International treaties threaten affordability of climate action: new report

A new IIED report shows how key international legal measures could risk an increase in the cost of shifting to green energy and tackling climate change.

News, 04 October 2020
A cooling tower of a power station is framed against the sky

A cooling tower at the Niederaussem coal power station, Germany. ISDS protects most of the world’s 257 foreign-owned coal plants, which must be retired early in order to put the planet on track to keep temperature rise below 1.5°C Photo: Craebby Crabbson via Flickr, CC BY-NC 2.0)

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 IIED report has revealed.

The ‘Raising the cost of climate action? Investor-state dispute settlement and compensation for stranded fossil fuel assets’ 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 country’s taxpayers – to pay large compensation sums to fossil fuel companies. 

And with previous research having shown that the value of potential stranded assets in the power sector alone is nearly US$2 trillion, and valued at $3-7 trillion for oil and gas reserves, the cost could be substantial. 

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.”

Obscure but powerful

There are more than 2,600 bilateral investment treaties and preferential trade agreements that protect foreign investors’ assets. 

And while these treaties may be obscure, they are powerful; ISDS enables foreign investors, including shareholders, to sue states over conduct they believe breaches international investment protection rules, such as vital action to cut emissions.

Examples could include the early retirement of coal-fired power stations and oil refineries, not exploiting coal, oil and gas reserves, and scrapping pipelines and other fossil fuel transport infrastructure. 

These are the measures that governments need to take to fulfil the climate commitments they have signed up to under the Paris Agreement.

The report was released to coincide with the latest meeting by the United Nations Commission on International Trade Law’s working group on investor-state dispute settlement (ISDS) reform, taking place from 5-9 October. The working group was set up to review possible reforms to ISDS, particularly procedures for settling disputes between investors and states.

And in the study, authors Kyla Tienhaara, Canada research chair in economy and environment at Queen’s University, and IIED’s Lorenzo Cotula, urge a range of measures to address ISDS.

These include 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.

Coal-fired power station focus

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. However, these projections often do not consider 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 world’s 257 foreign-owned coal plants, which must be retired early in order to put the planet on track to keep temperature rise below 1.5°C above pre-industrial levels. 

In Indonesia, one example highlighted by the report, 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.