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While climate change-driven energy transitions are only as effective as they are swift, they are also entangled with law’s stability-oriented system. How can law, then, deliver swift change? Path dependence analysis in legal development can help refine the tools needed to calibrate change and build adaptability into legal systems. In this blog post, doctoral researcher Marina Dutra Trindade addresses some issues of path dependence in the law of energy transitions.

What is path dependence?

Path dependence is a process through which past decisions influence the present. Analysts use it in different fields to explain how did we get here? This is perhaps not asked frequently enough in law. But when the here is an architecture of conflicting—but equally valid—norms, it might be useful to understand how path dependence constrains necessary change and undermines legal coherence.

How does it apply to energy transitions? Can you give an example?

In 1994, the EU birthed the ECT, the strongest legal instrument for the protection of  energy investments and a crusader for fossil fuels that is incompatible with the EU’s current ambitious climate policies. The EU withdrew from the ECT, but the treaty’s all-encompassing 20-year sunset clause (Art 47(3)) projects the ECT’s legal effects into the future, leading to the quasi-irreversibility of inconsistent norms at the expense of coherence in the EU legal order. The sunset clause creates a strong form of path dependence in EU energy law—one that hinders urgent, crucial energy transitions.

It is a case of perversive ultra-activity in the law. Despite having expired for the EU, the ECT reigns over the present and threatens the future through its sunset clause: existing fossil fuel-related investments amounting to 345 billion euros remain protected by the treaty well beyond this critical decade to mitigate the climate crisis. Legal change is made prohibitively costly by investment tribunals’ continuing powers under the ECT, their stance against discrimination, and expansive interpretation of investors’ rights. They do not have to follow past decisions but create legal doctrines loud enough to disrupt climate action.

Can we address this issue?

Yes, but it is complicated. The stronger the path dependence, the harder it is to change it. This is true in complex systems, like legal systems. The very limited—and likely unfeasible—legal solutions discussed for neutralising the sunset clause (eg, here, here and here) include the doctrines of rebus sic stantibus (fundamental change of circumstances) and necessity as possible defences in investment tribunals. But the commentaries behind them miss the point that the mere possibility of initiating proceedings in investment tribunals delays action and this might indeed be the goal of investors. Proceedings can take years and buy time for the fossil fuel industry’s survival. And a successful case for climate action does not guarantee that others will follow, so these arguments may not truly be effective.

How to calibrate legal certainty for change?

The ECT’s sunset clause was aimed at promoting legal certainty, which is invoked as a shield against change, eg, through legitimate expectations claims. But the concept is nuanced, and legal systems need to react to new circumstances; they cannot freeze the law in time. Predictability is key, but when path dependence strongly constrains legal change, such as in this case, its existence is hardly convincing from a strictly legal standpoint—even if for just for existing investments, the ECT is as valid as any other legal norm. And its legal effects continue to shape the law and reverberate through iterations in legal systems. This incoherence keeps the door open for regression, which for investors well equipped to use arbitral tribunals is already a win (again, fossil fuel investors want to buy time). Understanding path dependence in the law can help legal systems address norms’ ‘stickiness’ and close the door on fossil fuels. It could take a multi-pronged approach in international law (eg through diplomatic and adjudicatory channels) which accepts that legal retroactivity may not be the rule—but as a possibility, it prevents the immutability of norms which were not meant to be absolute in the first place. If other fundamental norms have to be balanced in times of crisis, this should not be different for investors claims to property rights.

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But it is possible to just exclude fossil fuels from the ECT’s protection to existing investments, right?

Again, it is complicated. An all-encompassing sunset clause as the ECT’s affords legal strategies against climate policies disguised as discrimination. For example, Art 16(2) ECT creates a hierarchy imposing the most favourable norm applicable to investors. And there is more: the ECT also hinders technological innovation and restricts policy space in renewable energy, thus weakening the level of ambition in climate action, but that’s another story…

An overview & lessons for the future

• Swift energy transitions depend on legal coherence, which can be prevented through path dependence-inducing lawmaking. This includes the use of sunset clauses in international investment law.
• Path dependence in the law is a virtue as long as it is moderate enough to accommodate evolution within the meaning of legal certainty, including norm reversibility. Predictability needs to be strengthened through coherent law- and policy-making across the board.
• Mechanisms such as legal retroactivity could be used and should be refined for the flexibility demands of transitioning energy systems.
• Sunset clauses should not be broad and long-term such as the ECT’s. They should be narrow and detailed to prevent investors from capturing legal concepts and States’ regulatory powers.

References

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