By Rachel Thrasher, and Blake Alexander Simmons, and Kyla Tienhaara
Fossil fuel companies have access to an obscure legal tool that could jeopardize world-wide 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 risks.
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 /zigman2/quotes/203758221/delayed CA:TRP -0.15% , a Canadian company, is currently seeking more than $15 billion over U.S. President Joe Biden’s cancellation of the Keystone XL Pipeline.
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 world-wide 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 forward.
Massive potential payouts
Of the world’s 55,206 upstream oil and gas projects that are in the early stages of development, we identified 10,506 projects—19% of the total—that were protected by 334 treaties providing access to ISDS.
That number could be much higher. We could only identify the headquarters of project owners, not the overall corporate structures of the investments, due to limited data. We also know that law firms are advising clients in the industry to structure investments to ensure access to ISDS, through processes such as using subsidiaries in countries with treaty protections.
Depending upon future oil and gas prices, we found that the total net present value of those projects is expected to reach $60 billion to $234 billion. If countries cancel these protected projects, foreign investors could sue for financial compensation in line with these valuations.
Doing so would put several low- and middle-income countries at severe risk. Mozambique, Guyana and Venezuela could each face over $20 billion in potential losses from ISDS claims.
If countries also cancel oil and gas projects that are further along in development but are not yet producing, they face more risk. We found that 12% of those projects world-wide are protected by investment treaties, and their investors could sue for $32 billion to $106 billion.
Canceling approved projects could prove exceptionally risky for countries like Kazakhstan, which could lose $6 billion to $18 billion, and Indonesia, with $3 billion to $4 billion at risk.
Canceling coal investments or fossil-fuel infrastructure projects, like pipelines and liquefied natural gas terminals, could lead to even more claims.
Countries already feel regulatory chill
There have been at least 231 ISDS cases involving fossil fuels so far. Just the threat of massive payouts to investors could cause many countries to delay climate mitigation policies, causing a so-called “regulatory chill.”