Why LatAm countries’ failure to prepare for climate lawsuits will be costly

As States and companies advance decarbonization plans, the number of commercial and investment arbitration cases related to climate change is growing in Latin America, as the lack of regulations combined with increasing energy transition requirements generates conflicts between the public and private sectors in everything from emission reductions to greenwashing.

In a region with a powerful extractive industry, experts foresee a rise in litigation to ensure environmental responsibility. Commercial and investment arbitration in the global energy industry rose to 2,180 cases last year from 884 in 2017, including a sharp increase in Latin America, according to a report from the UN Environment Programme.

To gain more insight on the topic, BNamericas talked with litigation experts David Enríquez, director of energy and infrastructure at Mexican law firm Goodrich Riquelme Asociados; Diego Durán de la Vega, director of Latin America disputes at Hughes Hubbard & Reed; and Oliver Wack, director of Control Risks Colombia, on the sidelines of a recent decarbonization event in Santiago, Chile.

BNamericas: What challenges do companies face in complying with regulations linked to climate change?

Durán de la Vega: They are in a changing landscape, especially in the regulatory field. Half of the cases handled at ICSID in 2021 were related to infrastructure for the energy sector due to regulatory changes. It is a growing phenomenon.

BNamericas: Why is commercial and investment arbitration increasing?

Enríquez: Growth will be exponential through 2050 but not follow a straight line, being rather sinuous and erratic. The business world and governments are not anticipating the costs that the closure of fossil fuel plants will cause to align with the Paris Agreement. This will bring about compensation obligations. The mistake of investment-receiving countries, including in Latin America, is not preparing for the level of disputes that will come.

BNamericas: Why is arbitration useful to resolve climate disputes?

Durán de la Vega: It is the ideal means to resolve conflicts due to its reliability, since arbitration provides flexibility to choose arbitrators and establish rules for the solution of a matter. Our role as lawyers is to prevent disputes for companies, especially when there have been million-dollar investments and they are protected under international treaties.

Companies are demanding that States respect their investment protection obligations and pay the corresponding compensation. For this reason, governments also need a lot of advice, as they live daily with the dilemma of ensuring energy security, equity and profitability.

BNamericas: How is coal mining viewed in these types of disputes?  

Wack: In the case of the Colombian mining industry, it is an essential target for decarbonization, but on the other hand, coal mines are large contributors to GDP in several areas of the country. The transition cannot be called for without, at the same time, opening space for more mining. This generates geopolitical tension that can bring various sanctions in a world that is changing toward a multipolar model.

BNamericas: What type of international regulations encourage the transfer to clean energy?  

Wack: Regulation through tax incentives to add actors to the supply chain of critical minerals.

Durán de la Vega: Large oil companies like BP are clear that fossil energy is not the future in the next 30 to 50 years. For this reason, they are looking at ways to start renewable energy or mineral projects that are part of the transition.

Enríquez: More than 40 critical minerals are required for electrification, and we are seeing Africa more aligned with China and Latin America closer to the US for historical reasons. This makes both mining production and refining much more multifactorial than the monolithic oil and gas industry of 100 years ago.

BNamericas: What factors influence greenwashing?

Enríquez: A part of greenwashing is related to the CO2 emissions market, where there are companies that buy certificates for US$15/t of carbon and others for US$160/t. As long as there is no system based on real certification levels, speculation will continue to exist.

At the corporate level, there are boards that claim [their companies are] advancing in the transition, but the steps are not verifiable. On the other hand, consumers are demanding certified products that demonstrate the level of emissions at each stage of the production process, but measuring the carbon footprint of a product is almost impossible. A large part of manufacturing is done in China with components from different parts of the world.

BNamericas: What do you think of green certifications such as The Copper Mark or IRMA in the mining industry?

Durán de la Vega: If they would not exist, there would be more conflicts and disputes. To the extent that these organizations support companies, the practice of certification will be encouraged. Green certifications are increasingly requested when capital is requested from a bank or funds, as well as to avoid greenwashing.

BNamericas: How will the conflict in the Middle East impact the energy supply chain, beyond the rise in oil prices?

Durán de la Vega: Both the Russia-Ukraine war and the Middle East conflict slow down the energy transition. The first reaction is to ensure domestic energy supply, regardless of whether it is green or not, and then create incentives to invest in renewables.

With the Russian-Ukrainian war, Europe faced an energy crisis and the first thing it did was to bet on domestic renewable energy, which is the great solution for security, since unlike fossil fuels, it can be produced anywhere in the world. After energy security, the focus is energy equity and sustainability.

Enríquez: Although some companies are open to selling their polluting assets, in some cases it has been governments that have closed plants. In the background, there are commitments with shareholders or financiers in ESG terms, where the most convenient thing is to develop a closure or transfer plan.

BNamericas: Is water also a relevant factor in climate litigation?

Enríquez: Some 70% of Mexico faces water stress and there is effectively competition between water consumption for industrial purposes, irrigation and human consumption. The solution is to use desalinated water accompanied by renewable energy, since the energy cost is one of the great challenges of desalination.