Fossil fuel companies reap billions from arcane dispute clauses

Fossil fuel companies have claimed billions of dollars from countries through an arcane legal provision that could deter governments from imposing more stringent climate laws, according to a new report.

The investor-state dispute settlement clauses allow foreign investors to resolve conflicts through international arbitration rather than local courts.

While that shields investors from unfair treatment, the provisions protect fossil fuel assets that emit 1.6 gigatons of carbon dioxide equivalent a year, climate think tank E3G said in a report Wednesday. That’s equal to about a third of emissions in the US in 2022, according to data compiled by Bloomberg.

Though ISDS claims can apply across all sectors, the fossil fuel industry has accounted for more than 20% of over 1,700 publicly known cases so far, according to the International Institute for Environment and Development, a research organization focused on climate change, nature loss and inequality. These companies have won at least $80 billion in damages, the institute said.

The threat of ISDS claims is having a “chilling effect” on climate action by governments, said Jordan Dilworth, a co-author of the report for London-based E3G. ISDS provisions in investment treaties are “very misaligned with other international efforts to reduce emissions,” he said.

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In 2022, oil firm Rockhopper Exploration Plc was awarded €190 million ($206 million) by arbitrators after the Italian government declined to give the company a production concession after imposing a ban on oil and gas exploration and production.

Since then, Italy has applied to annul the award, with a decision pending.

Rockhopper remains confident in the merits of its case and believes “the annulment request will be rejected in due course,” said Sam Moody, the company’s chief executive officer.

The case’s financial backer, UK-based Harbour Litigation Funding, which has raised $1.83 billion and funded more than 170 cases, didn’t respond to a request for comment.

As litigation funders increasingly seek out companies to make claims, “states that take necessary climate-related measures may be exposed to increasing risk of abuse of ISDS claims,” said Lisa Sachs, director of the Columbia Center on Sustainable Investment.

The E3G report identified more than 6,800 assets across the oil, gas, coal and power sectors as protected by ISDS provisions. Assets owned by companies headquartered in the UK, China, and Japan contributed the most to ISDS-protected emissions, while host countries most at risk from claims were Egypt and Nigeria, it found.

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As climate regulation develops, mismatched expectations between investors and governments will narrow, according to Tai-Heng Cheng, a partner at Sidley Austin LLP. “But until we get there, there is a period of instability that we’re going through,” said Cheng, whose firm has held talks with energy companies on climate-related ISDS.

Governments trying to fulfill their climate change commitments under the Paris Agreement may be liable for $340 billion in future ISDS cases linked to the oil and gas industry, a 2022 paper estimated. While some countries are planning to withdraw from treaties with ISDS clauses, that won’t affect existing investments.

The upshot is that “taxpayers could be ordered to pay incredibly high compensation to projects that experts in energy and climate are telling us could have no long-term value,” said Columbia’s Sachs.