Fossil fuel investors are adopting a bold new legal tactic in response to efforts to limit global warming: They are going to private international tribunals to argue that climate change policies are illegally cutting into their profits, and they must therefore be compensated. Now governments are scrambling to figure out how to not get sued for billions when enacting climate policies.
Termed “investor-state dispute settlement” legal actions, such moves could have a chilling effect on countries’ ability to take climate action. Consider this case from 2017: Nicolas Hulot, France’s environment minister at the time, drafted a law that sought to end fossil fuel extraction in the country by 2040. In response, Vermilion, a Canadian oil and gas company, threatened to use such a settlement provision to sue the French government. In the end, the French law was watered down to allow new oil and gas exploration even after 2040.
When these legal actions move forward, the results tend to benefit oil and gas interests. A recent report on investor-state dispute settlement (ISDS) actions found that when such cases were decided on by their merits, fossil fuel investors emerged victorious 72 percent of the time — earning, on average, $600 million in compensation.
According to a paper published in Science last month, more ISDS claims could soon be coming. That is because of the Energy Charter Treaty (ECT), a 30-year-old international energy agreement that has been ratified by 50 countries, mostly in Europe. The treaty calls for “fair and equitable treatment” of investors and “payment of prompt, adequate and effective compensation” in case governments take over their assets — clauses that fossil fuel investors could use to threaten ISDS legal action against new climate regulations.
Discussions are ongoing in Europe to “modernize” the ECT to take climate goals into account. But recently, Pascal Canfin, chairman of the European Parliament’s environment committee, announced that the negotiations haven’t been productive and that the ECT will likely “continue to be used by investors to sue states taking climate action.” Now, Canfin is calling for all European Union countries to mount a “coordinated exit” from the treaty.
Laura Létourneau-Tremblay, a doctoral research fellow at University of Oslo working on international investment law, explained that if states have to compensate fossil fuel companies under ISDS provisions for transitioning away from fossil fuels, it could “prevent governments from taking ambitious climate actions… [There are] real concerns as to whether the ECT is compatible with the net-zero energy transition.”
The potential for fossil-fueled ISDS actions are also baked into U.S. trade deals. The North American Free Trade Agreement (NAFTA), for example, includes stipulations of “fair and equitable treatment” of foreign investments, which could be used to thwart ambitious climate agendas.
The strategy is already being used in response to some of the United States’ biggest recent climate victories. After President Joe Biden revoked the permit for the controversial Keystone XL oil pipeline on his first day in office, TC Energy, the Canadian company behind the project, sued the U.S. government. Citing a “responsibility to our shareholders to seek recovery of the losses incurred due to the permit revocation,” the company claimed $15 billion in damages.
The matter has become so pressing that on May 10, the Organization for Economic Co-operation and Development, an intergovernmental organization comprising largely high-income countries that works on trade and economy, held a conference to discuss “the overriding importance of confronting the climate crisis,” including how to ensure investment treaties “do not hamper legitimate regulation in the public interest.”
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“Litigation Terrorism”
ISDS clauses were first added to international treaties in the 1980s and 1990s. Historically, the main aim of treaties with ISDS clauses was to protect economic interests of foreign investors, explained Ladan Mehranvar, a legal researcher at Columbia University’s Columbia Center on Sustainable Investment. Therefore, noted Mehranvar, “They were never designed to promote a state’s climate or human rights obligations towards other rights holders.”
Under ISDS provisions, when a dispute arises between foreign investors and the countries in which they have investments, the matter is taken to an arbitration tribunal, which is a panel of judges jointly chosen by the parties involved.
Experts have criticized such international arbitration tribunals’ lack of transparency. Silvia Steininger, a research fellow working on international law and arbitration at Max Planck Institute for Comparative Public Law and International Law, explained that the ability for affected people like local communities to give witness statements in such cases is “very limited and often denied.” Additionally, the parties to each case can decide to keep the results of the arbitration under wraps, further limiting public scrutiny and accountability.
The background of the people who usually act as judges in these three-arbitrator tribunals also raises concerns. “Arbitration is a very lucrative practice,” said Steininger, pointing out that arbitrators are generally “private business lawyers, whose socialization prioritizes economic interests before other public concerns, such as human rights or the environment.”
This state of affairs, noted Steininger, has resulted in “an elite group of approximately 50 arbitrators who are regularly appointed” to most cases.
These arbitration tribunals’ decisions are final — there is no option for appeal.
ISDS provisions, in other words, allow foreign companies to bypass local courts, which can hold them accountable to local laws and regulations, and instead sue governments in international arbitration tribunals, where they have a say in the selection of judges and are not bound by local laws. Governments, meanwhile, cannot sue foreign companies under ISDS — they can only file counters to claims brought against them.
No wonder, then, that the threat of ISDS actions has led to what is routinely described as “regulatory chill.” Governments have shied away from amending laws or imposing new regulations on foreign companies when there’s a possibility of expensive legal proceedings and major payouts. Joseph Stiglitz, an economist and Nobel laureate, has called this state of affairs “litigation terrorism.”
“The threat of facing such very expensive arbitration proceedings, including possible damage payments of millions or even billions of U.S. dollars, restricts the policy space of host states to impose regulations or amend laws which might impact investment activity,” Steininger said. “Governments are so fearful that foreign investors might sue them before an arbitral tribunal that they decide not to impose any policy changes, even when they would be necessary… to safeguard human rights or protect the environment.”
A recent Intergovernmental Panel on Climate Change report recognized such realities, specifically pointing out how fossil fuel companies use ISDS to “block national legislation aimed at phasing out the use of their assets.”
For years, ISDS clauses have been creating major problems for countries around the world. In Australia, Wikileaks found that ISDS clauses were allowing foreign firms to demand compensation from the government in response to the passage of policies related to public health, the environment, and other matters. In Pakistan, meanwhile, one 2019 ISDS lawsuit over a “sweetheart deal” offered to a mining firm riddled with allegations of kickbacks and bribery cost the country $5.8 billion, at a time of deep economic distress and nationwide strikes.
Progressive lawmakers, including Sens. Elizabeth Warren (D-Mass.) and Bernie Sanders (Ind.-Vt.) have long crusaded against ISDS provisions in American trade deals. In a 2017 letter to a U.S. trade representative, Warren wrote that ISDS provisions “give multinational corporations special rights to challenge American laws in corporate courts… a free pass to ignore our rules and bypass our courts.”
Sanders, meanwhile, highlighted examples of the havoc caused by ISDS clauses during the debate over the Trans-Pacific Partnership (TPP), a multilateral trade agreement pushed by the Obama administration. That included the tobacco giant Philip Morris suing Uruguay under ISDS over its cigarette labeling requirements, and Veolia, a French transnational company, suing Egypt for, among other things, increasing workers’ minimum wages.
The case against Uruguay was so ridiculous that it was spotlighted in an episode of John Oliver’s Last Week Tonight in which he introduced an anthropomorphic cartoon “Jeff the Diseased Lung” to represent the tobacco company. The show even put the cartoon up on billboards in Uruguay.
The ISDS provisions in the Trans-Pacific Partnership played a key role in Congress’ failure to ratify the TPP. The trade agreement’s proposed ISDS expansion was met with widespread concern across the political spectrum, with those on the left opposing it because of the additional power it would have handed multinational corporations and foreign investors to wreak havoc on public health and the environment, and those on the right opposing the idea of allowing international tribunals to overturn U.S. law.
Later, on the 2020 campaign trail, Biden told the United Steelworkers he opposes including ISDS clauses in trade agreements, arguing that they allow “private corporations to attack labor, health, and environmental policies.”
Over the years, some progress has been achieved in reforming ISDS provisions. In 2018, NAFTA was renegotiated to remove ISDS clauses between the U.S. and Canada, and the clauses were scaled back between the U.S. and Mexico.
The United Nations Commission on International Trade Law is currently looking to reform ISDS mechanisms. At these discussions, delegations have proposed “radical changes” to the current investment arbitration system, according to Yanwen Zhang, a PhD candidate working on investment law reform at University College London.
For instance, Brazil suggested the inter-State dispute resolution approach as an alternative, as opposed to the current system where private investors can sue governments while some non-governmental organizations like ClientEarth and Public Citizen are advocating moving away from ISDS altogether.
“It Boils Down To Just Political Will”
ISDS provisions have become a key weapon for fossil fuel companies looking to increase production in the climate change era or, at the least, claim damages for not being allowed to do so.
Chevron, the American oil and gas giant, has actively lobbied for the inclusion of ISDS provisions in E.U.-U.S. trade deals, noting they are a deterrent against environmental protections.
The fossil fuel industry accounts for 20 percent of all ISDS arbitrations, making it the most litigious industry, according to a report by the International Institute for Sustainable Development (IISD), a think tank working on climate and sustainability. And within the fossil fuel industry, the oil and gas sector accounts for 92 percent of the cases.
The fossil fuel industry’s fondness for ISDS actions could prove increasingly costly. The new Science paper on the matter found that if all governments canceled oil and gas projects according to net-zero recommendations made by the International Energy Agency (IEA) in May 2021, nations around the world could face total damages ranging from $60 to $234 billion.
The brunt of these claims could fall on countries in the Global South such as Mozambique and Guyana, which currently have high-value oil and gas projects under discussion for foreign investment. This arrangement is not surprising, said Mehranvar at the Columbia Center on Sustainable Investment, since she says the ISDS system was “designed to work in favor of capital of which the Global North is the source and against resource-rich and economically disadvantaged states of the Global South.”
Ultimately, taxpayers would bear the cost of such lawsuits. A January 2020 report by Openexp found that if the ISDS mechanism in the ECT was used to protect fossil fuels until 2050, it could result in fossil fuel payouts totalling more than $1 trillion. This amount is more than what is needed over the next 10 years to finance the European Green Deal, which aims to cut European emissions by 55 percent by 2030.
Ultimately, ISDS provisions in trade deals like the ECT could end up making the global transition to renewable energy much more expensive.
According to a new study published in Nature, the oil and gas industry is facing $1 trillion in losses due to oil and gas reserves left stranded from climate-related policy changes. Those losses would likely increase if nations continue to expand oil and gas supplies — such as the Biden administration is now looking to do in order to decrease reliance on Russian fossil fuels — and the additional stranded drilling assets could be used to launch more ISDS cases.
Therefore, the most direct way for governments of wealthy nations to avoid being entangled in such expensive lawsuits is to stop promoting fossil fuel expansion in the first place.
“Delaying climate action by giving out new permits [for oil and gas expansion] increases both the risk of exceeding 1.5 celsius of warming and of ISDS cases being launched,” said Kyla Tienhaara, Canada Research Chair in Economy and Environment at Queen's University in Canada, and lead author of the new Science paper.
Tienhaara added there are “a whole range of actions governments could take” to limit fossil fuel projects and decrease the threat of ISDS lawsuits. But, she added, at the end of the day, “it boils down to just political will.”
Editor's Note: This story was developed as part of a journalism residency program at Max Planck Institute for Comparative Public Law and International Law in Heidelberg, Germany
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