I. Introduction
The debate over whether, when, and by whom reparations should be paid for climate-related loss and damage has been central to the struggle over the role of international law in responding to climate change. The push for climate reparations is an attempt to have international law treat the harm caused by climate change with the same gravity as issues such as the damage caused by war, gross violations of human rights, or injury to the economic interests of foreign investors. At stake in that struggle is a broader question that goes to the heart of the global political economy: who should bear the social costs of industrialization and technological development on a global scale?
For decades, the negotiations conducted under the auspices of the United Nations Framework Convention on Climate Change (UNFCCC),Footnote 1 and at the annual meetings of the Conference of the Parties (COPS), have been the central focus of attempts to clarify who should pay for the loss and damage caused by climate change. Yet while states have been unable to reach agreement on that question through multilateral negotiations, that does not mean international law has nothing to say about climate reparations. Rather than focus on the perceived need to develop a new regime addressing climate-related loss and damage through the UNFCCC negotiations, this Article argues that international law has already developed such a regime through the background rules governing what states can do or allow to be done within their territory.
In decentering the UNFCCC as the source of international obligations relating to climate change, this Article suggests that the debate over climate reparations goes to the heart of modern international law. The broader role that the background rules of international law play in distributing the loss and damage caused by climate change has been masked in recent decades by the tendency to treat the UNFCCC regime as the central site for determining (or failing to determine) questions of responsibility, liability, and reparations for the harm caused by greenhouse gas emissions.Footnote 2 Instead, the UNFCCC negotiations need to be understood as just one site of a broader legal struggle over responsibility for the transboundary harm that has accompanied industrialization.
Questions about a state’s responsibility for harm caused by activities on its territory had begun to appear on the international agenda in the mid-twentieth century, as industrialization began to intensify, its consequences for people and property began to spill across international borders, and concerns began to arise over transboundary air and water pollution from large smelters and factories. Long before transboundary harm caused by industrialization became an issue for international law, however, domestic courts had been faced with disputes concerning the destructive effects of industrialization on both workers and the owners of properties that neighbored new railways, factories, and smelters. Judges, legislatures, and legal reformers in industrializing states had experimented with numerous ways of responding to the resulting disputes, included prohibiting harmful industries, passing legislation to regulate or zone dangerous industries, setting up social insurance or taxation mechanisms to spread the loss, or developing strict liability regimes to govern dangerous industries.Footnote 3
Those experiments in government intervention did not take place in a legal vacuum. In the absence of regulation or taxation, the social cost of industrialization was allocated through the operation of the background rules of property, contracts, and torts governing the transfer, protection, and use of property.Footnote 4 For example, if one party to a dispute had the right to pollute under existing law, the polluting industry would be more valuable than it would if its neighbors had a right to prevent that pollution or to be compensated for the damage the industry caused. Any disputes, transactions, or negotiations concerned with allocating the cost of such industries were thus structured by the background entitlements of property owners and the nature of their entitlements to use and protect their property under the law.Footnote 5 Whether the law recognizes an entitlement to engage in activities that harm other property owners, or alternatively to prevent or be compensated for the harm caused by such activities, has a fundamental effect on a society’s distribution of costs and benefits.Footnote 6
In the international law context, the allocation of the social cost of industrialization is similarly structured by the background rules governing the harm a state may do or allow to be done by activities carried out within its territory or control. The current debate over climate reparations can be understood as part of a much longer struggle over the nature and scope of those background rules. By the end of the 1940s, it was settled that the foundational principle of territorial sovereignty in international law gave rise both to rights over territory and to corollary duties to prevent activities conducted within a state’s territory from causing harm to other states.Footnote 7 But in response to new “transnational problems arising from the application of modern science to industry and engineering,”Footnote 8 international lawyers began to debate whether strict, absolute, or “no-fault” liability should replace the fault-based approach that was well established in international law.Footnote 9 The key question was whether loss and damage “lies on the shoulder of the victim” or “the operator” of a dangerous activity.Footnote 10 Much of the early literature on that question drew on existing principles of municipal law, including the common law doctrine of nuisance or strict liability for escape of a dangerous substance from a property, the U.S. doctrine of liability for ultrahazardous activity, the civil law doctrine of abuse of rights, and legislative regimes of products liability, operators’ liability, and absolute liability in industries such as nuclear energy. Those approaches to liability had been developed in municipal legal systems “to prevent the creator of a risk from passing that risk onto the public and thus expropriating other people.”Footnote 11 The choice of liability regime was considered to be particularly difficult if the activity in question was both “socially beneficial” and “ultra-hazardous.”Footnote 12 Attempts to develop a new liability regime to address the loss and damage caused to people, property, and the planet by climate change should be understood as one part of the broader process through which international law has allocated the social cost of industrialization.
It is timely to return the debate over those background rules governing what states can do within their territory to the foreground of the debate over climate reparations for three reasons. First, the question of how the UNFCCC regime interacts with the general rules of international law relating to state responsibility, reparations, and prevention of transboundary harm is now squarely before international courts and tribunals.Footnote 13 For decades, major greenhouse gas emitting states had pushed to keep the question of climate-related obligations out of international courts and tribunals, largely by insisting that interstate negotiations were the right place to resolve such a complex problem. However, as frustration with the slow pace of negotiations began to grown in the aftermath of the Paris Agreement, vulnerable states and climate activists turned to litigation.Footnote 14 While the vast majority of the more than 2,600 climate cases brought since 2015 have been before domestic courts,Footnote 15 the question of climate change has also begun to appear on the dockets of international courts and tribunals thanks to the creative use of advisory opinions and human rights claims. In that context, major emitting states have argued that the UNFCCC is the only or primary source of international law governing climate change, and have claimed that there are either no background rules addressing the transboundary harm caused by climate change, or that any such rules have been displaced by the limited treaty-based obligations governing greenhouse gas emissions.Footnote 16 The question of whether and how the background rules of international law are relevant to the determination of climate reparations has thus become a central focus of the growing number of climate-related matters before international courts and tribunals.
Second, states bargain, and activists campaign, in the shadow of the background rules of international law distributing the social costs and benefits of fossil-fueled industrialization. Those background rules structure the situation in which states negotiate to allocate the costs of polluting industries and harmful technologies, just as the background rules relating to contract, torts, and property structure the allocation of risks and rewards flowing from dangerous activities domestically. Even for those who consider that the ideal way to address a complex problem like climate change is politically,Footnote 17 parties will still be “bargaining in the shadow of the law.”Footnote 18 As major emitting states have become increasingly entangled with and captured by fossil fuel interests, they have sought to create a sense that the background rules of international law permit the transboundary harm caused by climate change. The lack of clarity regarding those rules serves to strengthen the negotiating hand of major emitters and prop up the value of the fossil fuel industry. Clarifying the background rules can thus potentially shift the balance of power in negotiations between states or in transactions between states and private actors over who bears the costs of industrialization.
Third, focusing on the distribution of social cost through the background rules of international law contributes to strategic thinking about the role that international adjudication can and should play in shaping responses to climate change. Many international environmental lawyers were initially cautious about adjudication as a mechanism for addressing the problem of climate change.Footnote 19 International environmental law more broadly had largely developed through negotiation, “reflecting the philosophy that policy should be developed through politics rather than adjudication.”Footnote 20 Commentators expressed caution about placing too much faith in courts to provide stronger climate protection, raised process questions about the capacity of judges to weigh the competing interests involved in developing climate policy, and pointed to the limited enforceability of international judgments and thus the “indirect and circuitous influence” of international cases on state behavior.Footnote 21 Scholars concerned with the relation between law and social change warned that resorting to litigation as a pathway to regulation could represent the wrong turn for a climate movement seeking large-scale transformation through broadly participatory means.Footnote 22 But there is a growing sense amongst climate lawyers that international adjudication can play a role in prompting the development of more ambitious climate policy by shifting the stakes of negotiations.Footnote 23 This Article contributes to that literature, by arguing that while international courts and tribunals may not be well placed to determine the technical details of national climate policy or set mitigation targets, they have a strategic role to play in clarifying the background rules governing state responsibility and liability for loss and damage. Those rules in turn provide the framework within which states negotiate, private actors bargain, and activists mobilize.
Building on those insights, this Article directs attention to international legal struggles over the nature and scope of those background rules governing state responsibility to prevent harm and repair injury, and explores their relation to the issue of who should bear the social cost of climate change and climate action.
Part II explores the role that debates over transboundary harm played in the early stages of work at the International Law Commission (ILC) on the topic of state responsibility. The attempt to codify the law of state responsibility was contested from its inception. Two issues, and more importantly the relation between them, initially divided ILC members. Debates over the first, concerning the substantive obligations governing state responsibility for injuries to the person or property of aliens on its territory, have been well documented.Footnote 24 Less attention has been paid to the second dispute over the need to address state responsibility for the emerging problem of transboundary harm caused by new technologies. Members from Europe and the Global South argued that the ILC could not address the law of state responsibility for harm caused to alien property and persons within its territory without also addressing state responsibility for transboundary harm caused to property and persons outside its territory. In the face of intense disagreements over the scope and interrelation of those two sets of primary obligations, the ILC decided that its work on state responsibility should focus only on secondary obligations, governing issues such as attribution, reparations, and circumstances precluding wrongfulness.
While the ILC thus missed the opportunity to address the primary obligations governing state responsibility for harm to foreign property and persons within and beyond a state’s territory in a coherent fashion, it successfully finalized a generalized set of secondary obligations that addressed issues including reparations. The ILC’s Articles on Responsibility of States for Internationally Wrongful Acts (ARSIWA),Footnote 25 adopted in 2001, in theory oblige states to make reparation for injuries caused by internationally wrongful acts across all fields of international law. However, that generalizable regime governing reparations has had very differentiated effects in practice. The availability of reparations in the context of climate change depends upon clarifying the two sets of primary obligations—concerning injuries to aliens and the prevention of transboundary harm—that the ILC considered too divisive for the ARSIWA work on state responsibility.
Parts III through V consider the ensuing struggle to clarify those primary obligations. As I show, obligations concerning the prevention of transboundary harm have since been addressed very differently to obligations governing injuries to aliens, with significant implications for the availability of climate reparations.
Part III focuses on the subsequent work at the ILC on the topic of liability for transboundary harm. Although the ILC decided to treat primary obligations relating to transboundary harm separately from state responsibility, that did not mean that the topic of state liability for transboundary harm disappeared from its program of work. In 1978, the ILC initiated a new project on the topic.Footnote 26 That work proceeded on the basis that the principle of harm prevention was established under international law, and focused initially on whether and when international law should adopt a stricter standard of liability for transboundary harm than that provided by existing law. The ILC eventually shifted its focus away from developing a strict liability standard, and toward detailing state obligations to prevent significant transboundary harm and establish civil liability for the operators of hazardous activities. Nonetheless, the ILC’s body of work on transboundary harm makes clear that by the time states began to negotiate a new treaty-based regime to govern climate change, the principle of harm prevention was firmly established in international law and new forms of strict liability were on the table.
Part IV situates the UNFCCC negotiations within that broader debate over the need for new standards of liability to address the growing problem of transboundary harm caused by industrialization. As evidence of the potentially catastrophic effects of global warming began to emerge, it might have been expected that states would negotiate stricter obligations aimed at the prevention of harm by greenhouse gas emissions. After all, that was the approach that states had taken since the 1960s in response to a raft of risks posed by new industries and technologies that threatened to cause harm on a planetary scale. States had adopted new strict liability regimes in the fields of nuclear energy, oil pollution, and space objects.Footnote 27 In addition, the successful negotiation of commitments to phase out the production of ozone depleting substances had built confidence in the possibility of similar international action to address greenhouse gas emissions.Footnote 28 However major emitting states from both the Global North and the Global South saw the loss and injury caused by greenhouse gas emissions as the necessary cost of socially beneficial (or at least extremely profitable) processes of fossil-fueled industrialization. As a result, those states proved reluctant to adopt new obligations to reduce climate emissions, accept stricter liability for climate-change related loss and damage, or make reference to reparations in the UNFCCC negotiations. Given that failure, Part IV concludes that much then turns on clarifying whether and how the background rules of international law relate to climate change.
In contrast, as Part V shows, the primary obligations relating to harm caused to the economic interests of aliens on a state’s territory have been dealt with very differently. While major emitters have dragged their heels on developing stricter international legal regimes of state responsibility for significant transboundary harm, international investment law has been interpreted to establish expansive obligations governing state responsibility for harm to foreign investors. The legislative and regulatory measures that are necessary to meet emissions reduction targets are already triggering disputes under investor-state dispute settlement mechanisms, with fossil fuel investors seeking to hold host states responsible for the devaluation of their investments. Tribunals established under investor-state dispute settlement provisions of investment agreements have awarded increasingly “crippling” levels of compensation for loss and damage caused to investors by the actions of host states,Footnote 29 including for injury caused when states regulate to protect against environmental damage. The potential scale of reparations payable to fossil fuel investors if states are found to be in violation of obligations under investment treaties adds to concerns about the misalignment of international investment law with climate action. The perverse result of that misalignment is that the climate reparations that are currently most likely to be awarded under international law are to fossil fuel investors from the Global North.
As Part VI concludes, any attempt to negotiate or demand a fairer, just, or more efficient allocation of risks associated with the global expansion and intensification of industrialization, including those involved with climate change, is structured by the background rules that determine whether states are responsible for harm caused by activities within their jurisdiction or control. Attention to the legal arguments made by states, independent experts, and international legal scholars since the 1940s illustrates the role that a renewed focus on the background rules of international law can play in redistributing the social costs of industrialization in general, and climate change in particular.
II. The Attempt to Modernize the Background Rules of State Responsibility
A. The Interrelationship of Responsibility for Harm to Aliens and Transboundary Harm
While state responsibility was included in the ILC’s initial list of topics for codification in 1949, it took over fifty years, six special rapporteurs, and numerous reports to finalize that topic. As that lengthy drafting period suggests, the project of codifying state responsibility was contested. By the time state responsibility arrived on the ILC’s agenda, it already had a long history as part of attempts to codify international law. The successful conclusion of the ARSIWA required successive special rapporteurs to find ways to resolve or avoid confronting contested issues dividing states over the scope and content of that topic.
Two such issues, and more importantly the relation between them, are relevant to climate reparations. The first concerned the substantive obligations governing state responsibility for economic injuries to aliens on its territory.Footnote 30 States had struggled with this issue for over a century. Disputes over state responsibility for injuries to aliens on their territory had their origins in the history of arbitrations between Western powers and Latin American states during the nineteenth century.Footnote 31 The result was a growing body of awards concerning claims arising from wars of national liberation, revolutions, or civil wars. Those awards extended the protection of international law to European and U.S. property-holders. The content of customary international law on protection of aliens, including whether the standard of compensation for expropriation was a matter for international law, remained contested throughout the nineteenth century, and intensified in the aftermath of the Mexican and Russian revolutions of the early twentieth century.Footnote 32 Repeated attempts to codify the resulting law on state responsibility were unsuccessful.
Thus one issue at stake in the ILC’s initial work on state responsibility was determining the law governing the protection of alien property in the age of decolonization.Footnote 33 The gulf between the “international standard of justice” approach championed by ILC members from Western states and the “equal treatment of aliens and nationals” approach proposed by those from Asia, Eastern Europe, and Latin America was evident in discussions of the reports produced by the first special rapporteur, Francisco V. García Amador (Cuba).Footnote 34
For example, Radhabinod Pal (India), rejected García Amador’s characterization of the “binding character of the so-called traditional rules in the field of state responsibility” relating to alien protection and his assumption that the standard prescribed by European states was universal.Footnote 35 Similarly, Luis Padilla Nervo (Mexico) argued that “the history of the institution of State responsibility was the history of the obstacles placed in the way of the new Latin American countries … to the defence of their (at that time) recent independence, to the ownership and development of their resources, and to their social integration.”Footnote 36 According to Padilla Nervo, international rules of state responsibility had been “based almost entirely on the unequal relations between great Powers and small States.”Footnote 37 The resulting “doctrine of State responsibility” was simply “a legal cloak for the imperialist interests of the international oligarchy.”Footnote 38 The task facing the ILC was to adjust those principles “to the new structure and conditions of post-war international society.”Footnote 39 And according to Grigory Tunkin (USSR), the codification of state responsibility “reached down to the very foundations of contemporary international law.”Footnote 40 International law “could not be a system of legal rules imposed by states belonging to one economic system on states belonging to another,”Footnote 41 and aliens must not be treated as a “privileged group” with “special privileges,” but must be subject to the law of the host country.Footnote 42
A second, and less studied, division between ILC members concerned state responsibility for transboundary harm caused by dangerous activities. In 1956, Jaroslav Zourek (Czechoslovakia) argued that the topic of state responsibility required the ILC to decide “whether the international responsibility of the State was engaged solely in the case of a fault (culpa) on the part of an organ of the State or whether it could be enlarged to include the theory of risk.”Footnote 43 Emil Sandström (Sweden) suggested that the “trend in municipal law seemed to favour the idea that there was no need to prove fault in order to impute responsibility,” noting that this principle was applied in Scandinavian countries in the context of industrial accidents, particularly involving dangerous occupations.Footnote 44 Sandström considered that an “analogous responsibility in the international field was perfectly conceivable,” and gave as an example the damages that had recently been paid by the U.S. government to Japanese fishermen injured by the U.S. nuclear tests at Bikini Atoll.Footnote 45
Discussion of the U.S. nuclear tests conducted in the trust territory of the Marshall Islands, and particularly the Castle Bravo test at Bikini Atoll, became central to the debates about state responsibility at subsequent meetings.Footnote 46 For example, both Padilla Nervo and Pal drew attention to the differential treatment being proposed for harm caused to foreign investors on the one hand and harm caused by nuclear testing and transboundary pollution on the other. Padilla Nervo argued that the question of whether the damage caused by nuclear tests to persons or territory of other states gave rise to international responsibility or a duty of compensation was central to the topic of state responsibility.Footnote 47 He insisted that the ILC needed to address responsibility for transboundary harm and alien protection together,Footnote 48 and develop a new international legal standard of responsibility for an era in which humankind had learnt how to unleash forces beyond its control leading to unforeseeable consequences.Footnote 49
Similarly, Pal argued that within the vast field covered by the international responsibility of states, the nuclear tests conducted by powerful states since World War II posed the most grave and urgent problem.Footnote 50 It would be a paradox if the ILC decided to codify “minor cases of international responsibility, and ignore what might turn out to be the most dramatic and far-reaching of all.”Footnote 51 He argued that if the ILC “was prepared to show such concern about an isolated individual’s possible future plight on foreign soil,” it should also “concern itself a little with the appalling dangers that already threatened millions of people in their own homes.”Footnote 52
The ILC members from the United States, Netherlands, and UK, however, rejected those arguments. For example, at the 1956 session Sir Gerald Fitzmaurice had stressed the “outstanding” need to codify state responsibility, urging the ILC not to be deterred by the major differences between members on “fundamentals.”Footnote 53 He argued that “international intercourse depended for its smooth flow on clearly formulated rules” regarding “the treatment of aliens in the broadest sense of the term—i.e., with regard not only to their persons, but also to their property, commercial interests and the like.”Footnote 54 He considered the ILC could be of real benefit to the international community if it could develop a code “that would reconcile the different points of view” on that issue and “find general acceptance.”Footnote 55
But faced with other ILC members who sought to address the substantive obligations relating to state responsibility for harm more broadly, Fitzmaurice backtracked. He argued that if speeches at the 1957 meetings “reflected the spirit in which the Commission intended to deal with the subject, it would be preferable to abandon it altogether.”Footnote 56 Fitzmaurice also dismissed the relevance of strict liability in international law,Footnote 57 arguing that the International Court of Justice (ICJ) had made clear in the Corfu Channel case that there must be an element of fault involved in a finding of international wrongdoing for transboundary harm.Footnote 58
In the face of those divisions, the ILC decided to abandon the attempt to codify the primary or substantive obligations relating to protection of alien property or prevention of transboundary harm as part of its work on state responsibility. That decision allowed the ARSIWA to be finalized (albeit decades later). However, it left unresolved the broader struggle over the substantive obligations relating to state responsibility for harm.
B. Secondary Obligations on Reparations as Background Rules of International Law
The ILC decided that its work on state responsibility would focus on “secondary” obligations that “become operative only when the breach of a ‘primary’ rule of obligation occurs.”Footnote 59 The ILC’s approach involved “generalizing about the effect of unlawful acts without talking too much about any particular unlawful acts.”Footnote 60 The resulting distinction between primary and secondary obligations assumed that there is a generalizable aspect of responsibility that is common to all international law, and that could be treated separately from the elements of a particular wrongful act.Footnote 61 Given space constraints, I will focus here only on the provisions relating to reparations.
The debate over reparations, and more specifically the standard of compensation owed by states to aliens in cases of expropriation or other injury to economic interests, had been at the forefront of disputes over the primary obligations to be codified under the heading of state responsibility. By treating the issue of reparations separately from substantive obligations, the ILC sought to defuse debates over injury to the economic interests of aliens, and address the issue of reparations for an internationally wrongful act more broadly.
The ARSIWA provides that a state is internationally responsible for its wrongful acts.Footnote 62 The responsible state has two obligations as a consequence of an internationally wrongful act: to cease the wrongful act and “to make full reparation for the injury caused” by that act.Footnote 63 The ILC described the latter obligation as being “to make ‘full reparation’ in the Chorzów Factory sense.”Footnote 64 The case to which the ILC referred, the Case Concerning the Factory at Chorzów (Germany v. Poland), was one in a series of claims brought against Poland by Germany during the interwar period, involving the breach of a specific treaty obligation requiring Poland not to expropriate German assets in the territory of Upper Silesia.Footnote 65 The Court there held it was an “essential principle … which seems to be established by international practice and in particular by the decisions of arbitral tribunals … that reparation must, as far as possible, wipe out all the consequences of the illegal act and reestablish the situation which would, in all probability, have existed if that act had not been committed.”Footnote 66 As commentators have noted, in adopting that demanding standard in Chorzów Factory, the ICJ was referring to the situation of an illegal or unlawful act that violated the terms of a post-war settlement.Footnote 67
The ILC relied on that passage as the basis for Article 31. Yet that reference to the principle of full reparation conceals decades-long debates at the ILC over whether there really was an obligation to make “full reparation” under international law.Footnote 68 In 1959, when discussing the question of compensation for expropriated property, the special rapporteur, García Amador, referred to “cases and situations in which compensation which does not cover the full value of the expropriated property must be regarded as valid and effective.”Footnote 69 Throughout the 1990s and into 2000, numerous ILC members continued to argue against the inclusion of ‘full reparation’ as unnecessary and undesirable.Footnote 70 As commentators have since shown, the record of arbitral decisions, mixed claim commissions, and ICJ decisions does not support the view that states have an obligation to make full reparation,Footnote 71 given the sustained practice of awarding and negotiating less than full reparation across all fields of international law.Footnote 72
ILC members were also divided over whether international law provided for limits to reparations made in the form of compensation. Article 34 specifies that “full reparation” can take three forms: restitution, compensation, and satisfaction. While the ARSIWA includes safeguards against excessiveness in relation to restitution and satisfaction,Footnote 73 there is no comparable limit or qualification set out in relation to compensation. Instead, Article 36 provides that the responsible state is under an obligation to compensate for damage caused by its wrongful act that is not made good by restitution.Footnote 74 Compensation “shall cover any financially assessable damage including loss of profits insofar as it is established.”Footnote 75 Until late in the drafting process, the ARSIWA included a provision precluding compensation that results “in depriving the population of a State of its own means of subsistence,” describing that as a “legal principle of general application.”Footnote 76 Numerous ILC members supported that provision in the first and second readings of the ARSIWA, and it received the explicit support of many states in the Sixth Committee.Footnote 77 However the final special rapporteur, James Crawford, dismissed the need to limit excessive compensation, arguing that the risk of excessively high awards was not likely to be realized in practice.Footnote 78 That position was supported by European members of the ILC, and by the United States, the UK, France, Australia, and Israel in the Sixth Committee.Footnote 79 The final version of the ARSIWA reflected the submissions of that small group of Western states.Footnote 80
The resulting ARSIWA did not achieve the goal of clarifying the primary obligations relating to state responsibility, as numerous ILC members who worked on the project in the 1950s had argued it should. It did, however, provide an authoritative set of secondary rules spelling out the general consequences of “internationally wrongful” conduct by states. In theory, the resulting provisions on reparations apply equally to state responsibility for injury to the economic interests of aliens and to state responsibility for transboundary harm. As the ILC noted, “breaches of international law can vary across a wide spectrum from the comparatively trivial or minor up to cases which imperil the survival of communities and peoples … and the environment of whole regions.”Footnote 81 What unites such disparate individual breaches of international law with the “rules and institutions of State responsibility” is “the maintenance of respect for international law.”Footnote 82
Yet while the secondary rules relating to state responsibility and the availability of reparations may be central to respect for international law, their application in practice depends upon the clarification of primary obligations. Of particular relevance to climate reparations are the related issues that the ILC considered too divisive for the ARSIWA project—the clarification of state responsibility for injury caused to foreign investors and for prevention of transboundary harm. As the following parts show, the struggle over how the rules governing state responsibility and reparations relate to those two sets of obligations has been hard fought.
III. Debating Strict Liability for Transboundary Pollution
A. The Background Rules Governing Transboundary Harm
Issues raised by transboundary harm caused by new and hazardous activities received growing attention in state practice and scholarly literature during the 1960s, in part because of the ongoing issue of nuclear tests. Following the tests conducted by the United States in the Marshall Islands, which had formed the backdrop to earlier ILC debates on state responsibility, both France and the UK had begun a series of nuclear tests in the Pacific, leading to strong protests. In addition, the scope and extent of the harm and pollution caused by the expansion and acceleration of industrialization became clear. Concerns began to be raised about the risks posed by peaceful uses of nuclear energy, the new phenomenon of acid rain, and the hazards accompanying off-shore mining and drilling as the continental shelf began to be opened up to extraction. In addition, states were concerned about the shared approach taken by the two Cold War superpowers to the use of space, with both the United States and the USSR insisting that they did not need permission to fly space vehicles over the territories of other states, leading to a risk of falling space objects.
In 1978, the ILC initiated a new project to address the issue of state liability for transboundary harm.Footnote 83 The topic focused on “the general nature of the obligations that States owe to each other, and to the international community, in relation to the use of territory,” “the way in which States use, or manage the use of, their physical environment, either within their own territory or in areas not subject to the sovereignty of any State,” and “the injurious consequences that such use or management may entail within the territory of other States, or in relation to the citizens and property of other States in areas beyond national jurisdiction.”Footnote 84 The aim was to determine whether the state practice of establishing new treaty regimes that adopted absolute liability for injurious consequences caused by new technologies and industrial processes had shaped the “substratum of obligations owed by States under customary law.”Footnote 85 As with the ILC’s program of work on state responsibility, this project also proved to be contentious and time-consuming, taking almost twenty years to complete.
B. Between Fault-Based and Strict Liability Models: The Legacy of Trail Smelter and Corfu Channel
At the time the ILC began work on the topic, the background fault-based approach to liability for transboundary harm was taken as given. As the first special rapporteur on the topic, Robert Quentin-Baxter (New Zealand), noted: “No one challenges the authority of the great, undifferentiated principle that it is wrongful to cause harm to other States.”Footnote 86
That principle had already been clearly established in international law. In the Trail Smelter arbitration concerning state responsibility for transboundary harm caused to farmers in the State of Washington by large amounts of sulfur dioxide emitted by a smelter in British Columbia, the Tribunal held that “under the principles of international law … no State has the right to use or permit the use of its territory in such a manner as to cause injury by fumes in or to the territory of another or the properties or persons therein, when the case is of serious consequence and the injury is established by clear and convincing evidence.”Footnote 87 The Tribunal concluded that Canada was required to make reparations for the damage caused, to take measures to control future emissions from the Smelter, and to pay an indemnity if any further damage occurred. Some international lawyers at the time and since have argued that the tribunal imposed “a more stringent standard of responsibility” upon Canada than that of negligence.Footnote 88
The principle of harm prevention was reaffirmed by the ICJ in the Corfu Channel case.Footnote 89 The ICJ held that Albania was responsible under international law for the explosion of mines in the Corfu Channel while British warships were passing through Albanian waters and for the damage to UK ships and crew which ensued. While the ICJ did not find that Albania had laid the mines, was complicit in a mine-laying operation, or that its knowledge of the mines had been directly proved, it held that the laying of the mines “could not have been accomplished without the knowledge of the Albanian Government.”Footnote 90 It based its finding of responsibility on “certain general and well-recognized principles,” including “every State’s obligation not to allow knowingly its territory to be used for acts contrary to the rights of other States.”Footnote 91
It is significant that both the United States in the Trail Smelter arbitration and the United Kingdom in the Corfu Channel case supported the existence in international law of, at minimum, a fault-based principle of liability for transboundary harm. In a memorandum to the U.S. agent in the Trail Smelter arbitration, the legal adviser to the U.S. State Department, Green Hackworth, argued that it was “a fundamental principle of the law of nations that a sovereign state is supreme within its own territorial domain and its nationals are entitled to use and enjoy their territory and property without interference from an outside source.”Footnote 92 According to Hackworth, the United States was arbitrating the case because “an international wrong has been committed.”Footnote 93 He characterized that wrong as consisting of “acts which deprive us of the free and untrammeled use of our territory in a manner which we as a sovereign state have an inherent and incontestable right to use it.”Footnote 94 That right to territorial integrity was “essentially a sovereign right,” and interference with it “at once an interference with our sovereignty.”Footnote 95 U.S. Secretary of State Cordell Hull declared that “[t]he United States is entitled to insist that an isolated agency without its borders, which is admitted to be polluting the air within its territory, shall desist from so doing.”Footnote 96
In the Corfu Channel proceedings, the United Kingdom insisted that Albania “must bear full responsibility for the loss of life, injuries and damage” caused by the minefield within its territorial waters, “whether or not she laid it or connived in its actual laying.”Footnote 97 Albania rejected that approach to responsibility, arguing that it extended beyond a fault-based model and that Albania could not “be held responsible for damage caused by mines merely because the mines were found in its territorial waters.”Footnote 98 For the responsibility of the state to arise, “it must be proved either that the State caused the mines to be laid, or that it knowingly allowed them to be laid.”Footnote 99 In his dissenting opinion, Judge Badawi Pasha also took the view that the UK argument was premised upon a strict liability standard and should not be the basis of a finding of responsibility by the Court, stating that “international law does not recognize objective responsibility based upon the notion of risk.”Footnote 100
The principle of harm prevention was confirmed by states at the 1972 UN Conference on the Human Environment held in Stockholm, with the only challenge being proposals made by states including Brazil, China, Costa Rica, Egypt, Yugoslavia, Zambia, Australia, and Canada that the international legal standard in relation to transboundary harm should be the more onerous one of strict liability.Footnote 101 However, some delegations were opposed to endorsing “the principle of the absolute liability of States.”Footnote 102 It was decided that the declaration should “emphasize that only the negligence of a State, imputable either to inaction or the failure to fulfil specific commitments, could engage its responsibility within the meaning of international law.”Footnote 103
The resulting Principle 21 of the Stockholm Declaration provided a clear statement of the no-harm principle, declaring that “States have, in accordance with the Charter of the United Nations and the principles of international law, the sovereign right to exploit their own resources pursuant to their own environmental policies, and the responsibility to ensure that activities within their jurisdiction or control do not cause damage to the environment of other States or of areas beyond the limits of national jurisdiction.”Footnote 104 Principle 22 provided that “States shall co-operate to develop further the international law regarding liability and compensation for the victims of pollution and other environmental damage caused by activities within the jurisdiction or control of such States to areas beyond their jurisdiction.”Footnote 105
Following the Stockholm Conference, awareness of environmental issues and global environmental activism increased dramatically, in part because of the continued conduct of nuclear tests in the Pacific. Of particular relevance is the legal response to the series of atmospheric nuclear tests carried out by France between 1966 and 1972 in the territory of French Polynesia in the South Pacific. Those tests created a high risk of radioactive fall-out in neighboring states. In response, Australia and New Zealand instituted proceedings against France at the ICJ in 1973, seeking declaratory judgments that the carrying out of further atmospheric nuclear weapon tests in the South Pacific Ocean was not consistent with international law.
Australia argued that the deposits of radioactive fall-out in Australian territory and airspace without Australia’s consent violated Australia’s territorial sovereignty and impaired “Australia’s independent right to determine what acts shall take place within its territory and … whether Australia and its people shall be exposed to radiation from artificial sources.”Footnote 106 Australia invoked Principle 21 of the Stockholm Declaration, arguing that the obligation of states to ensure that their territory is not used to cause damage to the environment “is expressed absolutely and without qualification.”Footnote 107 One of Australia’s “primary legal propositions” was “that the deposit of radio-active fall-out from nuclear tests infringes the inviolability of our territorial sovereignty.”Footnote 108 Australia argued that as the legal injury included interference with territorial sovereignty, it was not necessary “to establish the exact extent of the danger of these radio-active materials of which we are the unwilling target.”Footnote 109 New Zealand also regarded the conduct of the tests as violating its rights under international law, citing the New Zealand prime minister’s statement that “an activity that is inherently harmful is not made acceptable even by the most stringent precautionary measures.”Footnote 110 Although for procedural reasons the ICJ never ruled on the substance of those arguments, the dispute focused increased international attention on questions of responsibility and liability for transboundary harm.
C. The ILC and Strict Liability
By the 1970s, the question facing the ILC was thus not whether international law recognized an international legal obligation to prevent transboundary harm, but rather whether the basis of that obligation involved a strict liability model, a fault-based model, or a new approach. There was no doubt that states had obligations in relation to the prevention of transboundary harm caused by negligence of state officials or by a lack of due diligence in monitoring the use made of a state’s territory by private actors engaged in activities that risked transboundary harm. The only question was whether earlier decisions established strict liability for transboundary harm, and if not, whether the ILC should develop a strict liability approach, particularly in relation to dangerous or ultrahazardous activities.
The first special rapporteur on the topic, Quentin-Baxter, had been part of the New Zealand legal team in the Nuclear Tests case. Quentin-Baxter regarded the topic as a direct response to the commitment in Principle 22 of the Stockholm Declaration to develop the law of liability and compensation for the victims of transboundary harm.Footnote 111 For Quentin-Baxter, while the principle that it is wrongful to cause transboundary harm was unquestioned, the challenge was how it would apply in practice.Footnote 112 He considered it vital to ensure “that duties of reparation should not be separated from, or substituted for, duties of prevention.”Footnote 113 Compensation offered a means for responding when prevention is not possible, but “it should not be allowed to become a tariff for causing avoidable harm.”Footnote 114
Quentin-Baxter noted that until the twentieth century, states had largely “been able to believe that State sovereignty embraced an almost complete freedom to take or allow within national borders any action which was not directed against other States, and yet to be almost completely insulated from the unwanted side-effects of equally unfettered activities within the borders of other States.”Footnote 115 The growth of technology and the expanded scale and acceleration of industrialization challenged the false sense that a state could have both absolute freedom in the actions it took on its territory and absolute security from harm caused by actions on the territory of other states.Footnote 116 Existing international law based on a fault-based approach was not suited to an age in which the effects of actions taken within a state often unintentionally spilled across international borders.
International lawyers therefore needed to develop a system of obligation to complement the existing fault-based principle of harm prevention.Footnote 117 Such a system needed to balance two competing interests. On the one hand, “activities capable of causing substantial transboundary harm would be unduly hampered if they were circumscribed by rigid rules of the kind that regulate deliberate invasions of sovereignty,”Footnote 118 but on the other hand, “such activities would be oppressive, if they were under no effective legal constraint.”Footnote 119 Quentin-Baxter developed a schematic outline to assist states in reaching agreements that could balance those competing interests, which gave “pride of place to the duty, wherever possible, to avoid causing injuries, rather than to the substituted duty of providing reparation for injury caused.”Footnote 120 That outline offered a set of building blocks to “promote agreements between States in order to reconcile, rather than inhibit, activities which are predominantly beneficial, despite some nasty side-effects,” while also ensuring that “[a]t the very end of the day, when all the opportunities of régime-building have been set aside—or, alternatively, when a loss or injury has occurred that nobody foresaw—there is a commitment, in the nature of strict liability, to make good the loss.”Footnote 121
Over the following decades, the ILC slowly moved away from a focus on obligations of strict liability for states, and toward detailing the procedural aspects of harm prevention and establishment of civil liability in domestic law for the operators of hazardous activities. In the resulting Draft Articles on the Prevention of Transboundary Harm from Hazardous Activities (2001), the ILC explained it had placed “emphasis upon” and preferred “the duty to prevent as opposed to the obligation to repair, remedy or compensate,” because compensation often cannot fully repair or restore the situation prevailing prior to the harmful action.Footnote 122 The ILC linked the resulting articles to the principle of harm prevention established in the Trail Smelter arbitration, Principle 21 of the Stockholm Declaration and Principle 2 of the Rio Declaration.Footnote 123 The accompanying Draft Principles on the Allocation of Loss in the Case of Transboundary Harm Arising Out of Hazardous Activities (2006) provide that states have an obligation to ensure the existence and implementation of a civil liability regime in domestic law,Footnote 124 and point to the role that an interaction between private and public international law can play in providing reparation for transboundary harm.Footnote 125
Industrialized states have since kept a tight rein on any further attempts to develop liability regimes through the work of the ILC. More broadly, major emitters have limited the attempt to develop strict liability regimes in international law to the more overtly political process of multilateral interstate negotiations.Footnote 126
IV. The UNFCCC Negotiations and the Background Rules
A. The Background Rules Structuring the New Climate Regime
As Part III showed, by the time states began to contemplate a new regime to govern climate change, the principle of harm prevention was firmly established in international law. Many major emitting states had made submissions to international courts and tribunals stating that, at minimum, a fault-based or harm prevention model of liability for transboundary harm was a foundational principle in international law. States had agreed to include the principle of harm prevention in the 1972 Stockholm Declaration, and many had argued for the recognition of a strict liability standard at that conference. States and their legal advisers considered that, in the absence of new inter-state treaties to address liability for specific forms of transboundary harm, “any such liability will be governed by the ordinary principles of State responsibility.”Footnote 127
As the risks posed by climate change emerged as an issue of international concern, momentum grew toward an international climate treaty. In 1979, the First World Climate Conference called on states to prevent anthropogenic changes to climate that might cause harm to humanity, and established the World Climate Programme to pursue the study of climate change under the auspices of the World Meteorological Organization (WMO), the UN Environment Program (UNEP), and the International Council of Scientific Unions. In 1988, the UN General Assembly recognized that “climate change is a common concern of mankind” and called on governments to prepare a framework convention on climate change as a matter of urgency,Footnote 128 and UNEP and the WMO established the Intergovernmental Panel on Climate Change (IPCC). The release of the IPCC’s First Assessment Report in 1990 had a strong effect on international opinion. That report concluded that immediate reductions in long-lived greenhouse gas emissions of over 60 percent were necessary just to stabilize atmospheric concentrations.Footnote 129 In December 1990, the UN General Assembly established a negotiating process for the preparation of a framework convention on climate change.Footnote 130
In attempting to establish an international regulatory regime to stabilize greenhouse gas emissions at a safe level, states had to decide whether to accept stricter obligations than those required by the existing harm prevention principle. Specific treaty regimes in other areas of dangerous activity offered models for how to proceed, whether through agreeing to reduce or phase out greenhouse gas emissions, creating a strict liability regime that would allow industries to continue polluting provided they shouldered the resulting costs, or establishing insurance and taxation mechanisms to redistribute the risk of loss and damage. For those states from the Global North that were major emitters, and those states from the Global South that saw industrialization as their rightful destiny, the goal was to maintain policy space to decide upon the scope of continued emissions rather than agree to internationally determined prohibitions or restrictions on emissions. Those states sought to maintain the sovereign autonomy to decide upon their level of greenhouse emissions without being constrained by specific obligations requiring the reduction of greenhouse gas emissions.Footnote 131 In contrast, numerous states from both the Global North and Global South sought to adopt both immediate and effective greenhouse gas reductions and the inclusion of mechanisms to address loss and damage. Yet as the ILC had made clear in its work on transboundary harm, if states did not agree to a stricter regime of emissions reductions or liability, the background rules governing harm prevention would apply.
Acceptance of the principle of harm prevention by negotiators is evident both from its place in the UNFCCC text and in documents adopted at the same time. At the Rio Earth Summit in 1992, states adopted the UNFCCC alongside a number of other instruments, including the Rio Declaration on Environment and Development. In Principle 2 of the Rio Declaration, states reaffirmed their “sovereign right to exploit their own resources pursuant to their own environmental and developmental policies” while also declaring that “[s]tates have … the responsibility to ensure that activities within their jurisdiction or control do not cause damage to the environment of other States or of areas beyond the limits of national jurisdiction.”Footnote 132 The UNFCCC refers to the background rule of harm prevention in its preamble, which incorporates the language of Rio Declaration Principle 2 in paragraph 8. In addition, Article 2 uses the language of harm prevention to describe the treaty’s “ultimate objective” as “stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system.”Footnote 133
The key question facing negotiators was not whether the principle of harm prevention applied to climate change, but whether—and if so, which—states would adopt stricter obligations to ensure that the goal of preventing dangerous emissions was met in a timely fashion. Over the subsequent decades of climate negotiations, that has remained a site of intense disagreement. The preamble of the UNFCCC recognizes “that the largest share of historical and current global emissions of greenhouse gases has originated in developed countries.”Footnote 134 In addition, the inclusion of references to “common but differentiated responsibilities” in the UNFCCC,Footnote 135 alongside the recognition that “developed country Parties should take the lead in combating climate change and the adverse effects thereof,”Footnote 136 pointed to the responsibility of those states.Footnote 137 A number of industrialized states, however, were reluctant to take on binding emissions reductions. Meanwhile, industrializing states insisted on their entitlement to grow their energy consumption and their share of emissions, using the language of sovereignty and the right to development,Footnote 138 pushing instead for significant reductions on the part of industrialized states.Footnote 139 The result was that the binding obligations adopted in the UNFCCC focused primarily on procedural commitments to develop national inventories of anthropogenic emissions,Footnote 140 formulate, implement and publish measures to limit emissions,Footnote 141 promote and cooperate in technology diffusion and transfer,Footnote 142 cooperate in adaptation and scientific and technological research,Footnote 143 and for developed country parties to assist vulnerable developing country parties meet the costs of adaptation.Footnote 144
In 1997, states adopted the Kyoto Protocol, which established legally binding obligations for developed country state parties to achieve quantifiable reductions in greenhouse gas emissions. A key—but controversial—aspect was the operationalization of the notion of “common but differentiated responsibilities” through a differentiation between the quantified, concrete, and time-bound obligations for reduction of emissions for Annex 1 (developed) countries and the lack of binding emissions targets for non-Annex I (developing) countries.Footnote 145 The political pushback against that differentiation, combined with concerns about the introduction of sanctions for non-compliance, saw states such as Canada and the United States walk away from the Kyoto Protocol. It has, however, retained an ongoing influence on the allocation of climate-related loss and damage, through the provisions introducing market mechanisms for achieving emissions targets.Footnote 146
The 2015 Paris Agreement took over from the Kyoto Protocol as the primary source of regulatory commitments.Footnote 147 Its aim is “to strengthen the global response to the threat of climate change,” including by “[h]olding the increase in the global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels.”Footnote 148 The Paris Agreement replaced the internationally negotiated and enforceable emissions reductions obligations in the Kyoto Protocol with a bottom-up approach, according to which Parties agree to “undertake and communicate” their own “nationally determined contributions to the global response to climate change … with the view to achieving the purpose of this Agreement.”Footnote 149 In relation to mitigation, the “hard” obligations that are binding on individual parties include undertakings to prepare, communicate, and maintain a nationally determined contribution (NDC),Footnote 150 submit an NDC every five years,Footnote 151 account for NDCs,Footnote 152 and ensure each successive NDC represents progression and the party’s highest possible ambition.Footnote 153 While many parties, including the European Union and small island states, argued states should be obliged to implement their NDCs, that was strongly opposed by major emitters including the United States, China, and India.Footnote 154 In place of the enforcement mechanisms adopted under the Kyoto Protocol, states agreed only to a mechanism to “promote compliance.”Footnote 155 Overall, powerful industrialized and industrializing states have proved extremely reluctant to adopt new substantive obligations to reduce climate emissions.
B. Negotiating Liability for Loss and Damage
Major fossil fuel emitters have also been reluctant to address the obligation to make reparation for loss and damage through the UNFCCC negotiations, despite the issue being on the agenda of the climate treaty negotiations from their inception.Footnote 156 In 1991 Vanuatu, on behalf of the Alliance of Small Island States (AOSIS), proposed to the Intergovernmental Negotiating Committee for a Framework Convention on Climate Change that an international insurance mechanism be established to compensate the most vulnerable small island and low-lying coastal states for climate loss and damage resulting from sea-level rise.Footnote 157 The proposal was modeled on the international regimes set up to address liability in the fields of nuclear energy and oil pollution.Footnote 158 Numerous states, including from the Global North, supported the inclusion of liability and compensation based on the polluter pays principle on the agenda. However, those proposals gained little traction, because “potential victim states” were seen as having little “to offer the developed world in exchange for financial transfers.”Footnote 159 To protect their position, several small island states declared in signing that the UNFCCC was “without prejudice to the existing rights under international law, including rules governing international liability for damage to people, property and the environment.”Footnote 160
A step toward addressing loss and damage was made with the recognition in Article 8 of the Paris Agreement of “the importance of averting, minimizing and addressing loss and damage associated with the adverse effects of climate change, including extreme weather events and slow onset events, and the role of sustainable development in reducing the risk of loss and damage.”Footnote 161 However, the controversial paragraph 51 of Decision 1/CP.21 adopted alongside the Paris Agreement stated that the COP “[a]grees that Article 8 of the Agreement does not involve or provide a basis for any liability or compensation.”Footnote 162 Several states in turn submitted declarations when ratifying the Paris Agreement declaring that, in the words of Micronesia, “ratification of the Paris Agreement does not constitute a renunciation of any rights … under international law concerning State responsibility for the adverse effects of climate change, and that no provision in the Paris Agreement can be interpreted as derogating from principles of general international law or any claims or rights concerning compensation and liability due to the adverse effects of climate change.”Footnote 163 The consensus in the final days of the Paris negotiations was that international law remedies remained available and were unaffected by paragraph 51, as a COP decision addressing the effect of one Article cannot “alter or waive general rules of international law.”Footnote 164
At subsequent COPs, UNFCCC parties have agreed to put loss and damage on the negotiating agenda (on condition that the discussion not directly address liability or compensation),Footnote 165 decided to “establish new funding arrangements for assisting … particularly vulnerable … developing countries … respond[] to loss and damage” (but with contributions made on a voluntary basis),Footnote 166 and agreed that loss and damage be dealt with separately to financing of mitigation and adaptation (yet without recognizing any responsibility for loss and damage).
Overall, powerful industrialized and industrializing states have been reluctant to accept stricter liability for climate-change related loss and damage, or make reference to reparations in the UNFCCC negotiations.Footnote 167 Those negotiations have proceeded as if major emitting states were free to decide whether or not to bear any of the social costs of climate change.
The lack of clarity in relation to the background rules of international law has benefited major emitters, as negotiations over financial transfers between major emitters and climate-vulnerable states would have a very different character if they were understood to take place against the backdrop of an entitlement to make reparation rather than as an act of philanthropy or development aid. Much then turns on clarifying how the background rules of international law governing transboundary harm relate to climate change.
On one interpretation, as argued by the majority of parties before international courts and tribunals,Footnote 168 states have an obligation to reduce greenhouse gas emissions under the principle of harm prevention. Ideally a new climate treaty would establish stricter obligations of conduct (as in the case of the ozone layer agreements) or stricter liability standards (as in the case of the regimes governing nuclear energy or oil pollution). But unless and until such new standards are agreed, the background rules of international law continue to structure relations between states. The umbrella customary obligation of harm prevention “ensures the absence of any lacunae; all risks are covered, including those that are not subject to a tailored preventive obligation expressed in a treaty.”Footnote 169 An alternative interpretation, now being argued by major emitters before international courts and tribunals, is that the customary international law principle of harm prevention either does not apply to climate change,Footnote 170 was displaced by a lex specialis regime established under the UNFCCC regime,Footnote 171 or can be read down to mean that the UNFCCC and Paris Agreement specify all that the principle of harm prevention requires of states that are parties to those treaties.Footnote 172
The question of how the UNFCCC regime relates to the background rules of international law is thus a pressing one. For the established harm prevention principle not to apply in the context of climate change, injured states would have had to agree to give up their entitlements under the background rules of international law and accept that the UNFCCC regime establishes a more permissive standard in relation to transboundary harm caused by greenhouse gas emissions than that established by general international law. Yet as this part has shown, states have never explicitly agreed to waiving the harm prevention principle as part of the UNFCCC negotiations. Giving up an existing legal entitlement cannot lightly be implied.
V. International Investment Law and the Background Rules
A. The Misalignment of International Investment Law and Climate Action
As Parts III and IV discussed, states have been slow to agree on stricter obligations governing state responsibility for transboundary harm, either at the ILC or through UNFCCC negotiations. The other body of law that the ILC tried and failed to codify in the early stages of its work on state responsibility, concerning the property rights of aliens, has fared much better. Since the adoption of the ARSIWA there have been significant developments in the law governing responsibility for injuries to aliens, now recast as international investment law. While attempts to codify that body of law through multilateral treaty-making processes were unsuccessful,Footnote 173 an extensive body of jurisprudence extending the scope of obligations owed to foreign investors has nonetheless developed through the accumulated awards of ad hoc tribunals established under investor-state dispute settlement provisions of international investment treaties.
The current transnational regime for investment protection builds upon more than 3,000 bilateral and multilateral investment treaties. The investor-state dispute settlement (ISDS) regime was consolidated during the 1990s, with the negotiation of many new bilateral investment treaties (BITS) alongside broad-reaching multilateral agreements containing ISDS provisions, such as the Energy Charter Treaty. Under ISDS provisions, foreign investors are authorized by the dispute settlement provisions of a treaty to pursue binding international arbitration against the host government, while states have no corresponding right to bring an original claim against a foreign investor.Footnote 174
Fossil fuel investors have been major users of ISDS to date.Footnote 175 Indeed, representatives of and lawyers for fossil fuel industries were key norm entrepreneurs in the creation of the new regime of investor-state dispute settlement (ISDS) in the mid-twentieth century.Footnote 176 Approximately 20 percent of reported ISDS cases relate to fossil fuel investments, with one hundred of the most polluting fossil fuel companies (known as the “carbon majors”) being among the most litigious companies in the ISDS system.Footnote 177 Lower and middle-income countries have received the highest number of claims in fossil fuel cases, while 92 percent of investor-claimants come from high-income countries.Footnote 178
Scholars have cautioned that ISDS will likely be used to seek reparations for climate action. To date, there has been a small but steady stream of climate-change related disputes initiated under the ISDS system.Footnote 179 High-profile cases include claims brought against Australia, Canada, Denmark, Germany, the Netherlands, and the European Union regarding policy decisions to phase out coal-fired power or impose taxes on energy companies,Footnote 180 and claims brought against Canada, Italy, the Netherlands, and the United States for denying or withdrawing specific project approvals for climate-related reasons.Footnote 181 In addition, law firms have advised clients whose investments are most likely to be affected by climate actions to restructure their operations to ensure access to ISDS.Footnote 182 Corporations in the fossil fuel industry are generally global, so they can choose the applicable subsidiary or shareholder to match the most protective investment agreement available.
Even in the absence of a formal claim brought by an investor, the availability of ISDS causes “regulatory chill” in relation to climate change action and shapes government decisions about fossil fuels.Footnote 183 The risk of arbitration has already led to the delay or weakening of climate policies, as reported by officials in France, Denmark, New Zealand, and Germany.Footnote 184 The IPCC Working Group III on Mitigation has warned that ISDS cases could cause states to refrain from or delay measures to phase out fossil fuels.Footnote 185
The misalignment between international investment law and climate action is a significant problem more broadly. Continued investment in fossil fuels risks creating “stranded assets,” a term used since the early 2010s to describe assets that will lose economic value or be converted into liabilities before the anticipated end of their lifetime due to regulatory changes, technological innovation, or shifting consumer preferences.Footnote 186 Those assets may include in-ground fossil fuel resources, pipelines, fossil fuel power plants, and related infrastructure, as well as more intangible assets such as permits to explore for oil and gas. Many regulatory measures required to decarbonize the economy will contribute to turning such fossil fuel investments into stranded assets.Footnote 187 IPCC Working Group III has stated that limiting global warming to 2°C would result in stranded assets, and the impact of limiting global warming to 1.5°C on such assets would be even higher.Footnote 188 It notes the misalignment between ISDS provisions aimed at protecting investors against losses caused to stranded assets by government regulations and the urgent need for a transition to renewable energy.Footnote 189 Researchers have estimated that the global value of those assets is as high as USD17 trillion.Footnote 190 Significantly for the future allocation of climate-related loss and damage, nearly 70 percent of treaty-protected oil and gas projects at risk of becoming stranded assets are in the Global South, while investors from high-income countries stand to benefit the most.Footnote 191
There is growing concern amongst climate lawyers and activists that at least some arbitrators will hold that regulatory measures taken to mitigate climate change violate obligations to protect investors, including provisions on expropriation (if read broadly to include regulatory measures the effect of which is to undermine substantially the economic value or deny the benefits of a protected investment), and on fair and equitable treatment (if read broadly to protect the legitimate expectation of investors that the regulatory environment remain stable). To date, numerous investment tribunals have interpreted obligations to protect fossil fuel investors broadly and paid little attention to international obligations of harm prevention or to UNFCCC commitments.Footnote 192 The raft of older investment treaties that are still in force contain limited if any exceptions relating to environmental protection or carve outs for fossil fuels.Footnote 193 Even newer investment agreements containing clearer environmental exceptions have been interpreted to favor the protection of investors over a state’s right to enact environmental regulations.Footnote 194
B. Paying Climate Reparations to Polluters
The award and quantification of reparations is one of the most contentious topics in international investment law and arbitration, due in part to how compensation is being calculated by investment tribunals. As an Organisation for Economic Co-operation and Development (OECD) report has noted, “[t]he ISDS system has the highest average claim for damages and the highest average awards of any legal system in the world.”Footnote 195
Prior to the finalization of the ARSIWA, courts and tribunals would try to balance the interests of home states and host states through reference to notions of equity when it came to awarding compensation. The resulting awards adopted standards of compensation that reflected “a fair compromise between the interests of developing and developed nations,” and in reaching their decision on that question, tribunals would take into account “factors such as the history of the investor’s contribution to local development, the excessiveness of investor returns, the public policy rationale behind the State’s breach, or the impact that a large award would have on its finances.”Footnote 196 The legal determination of the standard of compensation by investment tribunals thus reflected a balancing of the interests of host and home states.
Since 2001, the process of valuation undertaken by investment tribunals has been strongly influenced by the framework set out in the ARSIWA,Footnote 197 despite the ILC making clear that the articles concerned with obligations of reparation did not apply “to the extent that these arise toward or are invoked by a person or entity other than a State.”Footnote 198 Arbitral practice has placed growing weight on the Chorzów Factory formulation that the responsible state must “wipe out all the consequences of the illegal act and re-establish the situation which would, in all probability, have existed if that act had not been committed.”Footnote 199 The calculation of the quantum of compensation no longer involves an equitable balancing of interests, but focuses on a financialized account of the full value of the investment. Valuation is treated as if it involved an objective determination based on the price that would have been obtained in an idealized market.Footnote 200 Investors routinely seek and are awarded substantial compensation for lost profits even when very little capital has been invested, and awards are regularly made for interference with planned investments that never eventuate.Footnote 201 The result has been an increasing number of mega-awards and a growing concern with “crippling compensation.”Footnote 202
The modern world of climate reparations is thus one in which compensation for loss and damage is far more likely to be awarded to investors who are contributing to climate change than to the victims of climate change itself. As Part II showed, that was precisely the unbalanced approach to state responsibility and reparations that ILC members from the Global South sought to avoid in the 1950s.
Negotiations over who will bear the risk of climate change and the cost of decarbonization take place in the shadow of ISDS awards.Footnote 203 As a result, the balance of power in climate negotiations between states and fossil fuel investors is shaped by the (over-)valuation of fossil fuel assets that investment awards produce. In that context, the combination of broad interpretations of obligations to protect investors, narrow interpretations of exceptions, limited reference to the background rules of harm prevention, and use of industry-friendly methods for valuing fossil fuel investments collectively work to determine the price that polluters can demand to stop polluting. Such awards distribute the social cost of carbon-intensive industries away from polluters. Overall, investor-state dispute settlement reduces the exposure of investors to the contingency, uncertainty, and risk inherent in undertaking activities that cause significant environmental harm, including climate change.Footnote 204
A clarification of the relation between the background rules regarding the prevention of transboundary harm and international investment law would shift the advantage that fossil fuel investors currently have in political negotiations aimed at phasing out fossil fuels and achieving a just energy transition. Attention to those background rules should inform the determination of the wrongfulness of a state’s actions to regulate in ways that injure fossil fuel investors,Footnote 205 and shape the valuation of fossil fuel investments when determining the quantum of reparations.Footnote 206
VI. Bargaining in the Shadow of the Background Rules
For decades, major emitters have maintained tight control over clarifying the background rules of international law concerning responsibility for transboundary harm in general and climate change in particular. Vulnerable states have been dissuaded from bringing climate disputes or advisory opinions before international courts and tribunals.Footnote 207 The primary exception to that aversion toward litigating responsibility for harm caused in the context of climate change has been, perversely, in relation to the protection of foreign investments in situations where states take action to mitigate environmental harm. States have supported an investor-state dispute settlement system in which the polluters are rewarded for continuing to invest in fossil fuel projects, knowing that any risks will be borne by the taxpayers of host states.
Lack of clarity about how background rules allocate the costs of climate-related loss and damage has been shaped by the uneven resort to international courts and tribunals in relation to questions involving state responsibility for climate-related loss and damage. Industrialized states have pushed to keep issues related to state responsibility and liability for transboundary harm out of international courts and tribunals, while fossil fuel investors have made use of their ready access to an enforceable regime of ISDS. The combined effects have made it easier for major emitters to make it seem that the background rules governing loss and damage are permissive. Faced with a surge in climate litigation, major emitters have begun to argue that the harm caused by greenhouse gas emissions is not governed by general international law principles of responsibility and liability. Instead, they argue that international obligations in relation to mitigating the harm caused by greenhouse gas emissions are limited to the commitments that states have been willing to make in the UNFCCC negotiations.Footnote 208
However, major emitters have not been able to shape international law to their own ends. States have not agreed to limit the liability for transboundary harm in general or for transboundary harm caused by greenhouse gas emissions in particular. The background rules governing responsibility and liability are settled. To alter long-established principles of international law that are premised on balancing the sovereign equality and territorial integrity of all states would require states expressly to agree on clearly articulated provisions setting out the basis for that limitation of liability. They have not done so. As the debates explored in this article show, states that are vulnerable to the immediate effects of climate change have always insisted that the background rules of international law are unaltered by the failure to negotiate stricter standards governing activities that cause significant transboundary harm.
Given the attempt by major emitters to suggest that international law permits states to allow significant transboundary harm to be caused by greenhouse gas emissions, it is timely to revisit the background entitlements that frame debates over climate reparations. The current turn to international courts, tribunals, and human rights bodies in climate litigation provides the opportunity to revisit and clarify those background rules of responsibility and liability for transboundary harm, and their relation to obligations under the UNFCCC and investment regimes. In 2022, the European Court of Human Rights and the International Tribunal for the Law of the Sea both rejected the argument that the UNFCCC is the only source of international legal obligations relating to climate change, or that a state that complied with its commitments under the UNFCCC and the Paris Agreement would meet all its international legal obligations relating to climate change.Footnote 209 The pending advisory opinion on climate change from the ICJ will also clarify the obligations of states under international law, and is likely to play a significant role in framing domestic litigation, justifying changes in domestic regulation, shaping international climate negotiations, and strengthening the available defenses in international investment disputes.
Climate litigation is part of the broader field of legal and political action. While there are good reasons to prefer negotiations or bargaining as the means of addressing deeply contested political questions, that bargaining takes place in the shadow of the law and within the framework of existing legal entitlements. Negotiations over which states or private actors must reduce greenhouse gas emissions would play out differently if it were clear that the background rules of international law oblige responsible states to make reparation for the harm resulting from those emissions. The fact that states have failed to negotiate stricter obligations to prevent transboundary harm caused by greenhouse gas emissions, develop a liability regime for transboundary harm, or finance adaptation for states at immediate risk should not mean that the most vulnerable are left to bear the cost. The cost of loss and damage will fall somewhere—the question is where. International adjudication is one theater in which these discussions are being reopened as questions of principle, justice, and equity.
The current asymmetrical and uneven development of reparations for climate-related loss and damage, with the only form of reparations likely in the short term being paid to polluters, is indefensible. There is no principle of international law, and indeed no theory of risk, no standard of efficiency, and no philosophy of justice, that justifies a world in which the powerful are free to cause whatever harm they want wherever they want without any obligation to pay compensation, while the cost of the resulting damage to property, people, and the planet is borne by those who are injured. The legal entitlements created by the background rules governing territorial sovereignty are an essential part of the struggle over the distribution of risks and rewards in the global political economy. By challenging the perception that background entitlements allow major emitting states and the fossil fuel industry to shift the social cost of that industry to others, international law can make that industry riskier and less profitable, and reshape the context in which climate bargaining and activism take place.
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