Investor-State Dispute Settlement: Obstructing a just energy transition

Summary of key findings the authors will present during the seminar

The International Energy Agency’s Net Zero Emissions (NZE) by 2050 report indicates that a 1.5°C-aligned energy transition requires no new oil and gas projects after 2021. Governments have already awarded leases for many of the oil and gas deposits that must remain in the ground according to this roadmap. There is also a strong case for a more aggressive transition than outlined in the NZE, as it relies on the successful deployment of unproven technologies, meaning many projects currently under development should also be halted.

Governments that revoke licenses/permits or take other measures to restrict further development of fossil fuels will face demands from investors for compensation. When investors are foreign, they may take these demands to international arbitration in a process known as investor-state dispute settlement (ISDS). Using a novel dataset of ISDS-protected assets in the upstream oil and gas sector, we quantify the legal and financial risk that countries face if they follow the NZE or act more aggressively to limit fossil fuel supply.

We demonstrate that providing investors access to ISDS is likely to obstruct a just and orderly energy transition. First, it raises the public cost of the transition; ISDS tribunals may award ‘lost future profits’ (of hundreds of millions or even billions of dollars) to companies, even if they have not commenced production. This reality also inevitably influences negotiations on compensation between governments and investors. As such, public funds that should be spent on ensuring a just transition for impacted workers and communities may instead end up being spent on payments to company executives and shareholders. Second, the threat of ISDS could delay the transition, particularly in countries in the Global South with less capacity to defend policies in arbitration (‘regulatory chill’).

We conclude that the best way for governments to avoid liability is to: 1) immediately cease providing any further licenses or permits for oil and gas projects; and 2) take steps to prevent existing leaseholders from having access to ISDS (modification/termination of investment treaties).