Investor-State Dispute Settlements Over Pipeline Project


Oil and gas investors are increasingly able to challenge nations over their climate policies because to investor-state dispute settlements, as reported by Grist.

Debate over pipeline project

For over a decade, the debate has raged over the Keystone XL pipeline project, which aimed to transport Canadian tar sands to the Gulf of Mexico.

After approving the project’s initial stages, the Obama administration rejected a permit allowing the pipeline to cross the national border in 2015.

However, the energy company backing the project didn’t take no for an answer: TransCanada soon sued the U.S. for $15 billion dollars — the future expected profits it claimed the pipeline would have earned, in addition to the $3.1 billion it had already invested in the project.

The company was able to do so because the North American Free Trade Agreement, the treaty known as NAFTA that the U.S. signed with Canada and Mexico in 1994, included a clause about something called an investor-state dispute settlement, or ISDS — a closed-door legal process that’s an often overlooked, but increasingly urgent, hurdle to addressing climate change.

ISDS mechanisms are included in many other bilateral and international trade agreements, allowing a country to be sued by investors from other member countries if it takes any subsequent actions that adversely affect those investments.

Double hatting

The threat of this liability has hung over the pipeline conflict ever since: When President Trump signed an executive order in 2017 reversing course and allowing Keystone XL to move forward, TransCanada announced that it would suspend its ISDS case against the U.S. for 30 days — exactly the deadline for the decision on their new permit application.

In March of that year, the new permit was approved, and TransCanada dropped its ISDS claim.

Corporations’ ability to threaten this kind of financial liability is creating growing problems for countries looking to tackle climate change and restrict fossil fuel extraction, says Kyla Tienhaara, the Canada Research Chair in Economy and Environment at Queen’s University in Ontario.

It’s far from the only recent example: Take Italy, which banned oil drilling within 12 nautical miles of its coast only to be sued by the UK-based oil company Rockhopper, which had hoped to develop a near-shore oilfield at Ombrina Mare, off the coast of Abruzzo.

These settlements are decided in a private legal process.

These people tend to be repeatedly selected from a small group of experts in corporate law, and at times they act as lawyers for an investor in one case and arbitrators deciding the case in another, though the cases may be similar or even simultaneous — a practice known as “double hatting.”

Reducing GHG

Because ISDS systems are written into thousands of different treaties, each with different wording, there’s also no system of precedence.

Just because arbitrators decide something in one case doesn’t mean that logic has to be applied to another.

Tieenhaara argues that the spectre of being sued for making decisions that inhibit the profits of companies and investors has a chilling effect on countries’ efforts to reduce greenhouse gas emissions.

Recently, however, there have been some exorbitant outliers, like a 2019 case in which Pakistan was ordered to pay $5.9 billion to the Australian Tethyan Copper Company for lost future profits after the country denied its lease. (The company had only invested about $150 million in the project to date.)

Financial obligation or risk

The annual United Nations conference COP27 concluded in November with a broad agreement that wealthy, developed countries have a financial obligation to support poorer countries that have contributed relatively little to causing climate change as they adapt to its consequences.

Yet those latter countries also bear the majority of the financial risk stemming from potential ISDS claims.

Tienhaara recently worked on an analysis, published in the peer-reviewed journal Climate Policy in December, which found that the developing world faces enormous liabilities if it cancels potential fossil fuel projects.

Mozambique, for instance, which has substantial offshore gas reserves, currently has an ISDS risk of $29 billion — nearly twice its annual national income.

“Are we really expecting Mozambique to take action against TotalEnergies or ExxonMobil, who have all the political and economic power?”

Old policies

There are at least 2,500 investment treaties globally, many written with decades-old policy priorities in mind.

Tienhaara believes that states should go further by taking steps to terminate existing treaties and developing binding rules to limit the amount of compensation that can be awarded to investors.

The Energy Charter Treaty, or ECT, which has been ratified by over 50 primarily European countries, is the international agreement that’s the largest hurdle to enacting policies to combat climate change.

Signed in 1993, it explicitly aims to protect the energy investments of its members.

Historically, many investor-state disputes resulted in rulings favouring companies based in rich countries.

Breaking point

This year, many appeared to reach a breaking point.

Poland announced this fall that it would withdraw from the ECT; Spain, France, Germany, the Netherlands, and Slovenia followed.

Instead, the European Parliament called for a coordinated European Union departure from the treaty altogether.

The United States is facing just such an issue currently: Though NAFTA expired in 2020, it included a sunset clause allowing investors to file disputes for three additional years.

Ultimately, Tienhaara argues that investor certainty should not be prioritized above climate action.


Did you subscribe to our newsletter?

It’s free! Click here to subscribe!

Source: Grist