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Commentary: How contracts to protect investors could jeopardize the global effort to save the climate – and cost countries billions

Fossil fuel companies have access to an obscure legal tool that could jeopardize global efforts to protect the climate, and they are beginning to use it. The outcome could cost billions of dollars to countries pursuing these efforts.

In the last 50 years, countries have signed thousands of contracts protect foreign investors from government action. These contracts are like contracts between national governments designed to entice investors to bring in projects with the promise of local jobs and access to new technologies.

But now, as countries seek to phase out fossil fuels to slow climate change, those deals could leave the public with overwhelming legal and financial risks.

The contracts allow investors to sue governments in a so-called compensation trial Investor-State Dispute Resolution, or ISDS. In short, investors could use ISDS clauses to claim compensation in response to government fossil fuel limiting measures such as B. the closure of pipelines and the denial of drilling permits.

For example TC Energy TRP,
+0.44%,
a Canadian company, is currently searching more than $15 billion on US President Joe Biden’s cancellation of the Keystone XL pipeline.

In a study published May 5, 2022 in the journal Science, we estimate so Countries would face up to $340 billion in legal and financial risks for the cancellation of fossil fuel projects subject to contracts with ISDS clauses.

That is more than countries worldwide put into climate adaptation and mitigation measures Fiscal year 2019, and it does not include the risks of phasing out coal investments or abandoning fossil fuel infrastructure projects such as pipelines and liquefied natural gas terminals. That means money that countries would otherwise spend on building a low-carbon future could instead go to the very industries that have it knowingly fueled climate changeseriously jeopardizing countries’ ability to drive the green energy transition.

Massive potential payouts

Of the world’s 55,206 upstream oil and gas projects in early-stage development, we identified 10,506 projects – 19% of the total – that were protected by 334 agreements granting access to ISDS.

This number could be much higher. Due to limited data, we could only identify the headquarters of the project owners, not the entire corporate structures of the investments. We know that too Law firms advise clients from the industry Structure investments to ensure access to ISDS, through processes such as using subsidiaries in treaty-protected countries.

Science

Depending on future oil and gas prices, we have found that the Total net value of these projects is expected to reach $60 billion to $234 billion. If countries cancel these protected projects, foreign investors could seek financial compensation based on these assessments.

This would put several low- and middle-income countries at serious risk. Mozambique, Guyana and Venezuela could each face potential losses of over $20 billion from ISDS lawsuits.

When countries also cancel oil and gas projects that are under development but not yet producing, they are at greater risk. We found that 12% of these projects are protected by investment treaties around the world and their investors could sue for $32 billion to $106 billion.

Cancel Approved Projects could prove exceptionally risky for countries like Kazakhstan, which could lose $6 billion to $18 billion, and Indonesia, where $3 billion to $4 billion is at risk.

The cancellation of coal investments or fossil fuel infrastructure projects like pipelines and liquefied natural gas terminals could lead to even more demands.

Countries are already feeling the effects of regulatory coldness

There were at least 231 ISDS cases previously with fossil fuels. The mere threat of massive payouts to investors could prompt many countries to delay climate action, leading to so-called “regulatory coldness.”

Both Denmark and New Zealandfor example, their fossil fuel phase-out plans appear to have been specifically designed to minimize their exposure to ISDS. Something climate policy Experts | have suggested that Denmark may have chosen 2050 as the end date for oil and gas production to avoid disputes with existing exploration license holders.

New Zealand banned all new offshore oil exploration in 2018 but did not cancel any existing contracts. The climate minister acknowledged a more aggressive plan “would have conflicted with investor-state agreements.”

France has revised a draft law Ban fossil fuel extraction by 2040 and allow renewal of oil exploration permits thereafter Canadian company Vermillion Energy VET,
-1.37%

not defined
threatened to initiate an ISDS procedure.

Securing the energy transition

While these results are alarming, countries have ways to avoid onerous legal and financial risks.

The Organization for Economic Co-operation and Development is is currently discussing proposals on the future of investment treaties.

A straightforward approach would be for countries to terminate or withdraw from these contracts. Some officials have expressed concern about unforeseen effects of unilateral termination of investment treaties, but other countries have already done so, with little or no real economic consequences.

For more complex trade deals, countries like the United States and Canada can negotiate to scrap ISDS provisions did when they were replaced the North American Free Trade Agreement with the agreement between the United States, Mexico and Canada.

Additional challenges come from “sunset clauses,” which bind countries for a decade or more after they back out of some treaties. Such is the case for Italy withdrawn from the Energy Charter Treaty in 2016. It is currently hanging in an ongoing ISDS case initiated by UK firm Rockhopper RKH,
+1.78%
about a ban on oil drilling on the coast.

The Energy Charter Treaty, a dedicated investment treaty for the energy sector, emerged as the largest single contributor to global ISDS risks in our dataset. Many European countries are currently under consideration whether to leave the treaty and how to avoid the same fate as Italy. If all countries contracting parties can agree to resigncould you collectively dodge the sunset clause by mutual agreement.

The global change

Fighting climate change is not cheap. Actions from governments and the private sector are both needed to slow and halt global warming from fueling ever more devastating catastrophes.

Ultimately, the question arises as to who will pay – and be paid – for the global energy transition. We believe diverting critical public finances from essential mitigation and adaptation efforts into the pockets of fossil fuel industry investors, whose products created the problem in the first place, would be at the very least counterproductive.

This comment was originally published by The Conversation — How contracts protecting fossil fuel investors could jeopardize global efforts to save the climate – and cost countries billions

Rachel Thrasher is a law lecturer and researcher at Boston University’s Global Development Policy Center

Blake Alexander Simmons is a postdoctoral fellow in the human dimensions of natural resources at Colorado State University

Kyla Tienhaara is a Canadian Research Chair in Economics and the Environment and Assistant Professor in the School of Environmental Studies and the Department of Global Development Studies at Queen’s University, Ontario.

https://www.marketwatch.com/story/how-treaties-protecting-investors-could-jeopardize-global-efforts-to-save-the-climateand-cost-countriesbillions-11652373275?rss=1&siteid=rss Commentary: How contracts to protect investors could jeopardize the global effort to save the climate – and cost countries billions

Brian Lowry

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