The Climate Emergency Demands a New Approach to Investor-State Disputes

In early 2021, the German energy company RWE launched a $1.4 billion compensation claim against the Netherlands—over a decision to phase out the use of coal to generate electricity by 2030. The Dutch government was responding to a court ruling that the country was not taking enough steps to protect its citizens against climate change.

But RWE says it has not been offered sufficient compensation for the costs of converting a coal-fired power plant it opened just six years ago. Uniper, another Germany company, is seeking €1 billion in a related dispute over another coal power plant.
 
The RWE case is ultimately a dispute over who pays the costs of climate change mitigation. It highlights the broader threat to climate transition efforts posed by the Energy Charter Treaty, a little-known but very powerful international agreement designed to protect foreign energy investments, including investments in fossil fuels.

The most dangerous aspect of the charter is the grievance mechanism: Investor-State Dispute Settlement. It enables a corporation to sue a country for decisions that may negatively impact their profits. Companies are even applying it to challenge progressive national climate policies, such as phasing out coal (Netherlands), banning off-shore oil drilling projects (Italy), or laws that put an end to fossil fuel extraction (France).

The Investor-State Dispute Settlement is a parallel system that can be used to bypass domestic courts, and national and EU law. Indeed, the Energy Charter is the treaty most invoked for investor-state arbitration, including the RWE case.

The Energy Charter Treaty is now the target of a campaign organized by a broad coalition of activist groups, including the Transnational Institute and Corporate Europe Observatory, both partly funded by the Open Society Foundations. Over a million people have signed a petition calling on the EU and its member states to withdraw from the treaty altogether, highlighting that “it allows coal, oil, and gas corporations to obstruct the transition to a clean energy future.”

Similar provisions are found in thousands of trade and investment agreements between an investor’s home country and the countries that host their operations.

Critics have long argued against the Investor-State Dispute Settlement system in global trade deals, arguing that the structure inherently favors foreign companies because they are the only stakeholders that can use it to initiate claims.

More profoundly, it can hinder countries’ ability, for example, to advance policies to protect people and the planet, including labor rights, Indigenous rights, or environmental protections that follow through on their climate pledges. In one recent example, Peru lifted highway tolls in response to the COVID-19 pandemic, which led to threats of Investor-State Dispute Settlement litigation by the foreign operators—despite the pressing and urgent threat to public wellbeing.

The status of the Energy Charter under EU law (and, in consequence, the RWE case) remains unclear. Recently, the advocate general of the Court of Justice of the European Union questioned the legality of the Energy Charter Treaty in a case before the court, saying “ISDS in intra-EU disputes is indeed not allowed under EU law”. This opinion highlights the manner in which ISDS is exploited by Western companies to challenge developing countries, but prohibits it within their own region.

The climate crisis is bringing Investor-State Dispute Settlement mechanisms back in the public eye in Europe—especially since negotiations are underway to “modernize” the Energy Charter Treaty. Unfortunately, this includes an effort to expand its membership to energy producers in Latin America, Africa, and Asia. Members of the Energy Charter Treaty need to recognize that the world has changed. The pressures of the climate crisis demand that governments make bold decisions about their energy policies, including to meet their emission commitments under international agreements.

It is long overdue that we rethink the goals of trade and investment agreements. Investor-State Dispute Settlement provisions do not protect public interest, nor do they promote equitable trade and investment. It is time for a new approach.