This is a transcript of The Conversation Weekly podcast episode: Secretive lawsuits by fossil fuel companies could hold back climate action, published on October 6, 2022.
NOTE: Transcripts may contain errors. Please check the corresponding audio before quoting in print.
Gemma: Hello, I’m Gemma Ware in London.
Dan: And I’m Dan Merino in San Francisco. Welcome to The Conversation Weekly.
Gemma: Dan, this week we’re gonna hear a story about a secretive international legal system that protects fossil fuel companies and could jeopardise global efforts to save the climate.
Dan: Well, I hate the sound of this. Where are we starting this story, Gemma?
Gemma: Well, we’re gonna start in a very idyllic part of the world on the East coast of Italy in a region called Abruzzo.
Maria D'Orsogna: It’s very, you know, beautiful. It’s unspoiled in many ways. It’s very raw.
Gemma: This is Maria D’Orsogna. A physicist by training, today Maria is a professor of mathematics at California State University at Northridge in the US, but her heart lies thousands of miles away, in Abruzzo.
Maria: My parents were from there. They immigrated to New York where I was born and raised, but then they went back to live there. So I lived there with them when I was a teenager and a young adult for a good ten years of my young life.
Gemma: Maria moved to the US for college and then graduated school, but she kept travelling back and forth to Italy to see her family in France.
Maria: I have a lot of memories. I love that place. So, it’s very near and dear to my heart.
Gemma: What do you love about it? Tell me what it’s like.
Maria: The lifestyle, the rituals, everything. You know, it’s almost like life is the way it used to be, like you know, 50 years ago in many ways. There’s a lot of rituals connected to agriculture. This time of the year we’re supposed to do stuff in the fields. We’re supposed to take care of the harvesting, make olive oil. So I have relatives that make wine, that make olive oil. So I’m part of all these things when I go back and it’s very different from my life in the US.
Gemma: There’s a national park on the Abruzzo coast, and Maria says it has beautiful views out over the Adriatic sea.
Maria: A long time ago, there used to be a railroad that was taken out, and that railroad has now been turned into a bicycle path. So you can actually bike all along the coast of Abruzzo for about 100km. You have all these beautiful sites of the sea that are unobstructed in many ways because the railroad, a long time ago protected it from overdeveloping.
Gemma: One day in 2007, Maria received a phone call from a friend in Abruzzo that would change the course of her life.
Maria: He just said there were these rumours, they wanna drill over here, but it’s not clear. You know, nobody knows much about it.
Gemma: Drill, for oil.
Maria: And he told me “Maria, just don’t worry about this. Don’t you know, don’t overthink it because you live so far away. There’s nothing you can do about it, even if they decided to go ahead with this.” But I couldn’t sleep that night. And I just kept wanting to learn more. So I spent several hours the next day just looking over the internet, whatever I could find. And it was clear that some drilling was going to happen.
Gemma: Maria swung into action. She poured over the documents that the oil companies were sending out to their investors, and she began contacting others in Abruzzo who were concerned about the prospect of oil drilling.
Maria: We started doing these town hall meetings. I would go to Italy often just to talk to people. While I was at home, I would start running a blog and I wrote it every day, it became very popular. I would do these debates with oil people, sometimes. I got the Catholic Church involved. Remember, I had a job. I was doing research, I was giving talks. And for a long time, I essentially led two parallel lives.
Gemma: Initially, Maria was fighting against two onshore projects. One to drill in and the other to refine oil. But pretty soon she also became aware of an offshore project called Ombrina Mare. In 2005, Italy had granted a British-registered company called Mediterranean Oil & Gas, an oil exploration permit for this offshore field. The plan was to erect a drilling platform a few kilometres offshore, accompanied by a large ship that would help to refine the oil.
Maria: They actually did also conduct some tests for the oil back in 2008. They actually did drill, they didn’t have the final permit, but they had permits to drill temporarily. So actually they did erect an oil rig, and this lasted for three or four months while they were doing all this testing.
Gemma: Maria told me that local residents found tar-like deposits on stones to nearby beach during the period the oil right was up. When a regional environmental agency inspected the deposits, it confirmed the substance was a form of heavy hydrocarbon. Where it came from, was never confirmed.
Plans for the onshore project and refinery were eventually abandoned, but Maria and her fellow campaigners continued to protest against the offshore Ombrina Mare project. Then in 2010, the Italian government decided to suspend exploration licenses for all offshore drilling within 12 nautical miles off its coast.
Maria: At the time we had the Louisiana oil spill. Remember that? The Gulf of Mexico, Deep Water Horizon. So that was one thing that kind of made the Italian politicians think.
Gemma: At Ombrina Mare, the oil company didn’t give up. And it set about challenging the government’s ban. Then in 2014, Mediterranean Oil & Gas was bought out by another British company called Rockhopper Exploration. It took on the permit to explore Ombrina Mare.
Maria: And again, they continued this attempt to have the judgements overturned. And actually they were able to have some changes in the law. Let me just say that there was a series of “Yes, you can drill. No, you cannot drill. Maybe you can drill. At some point you’ll be able to drill, but no, you can’t.” It ended in 2016.
Gemma: Pressure had mounted from the anti-oil activists and a couple of large protest rallies had drawn in tens of thousands of people. And so the Italian parliament decided to reintroduce its ban on offshore oil drilling 12 nautical miles off the coast. This meant Ombrina Mare could not go ahead.
Tell me what you felt when you heard the law was gonna be passed back in 2016?
Maria: At that time, I was, quite frankly, I was exhausted because again, not only was I doing all this activism, travelling to Italy a lot, I was under the attack of a lot of people, also, some normal people that were actually really convinced that this was gonna save all of Italy’s need for energy.
Gemma: Once she got over the exhaustion, over time, Maria was able to look back at what she and her fellow activists had achieved.
Maria: As the emotions cooled off. It turned also into pride for all that we have done and all that we had endured that we didn’t give up, that we resisted for so long. I didn’t know I had this in me.
Dan: Hooray, I say questioningly because I imagine Gemma, that though this sounds like a victory for Abruzzo and anyone on the Italian coastline, you’re gonna tell me I’m wrong, right?
Gemma: Yeah, unfortunately, this was a really great victory from Maria and all her colleagues, but it really is only the beginning of this story. I’ve been finding out all about what happened next for this episode because remember that oil company, Rockhopper, the one that bought the exploration rights for the Ombrina Mare field? Well, in 2017, it decided to take legal action against the Italian government, arguing that it had lost millions of Euros in potential earnings from that offshore drilling.
Dan: They wanted compensation …
Gemma: They did, they wanted money. They didn’t start doing this in an Italian court. They went through arbitration. So essentially a private form of litigation. But Rockhopper used a pretty obscure mechanism to do this, called investor state dispute settlement, or ISDS.
Dan: Sounds like some legal jargon agreementy thing. What’s ISDS?
Gemma: So these kind of arbitrations allow a company to sue a country if that country is signed up to an international investment treaty. Some of these treaties are huge, international, multinational ones … think about what used to be called Nafta. But others are just bilateral treaties between two countries.
Dan: So Gemma, this to me sounds like there’s some baked-in legalese, loophole type thing and these trade agree that is complicated, probably purposefully, to allow companies to sue nations for a tonne of money. Is that basically what’s happening here? And I’m already mad.
Gemma: Yeah, it is, and it is a huge deal and as I’ve been talking to a couple of academics over the past few weeks for this episode, I’ve been finding out just how worried and frankly irate they are about the whole ISDS arbitration system. Apart from lots of concerns about how secretive this whole system is just in the first place, they’re really worried about how it could be used by companies to sue governments who are taking climate actions that harm the bottom lines of fossil fuel investors. And you know the scary thing about this, Dan, is that it’s actually already happening, and somebody who knows a lot about it is Kyla Tienhaara. She’s an assistant professor at Queen’s University in Kingston, Canada.
Kyla: A lot of my research happens to be on investor state dispute settlement or ISDS. And how it in particular, impacts environmental policy and climate policy decisions.
Gemma: So how did you get interested in researching these opaque international treaties and this quite complex and very secretive bit of international law?
Kyla: First of all, I’m not a lawyer. So, it always is a bit funny how I managed to stumble into this. It was quite a long time ago, it was around 2005. I was working on my PhD and I was supposed to be working on forest governance and looking at sort of international cooperation on forests. I was looking at a case study, doing a case study in Indonesia. And came across this news article that was about all these mining companies that were threatening the government with hundreds of millions of dollars in legal claims, if they didn’t backtrack on a new policy that banned open pit mining in certain types of forest that were protected, basically to protect groundwater resources.
I understood nothing about what these legal claims were. I was like, it’s not in the Indonesian courts, so what is this system where this is happening? And I just kind of got hooked and started digging into it and completely abandoned my PhD on forest governance and took up something entirely new and spent some time in Indonesia actually digging into that case a bit more. The sad part is that the government did backtrack and allow the mining companies to proceed.
But then in the course of all that too, I realised that it wasn’t just Indonesia facing these cases. My own country, Canada, had been facing these cases for a couple years over environmental policy and I was really shocked that I had never heard of it. I think that’s the usual reaction whenever people find out about this system is: how have I never heard of this before?
Gemma: Yeah. I felt like that for sure. So tell us a bit about the history of these clauses and these treaties. When do they start getting used and why?
Kyla: So the treaties that allow for ISDS go back to the sort of immediate post-colonial period, and it’s really important that people understand the system really is an extension of colonialism. Although, countries like Italy and Canada are impacted by the system now, it was really intended in the first instance to protect the interests of multinational companies from the global north when then were operating in these newly de-colonised parts of the world. And so, that asymmetry still exists. The vast majority of these treaties are between a developed and a developing country. The investment only flows in one direction, usually. So that means that the risk is all on the developing country side and developed countries are mainly immune unless they get into these bigger regional or multilateral agreements.
Gemma: Between 1959 and 2009, 3,300 international investment agreements were signed, around two-thirds of which are still in place today. In the first few decades these treaties existed, companies didn’t use the ISDS clauses in them to sue countries they were investing in.
Kyla: Then we get into the late 90s and we have the North American Free Trade Agreement, Nafta, which had Canada, the US and Mexico. And we have some creative lawyers who started to realise that these vaguely worded causes in the investment chapter of Nafta could be used to challenge forms of regulation that honestly the government’s never anticipated these types of cases. Canada and the US were very clear that they expected this chapter of the free trade agreement to be used against Mexico. The concern really is what happens if a government completely takes over, nationalises or expropriates an investor’s property,
Gemma: That’s the argument for them, isn’t it? If you’re a company investing in a country that doesn’t have the kind of legal system that you think is gonna protect you, then these clauses are meant to protect you.
Kyla: Exactly, because in the early post-colonial period there was nationalisations occurring and we can all debate whether or not we agree with those and who should have sovereignty over natural resources and so forth, but that was the original argument in that these countries didn’t have well-developed court systems where investors would be able to make claims. But it has just morphed beyond, all recognition really of what the original intention of the treaties was. And that’s due to a lot of creative lawyering and the fact that the system is really stacked against states.
Dan: All right, Gemma, so Nafta, the TPP, all these international trade agreements and treaties, to be honest, I know that they’re a big deal and there’s been a lot of controversy, especially in the States in the last couple elections about whether they’re good, whether they’re bad, and globalisation and American jobs and it’s kind of all a big swirly mess that I will admit I’m not the most informed about. But one thing I didn’t hear anyone talking about ever were these ISDS clauses. Was this part of the reason people have been mad about these treaties in the past?
Gemma: No, it hasn’t really been a major part of the opposition to these treaties, which has been out there for a long time, but there are some ISDS cases that have got a bit more public attention.
Dan: I haven’t heard of any of these. Can you give me an example, Gemma?
Gemma: Yeah. So a pretty notorious case was one that started in 2011 in Australia. So the Australian government decided to introduce new rules about plain packaging for cigarette packets. This meant that companies could no longer have their logos or even any real design at all on the front of a cigarette packet. Now, Australia decided it wanted to do this to make smoking less appealing, but Philip Morris, the cigarette manufacturer, said, hang on a minute, this is gonna impact our sales.
So they used ISDS to sue the Australian government. Now Australia eventually won on a technicality based on the way that Philip Morris actually brought the case. But the whole thing led to a lot of opposition to ISDS clauses in Australia, and actually the newly elected Labor government in Australia has said it won’t agree to future ISDS clauses and actually wants to renegotiate any deals that have got them in there.
Dan: OK, so it sounds like there is a little bit of opposition, and it might be growing to these ISDS clauses and these treaties, but cigarettes and climate change are pretty different topics. What’s the connection here? How do both of these things fall under ISDS?
Gemma: Yeah, it’s a good question. And I guess climate change is kind of the future worry here for people like Kyla. And she told me there’s a particularly concerning clause that often appears in these international investment treaties that’s very concerning when it comes to climate change.
Kyla: The really problematic clause is this one called fair and equitable treatment. I mean it sounds fine, right? Like everybody believes people should be treated fairly, treated equitably. But it’s basically morphed into this idea that investors have legitimate expectations about what they’re going to be able to do when they invest in a country, and changing policy, changing science be damned. They should be able to have things go as they planned. And so that’s being used in cases now around climate where the investors were saying we had a legitimate expectation that our coal plant or our pipeline was gonna be able to have a 30-year life and now you’re saying that it can’t, so you’ve breached our legitimate expectations.
Dan: Gemma, if I can jump in here with a question. Kyla mentioned 30-year expectations. This all sounds like a loss of future earnings, which I’ve always found that to be a weird term. Is that what’s really going on here?
Gemma: Yeah, and this is really crucial because it’s not always just about what a company’s already invested, say in an oil well, it’s about their future earnings, what profits they might make from the oil in the future.
Dan: And that could be way more than the millions they spent building the well. Right?
Gemma: Exactly. And take the case of oil, like the oil price fluctuates massively depending on the global economy. So how much compensation a company gets really depends on the negotiations that happen in that room, in the arbitration panel.
Dan: So it sounds like a lot of squishy back and forth arguing in these back courts. Gemma, I would love to know what that’s like. Are people allowed into these negotiation rooms and these hearings, or is this as shady and dark as I’m imagining it to be?
Gemma: Well, obviously some people are allowed in, but I really wanted to know this too, Dan. I really wanted to know what it’s like, what it feels like inside one of them. So I called up someone who’s been on the inside of a lot of them.
Emilia Onyema: You don’t actually feel like you’re in a courtroom. You feel as though you are in a conference room or a boardroom. And it happens a lot in hotel rooms.
Gemma: This is Emilia Onyema. She’s a professor of international commercial law at SOAS University of London in the UK. She researches international arbitration. She’s also sat on many arbitration panels herself.
Emilia: Just imagine a boardroom with the wide table, and so you have the arbitrator sitting at one end, and usually the claimants will sit on the right, the respondent will sit on the left.
Gemma: The way arbitrations work depend on where they’re happening and who is suing who. For example, it could be a commercial case where a company sues another company, or as we’ve been hearing, it could be a company suing a country.
Emilia: Arbitration is like private litigation, which means, when we come to what the arbitrator does, the arbitrator is like a private judge.
Gemma: Sometimes a case just has one arbitrator acting as a judge, but often there’s a panel made up of three of them. Each side in the dispute gets to choose one, and then they both agree who will be the third, presiding arbitrator. At the end of the hearings, it’s these three people who will rule on the outcome of the case. Often the full details of their decisions are kept secret.
Emilia: It’s a private process and private in the sense that the parties determine who the arbitrator is, they appoint their arbitrator. They pay the arbitrator, so they have more powers over the process than what they’ll have in litigation.
Gemma: Sometimes there will be witnesses too. These could be technical experts on the case, or there could be specialists brought in by both sides to assess the size of any potential damages.
Emilia: The witnesses, if they’re appearing virtually, there’ll be a huge screen through which they would appear. If they’re appearing physically, they will be physically in the room. OK, so just go back to your image of the court and then the witness is sitting there in the middle between the claimant and the respondent, facing the tribunal.
Gemma: And I guess in a courtroom what you’d see is family members or the public might come in or the media, but I’m presuming that’s not the case.
Emilia: That’s not possible in arbitration, because remember we said it’s a private process. So for any third party, third party being anybody that is not the parties in dispute, for anybody else to be in the room, they need the consent of the parties and the tribunal.
Gemma: And do they have to agree not to talk about what they’ve heard?
Emilia: Yes. They have to agree.
Gemma: When I asked Emilia what she thought about this secrecy, she said it depends on the type of arbitration. If it’s a commercial one between two companies, she thinks it’s usually none of the public’s business.
Emilia: The one that the public should be concerned about is really investor state arbitrations, simply because the state is involved and it’s usually the state exercising its powers and an investor being uhappy with that, and it would impact on the public. It’s either issues around public goods or the exercise of sovereign authority by the state and its citizens – it’s their tax money ultimately that would be used to resolve those disputes.
Gemma: So when it comes to a state, you think there should be more transparency then?
Emilia: I think there should be more transparency. Definitely. Again because of the nature of those disputes.
Dan: So Gemma, that sounds exactly like I picture shady backroom dealings going on with the powerful people of the world. It sounds like Emilia’s worked on a lot of these cases. She’s an arbitrator. Has she worked on any climate-related or fossil-fuel-related cases?
Gemma: She actually hasn’t. No. But she did tell me that arbitrators like her are seeing and hearing more about these cases coming up on their radar and the world of arbitration is expecting more of them to come down the line as well too.
Dan: If this is somewhat of a new kind of case, do we have any idea how much money we’re talking here?
Gemma: So it’s still early days, but lots of researchers are thinking about this. And actually, Kyla Tienhaara and a couple of her colleagues actually recently figured out just how much money countries might get sued for if they want to try and keep warming to below 1.5 degrees celsius.
Kyla: In 2021, the International Energy Agency (IEA) came out with this big report on Net Zero Emissions by 2050. It basically modelled a scenario for what needed to happen in order to keep below 1.5 and said: no new oil, gas or coal. It’s important to recognise the IEA is not some left-wing environmental group. It’s a very conservative organisation. So for it to say fossil fuels have to stay in the ground now, was pretty significant.
Gemma: Kyla and her colleagues at Boston University used the IEA statement as a cutoff point in their study. They assumed that all existing oil and gas projects would need to be cancelled if governments wanted to stay within 1.5 degrees of warming. They used a global database of existing oil and gas concessions and looked at which ones were subject to some kind of investor state arbitration clause. They found that if countries decided to cancel just the oil and gas concessions alone, they could face up to US$340 billion in legal and financial risks from ISDS cases. And Kyla admits even this figure is probably an underestimate.
Kyla: But for me, the most important part about that study was not the big headline of $340 billion, but the distribution of the risks amongst different countries.
Gemma: Which countries are more at risk?
Kyla: So, what really stood out for me is that there are some countries like Mozambique that are highly vulnerable to climate change. They’re also not overflowing with resources to defend themselves in arbitration. But my main concern about these types of disputes is that countries like Mozambique are gonna look at a threat and just be like: “No way, we cannot afford to lose that much in an arbitration.”
Gemma: I wanna zoom in here on Mozambique for a moment. I spoke to another researcher called Lea Di Salvatore, who’s a PhD candidate at the University of Nottingham in the UK. Lea’s done a lot of work trying to track what we know about ISDS cases linked to environmental issues and to climate change. The main focus of her research is on Mozambique, which has huge reserves of natural gas and coal. She wanted to know how many of the contracts surrounding these mega fossil fuel projects could potentially be taken to arbitration.
Lea Di Salvatore: I looked at the contracts and the international investment agreements that cover these projects. And I can tell you that almost all of them are covered and have direct access with consent to ISDS. What that means is that the company can directly go and initiate an arbitration against Mozambique.
Gemma: Lea looked at contracts for 29 fossil fuel mega projects covering gas, coal and hydrocarbon exploration. All of these contracts have a duration of between 25 and 30 years. She found that 26 of these 29 contracts included clauses related to ISDS, either through international investment treaties or because of Mozambique’s own national investment laws. Now, Lea stressed that Mozambique is unlikely to cancel any of these contracts right now due to climate change, particularly when the country, like most of the global south, contributes so little to overall global emissions from fossil fuels.
Lea: It is definitely not its responsibility to go against these companies while it’s sitting on a huge pile of gas, when it contributed zero to the global emissions.
Gemma: But Leah warns that Mozambique is in danger of what’s called carbon lock-in. Other countries in the west are slowly moving away from fossil fuels and towards renewables. As this happens, Mozambique may find that the investments made in gas and coal infrastructure in the country start to lose their value over the duration of these 30-year contracts.
Lea: If the country decides to take some action that are not gonna be necessarily linked to the energy transition, but to protect itself from these risks, it might still be sued.
Gemma: She gave me a specific example. Say Mozambique decides it wants to raise the percentage, it taxes natural gas companies.
Lea: But in their contract they have what is called the stabilisation clause, a fiscal stabilisation clause. That means that the country, the moment they signed this contract, they have to maintain the same legal environment for taxation, for the duration of the contract. And if they change the legislation, the legislation does not apply to that specific.
Gemma: That’s crazy.
Kyla: Yes, it’s absurd.
Gemma: Just think about that for a moment. If Mozambique decides to change its own tax code – the way it taxes companies – it could potentially be on the hook for a lot of money if one of these investors decides to sue. For now, that’s not happening, but there are already disputes going on that are directly linked to a country’s policies on climate change. Kyla Tienhaara told me about two big ones. The first involves coal in the Netherlands.
Kyla: The Netherlands decided to phase out coal power and it offered compensation to companies that had coal power plants to help them convert to other forms of energy production. And two companies, Uniper and RWE said, the compensation you are offering us is insufficient, we are going to take claims to arbitration instead.
One of those companies: Uniper, has recently been forced by the German government to drop its case. Basically, Uniper needed a bailout. The German government said, we’ll bail you out, but one of the conditions is that you need to drop this case. So, great on Germany.
Interestingly, Germany has also had a lot of work around coal phase out and they negotiated compensation with several companies. And in those negotiation agreements, explicitly says that the companies cannot challenge the phase out under arbitration. So Germany’s clearly very aware of these issues.
Gemma: The second of these big cases is closer to home for Kyla. It involves Canada in the United States and the Keystone XL oil pipeline.
Kyla: This case originally started back in 2015 when the Obama administration, in the lead up to the Paris Agreement said, we are not going to provide the permit for this big pipeline that’s gonna carry the most awful type of oil from a climate perspective, tar sands oil, from Alberta and Canada through the US. And the company launched a US$15 billion case under what was then the North American Free Trade Agreement or Nafta. Then, Trump came to power and said, “We’ll provide the permit.” And so the company dropped that dispute. Fast forward a couple years and we have the Biden administration, and he immediately, on coming into office, revoked the permit. So the company again launched a $15 billion dispute.
Gemma: Nafta was replaced in July 2020 by a new US, Mexico Canada Agreement, which contains some limited ISDS provisions. But companies are still allowed to sue under the old Nafta agreement for three more years, up to July 2023. This is because of what’s called a sunset clause that’s common in these types of international treaties.
Kyla: In addition to TC Energy, which is the company that has launched that dispute over Keystone XL, the Alberta government, which had very foolishly invested very late in the day when many people were very aware that Biden was likely to cancel the project and seemingly betting on the fact that they hoped that Trump would be reelected. So Alberta invested a whole bunch of money into the project, and now they are also taking a claim against the US government, which is quite bizarre.
Gemma: You’ve talked about what you call the regulatory chill that these kind of cases can have on countries. So what does that chill look like in practice? And why are you so concerned about that part of this?
Kyla: The chill part has been what is most interesting to me from the beginning. People in the legal discipline tend to focus on the cases that actually happen and sort of going through and understanding how the arbitrators came to the decision and so forth. But for me it’s always been what are the cases that didn’t actually get to arbitration? When did an investor just threaten a dispute? And, you know the government wanted to make it go away, and so either rolled back the policy or delayed action or something like that. There is some preliminary evidence, at least that this is happening in the climate policy sphere. So, we have one case, a company called Vermillion threatened France when they came out with an oil and gas phase-out plan, and subsequently the government did change the oil and gas phase out so that those with sort of existing concessions would have more time to be phased out.
And then most recently, a journalist was able to get the New Zealand climate minister to actually say our phase-out plan wasn’t as ambitious as it could have been because we didn’t want to have to deal with investor state disputes. So this is really concerning. Again, it’s a critical decade for climate action we don’t have time for delay.
Dan: Gemma, the idea that the threat of being sued by a profit-driven corporation can prevent an entire country and many countries from trying to pursue their very necessary climate goals is just dark, honestly.
Gemma: Yeah. It’s sinister, isn’t it? I feel the same.
Dan: Bring me back to Italy though, Gemma, because we started in. Whatever ended up happening with that arbitration case?
Gemma: Right. So remember we had this on Ombrina Mare field off the coast of Italy that was blocked by the efforts of Maria D'Orsogan, and her activist colleagues and Rockhopper the oil company involved then launched an arbitration case back in 2017. And they did this based on something called the Energy Charter Treaty.
Dan: I’ve never heard of this one, but I assume it’s just one of these big international trade agreements, right?
Gemma: Yeah, it’s one that covers the energy industry and it’s got more than 50 signatories, including most EU states, the UK, Turkey and Japan. So Rockhopper launched this arbitration, and it’s actually been rumbling on for about five years until late August 2022, just a couple of weeks ago when a ruling was announced.
Dan: Who won?
Gemma: Rockhopper. Rockhopper won. The tribunal ordered the Italian government to pay 190 million Euros to Rockhopper, plus interest at 4%.
Dan: That’s obviously a lot of money, but honestly I was expecting it to be a bit higher … though I imagine Rockhopper was pretty stoked about the result, yeah?
Gemma: They were. Their chief executive, Samuel Moody said in a statement that he was “delighted” to have won the case, which had been obviously going on for a long time.
Italy has until late December to appeal the decision. But Rockhopper’s share price has already more than doubled on the news, so it’s been good for them.
Dan: OK. So yeah, 190 million, that’s great, but a doubling of the share price, this all makes a lot of sense now. There’s a huge potential upside for a company to try and do this very little risk downside. Yeah, maybe legal fees, but the real issue is, There’s so much at stake in terms of climate efforts.
Gemma: Yeah, and this is something that Kyla Tienhaara said to me when I got her take on the ruling too.
Kyla: Unfortunately, I wasn’t particularly surprised, but it is still really disappointing. I’m really concerned that this is gonna have a chilling effect on other countries that are considering similar actions in terms of banning oil and gas drilling.
So what Italy did is very consistent with the climate science, even though it really came out of concerns about the local environment and so forth. And now we have this arbitration tribunal saying if other countries do that sort of thing, they should expect to have to pay hundreds of millions or even billions of dollars to oil companies to compensate them for this. It’s just crazy.
Gemma: The decision in Rockhopper’s favour came even though Italy actually withdrew from the Energy Charter Treaty in 2016. But because it withdrew on its own without the agreement of the other members, Italy is subject to a sunset clause. This means it can still be taken to arbitration under the treaty for 20 more years after its official exit, so until 2036.
Kyla: And that means that any investments that existed prior to the termination of that treaty still get protected. And in the context of climate change, this is really problematic, right? Because this is a critical decade for action on climate. And we have all these treaties that really we should terminate. But if we don’t get agreement from everyone on doing that, then the sunset clauses are gonna protect these fossil fuel investors.
Gemma: Opposition has been mounting to the Energy Charter Treaty, and it’s recently gone through a reform process. In late June, the members reached an agreement in principle to modernise the text. The EU and the UK secured a carve-out which will exclude any new fossil fuel investments made after mid August 2023 from the treaty. That means that any coal, or gas or oil project that starts after that date in the UK or EU, won’t be subject to arbitration under the treaty. But when it comes to existing fossil fuel investments, there’s still going to be a ten-year sunset clause. That means companies will have until 2033 to launch an arbitration. Another key reform is that companies based in the EU will no longer be able to bring disputes under the treaty against other EU states. Some European environmental groups were dismayed at the reforms, saying they didn’t go far enough. The next step now is in November when the sides of the treaty will come together to formally agree on whether to press ahead with the reforms.
Kyla: There still is potential for a different path and the different path would be for European countries to leave, collectively, and hopefully bring the UK with them as well. And in doing so, they could cancel the sunset clause between them.
Dan: I’m happy to hear some good news at the end here, Gemma. Maybe a light at the end of the tunnel. Treaties are just pieces of paper if we all decide to rip them up. Makes sense. But I imagine it’d be really hard, it’s hard enough to get a number of countries to agree to anything these days. Are there other ways countries are trying to avoid getting sued under this ISDS system?
Gemma: Yeah, you know Kyla told me that countries are really starting to realise what’s at stake with these treaties and with ISDS more generally. So there are a couple of ways they’re trying to do this. Some countries are actually cancelling bilateral treaties that have ISDS clauses in them. Some are trying to renegotiate them. Other countries, like South Africa, are refusing to put these kind of clauses in any new international trade deals. And more recently, some countries have specifically fought to put clauses into these agreements that prevent companies from suing them over climate action.
Dan: That sounds good in that governments are finally getting wise to the risk of this.
Gemma: They are, and actually Emilia Onyema, the arbitration expert we heard from earlier, told me something that made a lot of sense to me. So as richer countries in Europe and North America face the threat of these arbitrations over their own policies to reduce fossil fuel emissions, it might actually give them pause for thought about demanding these clauses from other countries.
Emilia: So as we now have states from different hemispheres being sued, maybe states can see that they have common interests. It’s no longer a north-south sort of relationship where it’s only our own investors that can sue states in the global south. So, maybe states can understand that, well, we can also be sued and so we do have a common interest.
Gemma: Emilia said the next question is for states to ask themselves, why are we being sued?
Emilia: Because you’ve made promises that you can’t keep. These are contractual and legally binding promises. And I think it will be wrong for us to say that a state can wake up today, say something, and then it’s OK if the state does not comply with it. I think that’s wrong, because businesses rely on those promises made by states and they make investments. So it’s for states to step back and ask themselves what sort of commitments are we making? Can we realistically, can we actually perform? Can we comply?
Gemma: Emilia also said that if governments do decide to shut down oil exploration or coal power plants, they should be ready to pay out compensation, because if they don’t, they may well find themselves in one of these private litigations. There’s a bigger point here that there’s gonna be some kind of cost to phasing out fossil fuels whatever happens. Either you do it around a negotiating table or you leave it up to a secretive panel of three arbitrators in a hotel room somewhere.
I wanna give the final word in this episode to Maria D’Orsogna. I asked her how did she feel about the arbitration decision in Rockhopper’s favour?
Maria: It’s very discouraging for future battles, right? Even the politicians that wanted to change their minds in the future, they will be, they’ll have this thing in their heads: “Oh, you know, now we’re gonna be slapped with millions of dollars of fines.” So again, I was angry, I was discouraged. But again, in the end, I think that what we saved is worth much more than all the money they’re able to recuperate.
Gemma: OK, that’s it for this episode. We’ve got a few people to thank. First to Stacy Morford in the US who worked on a story earlier this summer with Kyla Tienhaara and some of her colleagues at Boston University. To our global executive editor Stephen Khan, to Alice Mason for our social media and to Soraya Nandy for help with our transcripts. Finally, thanks to Graham Griffith for all his help over the past few months.
Dan: You can find us Twitter @TC_audio; on Instagram; or email us. You can also sign up for our free newsletter And if you like what we do, please support the podcast and the conversation more broadly, go to donate.theconversation.com.
Gemma: This episode of The Conversation Weekly was produced by Mend Mariwany and me, Gemma Ware. I’m also the show’s executive producer. Sound Design was by Eloise Stevens and our theme music is by Neeta Sarl.
Dan: I’m Dan Merino. Been a pleasure having you.