convention provided that Annex I parties were
6
United Nations Framework Convention on Climate Change (opened for signature 20 June 1992, entered
into force 1994) (1992) 31 ILM 848, art 2 (‘Framework Convention’).
7
Ibid art 3(1).
8
Ibid art 3(2).
9
Ibid art 4(1).
10
Ibid Annex I. These are Australia, Austria, Belarus, Belgium, Bulgaria, Canada, Croatia, the Czech
Republic, Denmark, the European Community, Estonia, Finland, France, Germany, Greece, Hungary, Iceland,
Ireland, Italy, Japan, Latvia, Liechtenstein, Lithuania, Luxembourg, Monaco, the Netherlands, New Zealand,
Norway, Poland, Portugal, Romania, Russia, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey, the
Ukraine, the United Kingdom and the United States of America.
11
Framework Convention, art 4(2)(a).
12
Ibid.
Disputes Under the Kyoto Protocol
451
permitted to implement such policies and measures ‘jointly’ with other States
parties.13
The application of the concept of ‘joint implementation’ in the context of the
international response to climate change reflects the fact that ‘[s]ince
greenhouse gases remain in the atmosphere for a long time and migrate
globally, where emissions are reduced makes little difference to the greenhouse
effect’.14 But the Framework Convention did not make any further provision
on how joint implementation would operate, although this was a topic of some
debate during the drafting process.15 Under Article 4(2)(d) of the Framework
Convention, the States parties simply agreed that ‘[t]he Conference of the
Parties, at its first session, shall . . . take decisions for criteria regarding joint
implementation’.16 Nor did the Framework Convention impose any specific
quantitative obligations on States parties to reduce or limit their GHG
emissions.
At the Third Conference of the Parties (COP-3) in December 1997, the
States parties to the Framework Convention adopted the Kyoto Protocol. In so
doing, they managed to agree on quantified emission limitation and reduction
obligations for the States listed in Annex I of the Framework Convention.
Overall, the States parties agreed that Annex I States should reduce their
overall GHG emissions by at least 5% below 1990 emission levels in the first
Kyoto ‘commitment period’ of 2008–12.17 These States accepted an obligation
under Article 3 of the Kyoto Protocol to limit their GHG emissions to the
differentiated levels stipulated in Annex B of the Protocol.18 And crucially,
Article 3 further provided that the States parties could meet their quantitative
emission limitations either ‘individually or jointly’.19 Three methods are
elaborated by which States parties can comply with their emission limitations
‘jointly’. These are collectively known as the ‘Kyoto flexibility mechanisms’,
and they consist of JI, the CDM and IET.
The first of these, JI, is provided for in Article 6 of the Kyoto Protocol. This
provision enables Annex I States to engage in projects in other Annex I
countries that will lead to emission reductions or the enhancement of emission
removals by sinks. Article 6 provides in part that:
For the purpose of meeting its commitments under Article 3, any Party included in
Annex I may transfer to, or acquire from, any other such Party emission reduction
units resulting from projects aimed at reducing anthropogenic emissions by sources or
13
Ibid.
Daniel Bodansky, ‘The Framework Convention on Climate Change: A Commentary’ (1993) 18 Yale J
Int’l L 451, 520; see also Chester Brown, ‘Facilitating Joint Implementation under the Framework Convention
on Climate Change’ (1997) 14 EPLJ 356.
15
See discussion in Bodansky (ibid) 520 3.
16
Framework Convention, art 4(2)(d).
17
Kyoto Protocol, art 3.
18
Ibid annex B.
19
Ibid art 3.
14
452
Journal of International Dispute Settlement
enhancing anthropogenic removals by sinks of greenhouse gases in any sector of the
economy, provided that:
(a) Any such project has the approval of the Parties involved;
(b) Any such project provides a reduction in emissions by sources, or an
enhancement of removals by sinks, that is additional to any that would otherwise
occur.20
Article 6 further provides that a state party cannot acquire emission reduction
units (ERUs)—being a valuable commodity which can be traded—if it is not in
compliance with its qualitative obligations to have in place a ‘national system’
for the estimation of emissions, and an annual inventory of emissions by
sources. Further, the participation by states in joint implementation projects
has to be ‘supplemental to domestic actions for the purposes of meeting
commitments under Article 3’.21
In addition, Annex I States are permitted to ‘authorise legal entities’ to
participate in JI projects. If any such projects lead to emission reductions, this
can lead to the generation of ERUs, which can be used towards meeting
emission limitation and reduction commitments.22
The second of the flexibility mechanisms, the CDM, is provided for in
Article 12 of the Kyoto Protocol:
The purpose of the clean development mechanism shall be to assist Parties not
included in Annex I in achieving sustainable development and in contributing to the
ultimate objective of the Convention, and to assist Parties included in Annex I in
achieving compliance with their quantified emission limitation and reduction
commitments under Article 3.23
Under the CDM, Annex I States can engage in sustainable development
projects in non-Annex I countries, and can earn certified emission reductions
(CERs) for emission reductions achieved by such projects. As with ERUs
under JI projects, CERs might be accrued through emissions reduction
projects. They may also be accrued through projects which enhance the
sequestration of GHGs by ‘sinks’; these may be, for instance, afforestation or
reforestation projects.24
CERs can be used by Annex I states to contribute to compliance with their
quantified limitation and reduction commitments under Article 3.25 Article
12(9) provides that private entities can also participate in CDM projects, and
that participation is subject to any guidance provided by a body constituted
20
Ibid art 6(1)(a) (b).
Ibid art 6(1)(c) (d), see also arts 5 and 7.
Ibid art 6(3).
23
Ibid art 12(2).
24
Decision 17/CP.7, ‘Modalities and procedures for a clean development mechanism as defined in Article 12
of the Kyoto Protocol’, UN Doc No FCCC/CP/2001/13/Add.2 (2001) 20, 21 2, paras 6 7.
25
Kyoto Protocol, art 12(3).
21
22
Disputes Under the Kyoto Protocol
453
under the auspices of the FCCC Secretariat, the ‘CDM Executive Board’.26
This body’s role is to supervise and approve CDM activities, including the
certification of emissions reductions achieved by CDM projects.27
The third Kyoto flexibility mechanism is IET. Under this mechanism, Annex I
States may trade part of their ‘assigned amounts’, or permitted emission levels,
with other Annex I States in order to comply with their emission limitation
obligations under Article 3 and Annex B of the Kyoto Protocol. Article 17
provides in part as follows:
The Parties included in Annex B may participate in emissions trading for the
purposes of fulfilling their commitments under Article 3. Any such trading shall be
supplemental to domestic actions for the purpose of meeting quantified emission
limitation and reduction commitments under that Article.28
Having set out the legal regime that is established by the Framework
Convention and the Kyoto Protocol, this article now turns to a consideration
of the categories of disputes that can arise in the implementation of States’
obligations under these instruments.
3. Categories of Disputes Arising Under the Kyoto Protocol
A. International Disputes
The first category of dispute which might arise under the Framework
Convention and the Kyoto Protocol is international disputes, which might
emerge between States, concerning, for instance, the interpretation or
application of these international agreements.29 Such disputes could arise if
one State considers that another State is not in compliance with its obligations
under one or both of the treaties. This type of dispute is dealt with at an
26
Ibid art 12(9); Decision 17/CP.7, ‘Modalities and procedures for a clean development mechanism as
defined in Article 12 of the Kyoto Protocol’, UN Doc No FCCC/CP/2001/13/Add.2 (2001) 20, 27 30, paras
5 19.
27
Kyoto Protocol, art 12(4).
28
Ibid art 17.
29
On the settlement of inter-State disputes under the Framework Convention and Kyoto Protocol, see
Chester Brown, ‘The Settlement of Disputes Arising in Flexibility Mechanism Transactions under the Kyoto
Protocol’ (2005) 21 Arb Int’l 361, 371 2; Dane Ratliff, ‘Dispute Settlement in ‘‘Flexible-Mechanism’’
Contracts’, in David Freestone and Charlotte Streck (eds), Legal Aspects of Implementing the Kyoto Protocol
Mechanisms: Making Kyoto Work (OUP, Oxford 2005) 372, 374 8; Patricia Birnie and Alan Boyle, International
Law and the Environment (2nd edn OUP, Oxford 2002) 529 31; Markus Ehrmann, ‘Procedures of Compliance
Control in International Environmental Agreements’ (2002) 13 Colo J Int’l Envtl L & Pol’y 377, 415 30; René
Lefeber, ‘From the Hague to Bonn to Marrakesh and Beyond: A Negotiating History of the Compliance Regime
under the Kyoto Protocol’ (2001) 14 Hague YB Int’l L 25; Catherine Redgwell, ‘Non-Compliance Procedures
and the Climate Change Convention’, in W Bradnee Chambers (ed), Inter-linkages: The Kyoto Protocol and the
International Trade and Investment Regimes (2001) 43; Peggy Rodgers Kalas and Alexia Herwig, ‘Dispute
Resolution under the Kyoto Protocol’ (2000) 27 Ecology LQ 53. On the settlement of international
environmental disputes more generally, see especially Tim Stephens, International Courts and Environmental
Protection (CUP, Cambridge 2009); and Cesare Romano, The Peaceful Settlement of International Environmental
Disputes: A Pragmatic Approach (The Hague, Kluwer 2000).
454
Journal of International Dispute Settlement
intergovernmental level under Article 14 of the Framework Convention.30 This
provision stipulates that States are to settle disputes by negotiation or other
peaceful means of their own choice.31 It further provides that parties can
declare that they consent to submit the dispute to the International Court of
Justice (ICJ) or to international arbitration,32 although only the Solomon
Islands and Cuba have deposited such a declaration.33 If the dispute has not
been settled by negotiation after 12 months, and if the parties have not agreed
to submit their dispute to the ICJ or to international arbitration, either party
may request the constitution of a conciliation commission. However, the
conciliation commission does not have the power to render a binding award,
but can only make recommendations, ‘which the parties shall consider in good
faith’.34 Article 19 of the Kyoto Protocol provides that Article 14 of the
Framework Convention applies mutatis mutandis.35
In addition to these traditional inter-State dispute settlement procedures, the
parties to the Framework Convention have negotiated a ‘non-compliance
procedure’ to the Kyoto Protocol,36 the aim of which is ‘to facilitate, promote
and enforce compliance with the commitments under the Protocol’.37 The
Compliance Committee was the last of the bodies to be established under the
Kyoto Protocol; it held its first meeting in Bonn in 2006,38 and its Rules of
Procedure were adopted by the Meeting of the Parties in 2006.39 The
Compliance Committee is made up of two branches: the facilitative branch,
and the enforcement branch. The function of the facilitative branch is to offer
advice and assistance to parties in order to promote compliance,40 and the
enforcement branch has the responsibility to determine consequences for States
30
Framework Convention, art 14; for disputes concerning the interpretation or application of the Kyoto
Protocol, see Kyoto Protocol, art 19, which simply refers to art 14 of the Framework Convention.
31
Framework Convention, art 14(1).
32
Ibid art 14(2).
33
The Solomon Islands has recognised international arbitration as compulsory under art 14(2) of the
Framework Convention, and Cuba has declared that disputes shall be settled ‘through negotiations through the
diplomatic channel’: UNFCCC, ‘Status of Ratification’ (19 October 2009) <http://www.unfccc.de>.
34
Framework Convention, arts 14(5) (6).
35
Kyoto Protocol, art 19.
36
Decision 24/CP.7, ‘Procedures and Mechanisms relating to Compliance under the Kyoto Protocol’, UN
Doc No FCCC/CP/2001/13/Add.3 (2001) 64; and Decision 27/CMP.1, ‘Procedures and Mechanisms relating to
Compliance under the Kyoto Protocol’, UN Doc No FCCC/KP/CMP/2005/8/Add.3. See also Lefeber (n 29);
and Redgwell (n 29). For more on non-compliance procedures, see Catherine Redgwell, ‘Environmental
Non-Compliance Procedures and International Law’ (2000) 31 Netherlands Yearbook of International Law 35;
Martti Koskenniemi, ‘Breach of Treaty or Non-Compliance? Reflections on the Enforcement of the Montreal
Protocol’ (1992) 3 Yb Int’l Env L 123.
37
Decision 27/CMP.1, ‘Procedures and Mechanisms relating to Compliance under the Kyoto Protocol’, UN
Doc No FCCC/KP/CMP/2005/8/Add.3, Annex.
38
Ibid 92 para 4.
39
Rules of Procedure of the Compliance Committee of the Kyoto Protocol <http://unfccc.int/files/kyoto
_protocol/compliance/background/application/pdf/rules_of_procedure_of_the_compliance_committee_of_the_kp
.pdf> accessed 15 March 2010.
40
Decision 27/CMP.1, ‘Procedures and Mechanisms relating to Compliance under the Kyoto Protocol’, UN
Doc No FCCC/KP/CMP/2005/8/Add.3, Annex, Part IV, para 4.
Disputes Under the Kyoto Protocol
455
parties that do not meet their obligations under the Kyoto Protocol.41 The two
branches of the Compliance Committee consider ‘questions of implementation’; these can be raised by ‘expert review teams’ under Article 8 of the Kyoto
Protocol; by any State party to the Kyoto Protocol with respect to itself; or by
any State party concerning another State party’s compliance with its obligations.42 The enforcement branch has the power to decide on sanctions in the
case of States parties which are not in compliance with their obligations; such
sanctions may include a declaration of non-compliance; suspension of that
State party’s eligibility to participate in the flexibility mechanisms; and
penalties may also be applied to that State party’s future ‘assigned amount’
for future commitment periods, meaning that it will be required to make
additional emissions reductions in the future.43
Another form of international dispute—albeit not one between two States,
but between States and a supranational entity, the European Commission—has
arisen in the context of the EU ETS. This form of dispute concerns the
implementation of the EU ETS by Member States of the EU, and the
Commission’s oversight of the actions taken by those Member States. Several
such disputes have arisen since the EU ETS commenced operation on
1 January 2005; analysis of these cases is provided in Section 3 of this article.
A further type of international dispute might arise between a State and one
of the Kyoto Protocol’s bodies, such as the body established to supervise
projects undertaken under the CDM (the CDM Executive Board) or the body
created to monitor JI projects (the JI Supervisory Committee). These bodies
both work under the guidance of, and are accountable to, the Conference of
the Parties to the Framework Convention (COP), which also serves as the
Meeting of the Parties to the Kyoto Protocol (MOP) (which are together
referred to as the COP/MOP, or CMP).44
B. Mixed Disputes
The second category of dispute concerns those between States and private
entities, international organizations and private entities, and supranational
organizations and private entities; such disputes can be referred to as ‘mixed
disputes’.45 There are a number of instances in which mixed disputes have
already arisen, and in which they might potentially arise.
41
Ibid Part V, para 4; see also ‘An Introduction to the Kyoto Protocol Compliance Mechanism’
<http://unfccc.int/kyoto_protocol/compliance/introduction/items/3024.php> accessed 15 March 2010.
42
Decision 27/CMP.1, ‘Procedures and Mechanisms relating to Compliance under the Kyoto Protocol’, UN
Doc No FCCC/KP/CMP/2005/8/Add.3, Annex, Part VI, para 1.
43
Ibid Part XV, paras 1, 4 and 5.
44
See, eg ‘Modalities and Procedures of the CDM: Role of the Executive Board’, Decision 17/CP.7, Annex,
Part C, para 5.
45
For use of this phrase, see, eg Stephen Toope, Mixed International Arbitration: Studies in Arbitration between
States and Private Persons (Grotius Publications, Cambridge 1990).
456
Journal of International Dispute Settlement
First, if a national authority were to claim that ‘Kyoto units’—whether they
be certified emissions reductions (CERs) gained in CDM projects, emissions
reduction units (ERUs) gained in JI projects, or emissions trading allowances—
were subject to a form of particular treatment under taxation or insolvency
legislation, or were to be treated in a certain way for the purposes of national
accounting standards, this may be disputed by private entities holding such
units, and subjected to legal challenges in domestic courts. Relatedly, disputes
might also arise where the relevant national authority of a State party makes a
decision concerning, for instance, the allocation of emission allowances which
is disputed by the affected private entities.
Second, mixed disputes might also arise between private entities and a
relevant international or supranational regulatory authority, such as the CDM
Executive Board, the JI Supervisory Committee and the relevant organs of the
European Union which administer the EU ETS, where those bodies make
decisions adverse to the interests of private entities participating in, for
instance, a flexibility mechanism transaction; several instances of this type of
mixed dispute have also already arisen.
A third example of a mixed dispute would be provided by a situation where
measures taken by a State are alleged to be in violation of its obligations under
a BIT or MIT, which gives the private entity as an investor the right to bring a
claim directly against the host State. Such international investment treaties
usually confer the right on ‘investors’, having the nationality of one State party
to the treaty, to bring a claim in international arbitration against the other State
party to the treaty, where that State party is the host State of an ‘investment’,
and where it has interfered with that investment in violation of its obligations
under the treaty.
Finally, as a fourth example, mixed disputes may also arise where a State is a
party to a transaction with a private party under one of the flexibility
mechanisms. A private entity may contract with a State or State agency for the
purposes of carrying out a JI or CDM project if, for example, the project is an
afforestation or reforestation project under the CDM,46 and the land is
State-owned. In such cases, disputes may potentially arise over title to any
CERs generated by the project, if this is not made clear in the contractual
agreement between the parties.
C. Private Disputes
The third category of dispute concerns disputes between private parties. This
type of dispute might arise in the course of flexibility mechanism transactions if
one party considers that the other party is in breach of its obligations. While
these obligations will usually be contractual—ie obligations arising under an
46
See, eg Decision 17/CP.7, ‘Modalities and Procedures for a Clean Development Mechanism as Defined in
Article 12 of the Kyoto Protocol’, UN Doc No FCCC/CP/2001/13/Add.2 (2001) paras 7 11.
Disputes Under the Kyoto Protocol
457
Emissions Reduction Purchase Agreement (ERPA), or a contract for the sale
and purchase of emissions allowances—they may also encompass other
obligations in tort or in equity, depending on the facts and circumstances of
the case. The non-performance by a party of its obligations in a flexibility
mechanism transaction might, in the case of a CDM or JI project, result in the
failure of the project to realize the anticipated emissions reductions; or in the
case of an emissions trading contract, the non-delivery of emissions allowances.
The non-delivery of emissions allowances may also result from acts or
omissions by the international bodies established under the Kyoto Protocol,
namely the CDM Executive Board and the Joint Implementation Supervisory
Committee. The non-delivery of emissions allowances may also result from the
fact that participants in a chain of back-to-back transactions for the sale and
purchase of Kyoto units have used different model contracts.47 There are three
model contracts which are available for use in EU ETS transactions, being
those prepared by the International Emissions Trading Association (IETA), the
European Federation of Energy Traders (EFET) and the International Swaps
and Derivatives Association (ISDA).48 Each of these model contracts originally
differed in a number of respects (although many of the inconsistencies have
now been removed in a harmonization exercise in 2005 and 2006). The
non-delivery of Kyoto units might, in turn, have the effect that the intended
purchaser of the emissions allowances is unable to meets its obligations under
the its country’s national implementation of the Kyoto Protocol, which might
include, in the case of the EU ETS, the obligation to surrender sufficient
emissions allowances equivalent to the total emissions from the operator’s
installation on 30 April of each year.49
Disputes arising in the context of such transactions and projects would most
likely be referred to international commercial arbitration in accordance with the
parties’ agreement, as set out in the relevant ERPA, or contract used for the
sale and purchase of Kyoto units. For instance, IETA’s ‘CDM Emissions
Reduction Purchase Agreement’ provides in clause 15.11 that any disputes are
to be resolved by international arbitration in accordance with the Permanent
Court of Arbitration’s (PCA’s) Optional Rules for Arbitration of Disputes
Relating to Natural Resources and/or the Environment;50 likewise, the IETA
47
For a discussion of the problems which could be occasioned by the inconsistencies, see especially Brown
(n 1) 381 4.
48
See, eg IETA’s ‘Emissions Trading Master Agreement for the EU Scheme’, as well as the IETA
‘Emissions Allowances Single Trade Agreement for the EU Scheme’ (<http://www.ieta.org>); the EFET’s
‘Allowances Appendix’ to the EFET ‘General Agreement concerning the Delivery and Acceptance of Electricity’
(Version 2.1(a), 2007) <http://www.efet.org>; and the ‘Confirmation of OTC Physically Settled EU Emissions
Allowance Transaction’, which is intended to be used in conjunction with one of the ISDA Master Agreements
<http://www.isda.org> accessed 15 March 2010.
49
Council Directive (EC) 2003/87 art 12(3).
50
IETA’s CDM Emissions Reduction Purchase Agreement (Version 2.0, 2004), cl 15.11 <http://www.ieta
.org> accessed 15 March 2010.
458
Journal of International Dispute Settlement
‘Emissions Allowances Single Trade Agreement for the EU Scheme’ also
provides parties with the option of selecting international arbitration as the
means of settling disputes, and the arbitration clause recommends the use of
the same PCA Arbitration Rules.51
4. Experience of Disputes Under the Kyoto Protocol
The following discussion considers the extensive experience which has already
been gained in the settlement of disputes arising under the Kyoto Protocol, and
the implementation of the Protocol’s obligations in domestic law.
A. Inter-State Disputes and the Kyoto Protocol’s Non-Compliance Procedure
In the category of international disputes, it does not appear that any States
have yet sought to invoke the dispute settlement provisions under Article 14 of
the Framework Convention, or Article 19 of the Kyoto Protocol, although it
has been speculated that inter-State claims could be presented.52 In contrast,
however, the Kyoto Protocol’s Compliance Committee has been reasonably
active.53 First, the Facilitative Branch received a submission from South Africa,
as Chair of the G-77, and China, on behalf of the G-77 and China, titled
‘Compliance with Article 3(1) of the Kyoto Protocol’ on 26 May 2006, in
which South Africa and China brought to the Facilitative Branch’s attention
the failure of a number of Annex I Parties to comply with reporting
requirements.54 Ultimately, decisions were adopted by the Facilitative Branch
not to proceed against Slovenia and Latvia.55 Second, there have been at least
three cases—which are known as ‘questions of implementation’—of which the
Compliance Committee’s Enforcement Branch has been seized concerning the
alleged non-compliance by States parties with their obligations, and the States
involved are Greece, Canada and Croatia. Each of these procedures has been
initiated following the report of an expert review team, which considers reports
prepared by States parties in accordance with Article 8 of the Kyoto Protocol.
The issue in the procedure involving Greece related to Greece’s national
system of implementation, which includes ‘the institutional, legal and procedural arrangements for estimating emissions and sinks covered by the Protocol,
51
IETA’s ‘Emissions Allowances Single Trade Agreement for the EU Scheme’, cl 10.1 <http://www.ieta
.org>. The PCA’s Optional Rules for Arbitration of Disputes Relating to Natural Resources and/or the
Environment can be accessed at <http://www.pca-cpa.org> accessed 15 March 2010.
52
See generally Roda Verheyen, Climate Change Damage and International Law: Prevention Duties and State
Responsibility (Martinus Nijhoff, Leiden 2005), in particular 279 332.
53
On the Compliance Committee’s activity, see also Stephens (n 3) 15 18.
54
‘Compliance with Article 3(1) of the Kyoto Protocol’, CC-2006-1-1/FB (26 May 2006) <http://unfccc
.int/kyoto_protocol/compliance/facilitative_branch/items/3786.php> accessed 15 March 2010.
55
‘Report to the Compliance Committee on the Deliberations in the Facilitative Branch relating to the
Submission entitled ‘‘Compliance with Article 3(1) of the Kyoto Protocol’’ ’, CC/3/2006/5 (6 September 2006).
Disputes Under the Kyoto Protocol
459
and for reporting and archiving this information’.56 On 16–17 April 2008,
the enforcement branch found that Greece was in non-compliance with its
obligations; this was ‘the first time that any country has been officially found in
non-compliance with any Kyoto Protocol obligation’.57 The Compliance
Committee’s enforcement branch made a declaration of non-compliance,
required Greece to submit a plan to address its non-compliance, and ruled that
Greece was ineligible to take part in the flexibility mechanisms.58 On
13 November 2008, after receiving further reports from Greece, the
Compliance Committee reinstated Greece’s eligibility fully to participate in
the Kyoto Protocol.59
The issue in the procedure involving Canada concerned ‘a question of
implementation in relation to the registry requirements of the Kyoto
Protocol’.60 As the Secretariat’s informal information note states, ‘[a] national
registry is a computerized system used to track holdings of GHG credits,
similar to the computerized accounting system of a bank. Countries with 2012
emissions targets are required to have a registry that meets certain technical
standard’.61 However, on 15 June 2008, after a hearing, the Compliance
Committee’s enforcement branch decided not to proceed further with the
question of implementation with respect to Canada.62
As for the procedure concerning Croatia, there were two issues at play in this
procedure: first, a question of implementation relate to Croatia’s ‘assigned
amount’, and second, a question relating to its ‘commitment period reserve’.63
As the Secretariat’s informal information note states, the ‘assigned amount of a
Party sets its base emission limit for 5-year period of the Protocol, in the form
of assigned amount units (a form of tradable emissions credits)’; and its
‘commitment period reserve essentially limits the percentage of credits a Party
can sell’.64 The issue in this procedure was whether a decision taken under the
56
‘Informal Information Note by the Secretariat: The Compliance Procedure with respect to Greece’
(14 November 2008) <http://unfccc.int/files/kyoto_protocol/compliance/application/pdf/informal_info_note_by
_the_sec_on_the_compliance_procedure_with_respect_to_greece-rev-2.pdf> accessed 15 March 2010.
57
Ibid para 4. For the report of Greece’s hearing, see Compliance Committee—Enforcement Branch, Third
Meeting (4 6 March 2008), Report on the Meeting (18 March 2008) <http://unfccc.int/files/kyoto_protocol/
compliance/enforcement_branch/application/pdf/cc-eb-3-2008-2_report_on_the_3rd_meeting_of_the_eb.pdf>.
58
‘Informal Information Note by the Secretariat: The Compliance Procedure with respect to Greece’
(14 November 2008) para 6 <http://unfccc.int/files/kyoto_protocol/compliance/application/pdf/informal_info
_note_by_the_sec_on_the_compliance_procedure_with_respect_to_greece-rev-2.pdf> accessed 15 March 2010.
59
Ibid para 1.
60
‘Informal Information Note by the Secretariat: The Compliance Procedure with respect to Canada’
(16 June 2008) <http://unfccc.int/files/kyoto_protocol/compliance/application/pdf/informal_information_note_by
_the_ secretariat_on_the_comp_proc_wrt_canada.pdf> accessed 15 March 2010.
61
Ibid para 2.
62
Ibid para 1. For the report of Canada’s hearing, see Compliance Committee—Enforcement Branch, Fifth
Meeting (14 15 June 2008), Report on the Meeting (23 June 2008) <http://unfccc.int/files/kyoto_protocol/com
pliance/enforcement_branch/application/pdf/cc-eb-5-2008-2_report_on_the_5th_meeting_of_the_eb.pdf>
accessed 15 March 2010.
63
‘Informal Information Note by the Secretariat: The Compliance Procedure with respect to Croatia’
(30 November 2009) para 3 <http://unfccc.int/files/kyoto_protocol/compliance/application/pdf/informal_informa
tion_note_by_the_sec-croatia_compliance_procedure-final_decision-rev1.pdf> accessed 15 March 2010.
64
Ibid.
460
Journal of International Dispute Settlement
Convention would allow Croatia to issue more credits under the Protocol
(which would also increase the commitment period reserve).65 At the
enforcement branch’s meeting in November 2009, it made a finding that
Croatia was in non-compliance.66 It made made a declaration of
non-compliance, required Croatia, to submit a plan to address its
non-compliance, and ruled that Croatia was ineligible to take part in the
flexibility mechanisms.67 At the time of writing, these sanctions still apply to
Croatia.
B. Disputes Between the EU and EU Member States
A number of mixed disputes have arisen in the context of the implementation
of the EU ETS by Member States of the EU, and the Commission’s oversight
of the actions taken by those Member States. In 2005, for instance, the United
Kingdom applied to the Court of First Instance of the European Communities
for annulment of a decision of the Commission relating to the United
Kingdom’s National Allocation Plan under the EU ETS.68 The relevant facts
were that the United Kingdom had sought to increase its allocation of emission
allowances, but the Commission had rejected the United Kingdom’s amendment to its National Allocation Plan. The Court of First Instance ultimately
held that the United Kingdom’s application was well founded, and annulled
the contested decision.69 At least one other Member State of the EU—namely,
Germany—has also sought to challenge a decision taken by the Commission in
relation to its implementation of the EU ETS.70 In that case, Germany applied
for partial annulment of Commission Decision C(2004) 2525/2 of 7 July 2004,
in which the Commission had rejected certain aspects of Germany’s National
Allocation Plan concerning the ex-post adjustment of allowances as being
incompatible with the Directive. In its judgment of 7 November 2007, the
Court of First Instance upheld Germany’s claims for partial annulment.71
65
Ibid.
Ibid para 6. For the report of Croatia’s hearing, see Compliance Committee—Enforcement Branch,
Seventh Meeting (11–13 October 2009), Report on the Meeting (26 October 2009) <http://unfccc.int/
files/kyoto_protocol/compliance/enforcement_branch/application/pdf/cc-eb-7-2009-2_report_on_the7th_meeting_
of_the_eb.pdf> accessed 15 March 2010.
67
Informal Information Note by the Secretariat: The Compliance Procedure with respect to Croatia’
(30 November 2009) paras 7 8 <http://unfccc.int/files/kyoto_protocol/compliance/application/pdf/informal
_information_note_by_the_sec-croatia_compliance_procedure-final_decision-rev1.pdf> accessed 15 March 2010.
68
Case T-178/05 United Kingdom v European Commission (Judgment of 23 November 2005) [2005] All ER
(D) 304 (Nov); OJ C22 (28 January 2006) 14. See also Case T-143/05 United Kingdom v Commission, OJ C115
(14 May 2005) 39.
69
Case T-178/05 United Kingdom v European Commission (Judgment of 23 November 2005) [2005] All ER
(D) 304 (Nov); OJ C22 (28 January 2006) 14.
70
See, eg Case T-374/04 Germany v Commission, OJ C284 (20 November 2004) 25; Case T-374/04 Germany
v Commission, Judgment of the Court of First Instance (7 November 2007); Case T-374/04 Germany v
Commission, OJ C315 (22 December 2007) 34.
71
Case T-374/04 Germany v Commission, Judgment of the Court of First Instance (7 November 2007) OJ
C315 (22 December 2007) 34.
66
Disputes Under the Kyoto Protocol
461
In addition to these applications which have been made by Member States
against the Commission, the Commission has commenced proceedings against
various Member States for non-compliance with their obligations under the
EU ETS.72
C. Disputes Between the EU and Private Entities
In addition to the mixed disputes between the EU and various Member States,
there have also been mixed disputes between the EU and private entities. One
such dispute, in which the General Court of Justice of the European Union has
recently issued its judgment, concerns the application made by Arcelor SA
against the European Parliament and the Council of the European Union, in
which it claimed that the Emissions Trading Directive 2003/87/EC should be
partially annulled.73 More specifically, Arcelor SA requested that the Court
declare Articles 4, 6(2)(e), 9, 12(3) and 16(2), (3), and (4) and related
provisions of the Directive ‘void to the extent that those provisions . . . appl[ied]
to installations for the production of pig iron or steel, including continuous
casting, with a capacity exceeding 2.5 tonnes per hour’. In addition, Arcelor
SA sought the payment of compensation for damage it had suffered following
the adoption of the Directive.74 Arcelor SA’s case rested on its view that the
contested provisions ‘infringe[d] its right to property and its freedom to pursue
an economic activity, which constitute fundamental rights guaranteed by the
Community legal order’.75 It further argued that the contested provisions
‘infringe[d] the principle of equal treatment’, because the competing
non-ferrous metal and chemical product sector s were excluded from the
scope of the Directive.76
The General Court ultimately rejected Arcelor SA’s arguments as unfounded, observing that the right to property and freedom to pursue an economic
activity did not constitute ‘absolute prerogatives’, but had to be ‘viewed in
relation to their social function’.77 It also held that Arcelor SA had failed to
substantiate ‘how and to what extent . . . it was likely to become a ‘‘net
purchase of emissions allowances’’ unable to pass on its costs to its
customers’.78 As for the issue of unequal treatment, this argument had
previously been made in Arcelor Atlantique et Lorraine and Others, in which the
Grand Chamber of the European Court of Justice rendered its judgment on
72
Case C-122/05 Commission v Italy (Judgment of 18 May 2006) OJ C165 (15 July 2006) 10; Case
C-107/05 Commission v Finland (Judgment of 12 January 2006) OJ C60 (11 March 2006) 10.
73
Case T-16/04 Arcelor SA v European Parliament and Council of the European Union, Judgment of the General
Court (2 March 2010).
74
Ibid para 32.
75
Ibid para 146.
76
Ibid paras 161 2.
77
Ibid para 153.
78
Ibid para 155.
462
Journal of International Dispute Settlement
16 December 2008, while the present case was pending.79 The General Court
relied on the Grand Chamber’s judgment in Arcelor Atlantique et Lorraine and
Others, and accepted that the steel, chemical and non-ferrous metal sectors
were, for the purposes of examining the validity of the Directive, in a
comparable position while being treated differently.80 However, the General
Court then observed that the principle of equal treatment would not be
infringed if the different treatment of the steel sector, on the one hand, and the
chemical and non-ferrous sectors, on the other, could be justified.81 Noting
that the EU ETS established by the Directive was a ‘novel and complex
scheme’, the Court held that ‘the original definition’ of the Directive’s scope,
and the ‘step-by-step approach taken’, were within the discretion enjoyed by
the Community legislature;82 therefore, this plea of illegality was also
rejected.83 Two further arguments advanced by Arcelor SA—being that the
Directive infringed the freedom of establishment under Article 43 of the EC
Treaty, and that it infringed the principle of legal certainty—were also both
rejected by the Court.84 It followed that Arcelor SA had failed to demonstrate
that the European Parliament and the Council of the European Union had
‘acted unlawfully or committed a sufficiently serious breach of a rule of law
designed to confer rights on the applicant’.85
D. Disputes Between States and Private Entities
Mixed disputes have also arisen in circumstances where private entities have
launched challenges to the decisions of national authorities concerning the
implementation of the EU ETS. This particular form of mixed dispute arose in
2005, when the German Emissions Trading Office faced over 800 complaints
concerning the German National Allocation Plan.86 At least one of these
complaints ultimately found its way to the Court of First Instance of the
European Communities. In EnBW Energie Baden-Württemberg v Commission,
the claimant argued that the Court of First Instance should annul the
79
Case C-127/07 Arcelor Atlantique et Lorraine and Others [2008] ECR I-9895 (Judgment of 16 December
2008) OJ C44 (21 February 2009) 8.
80
Case T-16/04 Arcelor SA v European Parliament and Council of the European Union, OJ C100 (17 April
2010) 35, Judgment of the General Court (2 March 2010) para 168, citing Arcelor Atlantique et Lorraine and
Others, Case C-127/07, [2008] ECR I-9895 (Judgment of 16 December 2008) OJ C44 (21 February 2009) para
38.
81
Case T-16/04 Arcelor SA v European Parliament and Council of the European Union, OJ C100 (17 April
2010) 35, Judgment of the General Court (2 March 2010) para 168, citing Case C-127/07 Arcelor Atlantique et
Lorraine and Others, [2008] ECR I-9895 (Judgment of 16 December 2008) OJ C44 (21 February 2009) para 46.
82
Case T-16/04 Arcelor SA v European Parliament and Council of the European Union, Judgment of the General
Court (2 March 2010) para 168, citing Case C-127/07 Arcelor Atlantique et Lorraine and Others, [2008] ECR
I-9895 (Judgment of 16 December 2008) OJ C44 (21 February 2009) para 61.
83
Case T-16/04 Arcelor SA v European Parliament and Council of the European Union, Judgment of the General
Court (2 March 2010) para 169.
84
Ibid paras 176 92, 196 205.
85
Ibid para 206.
86
‘German Lawsuits Left Small Changes for Success’, Carbon Market Europe (8 April 2005) 4 <http://www
.pointcarbon.com/wimages/CME_8_April_2005jspf_1.pdf> accessed 15 March 2010.
Disputes Under the Kyoto Protocol
463
Commission’s decision of 7 July 2004, in which it had endorsed Germany’s
National Allocation Plan.87 In particular, the claimant considered that
elements of the National Allocation Plan amounted to state aid within the
meaning of article 87(1) of the EC Treaty. On 30 April 2007, however, the
Court of First Instance dismissed the application as being inadmissible.88
In Australia, court proceedings have also been initiated by public interest
groups which have sought to ensure, inter alia, that GHG emissions from
proposed projects were considered as part of the environmental impact
assessment process.89 As Stephens has observed, ‘in several cases in Australian
jurisdictions it has been held that GHG implications of development proposals
must be addressed under environmental planning legislation’; this is ‘despite
the fact that such legislation often makes no reference to climate change and
requires only that broad consideration to be given to environmental impacts
and values including the objective of sustainable development’.90 The public
interest groups’ success in this type of litigation does have its limits, however,
as it relates only to the environmental impact assessment process, rather than
the merits of the project in question from the perspective of its likely GHG
emissions.91
E. Disputes Under BITs and MITs
A further type of mixed dispute could arise in a situation where a host State
adopts a legislative measure or takes any step that adversely affects an
investment of a foreign national who is entitled to the protections of a BIT or
MIT. Legislative or regulatory measures that might fall foul of a State’s
obligations under a BIT potentially encompass a wide range of sovereign
actions, such as the introduction of emissions limitation and reduction
obligations in domestic law; the adoption of regulatory measures restricting
the use of an investment; the revocation of a necessary licence which is
required under national law for an afforestation project or a methane recovery
project; the introduction of regulatory measures which amount to an indirect or
‘creeping’ expropriation, or which result in the investment not being accorded
one of the other standards of protection contained within the BIT; and of
87
Case T-387/04 EnBW Energie Baden-Württemberg AG v Commission, OJ C6 (8 January 2005) 38.
Case T-387/04 EnBW Energie Baden-Württemberg AG v Commission, Order of the Court of First Instance of
30 April 2007, OJ C140 (23 June 2007) 23. For a similar dispute, see Case T-371/05 AIETC—Associazione
Italiana Tecnico Economica del Cimento et al v Commission. This case was removed from the list on 24 July 2006: OJ
C237 (30 September 2006) 14.
89
Gray v The Minister for Planning, Director-General of the Department of Planning and Centennial Hunter Pty
Ltd [2006] NSWLEC 720; on this case, see Anna Rose, ‘Gray v Minister for Planning: The Rising Tide of Climate
Change Litigation in Australia’ (2007) 29 Syd LR 725; for similar proceedings, see Greenpeace Australia v
Redbank Power Company (1994) 86 LGERA 143; Australian Conservation Foundation v Minister for Planning
[2004] VCAT 2029; and Taralga Landscape Guardians v Minister for Planning [2007] NSWLEC 59. See further
Stephens (n 3) 4, 6 8.
90
Stephens (n 3) 6 7.
91
Ibid.
88
464
Journal of International Dispute Settlement
course more extreme measures, such as those which result in the direct
expropriation of a CDM or JI project.92
In general terms, BITs require the host States of ‘investments’ to provide
certain protections for ‘investors’; ‘investors’ are usually defined in the BIT as
being nationals of the other State party to the BIT. The manner in which the
relevant BIT defines ‘investment’ will determine whether an investor’s asset,
such as a CDM or JI project, falls within the protection of that treaty. As the
definition of ‘investment’ is usually defined in relatively broad terms to include
moveable and immovable property, rights in contracts, as well as shares, it is
highly likely that an industrial asset, or a commercial interest in a flexibility
mechanism project, would qualify for protection under most BITs.
In entering into BITs, host States typically agree to treat investors of the
nationality of the other State party in accordance with certain standards of
protection, and accept certain obligations to accord those standards of
treatment.93 These include the obligation to accord fair and equitable
treatment,94 the obligation to accord full protection and security,95 the
obligation to accord national treatment, being treatment no less favourable
than the host State accords to its own investors;96 the obligation to accord
most-favoured-nation treatment, being treatment consistent with the most
favourable treatment accorded to foreign investors;97 the obligation not to
subject the investor’s investment to discriminatory, arbitrary or unreasonable
measures,98 and the obligation not to expropriate the investment unless it is
done for a public purpose, in a non-discriminatory fashion, and is accompanied
by the payment of prompt, adequate and effective compensation.99
In addition to these obligations being contained in BITs and MITs, some of
them also exist as obligations under customary international law. For instance,
it is generally accepted that states are under an obligation not to expropriate
the property of aliens unless it is done for a public purpose, is nondiscriminatory, and is accompanied by the payment of prompt, adequate and
effective compensation.100 In addition, the fair and equitable treatment
92
See, eg ‘The Impact of Climate Change Regulation on Bilateral Investment Treaties’ <http://www
.mallesons.com/publications/2008/Nov/9695998w.htm> accessed 15 March 2010.
93
On each of these standards of protection, see Campbell McLachlan, Laurence Shore and Matthew
Weiniger, International Investment Arbitration: Substantive Principles (OUP, Oxford 2007); and Rudolf Dolzer and
Christoph Schreuer, Principles of International Investment Law (OUP, Oxford 2008).
94
Dolzer and Schreuer, ibid 119 49.
95
Ibid 149 53.
96
Ibid 178 86.
97
Ibid 186 91.
98
Ibid 173 8.
99
Ibid 89 118. See also Christoph Schreuer, ‘The Concept of Expropriation under the ECT and other
Investment Protection Treaties’ in Clarisse Ribeiro (ed), Investment Arbitration and the Energy Charter Treaty
(JurisNet, Huntington 2006) 108, 108: ‘Expropriations, in order to be legal, must be in the public interest,
non-discriminatory, must take place under due process of law and against prompt adequate and effective
compensation.’
100
See, eg Ian Brownlie, Principles of Public International Law (7th ed, 2008) 531 6; Malcolm Shaw,
International Law (5th edn OUP, Oxford 2003) 737 47.
Disputes Under the Kyoto Protocol
465
standard, as well as the full protection and security standard, are related to the
customary international law obligation on States to treat aliens in accordance
with the ‘international minimum standard’ of treatment.101
Crucially, most BITs permit investors to bring direct claims against the host
State for alleged breaches of any of the obligations owed to foreign investors.102
Thus, should a host State adopt any measure that has the effect of depriving
the investor of the benefit of a flexibility mechanism transaction, the investor
may, if there is a relevant BIT or MIT, bring a claim against the host State,
without needing to seek the diplomatic protection of its own government, and
often without the need to exhaust local remedies or even the contractually
agreed remedies.103
There are also aspects of the Kyoto regime that might be considered as
conflicting with certain obligations under most BITs, including, in particular,
the national treatment and most-favoured-nation treatment obligations. For
instance, under Article 12 of the Kyoto Protocol, CDM projects can only be
entered into between developing countries (ie States not included in Annex I of
the Framework Convention on Climate Change) and developed countries
(ie States included in Annex I). As a practical matter, the States listed in Annex I
will only become involved in CDM projects through the participation of a private
company having that State’s nationality. As participation is limited to private
entities from Annex I States, it is arguable that this regime might lead to claims
that potential investors are suffering discriminatory treatment on the basis of
their nationality; this would, prima facie, appear to amount to a violation of the
obligation existing under most BITs to accord national treatment.
Were a claim to be made under a BIT, it is unclear how an arbitral tribunal
would respond to an argument by the host State that it should not be held
liable for any breach of a investment treaty on the basis that it was acting in
accordance with its obligations under the Kyoto Protocol, or the Framework
Convention on Climate Change. In general, States that have sought to defend
their regulatory actions by relying on rules arising from other international
regimes have received relatively short shrift. For instance, in Compañia del
Desarrollo de Santa Elena SA v Republic of Costa Rica,104 the claimant sought
compensation due to Costa Rica’s expropriation of a property consisting of
over 30 km of Pacific coastline, which was home to ‘a dazzling variety of flora
101
On the international minimum standard, see especially the Neer claim, IV RIAA 60 (1926), and
discussion in Brownlie (ibid) 524 8; on the relationship between the ‘international minimum standard’ and the
obligation to accord ‘fair and equitable treatment’ in accordance with art 1105 of the NAFTA, see, eg Glamis
Gold Ltd v United States (Award of 8 June 2009) paras 598 627.
102
Dolzer and Stevens (n 93) 129.
103
See, eg Alan Redfern and Martin Hunter, with Nigel Blackaby and Constantine Partasides, Law and
Practice of International Commercial Arbitration (4th edn Sweet and Maxwell, London 2004) 474 7. For a
suggestion that some steps to exhaust local remedies should be taken, see Generation Ukraine Inc v Ukraine
(ICSID Case No ARB/00/9, Award of 16 September 2003) para 20.30.
104
Compañia del Desarrollo de Santa Elena SA v Republic of Costa Rica (ICSID Case No ARB/96/1, Award of
17 February 2000) 5 ICSID Rep 153.
466
Journal of International Dispute Settlement
and fauna, many of which [were] indigenous to the region’.105 Costa Rica’s
arguments relating to its efforts to have the relevant coastal area designated as a
World Heritage site were dismissed by the Tribunal.106 In its award, the
Tribunal held that: ‘While an expropriation or taking for environmental reasons
may be classified as a taking for a public purpose, and thus may be legitimate,
[this] . . . does not affect the nature of the measure or the compensation to be
paid for the taking. . . . The international source of the obligation to protect the
environment makes no difference.’107
The difficulty created by the existence of competing norms in public
international law is by no means specific to investment treaty arbitration.108 As
the Arbitral Tribunal in Southern Bluefin Tuna stated: ‘There is frequently a
parallelism of treaties, both in their substantive content and in their provisions
for settlement of disputes arising thereunder.’109 It is not necessarily the case
that investment treaty tribunals will assume that rules contained in BITs
should always prevail over other rules of international law; defences to
violations of treaty obligations can be found in the Vienna Convention on the
Law of Treaties,110 as well as the ILC Articles on State Responsibility.111 It
would be difficult to imagine, for instance, that an arbitral tribunal would apply
a rule in an international investment agreement where to do so would be
contrary to a rule of international law having the status of jus cogens, being a
norm ‘accepted and recognised by the international community of States as a
whole as a norm from which no derogation is permitted’.112 Nor would an
investment treaty tribunal ordinarily insist on the performance by a State of
obligations arising under an international investment agreement in circumstances where that State was in ‘distress’, or the violation was done out of
‘necessity’.113 So much is clear, but the obligations under the Kyoto Protocol
are clearly far from attaining jus cogens status, and it is also difficult to say that
failure to comply with the Kyoto rules would place the State in a position
where it was entitled to invoke any of the circumstances precluding wrongfulness contained in the ILC’s Articles.
Nonetheless, it is possible that an investment treaty tribunal could take the
Kyoto rules into account if they were raised as a defence by a host State in an
investment treaty dispute. The tribunal may take the view that it can take into
105
Ibid para 15.
Ibid paras 35, 46.
107
Ibid para 71.
108
See especially Joost Pauwelyn, Conflict of Norms in Public International Law: How WTO Law Relates to other
Rules of International Law (CUP, Cambridge 2003).
109
Southern Bluefin Tuna (Australia and New Zealand v Japan) (Award on Jurisdiction and Admissibility of
4 August 2000) para 52.
110
Vienna Convention on the Law of Treaties (opened for signature 23 May 1969, entered into force
27 January 1980) 1155 UNTS 311, arts 46–64 (‘Vienna Convention’).
111
See, eg James Crawford, The International Law Commission’s Articles on State Responsibility: Introduction,
Text and Commentaries (CUP, Cambridge 2002) 61, arts 20 27 (‘ILC Articles’).
112
Vienna Convention, art 53.
113
ILC Articles, arts 24 25.
106
Disputes Under the Kyoto Protocol
467
account the host State’s obligations under the Kyoto Protocol when interpreting the (possibly) conflicting obligation under the BIT. Article 31(3)(c) of the
Vienna Convention provides that in interpreting treaties, there shall be taken
into account, together with the context, ‘any relevant rules of international law
applicable in the relations between the parties’.114 This provision lay dormant
and ignored in the Vienna Convention for many years,115 but it has recently
been invoked before and applied by international courts on a number of
occasions.116 In EC—Biotech Products, a WTO Panel held that Article 31(3)(c)
of the Vienna Convention required ‘consideration of those rules of international law which are applicable in the relations between all parties to the treaty
which is being interpreted’.117 The full potential of this provision as a principle
of ‘systemic integration’ in treaty interpretation is probably yet to be seen, and
it is available to investment treaty tribunals as a tool to aid the interpretation of
BIT provisions, assuming that the States parties to the BIT are both States
parties of the Kyoto Protocol. But there are limitations to the possibility of
using Article 31(3)(c) as a means of reaching a Kyoto-friendly interpretation of
BIT obligations; it is suggested that it would be extremely difficult for an
investment treaty tribunal to reconcile directly conflicting obligations under a
BIT and the Kyoto Protocol.118
F. Disputes Between Private Entities Arising in Flexibility
Mechanism Transactions
The private entities which enter into flexibility mechanism transactions under
the Kyoto Protocol face the possibility of private disputes arising out of their
commercial relationship. Possibly the issue which will arise most frequently in
these disputes is a claim by one party that its contractual counterparty has
114
Vienna Convention, art 31(3)(c).
Campbell McLachlan, ‘The Principle of Systemic Integration and Article 31(3)(c) of the Vienna
Convention’ (2005) 54 ICLQ 279, 279; Philippe Sands, ‘Treaty, Custom and the Cross-Fertilisation of
International Law’ (1998) 1 Yale Human Rights Dev L J 85, 95; Philippe Sands, ‘Sustainable Development:
Treaty, Custom and the Cross-Fertilisation of International Law’ in Alan Boyle and David Freestone (eds),
International Law and Sustainable Development: Past Achievements and Future Challenges (OUP, Oxford 1999) 39,
49 50.
116
See especially Chester Brown, A Common Law of International Adjudication (OUP, Oxford 2007) 49 52;
McLachlan (n 115) 295 309; and the Report of the International Law Commission Study Group,
‘Fragmentation of International Law: Difficulties Arising from the Diversification and Expansion of
International Law’, UN Doc A/CN.4/L.682 (4 April 2006) paras 433 60. See, eg Iron Rhine Railway
(Belgium/Netherlands), Award of 24 May 2005 (PCA) paras 58, 79; Oil Platforms (United States v Iran) (2003) 42
ILM 1334, 1352, para 41 (ICJ); Mamatkulov and Abdurasolovic v Turkey, Judgment of 6 February 2003, paras
98 9 (ECHR); Al-Adsani v United Kingdom, 123 ILR 24, 40 (ECHR, 2001); Fogarty v United Kingdom, 123 ILR
54, 65 (ECHR, 2001); McElhinney v Ireland, 123 ILR 73, 85 (ECHR, 2001); Bankovic v Belgium, 123 ILR 94,
108 (ECHR, 2001); US – Import Prohibition of Certain Shrimp and Shrimp Products, DSR 1998-VII, 2755, 2807,
para 158 (WTO Appellate Body); EC – Measures Affecting the Approval and Marketing of Biotech Products, WT/
DS291-293 (WTO Panel).
117
EC—Measures Affecting the Approval and Marketing of Biotech Products, WT/DS291 293, para 7.70 (WTO
Panel).
118
See further Stephens (n 29) 334 42; Brown (n 116) 49 52; and Margaret Young, ‘The WTO’s Use of
Relevant Rules of International Law: An Analysis of the Biotech Case’ (2007) 56 ICLQ 907.
115
468
Journal of International Dispute Settlement
failed to deliver the Kyoto units which had been agreed. And this possibility
can arise for a number of reasons, which are examined in the following
paragraphs.
(i) Non-delivery in the Context of CDM Projects
Since the entry into force of the Kyoto Protocol, over 2065 CDM projects have
been registered by the CDM Executive Board.119 The rules, modalities and
procedures for entering into CDM projects are contained in the Marrakesh
Accords, agreed at COP-7.120 Close scrutiny of the different stages in the
lifespan of the CDM project cycle reveals several possibilities for disputes to
arise. Problems might arise in the ‘preparation’ of the CDM project; and also
in the subsequent stages of the ‘validation’ of projects; ‘registration’; ‘monitoring’; ‘verification’; ‘certification’; and the ‘issuing’ of certified emission
reductions.
Prior to the ‘validation’ and ‘registration’ of a CDM project, the relevant
‘designated operational entity’ must have received ‘written approval of
voluntary participation’ in the CDM project from each State party involved.121
No dispute settlement provisions attach to such ‘written approval’, resulting in
a ‘legal vacuum in terms of not having a right to recourse any court or
tribunal’.122 In other words, it is probable that a contract containing a dispute
resolution clause, such as an ERPA, would only be entered into by the project
participants after the written approval was received. If one of the State parties
withdrew its approval, presumably the other State party could have recourse to
the dispute settlement provision in the Kyoto Protocol, Article 19, which
provides for the application of the dispute settlement procedures set out in
Article 14 of the Framework Convention.123 But these provisions only apply to
disputes between States. Further, even though a State can espouse the claim of
one of its nationals and exercise diplomatic protection to bring a claim, the
State need not choose to do so. If such an event, the lack of any dispute
settlement provision could leave private entities involved in such projects
exposed.124 Problems might equally arise if there is a substantial delay in a
119
As at the time of writing, the most recently registered CDM project (on 1 March 2010) was the Hubei
Shenhe 4MW Hydro Power Project, in China: figures taken from <http://www.unfccc.de> accessed 15 March
2010.
120
See especially Decision 17/CP.7, ‘Modalities and procedures for a clean development mechanism as
defined in Article 12 of the Kyoto Protocol’, UN Doc No FCCC/CP/2001/13/Add.2 (2001).
121
Decision 3/CMP.1 (Article 12), ‘Modalities and procedures for a clean development mechanism as
defined in Article 12 of the Kyoto Protocol’, UN Doc No FCCC/KP/CMP/2005/8/Add.1 (2005) 6, 15, para
40(a).
122
Ratliff (n 29) 386.
123
Kyoto Protocol, art 19.
124
This discussion presupposes, of course, that the issuing by a state of a Letter of Approval actually gives
rise to international obligations. It has been argued that, depending on its terms, the Letter of Approval could be
regarded as a unilateral declaration giving rise to international obligations: Ratliff (n 29) 386. It is, admittedly, a
more difficult question whether the Letter of Approval creates enforceable rights for the individual project
participant.
Disputes Under the Kyoto Protocol
469
State issuing its written approval for a CDM project; this might make it
difficult for private entities to meet their contractual delivery obligations.
Subsequent stages in the CDM project cycle also entail complex procedural
requirements. The next step is the ‘validation’ of the CDM project, which is
the process of ‘independent evaluation of a project activity by a designated
operational entity (‘‘DOE’’) against the requirements of the CDM’.125 These
requirements include ensuring that local stakeholders have commented on the
proposed project, that an environmental impact assessment has been prepared,
that the project would result in GHG emission reductions additional to any
that would occur in the absence of the project, and that any methodologies
used comply with those approved by the CDM Executive Board.126 After
submission of the validation report to the CDM Executive Board for
registration, the CDM project needs to be monitored; this task is largely
carried out by the project participants, but the relevant DOE has to approve of
the monitoring plan.127 Next, during the life of the project, it has to be
‘verified’, meaning that the DOE has to confirm that the reduction in GHG
emissions.128 And finally, the project has to be ‘certified’. This is the ‘written
assurance’ by the DOE that during the relevant time period, ‘a project activity
achieved the reductions in anthropogenic emissions by sources of greenhouse
gases as verified’.129 In these subsequent stages, contractual disputes might
arise between the project participants, and also between the project participants
and the DOE if it does not perform its obligations adequately, or if it comes to
a conclusion that the CDM project activity is not meeting the stated objectives
of the project design document.
If there are any problems in the CDM project cycle—or if a CDM project
simply does not yield the number of Kyoto units which had originally been
foreseen by the project participants—then a CDM project participant might be
unable to meet its contractual obligations, resulting in one or more disputes.
(ii) Non-delivery in the Context of JI Projects
In the course of a JI project, similar issues can arise. There are two possible
procedures for JI projects, known as ‘Track 1’ and ‘Track 2’.130 The ‘Track 1’
procedure applies where the Annex I state hosting the project meets the
125
Decision 3/CMP.1 (art 12), ‘Modalities and procedures for a clean development mechanism as defined in
Article 12 of the Kyoto Protocol’, UN Doc No FCCC/KP/CMP/2005/8/Add.1 (2005) 6, 14, para 35. The CDM
Executive Board maintains a list of private corporations permitted to act as DOEs in CDM projects. There are
currently 26 DOEs: see <http://cdm.unfccc.int/DOE/list> accessed 15 March 2010.
126
Ibid para 37.
127
Ibid paras 53 60.
128
Ibid para 61; see further Hugh Wilkins, ‘What’s New in the CDM?’ (2002) 11 RECIEL 144, 155.
129
Decision 3/CMP.1 (art 12), ‘Modalities and procedures for a clean development mechanism as defined in
Article 12 of the Kyoto Protocol’, UN Doc No FCCC/KP/CMP/2005/8/Add.1 (2005) 6, 18 19, paras 61, 63;
Wilkins (n 128) 155 6.
130
For an overview of the JI process, see also UNFCCC, ‘Joint Implementation (JI)’, at <http://unfccc
.int/kyoto_mechanisms/ji/items/1674.php> accessed 15 March 2010.
470
Journal of International Dispute Settlement
eligibility requirements of the Marrakesh Accords.131 In such a case, the Annex
I state may apply its own national rules and procedures to select JI projects and
issue ERUs.132 At the time of writing, 131 such JI projects have been registered
with the JI Supervisory Committee.133 If the host State does not meet the
eligibility requirements set out in the JI Guidelines of the Marrakesh Accords,
the ‘Track 2’ procedure applies, meaning that the JI Supervisory Committee,
established under the Accords, must ‘verify’ the project.134 To date, 16 projects
have been registered under Track 2.135
Similar to verification under the CDM, the process of ‘verification’ seeks to
determine whether a project and the ensuing reductions of GHG emissions
meet the requirements of Article 6 and the guidelines agreed in the Marrakesh
Accords.136 Where the ‘Track 1’ procedure is followed, this verification is made
by the host State of the JI project, and can proceed to issue the appropriate
quantity of ERUs.137 But if the ‘Track 2’ procedures apply, then project
participants are required to submit a project design document to an
‘independent entity’, accredited by the JI Supervisory Committee, in order
to have their JI project ‘verified’.138 To meet the conditions for verification, the
accredited independent entity (AIE) is required to determine whether, inter
alia, the project has been approved by the states parties involved (ie, whether
both states have provided a Letter of Approval), whether the project meets the
test of ‘additionality’, in that the project would result in a reduction of GHG
emissions that is additional to what would otherwise take place, and whether an
environmental impact assessment has been carried out.139 As is the case in
CDM projects, the project participants are to submit a monitoring plan to the
accredited independent entity, which then makes a determination of the
emission reductions or enhancements of removals by sinks by the JI project.
This determination is not final, but a review of the determination can be
requested by a state party involved in the JI project, or three members of the JI
131
These requirements are set out in Decision 9/CMP.1, ‘Guidelines for the implementation of Article 6 of
the Kyoto Protocol’, UN Doc No FCCC/KP/CMP/2005/8/Add.2 (2005) 2, 6, para 21.
132
Ibid para 23.
133
The most recent Track 1 JI project is the ‘District Heating System Rehabilitation in Rivne Region’, in the
Ukraine (JI project UA1000131) (approved 12 February 2010): available at <http://www.unfccc.de> accessed 15
March 2010.
134
Decision 9/CMP.1, ‘Guidelines for the implementation of Article 6 of the Kyoto Protocol’, UN Doc No
FCCC/KP/CMP/2005/8/Add.2 (2005) 2, 6, para 24.
135
As at the time of writing, the most recent Track 2 JI project was the ‘CMM utilisation on the Joint Stock
Company ‘‘Coal Company Krasnoarmeyskaya Zapadnaya No 1 Mine’, in the Ukraine (JI project UA2000016)
(approved 22 February 2008): available at <http://www.unfccc.de> accessed 15 March 2010.
136
Decision 9/CMP.1, ‘Guidelines for the implementation of Article 6 of the Kyoto Protocol’, UN Doc No
FCCC/KP/CMP/2005/8/Add.2 (2005) 2, 6, para 30.
137
Ibid para 23.
138
Ibid para 31. At present, any organisations which have the status of a ‘designated operational entity’ for
the purposes of CDM projects also qualifies as an ‘accredited independent entity’ for the purpose of JI projects:
Decision 10/CMP.1, para 3. There are currently 26 such organisations: see <http://www.unfccc.de>.
139
Decision 9/CMP.1, ‘Guidelines for the implementation of Article 6 of the Kyoto Protocol’, UN Doc No
FCCC/KP/CMP/2005/8/Add.2 (2005) 2, 6, para 33.
Disputes Under the Kyoto Protocol
471
Supervisory Committee, within 15 days of the receipt of the determination.140
As is the case in CDM projects, disputes might arise at several junctures in
the life of a JI project. First, one State might withdraw its approval, leaving the
investor—and possibly the other project participant—bereft of a judicial
remedy. Second, one of the project participants might allege that the other
has not complied with its contractual obligations. Third, the project participants might consider that the accredited independent entity has not performed
its functions properly, or disputes might also arise if that body comes to the
conclusion that the JI project is not meeting its stated objectives.
(iii) Relevance of Force Majeure
There are, of course, many other possible situations that might be envisaged
where one party is unable to meets its obligations. In some of these cases, it is
possible that the party in default will invoke a force majeure provision which is
contained in their ERPA (or other contract for the sale and purchase of Kyoto
units). Whether these sets of facts would enable the project participants to
invoke successfully the defence of force majeure is unclear, and will depend in
each instance on the facts and circumstances of the case. But given the
likelihood that a force majeure defence will be invoked, it is worth examining
this doctrine more closely.
In private law, the term ‘force majeure’ is usually used to describe a provision
in a contract ‘by which one or both of the parties is excused from performance
of the contract, in whole or in part, or is entitled to suspend performance or to
claim an extension of time for performance, upon the happening of a specified
event or events beyond his control’.141 It is related to the English law doctrine
of frustration, which permits parties to avoid compliance with contractual
obligations ‘where something occurs after the formation of the contract which
renders it physically or commercially impossible to fulfil the contract or
transforms the obligation to perform into a radically different obligation from
that undertaken at the moment of entry into the contract’.142 However,
frustration operates within ‘narrow confines’. One reason for this, as the editors
of Chitty on Contracts put it, is that:
[P]arties to commercial contracts commonly make provision within their contract for
the impact which various possible catastrophic events may have on their contractual
obligations. Thus, force majeure clauses . . . are frequently inserted into commercial
contracts. The effect of these clauses is to reduce the practical significance of the
doctrine of frustration because, where express provision has been made in the
contract itself for the event which has actually occurred, then the contract is not
140
Ibid para 39.
Hugh Beale and others (eds), Chitty on Contracts (29th edn Sweet and Maxwell, London 2004) vol I, 860
(footnotes omitted).
142
Ibid 1311.
141
472
Journal of International Dispute Settlement
frustrated. Therefore the wider the ambit of contractual clauses, the narrower is the
practical scope of the doctrine of frustration.143
Most contracts for the sale and purchase of Kyoto units, be they an ERPA under
the CDM, or an agreement for the sale and purchase of emissions allowances,
such as the model agreements prepared by IETA, EFETand ISDA, contain a force
majeure provision.144 Such provisions could come into play in various situations—
including those described above—in the course of a flexibility mechanism
transaction. However, project participants should note that the force majeure
provision is extremely limited in its scope of operation. It is unlikely, for instance,
that a party would successfully be able to claim force majeure in respect of the
non-registration of a CDM project by the CDM Executive Board; such an event
should probably be regarded as something within the control of the party affected
by the force majeure. Nevertheless, this doctrine is likely to play a role in the
resolution of disputes concerning the non-delivery of Kyoto units.
5. Conclusion
This article has reviewed the categories of disputes that have arisen, and which
may arise, under, and out of, the Kyoto Protocol. These can broadly be
described as being international disputes, mixed disputes and private disputes.
In the category of international disputes, it appears that no formal dispute
settlement proceedings have been initiated between States parties to the
Framework Convention or the Kyoto Protocol, but the Protocol’s Compliance
Committee has been seized of three questions of implementation in the short
time since it was established in 2006. In contrast, there has been a greater
number of mixed disputes, with the implementation of the EU ETS especially
giving rise to numerous proceedings before national courts and the Court of
Justice of the European Union. Other types of mixed disputes have also arisen,
such as applications by public interest litigants seeking orders from national
courts that the environmental impact assessment of proposed development
projects should take into account their expected GHG emissions. Another form
143
Ibid 1312 (footnotes omitted).
See, eg IETA Emission Allowances Single Trade Agreement for the EU Scheme (Version 4.0, 2008),
clause 11: ‘ ‘‘Force Majeure’’ means the occurrence of any event or circumstance, beyond the control of the FM
Affected Party, that is not a Suspension Event and that could not, after using all reasonable efforts, be overcome
and which makes it impossible for the FM Affected Party to either (i) where the Delivering Party, to deliver the
Compliance Period Traded Allowances from the Delivering Party’s Account specified in clause 3.3 or (ii) where
the Receiving Party, to accept the Compliance Period Traded Allowances into the Receiving Party’s Account
specified in clause 3.3, in accordance with the Scheme. The inability of a Party to perform a relevant delivery or
acceptance obligation as a result of it having insufficient Compliance Period Traded Allowances in any relevant
Account (whether caused by the low or non-allocation of Allowances from a Member State or non-Member State
or the failure of that Party to procure sufficient Allowances to meet its delivery obligations) shall not constitute a
Force Majeure; provided, however, that this is not an exhaustive list of events which will not constitute a Force
Majeure and is provided for the avoidance of doubt only.’ Clause 5 of that same agreement deals with the
consequences of a force majeure. For another example, see the IETA Code of CDM Terms (Version 1, 2006),
which is to be used for the IETA Emissions Reduction Purchase Agreement (Version 3, 2006), all available at
<http://www.ieta.org>.
144
Disputes Under the Kyoto Protocol
473
of mixed dispute could arise if investors decide to launch claims under BITs as
a result of States implementing their emissions reduction obligations under the
Kyoto Protocol. As for the disputes that have arisen between private entities,
comparatively little is known about the number of such disputes. Many
disputes arising out of flexibility mechanism transactions are likely to result in a
commercial settlement being reached, and, in any event, the majority of the
disputes that proceed to formal dispute settlement proceedings will be resolved
by international commercial arbitration, rather than by national courts. Bearing
in mind the confidentiality that usually attends international arbitration
proceedings, it is likely that those disputes will continue to be dealt with
away from public scrutiny.
There is plainly a lot of activity being undertaken to implement the Kyoto
Protocol. Most States are anxious to ensure that they are in compliance with
their obligations. Many private entities are entering into flexibility mechanism
transactions with great fervour, as they endeavour to comply with their
emission reduction and limitation obligations under national law. This activity
is reflected in the size of the global carbon market, which was estimated in
October 2009 to be worth USD100 billion.145 At the same time, those private
entities are making full use of the legal tools available at their disposal to
minimize the impact of the Kyoto regime on their business.
For the moment, however, the main battleground at the international level
remains the negotiating table, rather than the courtroom. As has been mentioned
above, the first Kyoto ‘commitment period’ ends in 2012, and the post-2012
regime is yet to be agreed. Work towards a post-2012 framework has been
ongoing through the ‘Ad Hoc Working Group on Further Commitments for
Annex I Parties under the Kyoto Protocol’ (the ‘AWG-KP’), and the ‘Ad Hoc
Working Group on Long-term Cooperative Action under the Convention’ (the
‘AWG-LCA)’.146 There have been a number of roadblocks to progress, one
being the failure of States to agree on future commitments at the Copenhagen
Meeting. Only time will tell if States will be able to reach agreement on these
issues. In the meantime, participants in the process—including both States and
non-State entities—should have confidence in the various means available to
settle disputes that have been built around, and which support, the Kyoto
Protocol. And in designing the post-2012 arrangements, States should take note
of the value that the participants recognize in having a multi-layered dispute
settlement system; this will, it is hoped, help to ensure the effective functioning of
the Kyoto Protocol, its successor, and the markets that have been established
under the auspices of the international climate change regime.
145
‘Carbon Market Trading Hit as UN Suspends Clean-Energy Auditor’, in The Times (London),
(13
September
2009)
<http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/
article6832259.ece> accessed 15 March 2010.
146
See especially Stephens (n 5) 6; and UNFCCC Secretariat, ‘Notification of UN Climate Talks in Bonn’
(2
March
2010)
<http://unfccc.int/files/parties_and_observers/notifications/application/pdf/notification
_20100303.pdf> accessed 15 March 2010.