Striking a Balance Between Environmental Carve-outs and Public Policy Considerations in new Generation BITs: Re-reading Eco Oro Minerals Corp v. Colombia

[Samriddhi Guha is a fourth year law student at O.P Jindal Global Law School]

In 2012, Colombia adopted measures to protect the paramo ecosystem through the National Development Plan 2014-2018 (‘Plan’) that came into force in 2016. The Plan prohibited ‘agricultural activities and exploration for or exploitation of non-renewable natural resources, and ‘construction of oil and gas refineries’ in the paramos areas. The paramos ecosystems are a unique mountain ecosystem, commonly known as ‘evolution hot spots’. Due to their unique biological adaptations and being home to various endemic species, these areas require protection and regulated conservation. The Indigenous peoples of these areas also hold symbolic links to these lands in a post-human geographical context. Moreover, these areas supply more than 70% of the country’s population with water. In consideration of these factors, the government of Colombia executed the Plan to conserve and preserve the Santurban highlands. The Plan, however, provided exemptions to mining companies who held contracts and the appropriate environmental licenses with the State before 9 February 2010, or companies engaged in oil and gas mining with licenses before 16 June 2011. 

Eco Oro, the appellant, is a Canadian mining company that conducted mining exploration and exploitation rights in Colombia. The company was conducting these mining operations in an area within the Santurban paramo area. Eco Oro initially invested over $250 in 1994. This initial investment was made nearly two decades before the host State adopted these restrictive measures over the paramos. Paramos were also not delimited and protected by the Plan at the time. Eco Oro was also permitted to conduct their operations because it complied with the exception clauses of the Plan. 

However, in 2016, the Constitutional Court of Colombia struck down the exception to the ban on mining in the paramos ecosystems due to the lack of consultation with the public. Subsequently, in August 2016, the National Mining Agency issued a resolution to withdraw Eco Oro’s licenses in areas of operation which were overlapping with the paramos areas. As a result, Eco Oro was forced to discontinue its operations in 2016. 

In December of 2016, Eco Oro filed a request for arbitration in accordance with Article 36 of the Convention on Settlement of Investment Disputes between States and Nationals of Other States (‘ICSID’). Both Colombia and Canada are parties to ICSID. The request for arbitration was filed pursuant to Article 819 of the Free Trade Agreement signed between Canada and Colombia (‘FTA’) on 15^th August 2011. 

Subsequently, Eco Oro invoked Article 805 and 811 of the FTA. Article 805 of the FTA upholds the customary principles of minimum standard of treatment of aliens which guarantees foreign investors that their investments and the obligations that arise out of such investment would be treated fairly and equitably. Article 811 of the FTA prohibits direct and indirect expropriation. However, article 811 provides certain carve outs, where the host State is empowered to nationalise a covered investment if  such expropriation is for a public purpose, is conducted in a non-discriminatory manner, adequate and effective compensation is paid to the investor and finally it is done as per the due process of law. 

The majority of the Tribunal upheld Eco Oro’s claim under Article 805 of the FTA. The Court found that Colombia did not breach the prohibition on Direct and Indirect Expropriation vide Article 811 of the FTA. But the Tribunal held that Colombia was in breach of its duty to uphold a minimum standard of treatment for its covered investments. Due to this breach of obligation, the Tribunal permitted Eco Oro to make claims for damages against the Government of Colombia.

Environmental Carve-outs: Public Policy Considerations in new Generation Treaties

Due to the advent of climate change, it has become more important than ever to keep public policy considerations in mind while drafting new generation BITs and FTAs. The FTA between Colombia and Canada is indeed a new generation investment treaty especially due to the environmental carve-out provided in the FTA. Article 2201(3) of the FTA provides an environmental exception that encourages positive discrimination and restriction on investments in order to protect human, animal or plant life and health and to conserve living or non-living exhaustible natural resources. 

Notwithstanding the environmental carve out in the FTA, the Tribunal found that Colombia was liable for compensation. This finding is clearly at crossroads with Article XX of the General Agreement on Tariffs and Trade (‘GATT’), on the basis of which the environmental carve out in the FTA was modelled. The general interpretation of Article XX of GATT stands that if an exception to a violation is upheld, the State can deviate from its obligation to compensate the investor or incorporate structural changes to the measure. Article XX provides policy space to national governments to pursue ecological goals through placement of restrictions on international trade in certain goods in order to promote various commitments of the climate crisis. Hence, the Tribunal’s holding in this aspect calls for debate and deliberation. 

In the Non-disputing Party Submissions (‘submissions’), while setting aside the Tribunal’s finding with respect to Colombia’s monetary liability towards Eco Oro, Canada submitted pursuant to the FTA, that the host State would not be required to pay compensation as long as the requirements of Article 2201(3) are met. The government of Canada acknowledged in paragraph 24 of the submissions that the investor State did not view their investment obligations being at odds with the protection of environmental and social goals and obligations. The good faith interpretation of Canada to the FTA essentially encourages Colombia’s ability to regulate in the public interest for the protection of the environment. 

Interestingly, the Tribunal’s reasoning seems to defeat Canada’s good faith interpretation to the treaty. While deciding the Jurisdiction, Liability, and Directions on Quantum, the Tribunal primarily relied on Article 31(1) of Vienna Convention on Law of Treaties to argue that the “ordinary meaning” of the FTA exception with respect to the object and purpose of the FTA does not prevent the payment of compensation by the host State (Colombia) to the aggrieved investor (para. 380). 

Striking a Balance: Climate Action and Investment Obligations

The urgency of climate action has brought attention to the need to reform the international investment agreements regime. The peculiar reasoning given by the Tribunal in the Eco Oro v Colombia case displays two distinct takeaways. Firstly, by holding that the environmental carve outs in Article 2201(3) of the FTA do not preclude the host State’s (Colombia) obligation to pay compensation, such reasoning indicates that measures taken for the protection of the environment can be challenged and deemed a violation of IIAs. Secondly, the conclusion in the case raises confusion regarding the effectiveness of countries’ efforts to rebalance the IIA regime through incorporation of overt carve-out and exception clauses  to safeguard the State’s right to regulate the protection and conservation of their environment. In 2022, in the case of RWE v. Netherlands (‘RWE’) similar claims were raised by the parties. The case was prefaced  on the Energy Charter Treaty 1994, where the Dutch government decided to ban burning coal for electricity generation by 2030. Such measures were undertaken by the government in pursuit of the country’s Paris Agreement commitments. RWE was operating a power plant in the Netherlands, and in 2017 the host State implemented the Law on the Prohibition of Using Coal in the Electricity Production (‘Coal Ban Law’), which came into force in 2019. RWE sued the Dutch government for 1.4 billion euros in damages. The main contention raised by RWE was that the Coal Ban Law was expropriatory in nature. The Tribunal decided in favour of the investor, where the Tribunal found that the respondent State committed a breach of the IIA. However due to jurisdictional issues the case has been pending in the court. Such treaty interpretations by the arbitral tribunals gravely harm the host State’s right to regulate its environment in the public interest and hurts the initiatives taken by Governments to protect the environment with respect to the larger international community. 

A structural overhaul in the IIA regime is required as soon as possible to deter tribunals from conveniently dismissing the initiatives taken by the host State to fight climate change. Professor Prabhash Ranjan explains in his book India and Bilateral Investment Treaties, how for example inclusion of general exceptions with a long list of permissible objectives within Article 32 of the 2016 Indian Model BIT, like protection of human, animal, or plant life or health, will provide opportunities to reconcile investment protection with the host State’s right to regulate. 

It is undeniable that climate change cannot be tackled without phasing out the fossil fuel industry and an energy transition to more renewable sources. In both the Eco and RWE case, the interests of the fossil fuel industry have triumphed since the tribunals have undermined parliamentary and democratic efforts of the host State to protect the climate. In consideration of environmental and human rights, independent organisations have intervened amici curiae in certain cases like that of RWE. The European Center for Constitutional and Human Rights had intervened in the RWE case to represent the environmentalist perspective better. 

The decisions taken by these tribunals set important precedents for advancing climate protection that respects human rights. In the Global South, decisions pioneered by the Supreme Court of Nepal in the case of Shrestha v. Office of the Prime Minister et al. in 2018 has shaped climate litigation and policy. In the former case, the Supreme Court of Nepal the appellant compelled the government of Nepal to enact a new climate change law which is compliant to the United Nations Framework Convention on Climate Change and the Paris Agreement. Subsequently, the government of Nepal passed the Environment Protection Act of 2019 and the Forests Act of 2019. One way in which such overhaul can be brought about is through BITs, more specifically the drafting of New Generation BITs which actively takes public policy into account. 

Structural Overhaul of the IIA Regime through Sustainable Investment 

A case for sustainable investment can be made to kick start the structural overhaul in the international investment agreements that have been previously suggested. The World Economic Forum describes sustainable investment from an economic, social, environmental and governance standpoint provides not only capital but also advances job creation, alleviates poverty, encourages technology transfer and helps developing industries. Sustainable investment has the potential to increase peace and stability and comply with climate and environment goals. The Columbia Center on Sustainable Investment has also examined the alignment of IIAs with the 2030 Sustainable Development Agenda. The paper argues that IIAs should be designed in a manner that promotes investments which encourage sustainable development goals. The way to approach this is to encourage more investments in sustainable sectors such as renewable energy sources. IIAs can be reimagined, which means that in this re-imagination they should be evaluated with respect to their encouragement of investments which contribute to sustainable development and withhold benefits from those investments which do not appropriate policy intervention at the national level, for example the National Development Plan 2014-2018 implemented by the Colombian government in the Eco Oro case. 

At a multilateral level, the United Nations Conference on Trade and Development has recently launched the Investment Policy Framework for Sustainable Development which provides guidelines for policymakers to develop New Generation of investment policies. One of the design criteria in the guidelines is an action menu for the promotion of investment in sectors related to the sustainable development goals. The action menu promotes three core principles to keep in mind while drafting investment strategies, policies and treaties. The other two legs of the design criteria are a National Investment policy guideline, and an IIA guidance for policy options which would provide a framework for designing and negotiating international investment treaties. 

Both private and public actors play an important role to facilitate investment in a sustainable manner. These actors along with expert organisations can further identify bottlenecks that hold back investment as well as protect the regulatory flexibility and freedom of the host State. 

Conclusion 

In consideration of all the above arguments and factors, we can safely conclude that the impact of Eco Oro has been consequential. The Tribunal’s holding and reasoning raises certain debates around the suitability of environmental carve-outs in new generation investment treaties. Although there is an identifiable need for environmental carve-outs and other public policy adaptations to fuel the collective fight against climate change, the effect of these carve-outs seem to be counter-intuitive. The Tribunal in the Eco Oro case missed out the most important aspect of addressing the need for environmental carve outs in BITs, instead the holding emphasised more on the liability of the Colombian government to pay compensation to the mining company. Therefore, time and again environmental interests seem to lose important battles in international forums which leaves the war against climate change far from being won. 

Photo: ‘Andean páramo in Ecuador’ by Alicia Correa Barahona licenced under CC BY 3.0.