Investor-State disputes and the global green energy transition

The latest report from the UN International Panel on Climate Change has made clear that this decade is make-or-break for climate action and mitigating the worst-case scenarios of a warming earth. Crucial to keeping warming below the 1.5C threshold by 2100, countries must focus on phasing out both demand and supply for fossil fuels. The International Energy Agency (IEA) has laid out a roadmap toward that goal – urging countries to deny new fossil fuel investments after December 31, 2021. To reach that goal, 60 percent of oil and gas and 90 percent of coal must stay in the ground. 

However, states will also have to halt some projects already underway and demands for compensation from asset holders are likely to follow. Private investors can sue states directly for breach of agreements through a controversial process known as an investor-state dispute settlement (ISDS), which has been recognized as a “significant departure” from what is typically available under international law. Treaty breaches include alleged discrimination against the foreign investor, undermining the investor’s “legitimate expectations” of regulatory stability or introducing a measure that is “disproportionate” to the otherwise legitimate policy objective. Already, countries have been sued for environmental regulations, public health measures and efforts to maintain economic stability. Among investors, the fossil fuel sector has been the most litigious, accounting for 20 percent of the total investor-state disputes so far and winning almost three-quarters of them. 

Our first study, published in Science, estimates the costs of possible legal claims from oil and gas investors in response to government actions to limit fossil fuels. We found legal claims could reach $340 billion, a substantial amount that would divert critical public finance from essential mitigation and adaptation efforts to the pockets of fossil fuel industry investors. This sum would exceed the total global public climate finance provided from 2019-2020, which was $321 billion.

Watch this space for more updates on this project