IIED | 5 October 2020
Key international legal measures risk making the cost of green energy shift skyrocket
A complex set of international legal measures protecting the fossil fuel industry risks significantly increasing the cost of moving to green energy and tackling climate change, a new report released today reveals.
’Raising the cost of climate action? Investor-state dispute settlement and compensation for stranded fossil fuel assets’ by IIED is released as the United Nations Commission on International Trade Law’s working group on investor-state dispute settlement reform meets (5-9 October).
The study is the first to quantify the proportion and value of the fossil fuel industry and associated infrastructure that is protected by international treaties that include provisions for investor-state dispute settlement (ISDS).
ISDS could require governments – effectively the taxpayers – to pay large amounts of compensation to fossil fuel companies. The cost could be substantial. Previous research shows that the value of potential stranded assets in the power sector alone is nearly US$2 trillion, and those for oil and gas reserves are valued at $3-7 trillion.
More than 2,600 bilateral investment treaties and preferential trade agreements protect foreign investors’ assets under these obscure but powerful legal measures. ISDS enables foreign investors, including shareholders, to sue states over conduct they believe breaches international investment protection rules.
This could include key action to cut emissions, such as the early retirement of coal-fired power stations and oil refineries, not exploiting coal, oil and gas reserves, as well as scrapping pipelines and other fossil fuel transport infrastructure. These are measures that governments need to take to fulfil their climate commitments under the Paris Agreement.
To date, huge pay-outs have been made based on ISDS tribunals’ estimation of what an investor could have earned over an installation’s lifetime. These projections often do not take into account the volatility of fossil fuel prices as renewables have become more competitive and as other factors have impacted the market.
‘Raising the cost of climate action?’ includes a focus on coal-fired power stations. ISDS protects most of the 257 foreign-owned coal plants around the world, which need to be retired early in order to put the planet on track to keep temperature rise below 1.5°C above pre-industrial levels. One example is Indonesia, where the estimated value of 12 coal-fired power stations protected by ISDS could be up to $7.9 billion. The cost of ISDS compensation could be even greater.
IIED director Andrew Norton said: “Ending dependence on fossil fuels is crucial to being able to tackle climate change, and our research shows that rethinking investor-state dispute settlement is a key part of making that possible. It is vital that people are not made to bear the costs of compensating fossil fuel companies and that the state instead invests in clean, green alternatives.”
The report urges a range of measures to address ISDS, including terminating old treaties, developing innovative drafting approaches for any new treaties, and radically modernising the Energy Charter Treaty, which plays a significant role in protecting foreign-owned coal power plant assets.
For more information or to arrange an interview, please contact Beth Herzfeld, IIED head of media, on +44 (0)7557 658 482 or email email@example.com.
Notes to editors
- See ‘Raising the cost of climate action? Investor-state dispute settlement and compensation for stranded fossil fuel assets’ by Kyla Tienhaara, Canada research chair in economy and environment at Queen’s University, and Lorenzo Cotula, principal researcher on law and sustainable development at IIED.
- The United Nations Commission on International Trade Law’s working group on investor-state dispute settlement (ISDS) reform is meeting in Vienna, Austria from 5-9 October. The working group was set up to review possible reforms to ISDS, particularly at procedures for settling disputes between investors and states.
- The Energy Charter Treaty plays a particularly significant role in protecting foreign-owned coal power plant assets. It is a multilateral treaty ratified by many states in Europe and Asia and protects 47 power plants exposed to stranded asset risk.