Should Companies Get Paid When Governments Phase Out Fossil Fuels? They Already Are
A common clause in free trade agreements is allowing fossil fuel companies to secure large payouts from governments phasing out oil and gas projects. Recently, the U.S. narrowly avoided a $15 billion claim from TC Energy over the canceled Keystone XL pipeline.
On his first day in office, President Biden revoked the permit for the Keystone XL pipeline as part of his climate policy, risking a significant payout to TC Energy. This risk arose from an international legal system embedded in thousands of trade and investment treaties, which allows corporations to demand compensation from governments implementing new environmental regulations. This system, known as investor-state dispute settlement (ISDS), has led to billions in damages paid to oil and mining companies and is now seen by critics as a hindrance to climate action.
In a recent case, TC Energy's $15 billion claim against the U.S. was dismissed on a technicality related to the North American Free Trade Agreement (NAFTA). However, other countries like Australia, Canada, Colombia, and Slovenia face similar claims totaling tens of billions of dollars due to their efforts to phase out fossil fuels or deny permits for environmentally harmful projects.
The ISDS system is particularly challenging for governments because it can award compensation not only for actual losses but also for anticipated future profits. This has led to massive financial liabilities and has created what many see as an unfair obstacle to necessary climate actions.
Former Trump administration officials and the American Chemistry Council have sought to limit ISDS provisions in U.S. trade agreements, arguing they undermine national sovereignty and promote overseas investment by American companies. Yet, the system remains in many existing treaties, presenting ongoing challenges for governments seeking to transition away from fossil fuels.
For developing countries, the financial burden of ISDS claims can be particularly devastating, often outstripping their contributions to international climate funds. These nations face mounting debts and increased risks as they grapple with the impacts of climate change.
Despite its original intention to protect foreign investors from unfair treatment, ISDS is increasingly seen as a mechanism that fossil fuel companies can exploit to secure compensation, regardless of their environmental impact. This has led to calls for reform or abolition of the ISDS system, particularly as it poses a significant barrier to global climate efforts.
Critics argue that the current system not only undermines climate policies but also disproportionately impacts developing nations, exacerbating their economic challenges while they strive to implement sustainable practices. The debate continues as to whether reforming ISDS could align it more closely with environmental goals, or if a complete overhaul is necessary to support the global transition away from fossil fuels.