The fossil fuel industry has a trillion-dollar secret weapon to kneecap climate action

International trade agreements open the door to claims that could slow progress on climate change.

The case is known as an investor-state dispute settlement (ISDS), a tactic that may be the fossil fuel industry’s secret weapon as countries begin ramping up their efforts to phase out fossil fuels. Thousands of treaties, bilateral agreements and international contracts offer companies a way to try to get their money back across country borders, sometimes for theoretical profits from projects that have yet to even break ground. Though ISDS cases have been around for decades, only a few have been explicitly tied to climate policy; the urgent need to mitigate climate change and the global trend toward more aggressive action may be about to change that.

A potent tool for industry

ISDS claims can be brought by investors under treaties like NAFTA and the Energy Charter Treaty (ECT), as well as under thousands of bilateral trade agreements and international contracts. The claims essentially argue that if a country’s shift in policy renders a project unviable, the country should compensate the investor for the money they would have made. The claimant and the host country each get to appoint one arbitrator, and a third is agreed upon mutually; this small panel then decides if the host country is on the hook for huge sums of money.

Regulatory chill

The open question, then, is whether the threat of ISDS claims will produce a “chilling effect” on potential climate policies.

In general, it will be tough to prove that such policy maneuverings are a direct result of ISDS claims or threats, because, as Tienhaara told Grid, most of the relevant discussion will happen behind closed doors.

Ripe for reform

The potential flood of ISDS claims in the face of climate change mitigation policy suggests drastic reforms are needed. In their paper in Science, Tienhaara and her colleagues advocate for an “abolitionist approach” including termination of bilateral trade agreements and exiting from treaties. Other options could include countries agreeing to amend various agreements in ways that would put ISDS off limits to the fossil fuel industry. The industry, of course, will undoubtedly lobby hard to prevent any of these reforms.

Tienhaara told Grid that while the trade agreements and treaties were originally sold to the Global South as a way to increase investment, substantial research on the topic has shown that any such effect is negligible. “When I say what we need to do is terminate these treaties, I always get the ‘Oh, we shouldn’t throw out the baby with the bath water,’” she said. “There’s no baby!”

“I think it’s one of the most pressing reforms we have to make,” Di Salvatore said. “This is really something that should be dealt with yesterday.”

Start your day with the biggest stories and exclusive reporting from The Messenger Morning, our weekday newsletter.
 
By signing up, you agree to our privacy policy and terms of use.
Sign Up.