Abstract
The effects of climate change are profoundly affecting enterprises, communities, and individuals. There’s a growing consensus about the necessity of transitioning towards an economy with reduced carbon emissions. The transformation is particularly pivotal within the construction industry, which holds a key position in this transition. This sector is responsible for around 40% of the world’s total greenhouse gas emissions, highlighting its significant impact on global emissions. Considering the increasing number of undertakings centered around alternative and sustainable energy resources, it’s a given that a large number of these projects would be encountering challenges and becoming subjects of disputes. Out of all sectors, the construction and energy sectors contribute the highest number of international arbitration cases. Among various factors, arbitration provides confidentiality, often involves less burdensome discovery procedures compared to litigation, and enables parties to have their issues determined by a panel of experts. The construction industry being an extremely vital component in the modern economy, it would be unfortunate if the sector is plagued with numerous disputes arising out of the global energy transition. Therefore, arbitration could play an important role in easing the transition for economies and private actors by providing quicker and more efficient resolution of disputes.
Introduction
The Paris Agreement (“Paris Agreement”) signed at COP 21 in December 2015, set the target of limiting global warming below 2°C as compared to the pre-industrial levels by the end of this century and preferably limiting it at 1.5°C. The Paris Agreement marked an important milestone in global climate action, as it was the first universal, legally binding treaty to bring all nations together to address the issue of climate change.
The global energy transition refers to the ongoing process of shifting the world’s energy production and consumption patterns from predominantly relying on fossil fuels (such as coal, oil, and natural gas) to utilizing more renewable and sustainable energy sources, with the primary goal being to address the challenges posed by climate change, reduce greenhouse gas (“GHG”) emissions, and move towards a more environmentally friendly and sustainable energy system.
The ongoing energy transition also has an obvious impact on economies such that governments are being necessitated to adopt alternative energy practices to fulfill their low carbon commitments. Construction sector being one of the largest economic ecosystems in the world has a significant role to play in reaching the overall sustainability goals that the world aims at. GHG emissions from the construction ecosystem are mainly driven by two components: The processing of raw materials for buildings and infrastructure, which accounts for about 30% of annual construction emissions and mostly consists of cement and steel, and building operations, which account for about 70% of construction emissions. Due to the lengthy lifespan of ordinary building, by 2050, 80% of the world’s building stock will consist of constructions before 2020. As a result, it will be necessary over the coming years to decarbonize new construction as well as retrofit existing stock to be more sustainable.
The nature of the new and upcoming construction projects and the numerous pressures on those projects along with the ever-existing multiplicity of stakeholders make it inevitable that there will be problems and, therefore, disputes are inevitable. Practically, construction disputes may not result from circumstances that are unaltered over time; instead, they may be caused by deviations from the original designs, price changes, weather variations, raw material availability, labour conditions like strikes and lockouts, changes to laws and regulations, and other unforeseen or foreseeable but unpredictable events.
The blog tries to navigate the impediments, opportunities, and changes in discourse that the energy transition would have on the construction sector. Further, the author touched upon the impact of new and alternative energy practices on construction disputes, and how Arbitration could play a key role in the resolution of disputes in the face of the energy transition.
The Indian Energy Pledge
As part of its Nationally Determined Contributions (NDCs) under the Paris Agreement, India stands committed to reducing the Emissions Intensity of its GDP by 45% by 2030, from the 2005 level and achieving about 50% cumulative electric power installed capacity from non-fossil fuel-based energy resources by 2030 and aims to reach net zero emissions by 2070. India definitely is setting the bar for an unconventional approach to economic growth that might sidestep the carbon-intensive strategies many nations have previously adopted and serve as a model for other emerging markets. Having surpassed its COP 21 commitment made during the Paris Summit and by achieving 40% of its power capacity from non-fossil fuels, India is nearly nine years ahead of schedule. The utilization of solar and wind energy in India’s energy mix has experienced remarkable growth. India’s renewable electricity sector is expanding at a faster pace than any other major economy, with projections indicating that new capacity additions will double by 2026. Additionally, India ranks among the leading producers of modern bioenergy and has ambitious plans to expand its usage across various sectors. According to the IEA, India is expected to surpass Canada and China in the coming years, becoming the world’s third-largest ethanol market after the United States and Brazil.
The Construction Landscape and its Response to Energy Transitions
The majority of issues faced by the construction sector are that on one hand, the industry causes climate change by emitting GHGs, and on the other, it is subject to carbon taxes during the manufacture of construction materials as well as during the provision of electricity and heat during the usage phase of structures. Additionally, the sector needs to handle transition risks associated with infrastructure and sector decarbonization ambitions. On the other hand, stakeholders are exposed to risks from the physical changes in the environment brought on by climate change, including increased risk of extreme weather on job sites, water shortages, and other deteriorating environmental conditions like temperature rise and flooding, for which there are no mitigation measures available outside of the sector taking the losses associated with it.
Physical risks such as floods and other weather occurrences could occur in the near future, necessitating a forward-looking appraisal of physical risks. It is necessary to take precautions against these events’ detrimental impacts when buildings and infrastructure are being used. Due to changes in precipitation and the ability of the natural environment to store carbon, the expansion of structures and infrastructure will also have an impact on how resilient the natural environment is to the adverse effects of climate change.
The infrastructure sector may have the capacity to contribute to the acceleration of the new transmission infrastructure to support more renewable energy projects and help industrial users control their energy expenses. The new transmission infrastructure will help eradicate problems like erratic marginal loss factors and curtailments, which have previously hampered the development of renewable energy projects. The function of the behind-the-meter connectivity infrastructure is less obvious. Some large industrial users, such as miners and smelters, have started their own decarbonization projects and are becoming more active through their demand response capabilities.
The renewable energy source that receives the most attention is solar energy, which is also the one that is being used the most in the construction industry. The world is progressively moving closer to having solar-powered construction sites, even though it is becoming increasingly common to see structures that are powered solely by solar energy. With a variety of heavy equipment powered by electric motors currently available on the market to replace the old diesel-guzzling giants, Volvo appears to be at the forefront of this transition. However, this is only the beginning. At the ConExpo in 2021, Volvo demonstrated construction equipment that is wirelessly powered by solar energy, making it a milestone in the energy transition in the construction landscape.
Impact of Climate Change on the Nature of Disputes
The impact of climate change is evident in the disputes space. The nature of disputes have become proportional to the quantity and size of climate-related initiatives, especially those in the energy sector, have dramatically increased. For instance, battery manufacturing facility construction projects in the US, new mines being planned or constructed around West America for minerals required for the energy transition, etc. Around the US and the rest of the world, massive solar and wind projects are being constructed. These projects usually entail the adoption of brand-new technologies or the deployment of current technologies to a never-before-seen scale. At every level, including design, supply, building, and commissioning, this unavoidably causes issues, delays, and disagreements.
Even though the majority of them are still in the early phases, disputes are already beginning to result from these kinds of projects. Although environmental litigation is not new, it has become more prevalent in construction contracts due to the political, legislative, and social focus on these issues—specifically, environmental and climate concerns—as well as the risk of legal action or reputational harm if something goes wrong. Due to the demands involved and the incorporation of obligations relating to these issues into contracts, disputes over them are becoming more and more often. Regarding climate change in particular, the scope of works, as opposed to the terms and conditions of a contract, usually addresses many of the requirements relating to the materials used and the way a structure is built, used, and maintained because they are technical in nature.
Take oil and gas companies, for instance. The energy transition involves re-purposing or discontinuing the use of infrastructure assets that have often been in operation for many years. This includes infrastructure like drilling and extraction equipment, distribution systems, and processing facilities. All of these will need to be dismantled or disposed of. Moreover, long-standing business partnerships related to the use of these shared infrastructures will have to be sorted out, which could potentially lead to disputes.
Role of Arbitration
Arbitration has already proved its efficiency in the field of dispute resolution, especially for construction and energy related disputes. Taking help from the momentum and acceptance that the process of arbitration already enjoys, the new areas that are opening up due to energy transition can directly benefit from the already established arbitral institutions and infrastructure. As far the expertise goes, techno-legal experts have always been a part of all arbitral processes, as expert witnesses or to assist the tribunals on technical aspects. It can, therefore, be derived that arbitration being an almost established dispute resolution route, clubbed with the efficiency and effectiveness quotient can best suit the energy transition and the natural change that is coming in the disputes space, as discussed above. Due to the expense and specialized knowledge necessary for energy and renewable initiatives, these projects often engage stakeholders from multiple legal jurisdictions. In such situations, arbitration offers several benefits. For instance, if a contractor is in discussions with a government or an entity affiliated with a government, they might be hesitant to have disputes settled by the local courts of that same government. Instead, they might prefer arbitration in an impartial location.
Conclusion
In the near future, it is expected that there would be an increase in both new projects, especially alternative and renewable energy projects and redevelopments in the construction industry. These projects would be needed to reduce carbon emissions, use recycled materials, and improve the effectiveness of building heating and cooling systems, as well as water use. Construction companies are showing awareness that the manufacturing of the materials they use and the activities they engage in historically have consumed significant quantities of traditionally-generated forms of energy, therefore adopting greener forms of energy is one important approach to achieving energy goals. Additionally, businesses that specialize in energy-related projects are eager to invest in initiatives and technology that support alternate forms of energy production.
The shift towards global energy transition demands the implementation of intricate and innovative solutions, particularly in challenging geographical areas. Given the upcoming construction projects’ unique nature and the various challenges they face, encountering issues and subsequent disputes is unavoidable. A significant portion of these disagreements will find resolution through international arbitration. Entities participating in these projects, whether as project initiators, designers, advisors, or contractors, should familiarize themselves with the latest technical advancements and potential remedies. As always, a proactive and pragmatic strategy, coupled with meticulous documentation, will be crucial for achieving a favorable outcome in case disputes emerge.
About the Authors
Mr. Gauhar Mirza (Partner, Cyril Amarchand Mangaldas & Co.) and Harshita Tyagi (4th Year Student at SVKM’s Pravin Gandhi College of Law, Mumbai).
Editorial Team
Managing Editor: Naman Anand
Editors-in-Chief: Abeer Tiwari & Muskaan Singh
Senior Editor: Harshita Tyagi
Associate Editor: Harshita Tyagi
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