Oil and gas investors are using a little-known legal tool to successfully argue that climate policies are cutting into their profits.

By Rishika Pardikar, The Lever

Fossil fuel investors are adopting a bold new legal tactic in response to efforts to limit global warming: They are going to private international tribunals to argue that climate change policies are illegally cutting into their profits, and they must therefore be compensated. Now governments are scrambling to figure out how to not get sued for billions when enacting climate policies.

oil rigs and fire

Termed “investor-state dispute settlement” legal actions,  such moves could have a chilling effect on countries’ ability to take climate action. Consider this case from 2017: Nicolas Hulot, France’s environment minister at the time, drafted a law that sought to end fossil fuel extraction in the country by 2040. In response, Vermilion, a Canadian oil and gas company, threatened to use such a settlement provision to sue the French government. In the end, the French law was watered down to allow new oil and gas exploration even after 2040.

When these legal actions move forward, the results tend to benefit oil and gas interests. A recent report on investor-state dispute settlement (ISDS) actions found that when such cases were decided on by their merits, fossil fuel investors emerged victorious 72 percent of  the time — earning, on average, $600 million in compensation.

According to a paper published in Science last month, more ISDS claims could soon be coming. That is because of the Energy Charter Treaty (ECT), a 30-year-old international energy agreement that has been ratified by 50 countries, mostly in Europe. The treaty calls for “fair and equitable treatment” of investors and “payment of prompt, adequate and effective compensation” in case governments take over their assets — clauses that fossil fuel investors could use to threaten ISDS legal action against new climate regulations.

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