Investor–state disputes in the fossil fuel industry
By Lea Di Salvatore
The fossil fuel industry is the most significant contributor to climate change. As the consequences of burning fossil fuels become increasingly evident, policy-makers across the globe are stepping up their efforts to curb emissions.These actions inevitably aim at curtailing fossil fuel activities. However, under current international investment law (IIL), foreign investments in fossil fuel projects are granted special protection and access to investor–state dispute settlement (ISDS). Through this system, investors can bring claims to international tribunals regarding regulatory measures adopted by a host state that they allege breach their investment privileges under IIL.
This report analyses the trends in investor–state disputes initiated by investors in the fossil fuel industry to understand the extent to which this industry relies on ISDS to protect its investments.The emerging picture is that the fossil fuel industry has been a pioneer of the ISDS system and has been using it extensively to protect its investments. This protection can hinder the development and implementation of measures to tackle climate change and can present a major obstacle for countries seeking to phase out fossil fuels.
Southeast Asia is home to over 54% of the world’s peatlands — tropical wetlands which have a major role to play in climate action. But they are being deforested rapidly: Around 25 million hectares of tropical peatlands in Southeast Asia have been deforested and drained over the last three decades alone, and only 6% of peatlands remain untouched.
This is a major blow to the region. These terrestrial wetland ecosystems help regulate water flow by capturing rainwater during the wet season and slowly releasing it during the dry season. They are also key habitats for endangered and rare species of both plants and animals, and are essential for the livelihoods of local communities.
Additionally, they are an important carbon store in the global carbon cycle; more than three-fourths of global peat carbon stocks (52 Gigatons) are stored in Southeast Asian peatlands. Their destruction warrants global attention.
The Biden administration took office with the intention of making partnership with Europe a central element of its China strategy. This paper assesses what has been achieved in the first year of these efforts, and what to expect in 2022. Despite some of points of contention, such as the disputes over the security pact between Australia, the United Kingdom, and the United States (AUKUS), European and US officials ended the year in a more optimistic place on the transatlantic China and Indo-Pacific agendas than they were at the start. Over the course of 2021, the two sides put in place new structures—from the EU-US Trade and Technology Council (TTC) to the Indo-Pacific high-level consultations—that have helped to get the right issues on the table and pushed their bureaucracies to deal with each other in ways that they had not before. Instead of a thin layer of periodic dialogues on China, there is an increasingly thick web of interactions, from working-level groups in different policy areas to leader-level exchanges. The EU and the United States also removed many of the obstacles to their joining forces more effectively on economic goals, particularly with the deal on steel and aluminum tariffs. Meanwhile, without raising excessively high expectations of a new coalition government that will not depart radically from its predecessor, the change in Berlin should also provide a stronger basis for cooperation on China than was present during the final phase of Chancellor Angela Merkel’s government.
All this needs to be translated into results this year. The gap between the EU and the United States is less in their analysis of China and more in the level of urgency with which they treat the challenge. Where the United States is in the process of making China the animating factor for its grand strategy, Europe is not, and the crisis with Russia will not make it likelier in the months ahead. Yet the actor that has done most to narrow the urgency gap between Europe and the United States has been China. Much as its escalatory sanctions in 2021 derailed its contentious Comprehensive Agreement on Investment with the EU, Beijing’s treatment of Lithuania is helping to expedite European plans to address economic coercion and supply-chain risks that might otherwise have taken years.
Economic coercion is one of several issues that are a priority for EU-US cooperation this year. The transatlantic agenda on China and the Indo-Pacific is a very expansive one and, although there is value to this breadth, the two sides will need to pick a few areas that merit an additional political push. While in an ideal world these would all be positive-sum efforts, such as aligning their infrastructure finance initiatives to compete more effectively with China’s Belt and Road Initiative (BRI), Europe and the United States will unavoidably have to deal with the sharp edges of Chinese power too. In all these efforts, the transatlantic agenda is only one component of a wider framework of cooperation that also involves their major partners in the Indo-Pacific. From the Quad to the TTC, one of the key goals for this year will be for these allies to stitch their efforts together with a view to driving outcomes rather than creating even more complex consultation structures.
There are also long-running goals for the United States and Europe that transcend administrations. There were striking shifts between the Obama, Trump, and Biden administrations but there has been more underlying consistency in what both sides need from each other in dealing with the China challenge than in many other policy fields. Considerable long-term planning is possible regardless of the potential political oscillations in the years ahead.