They are the fossil fuel industry’s “secret weapon”: private courts that enable companies to win billions of dollars from countries that choose to tackle the climate crisis by halting oil, gas and coal projects.
Some campaigners say the closed-door tribunals are the biggest threat to the Paris climate agreement. They are certainly a very big stick. The latest assessment puts the future costs to governments for ending projects being developed at up to $340bn, depending on the oil price. A separate analysis looking ahead to 2050 reckons that governments – and therefore taxpayers – could be on the hook for €1.3tn. That money is desperately needed to fund the vital transition to a clean, green world.
We know that most fossil fuel reserves must stay in the ground to have a hope of limiting global heating to 1.5C and avoiding the worst climate impacts. We also know that the “carbon bomb” projects planned by oil and gas companies would blow up those hopes, as set out in a recent investigation by me and my colleague Matthew Taylor. Experts say even some existing fossil fuel sites will have to be shut down.
Making that happen when fossil fuel companies and petrostates wield enormous power is hard. Adding colossal financial penalties makes defusing the carbon bombs harder still.
It is not just campaigners warning about these investor-state dispute settlements (ISDS), as the private courts are formally called. The latest report from the UN Intergovernmental Panel on Climate Change says ISDS can be used by fossil-fuel companies to “block national legislation aimed at phasing out the use of their assets”, and “may lead to countries refraining from or delaying” action to cut emissions.
‘An affront to justice’
The latest analysis of fossil fuel ISDS cases identified 231 to date, although that is a modest estimate due to the secrecy of the corporate courts. Fossil fuel companies usually win big, with 72% of cases where the final award was disclosed going in their favour and the average payout being $600m. Cases include Canada’s TC Energy demanding US$15bn (£12bn) after US president Joe Biden cancelled the Keystone XL pipeline, while in 2021 the European energy companies RWE and Uniper launched suits against the Netherlands for billions of euros over its policy to phase out coal.
“During the most important decade for climate action, the international community cannot afford to divert critical funds from essential [climate] efforts to compensation for fossil fuel companies,” said Rachel Thrasher, who is part of the research team and works for the Global Development Policy Center at Boston University.
The five countries with the greatest potential losses from ISDS are the UK, Russia, Venezuela, Guyana and Mozambique, the researchers found. “The most problematic treaty is the Energy Charter Treaty (ECT),” said Thrasher. Signed in 1994, it was intended to protect foreign investors in Russia and the post-Soviet republics. But since 2014 more than two-thirds of ECT cases have involved EU companies suing EU governments.
Jean Blaylock, at Global Justice Now,* joined recent protests on the issue in the UK. “The fossil fuel industry is already doing everything in its power to delay and deter climate action,” she said. “The last thing we need is for governments to give these companies a secret weapon in their battle to squeeze maximum profits out of climate breakdown. But that’s what we’ll be doing if we fail to withdraw from the Energy Charter Treaty.”
“It is an affront to democracy and an affront to justice,” Blaylock said. Global Justice Now estimates that the cost of Germany’s coal phase-out was hugely inflated due to the risk of being sued.
My colleague Jennifer Rankin has written an excellent explainer on the ECT and in November revealed that the number of cases had more than tripled in the past decade. Strikingly, the true number of cases is unknown as hearings take place in secret and investors have no obligation to disclose the existence of a case, even to the ECT secretariat.
However, change may be coming. European nations are increasingly unhappy with efforts to reform the ECT. Leaked diplomatic cables seen by Euractiv show frustration from Germany, the Netherlands, Poland and Spain, with the latter making “it clear it would consider an exit scenario, as it did not see how the ECT could be adapted to the Paris agreement”.
Pascal Canfin, chair of the European parliament’s environment committee, and others recently called for the 27 EU nations to pull out of the ECT en masse: “We cannot remain part of an agreement that allows [companies] to protect climate-damaging investments indefinitely.”
Thrasher proposes three possible solutions. “First, countries should terminate their treaties – even unilaterally – to avoid ISDS cases. South Africa and others [including India, Indonesia and Ecuador] have done so without substantial impact on foreign investment flows.” And countries could also negotiate the end of ISDS between themselves, she said, or withdraw consent for any ISDS cases involving fossil fuels.
The EU commission is trying to forge a compromise with Japan, which is holding out against ECT reform. We’ll know if that succeeds, and whether the fossil fuel industry’s secret weapon has been blunted, after a meeting in Brussels on 24 June.
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