Investment treaties, particularly those with investor-state dispute settlement (ISDS) provisions, are increasingly being seen as significant barriers to the global transition to lower-carbon energy sources, says a recent report by the climate think tank E3G.
These treaties protect investments in fossil fuels such as oil and gas by allowing companies to sue governments in international tribunals if policy changes threaten their profits, the report says. This legal shield has led to delays in phasing out fossil fuels, increased costs for climate action, and continued fossil fuel investments, which undercut global efforts to reduce greenhouse gas emissions.
The report highlights that these treaties protect fossil fuel assets capable of emitting two gigatonnes of carbon dioxide annually, with G7 countries responsible for shielding 50 per cent of these emissions. The report says this protection is misaligned with the G7’s climate commitments, such as phasing out coal.
The report argues that developing countries are particularly vulnerable to ISDS claims, which can severely constrain their financial capacity to implement ambitious environmental policies. The threat of high-value ISDS compensation claims often delays essential climate policies, trapping these nations in high-carbon pathways and increasing the overall costs of their energy transition. With most ISDS-protected fossil fuel assets owned by companies based in high-income countries, the report also highlights the unequal distribution of protection and risk across the globe.
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Criticising the misalignment of ISDS protection with international climate initiatives like the Beyond Oil and Gas Alliance and the Clean Energy Transition Partnership, the report calls for urgent reforms when it comes to investment treaties. E3G’s recommendations include terminating or renegotiating agreements to exclude fossil fuel protections, adopting cross-country pacts among like-minded nations to collectively address the issue, and integrating treaty reform into global climate discussions, particularly at forums like the G7, G20, and the United Nations Framework Convention on Climate Change (UNFCCC).
Circling back to countries that lead the way when it comes to global climate initiatives, the report says:
We recommend that countries that have been spearheading climate action bring the investment treaty reform agenda to multilateral climate discussions. By doing so, they can build political support to reform the investment treaty regime in line with climate goals and initiate discussions on plurilateral action among like-minded countries. Countries like the United Kingdom and France can use the upcoming COP29, which will focus on climate finance, as an opportunity to start this process, and Canada can use its G7 Presidency in 2025 to shape the agenda.
“Investment Treaties Are Undermining the Global Energy Transition,” by Eunjung Lee & Jordan Dilworth, E3G, July 31, 2024.
Read the full report originally published by E3G on July 31, 2024.
