Challenges await India in decarbonising its economy

Since its big climate commitments under the 2015 Paris Agreement, and the United Nations Framework Convention on Climate Change, India has given a big impetus to decarbonising its economy. The Cabinet approval of the national green hydrogen mission is a step in this direction. India is bolstering its renewable energy sector by permitting foreign direct investment (FDI) up to 100% through the automatic route. The country attracted FDI of $1.6 billion in 2021-2022, making it the fastest growing market for renewable energy. Simultaneously, to smoothen this transition, India — as agreed at COP27 — plans to phase down around 81 coal-fired power plants over the next four years.

But there’s a catch. Given global developments, especially in Europe, this laudable objective of decarbonising the economy may face certain challenges under international investment law (IIL), which Indian policymakers need to be alert about. IIL allows foreign investors to sue States before international arbitration tribunals for alleged breaches of bilateral investment treaties (BITS). This is known as investor-state dispute settlement (ISDS).

In Europe, foreign investors have employed ISDS to challenge the climate policies of countries in two ways. First, foreign investors in the fossil fuel sector have challenged decisions to phase out power generation through coal. In 2019, the Netherlands adopted a law prohibiting the use of coal for power generation, aiming at a complete phase-out by 2030. This led to ISDS claims against the Netherlands — RWE v Netherlands, and Uniper v Netherlands. In a recently decided case, Rockhopper v Italy, a British oil firm challenged the decision of the Italian government to ban oil exploration and production within 12 nautical miles owing to environmental, and local communities concerns, and was awarded €190 million in compensation.

According to researchers Kyla Tienhaara and Lorenzo Cotula, India has 10 coal-fired power plants with substantial foreign investments, and 70% of such plants are protected by at least one BIT containing the ISDS mechanism. Therefore, if India chooses to phase down or later completely phase out the coalfired plants with foreign investment, it runs the risk of disputes much like RWE and Uniper. Although India has unilaterally terminated several of its BITS, the sunset clause in these treaties ensures that foreign investment made before the treaty termination is protected.

Second, foreign investors have used ISDS to challenge policies affecting the renewable energy sector. For instance, Spain introduced various financial incentives for attracting foreign investments in the renewable energy sector, which were abolished later due to the increasing financial strain on the national exchequer. This prompted foreign investors to bring more than 50 ISDS claims against Spain under the Energy Charter Treaty (ECT), arguing that the abolition of these incentives breached their legitimate expectations and the fair and equitable treatment standard.

India, too, has moved to give several incentives (such as productionlinked incentives) to investors in the renewable energy sector. If these incentives are withdrawn at a later date, they might trigger ISDS claims. For instance, in 2019, the Andhra Pradesh government cancelled the power purchase agreements between various renewable energy companies and the state power distribution companies (discoms), asking for tariff renegotiation on the ground that discoms were facing financial strain. This led to Japanese investors, who had sizable investments in the renewable sector in Andhra Pradesh, threatening global arbitration.

None of this should deter India from reducing its carbon footprint. But policymakers should learn from international experience. The phasing down of foreign-owned coalfired power plants should follow the principles of transparency, due process, and judicious reading of the BIT that covers the relevant coal plant. Likewise, incentives to foreign renewable energy companies need to be assessed so that there’s no need for an abrupt stoppage in case of fiscal challenges. Better internalisation of IIL obligations will ensure that even if ISDS claims are initiated, India will be able to defend itself with aplomb.