Investor-state dispute settlement: obstructing a just energy transition

Kyla Tienhaara, Rachel Thrasher, B. Alexander Simmons and Kevin P. Gallagher

Climate Policy, 2023, vol. 23, issue 9, 1197-1212

Abstract: Governments that revoke licenses and permits or take other measures to restrict the development of oil and gas in their territory will face claims from investors for compensation. When investors are foreign, they can seek compensation for ‘lost future profits’ in investor-state dispute settlement (ISDS), even if they had not commenced production. ISDS cases are likely to obstruct a just transition by chilling supply-side climate measures and diverting public funds away from climate change mitigation and adaptation efforts. Using a dataset of ISDS-protected assets in the upstream oil and gas sector, we demonstrate that the global distribution of legal and financial risks is highly unjust. More than two thirds of the net-present value of 1.5°C-incompatible and treaty-protected oil and gas assets are found in low- and middle-income countries, including those highly vulnerable to climate change. The Energy Charter Treaty (ECT) is the most significant single treaty obstructing the transition. While protection of fossil fuels in some countries may soon be phased-out of this treaty, the protection of the assets identified in our study will remain for at least ten more years. To limit ISDS risk, states should: (1) immediately cease the issuance of new permits/leases for oil and gas developments; (2) terminate investment treaties (including the ECT) and (3) develop binding rules that cap the amount of compensation that can be awarded to investors.Oil and gas investors protected by investment treaties can claim compensation for ‘lost future profits’ in investor-state dispute settlement (ISDS) when governments impose limits on production (supply-side climate policy).ISDS claims could absorb a significant amount of public finance that is needed for climate mitigation and adaptation, particularly in the Global South.The Energy Charter Treaty (ECT) protects more upstream oil and gas assets than any other single treaty and is already being used to challenge climate action; recent efforts to modernize the treaty are insufficient.To limit the risk of ISDS claims, states should stop issuing permits for new oil and gas projects, terminate investment treaties and develop rules to cap the amount of compensation that can be awarded to investors.

Date: 2023
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DOI: 10.1080/14693062.2022.2153102

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