Governments which enact climate legislation risk being sued for trillions of dollars by fossil fuel companies seeking compensation for lost revenue and stranded assets.
Energy experts predict that more ambitious climate action from world leaders will significantly increase companies’ use of a tribunal mechanism that has already awarded billions to the heavy industry.
Trade agreements such as the Energy Charter Treaty and NAFTA contain investor arbitration clauses, known as investor-state dispute settlement (ISDS), that allow foreign companies to sue governments over actions they say hit profits or investments.
Campaigners say that energy companies are increasingly turning to this type of arbitration to recoup investments as governments accelerate the shift away from fossil fuels.
Jean Blaylock, trade campaigner at Global Justice Now, tells AFP these corporate courts – “the global trade system’s dirty little secret” – could “make a mockery” of commitments generated at the COP26 summit.
“We are seeing the fossil fuel sector use investor-state dispute settlement to hold climate action to ransom,” she says.
“These companies have made unfathomable profits from fuelling the climate crisis, we cannot let them demand even bigger payouts.”
AFP has obtained excerpts from a presentation given at a September trade event by consultancy firm Berkeley Research Group (BRG), which predicted that climate legislation would lead to a rise in private lawsuits.
“Increased climate policy ambition (eg CAT Ratings) will drive the policies behind climate-related disputes,” said an excerpt.
CAT refers to Climate Action Tracker, which ranks national emissions plans on their compatibility with the Paris climate deal.
The presentation suggested that the “scale of energy transition policy” could “unleash a wave of international investment and/or commercial arbitration to adjudicate claims”.
Responding to a request to comment, Christopher Goncalves, chair of BRG’s Energy and Climate practice, told AFP that dispute resolution was “likely to remain a critical component of the energy transition process”.
“It is not possible to make any generic conclusion as to whether such legal disputes accelerate or impede the energy transition,” he added.
The BRG presentation said if governments legislate to limit heating to 2-degree Celsius by 2050, $3.3-6.5 trillion in upstream fossil fuel assets would be at risk, as well as $650-700 billion in coal power assets and $900 billion in oil reserve write-offs in a 1.5-degree Celsius scenario.
Blaylock said $9 trillion in upstream fossil fuel and oil reserve write-offs are at risk of litigation – a little over a tenth of the global economy.
Energy and mining firms have a long history in winning large settlements. In 2006, Occidental Energy sued the government of Ecuador for terminating an oil contract. It was awarded $1.77 billion, which was later reduced to $1 billion.
In 2012, Tethyan Copper sued the government of Pakistan over a gold mine, and in 2019 was awarded $5.9 billion – roughly 2% of the country’s GDP.
Published in The Express Tribune, November 13th, 2021.