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IPCC points out the incompatibility between protecting fossil investments and decarbonisation

Mathilde Dupré, 5 April 2022

[English] [français]

In the report of the third working group, published on 4 April on climate change mitigation, the IPCC addresses for the first time the issue of investment protection provisions and their incompatibility with the implementation of States’ commitments under the Paris Climate Agreement.

In the Summary for Policymakers, the IPCC highlights :

"Trade rules have the potential to stimulate international adoption of mitigation technologies and policies, but may also limit countries’ ability to adopt trade-related climate policies."

And in chapters 14 and 15 of the full report, it provides a quite detailed analysis:

"Investment agreements, which are often integrated in FTAs, seek to encourage the flow of foreign investment through investment protection. While international investment agreements hold potential to increase low-carbon investment in host countries (PAGE 2018), these agreements have tended to protect investor rights, constraining the latitude of host countries in adopting environmental policies (Miles 1 2019). Moreover, international investment agreements may lead to ‘regulatory chill’, which may lead to countries refraining from or delaying the adoption of mitigation policies, such as phasing out fossil fuels (Tienhaara 2018)". (page 2433)

"A large number of bilateral and multilateral agreements, including the 1994 Energy Charter Treaty, include provisions for using a system of investor-state dispute settlement (ISDS) designed to protect the interests of investors in energy projects from national policies that could lead their assets to be stranded. Numerous scholars have pointed to ISDS being able to be used by fossil-fuel companies to block national legislation aimed at phasing out the use of their assets (Bos and Gupta 2019; Tienhaara 2018)". (page 2442)

"Recent phase-out deals [of polluting technologies] tend to aim for a (partial or full) compensation rather than no relief for losses. In contrast to the line of argument in the tobacco industry, the backward looking approach and a resulting obligation of compensation by investors in polluting assets can be observed rarely with the forward looking approach of compensations by future winners for current losers dominating – despite the high level of awareness about carbon externalities and resulting climate change impacts among polluters for many years (van der Ploeg and Rezai 2020). In particular, transactions in the energy sector show a high level of investor protection also against much needed climate action which is also well illustrated by share of claims settled in favour of foreign investors under the Energy Charter Treaty and investor-state dispute settlement (Bos and Gupta 2019)". (p 2582)

The protection of fossil fuel investments under investment protection agreements appears to be in direct contradiction with the need to move away from coal, oil and gas. This is evidenced by the private court cases brought by the German energy companies Uniper and RWE against the Netherlands under the Energy Charter Treaty (ECT) in response to the coal phase-out law.

The ECT is being singled out as the most contentious investor-state treaty to date and specifically covers investment in the energy sector. It had already been the subject of a call launched by over 500 scientists and climate leaders in December 2020.

A few weeks before the announced date for the end of the negotiations, in June 2022, the contracting parties to the Energy Charter Treaty must hear this strong message from the IPCC experts.
While the EU’s stated objectives in these negotiations remain out of reach, the best way to end the protection of fossil investments is to exit the treaty as soon as possible and in a coordinated manner with all states that share the same concerns.

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