An outdated treaty is stopping climate action in its tracks

What’s happening? Five energy companies are suing governments for £13bn ($17.8bn) under the investor-state dispute settlement mechanism, arguing their climate policies would harm their profits. Keystone XL pipeline developer TC Energy is demanding nearly £11bn from the United States for cancelling the project, while RWE and Uniper want £1.2bn and £725m respectively from the Dutch government for phasing out coal. (The Independent)

Why does this matter? At first, we might assume such cases wouldn’t have much merit. After all, states are free to introduce new legislation as they see fit, right? Well, not quite. RWE and Uniper’s claims are based on powerful international treaties that effectively prioritise the interests of corporations by creating a parallel judicial system for multinational businesses, which could seriously undermine climate change mitigation efforts.

How did we get here? As many former colonised countries gained independence after World War II, developed nations were keen to protect their foreign assets from expropriation, and argued they couldn’t trust the protection of property under national law. So, they started to draw up bilateral investment treaties (BITs) to establish terms and conditions for foreign direct investment. BITs typically include four main rights: national treatment (the right to receive the same treatment as national businesses), most-favoured-nation treatment (the same treatment as the country’s closest ally), fair and equitable treatment, and compensation in the event of expropriation.

To enforce these claims, BITs use a mighty tool called investor-state dispute settlement (ISDS), defined as “a procedural mechanism that allows an investor from one country to bring arbitral proceedings directly against the country in which it has invested”. Notably, these cases are not decided by domestic courts but by private, highly non-transparent arbitration panels whose decisions cannot be appealed.

In the 1990s, the EU was the driving force behind the Energy Charter Treaty, a very similar agreement designed to protect the investments of energy majors like Shell and BP in post-Soviet countries. This treaty, which now counts 53 signatories, is increasingly used by fossil fuel companies to claim compensation for policies driving the clean energy transition. The Energy Charter Secretariat says it is aware of 142 investment arbitration cases under the ECT, some of which are linked to BITs.

Ever heard of regulatory chill? The ECT does not only force governments to pay large sums of compensation to private companies that could otherwise be used to fund an equitable green transition, it can also prevent them from introducing ambitious climate legislation in the future, known as “regulatory chill”. In 2017, France scrapped a law that would have ended all fossil fuel extraction on French territories after Canadian oil and gas company Vermilion threatened legal action under the ISDS.

Resistant to change – Faced with the prospect of massive pay-outs to polluters, countries like France, Spain or Sweden have tried to amend the treaty, but their efforts have been unsuccessful due to the requirement of unanimous approval by all contracting parties – Japan, for example, has dismissed all proposals so far. Individual exits are further complicated by a 20-year sunset clause which allows companies to sue states over any investment they made while the country was a member. For this reason, Rockhopper has been able to file a lawsuit against Italy over its ban on offshore oil drilling despite the country’s exit in 2016.

One last thing – There is a certain irony in the fact that some of the suing companies are the ones that are trying to convince the public they’re suddenly serious about climate action. RWE, for example, proudly proclaims on its website that it’s “contributing to the achievement of the Paris Agreement” and aims to be net-zero by 2040.

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