"Fossil fuel companies have access to an obscure legal tool that could
jeopardize worldwide efforts to protect the climate, and they’re starting to
use it. The result could cost countries that press ahead with those efforts
billions of dollars.
Over the past 50 years, countries have signed thousands of treaties that
protect foreign investors from government actions. These treaties are like
contracts between national governments, meant to entice investors to bring in
projects with the promise of local jobs and access to new technologies.
But now, as countries try to phase out fossil fuels to slow climate change,
these agreements could leave the public facing overwhelming legal and financial
The treaties allow investors to sue governments for compensation in a process
called investor-state dispute settlement, or ISDS. In short, investors could
use ISDS clauses to demand compensation in response to government actions to
limit fossil fuels, such as canceling pipelines and denying drilling permits.
For example, TC Energy, a Canadian company, is currently seeking more than
US$15 billion over U.S. President Joe Biden’s cancellation of the Keystone XL
In a study published May 5, 2022, in the journal Science
, we estimate that
countries would face up to $340 billion in legal and financial risks for
canceling fossil fuel projects that are subject to treaties with ISDS clauses.
That’s more than countries worldwide put into climate adaptation and mitigation
measures combined in fiscal year 2019, and it doesn’t include the risks of
phasing out coal investments or canceling fossil fuel infrastructure projects,
like pipelines and liquefied natural gas terminals. It means that money
countries might otherwise spend to build a low-carbon future could instead go
to the very industries that have knowingly been fueling climate change,
severely jeopardizing countries’ capacity to propel the green energy transition
*** Xanni ***
Chief Scientist, Xanadu
Partner, Glass Wings
Manager, Serious Cybernetics