Fossil fuels is the most litigious industry benefitting from these investment agreement clauses
As Canada burns and Eastern North America chokes on our smoke, coal, gas and oil companies in Canada and around the world continue to use investor-state dispute settlement (ISDS) clauses in international investment agreements (IIAs) to prevent governments from taking measures to fight climate change.
In its latest report, released in March 2023, the Intergovernmental Panel on Climate Change found only a 50 percent chance that global warming can be limited to 1.5 degrees Celsius above pre-industrial levels, which is the ultimate goal of the 2015 Paris Agreement. This goal would require all coal, oil and gas projects not yet in production to be abandoned, as the International Energy Agency made clear in 2021 and which the Canadian government ignored by authorizing the Bay du Nord offshore oil project in 2022. The goal would also require at least some existing fossil fuel infrastructure to be shut down.
Against this background, there is increasing concern about ISDS obstructing measures by states to address climate change. ISDS enables fossil fuel corporations, and those who invest in them or their ISDS claims, to attack any measure that could reduce their profits, including those dealing with the climate emergency. Governments attempting to prevent projects that further lock in fossil fuel dependence and accelerate climate change can thus be liable for billions of dollars in damages.
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For example, in 2017, Calgary-based oil and gas company Vermillion, which extracts almost 75 percent of all French oil, used the threat of an ISDS lawsuit to dissuade the French government from legislating to phase out fossil fuel extraction. The bill was shelved and replaced by a watered-down law that continues to allow it.
The fossil fuel industry is the most litigious in the ISDS system, accounting for almost 20 percent of known cases. Most of those cases are decided in favour of foreign investors, who succeeded in 76 percent of cases at the merits stage. Moreover, the average amount awarded in fossil fuel cases – over US$600 million – is almost five times that in non-fossil fuel cases.
The five largest oil companies posted an unprecedented US$153.5 billion in net profits for 2022 and are approaching the total figure of $200 billion in adjusted net profit, i.e., excluding provisions and exceptional items.
UN Secretary-General Antonio Guterres slammed the "grotesque greed" of oil and gas companies and their financial backers and said it was immoral for them to be making record profits from the current energy crisis on the backs of the poorest people and communities “at a massive cost to the climate."
There is, however, a way to stop this madness. Given the existential threat posed by climate change, States should unilaterally withdraw the consent they unilaterally gave to foreign investors in IIAs containing ISDS clauses to submit to arbitration claims arising out of climate change measures.
By becoming party to IIAs containing ISDS clauses, states gave domestic coal, oil and gas companies and those who invest in them or their ISDS claims the right to sue other state parties for climate change measures. They should also unilaterally withdraw that right.
A state could only be sued for withdrawing its consent to have claims against it based on measures it has taken or proposes to take to combat climate change submitted to arbitration under the ISDS clauses of an IIA to which it is a party by another state party to that IIA.
Instituting state-to-state dispute settlement proceedings is always a political act. In the current highly charged political circumstances surrounding climate change and ISDS, a state’s decision to unilaterally withdraw its consent to arbitration is unlikely to be challenged by other states.
Given that the obligation created by IIAs to submit claims to ISDS is owed to other state parties to those IIAs, foreign investors could only sue the withdrawing state based on an alleged loss of profits arising out of climate change measures.
Foreign investors making such allegations would have brought their ISDS claims anyway, so the withdrawal of consent doesn’t increase the withdrawing state’s litigation risk.
If a state unilaterally withdraws its consent to arbitration under the ISDS clauses of IIAs and it nevertheless becomes the object of an ISDS claim by a coal, oil or gas company or those who invest in it or its ISDS claims as a result of measures taken by that state to fight climate change, and that claim succeeds in proceeding to the merits stage, the state could invoke the state of necessity defence to justify those measures.
The doctrine of the state of necessity is an international customary rule where a factual situation of a grave and imminent peril for the essential interests of a state can legally justify a breach of an international obligation by that state as the only means to safeguard those essential interests.
Climate change fueled by using coal, oil, and gas constitutes a grave and imminent peril threatening the essential interests of all states and humanity.
It’s too late to stop climate change. The best we can hope for now is to avoid its most catastrophic and irreversible effects.
ISDS is not compatible with the necessary energy transition. Maintaining it will only prolong the fossil fuel era and accelerate catastrophic climate change.
Instead of protecting profits, the law should be used to serve climate justice. Stopping coal, oil and gas companies and those who invest in them or their ISDS claims from continuing to use ISDS to block climate action by states would be an excellent place to start.
