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Fossil fuel companies sue governments over climate action

In response to attempts to limit further extraction, foreign oil and gas companies continue to file lawsuits against governments.

According to a report by the UK-based social justice organisation Global Justice Now, five major fossil fuel companies, including Rockhopper, TC Energy and Uniper, have filed lawsuits worth over 15 billion EUR in Europe and the United States.

An increasingly visible climate emergency and calls on governments to take action have led some countries to pass legislation to enable a clean energy transition – a critical step in solving the climate crisis.

Doing so, however, has reportedly led coal, oil and gas companies to incur damages and lose out on potential profits, according to the companies in question.

These lawsuits have followed bans on offshore drilling, plans to phase out coal, the cancellation of the XL oil pipeline project and requirements to report on the environmental impacts of extraction and production.

In 2014, the UK company, Rockhopper Exploration, bought a license to drill for oil off Italy’s coast, only to be faced with a ban on coastal oil and gas projects two years later. Rockhopper has since filed suit against Italy, claiming damages of over 250 million EUR – the expected future profits from the oilfield.

Ascent Resources, an American oil and gas company, is suing Slovenia because the country’s environment agency requested an environmental assessment of a fracking project which opponents claimed could pollute critical water sources.

Similar cases have sprung up across Asia, Europe, North America and South America, sparking global outrage and leaving many to question what gives companies the right to challenge a government over a regulation that is in the public interest.

Investor-State Dispute Settlement

Threatened by decolonisation, in the 1950s, Shell and other oil companies looked for ways to maintain control over the Global South’s natural resources.

Spearheaded by a director and chief counsel of Royal Dutch Shell, this gave rise to the legal regime known as Investor-State Dispute Settlement, or ISDS. ISDS allows countries to be sued outside of their court system by foreign investors for state actions affecting foreign direct investment.

Fellow foreign investors soon joined to form the International Association for the Promotion and Protection of Private Foreign Investments. Members of its directing committee included executives from Rio Tinto, Standard Oil of New Jersey (now ExxonMobil), and Compagnie Française des Pétroles (now Total).

Signed by 53 countries, the Energy Charter Treaty (ECT) establishes a framework for international cooperation in the energy industry. The ECT includes ISDS meaning energy companies can sue any of the signatories if they take action that could hinder said companies’ future earnings.

Unfortunately, these actions are often necessary to address climate change and avoid ecological harm.

What ISDS means for the climate

ISDS and the resulting billions in lawsuits have influenced climate-related decision-making in several countries as governments fear the possibility of being sued.

Senior advisor to the campaign group Trade Justice Movement, Ruth Bergan, tells The Guardian, “People are watching these cases and there is evidence that they look at what is happening elsewhere and it puts the brakes on their own policies. It also just adds a huge price tag to climate action and we can’t afford it.”

Following COP26 in late 2021, the climate ministers of Denmark and New Zealand admitted that the threat of said lawsuits had thwarted their governments’ climate policy ambitions, according to Capital Monitor.

In the last few years, criticism of ISDS has increased with the urgency of addressing climate change.

Countries such as France and Spain have advocated for a coordinated withdrawal from the ECT, but as it stands, doing so would not protect governments from suits related to past investments. The ECT’s “sunset clause” means former members are still subject to the treaty 20 years after leaving.

Others have called for the modernisation of the ECT to make the treaty in line with the Paris Agreement. The EU has developed a proposal for such that would exclude all future fossil fuel investments from investment protection and oblige signatories to cooperate on climate mitigation and adaptation.

The phase-out of the ISDS is imperative to the clean energy transition.

Allowing governments to be exposed to such lawsuits further perpetuates climate delay, a no longer affordable reality in the time of rapid climate change. Just as it is critical to move away from fossil fuels, it is essential to examine the legal frameworks that have enabled the industry’s dominance and work to reassess and dismantle them in parallel to the transition.