The Environmental Regulation of Foreign Investment Schemes under International Law

This chapter analyzes the important litigation risks arising for States as a result of the environmental regulation of foreign investment transactions. Legal commentators have traditionally framed this issue from the perspective of investment or trade law. The question is the extent to which a given environmental measure is consistent with investment or trade disciplines. This is of course not the only way to frame the issue. Instead of assuming that the framework of reference is either investment or trade law and the ‘object’ to be evaluated is the ‘environmental measure’, one could change the terms of the equation and assess the consistency of an ‘investment scheme’ with environmental disciplines. This change in perspective would have significant legal consequences. If ‘environmental measures’ are only permissible within the bounds set by investment (or trade) disciplines, then they are in practice subordinated to investment (or trade) protection. The main argument underlying this approach is the legal priority of international law over domestic law. A domestic (environmental) measure must be consistent with international (investment or trade) standards. But this approach does not take into account the possibility that at least some domestic environmental measures may be required or authorised (I shall use the term ‘induced’) by international environmental law. In this case, the rule giving priority to international law over domestic law would not apply and there would be no legal reason, as a matter of principle, to consider that an internationally-induced environmental measure inconsistent with an investment (or trade) discipline is illegal under international law. To the extent that the requirements of the applicable international environmental and investment (or trade) standards conflict with each other, their priority would have to be determined on the basis of a different set of conflict rules, which would not include the rule giving priority to international law over domestic law. As the chapter shows, this alternative model faces some important practical obstacles. But this is not to say that the scope for the environmental regulation of foreign investment schemes is not expanding through other avenues. Investment disciplines are increasingly being interpreted so as to leave considerable room for the accommodation of environmental considerations through a variety of legal concepts, such as environmental differentiation, the level of reasonableness expected from investors, the police powers doctrine or the scope of the necessity/emergency clauses.