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IISD | 31 December 2021
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.
The report provides a quantitative analysis of the known investment arbitrations related to the fossil fuel industry (fossil fuel arbitrations)—a total of 231 have been identified.These arbitrations have been identified within a dataset compiled by the author consisting of 1,206 investor–state arbitrations across all sectors based on international investment agreements, national investment laws, and investment contracts. The database comprises all the arbitrations initiated up to December 31, 2020, included in either the International Centre for Settlement of Investment Disputes (ICSID) or the United Nations Conference on Trade and Development (UNCTAD) databases.
The main findings are as follows:
• The fossil fuel industry is the most litigious industry in the ISDS system by number of cases, accounting for almost 20% of the total known ISDS cases across all sectors. In comparison, the second most litigious sector, the mining industry, is accountable for 11% of known ISDS cases across all sectors.The vast majority of fossil fuel arbitrations are related to the oil and gas industry (92%). Further, almost half of all fossil fuel cases are related to upstream investments, which comprise all operations from the exploration of new fossil fuel reserves to their extraction.
• There is a widespread lack of transparency. In all, 54% of the concluded fossil fuel cases are confidential—while their existence is known, no case-related documents, such as awards or decisions, have been made public. Almost one-third of fossil fuel arbitrations have been settled before the tribunal reached a final award, and nearly all of these cases are confidential.The implications of these settlements for public policy and states’ regulatory and fiscal space are therefore unknown.
• Over 30% of the publicly available decisions awarded in fossil fuel arbitrations present environmental components, and there has been a recent (but growing) wave of arbitrations initiated to counteract specific climate measures, such as the phasing out of fossil fuels.
• The majority of known fossil fuel cases are decided in favour of investors.This is particularly visible at the merits stage, where investors succeeded in 76% of all cases. Moreover, the average amount awarded in fossil fuel cases—over USD 600 million—is almost five times the amount awarded in non-fossil fuel cases.
• Investors in the fossil fuel industry base their claims on contracts more frequentlythan on international investment agreements or domestic investment laws. Further, contract-based arbitrations constitute almost 65% of the fossil fuel arbitrations brought against low-income countries. Accordingly, attention should be paid to investment contracts in addition to international investment agreements (IIAs).Where investors do bring claims based on international agreements, they most frequently do so on the basis of the Energy Charter Treaty (ECT)—with 17% of all fossil fuel cases, the ECT is the single most employed IIA. Moreover, fossil fuel investors have recourse to increasingly complex legal strategies and tend to initiate multiple arbitrations over the same case scenarios.
• Lower middle- and upper-middle-income countries receive the highest numberof claims related to fossil fuel investments, while 92% of investors/claimants are from high-income countries (American investors initiated almost 30% of fossil fuel arbitrations).
The prevalence of fossil fuel cases in the ISDS system is particularly concerning in the context of climate change, where phasing out fossil fuels is imperative to stay within the Paris Agreement’s objectives (Allen et al., 2009; Lazarus & Van Asselt, 2018; Muttitt et al., 2016). Article 2.C. of the Paris Agreement states the objective of “Making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.” Further, there is scientific consensus that to limit global warming to 1.5°C, the majority of all estimated reserves of coal, oil, and gas must not be extracted (Ripple et al., 2019;Welsby et al., 2021).
Moreover, the fossil fuel sector is already using ISDS to challenge state decisions aimed at implementing climate policies.With the adverse impacts of climate change becoming increasingly frequent and intense, states are set to pursue ever-more ambitious and determined climate policies. Based on the findings of this report, we can expect an increase in the use of ISDS by fossil fuel investors to challenge these urgently needed government actions.
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