In 2023, global ocean heat content rose to a record high, Antarctic sea ice coverage dropped to a record low, and global temperatures reached approximately 1.4 degrees Celsius above pre-industrial levels–dangerously close to the threshold that scientists state risks irreversible loss of some ecosystems and catastrophic consequences for vulnerable people and societies. Governments across the globe, with the United States and other developed countries taking the lead, must quickly take the bold steps needed to dramatically reduce emissions in line with the global goal of limiting warming to well below 2°C and preferably 1.5°C above pre-industrial levels. Whether the global community meets that goal hinges largely on one question: are governments willing to put in place the policies needed to stop the expansion of fossil fuels, which account for over 75% of greenhouse gas emissions and nearly 90% of all carbon dioxide emissions? Tragically, in a moment when governments need all tools in the toolbox to limit the use of fossil fuels and slash greenhouse gas emissions, outdated trade and investment deals written under the advisement of fossil fuel corporations are threatening a just clean energy transition–and therefore threatening the prospects of averting the most catastrophic impacts of climate change. Free trade agreements (FTAs) with investment chapters and bilateral investment treaties (BITs) provide the fossil fuel industry, among other industries, with broad protections for their investments–including the right to bypass domestic courts and sue governments in an ad hoc arbitration tribunal over laws and policies that companies allege reduce their profits or alter their stable regulatory environment. In this system, called the investor-state dispute settlement (ISDS) system, tribunals composed of three arbitrators can order a government to pay the claimant (often corporations, but at times wealthy individuals) the expected future profits it might have earned without the new policy. Often, this amounts to billions of dollars. ISDS, therefore, indemnifies fossil fuel companies for most risks associated with making polluting investments and transfers those risks to the government making the policy and, more specifically, the taxpayers in those countries who could be forced to foot the bill. The threat of big polluters using ISDS to challenge policies designed to limit production and use of fossil fuels is not hypothetical. Of the 1,206 known treaty-based ISDS arbitrations across all sectors, nearly 20% were initiated by fossil fuel corporations. As just two recent examples, TC Energy of Canada is using ISDS provisions under the North American Free Trade Agreement to sue the United States for more than $15 billion over rejection of the Keystone XL pipeline. And U.S. energy company Ruby River is using ISDS provisions to challenge Canada’s rejection of a liquefied natural gas facility in Québec. ISDS challenges are dangerous for myriad reasons. Governments might be less likely to make a policy decision in the public interest for fear of being ordered to pay a foreign investor billions of dollars if a tribunal were to rule against them.
Moreover, even the defense of a case costs millions of dollars and takes years of work. And the implications of settling a case can be even more dangerous; while an investment arbitration tribunal can order a government to compensate a foreign investor for the losses of its expected future profits, settlements can lead to the government weakening or rolling back a policy or decision in order to avoid paying the investor. TRADING AWAY OUR CLIMATE 4 Importantly, the dangers of ISDS are stark not just for climate change, but for a broad swath of public interest policies including ones related to public health, labor protections and workers’ rights, green jobs policies, and more. For this reason, while this paper focuses on the impacts of ISDS on climate change, the Sierra Club supports the elimination of ISDS in its entirety–not just for policies related to climate change. ISDS is a system that not only puts polluters over people and the planet, it also perpetuates myriad inequities so the privileged few can maintain the status quo. Recognizing the threats of ISDS to climate, workers, and public interest policies, civil society movements across the globe have been fighting against this undemocratic system. And, due in part to decades of campaigning and the strong evidence of the threats of ISDS to climate and other public interest policies, the tides are beginning to turn. For example, countries across the globe are terminating their BITs, which include ISDS provisions.
And in the U.S., ISDS has lost considerable support. Administrations from both major political parties have recognized the dangers of ISDS and have taken steps to limit the system. The Biden Administration has committed to not pursue any trade or investment agreements that would establish ISDS. This is a critical step forward, but additional action is needed to end the threats of ISDS to climate and other public interest policies once and for all. To that end, this paper makes several core recommendations: The U.S. government must help stop the expansion of ISDS. The first step to ending the threats of ISDS to climate and other public interest policies is to stop the expansion of the system. Moving forward, President Biden and any future U.S. administration must publicly announce their strong opposition to ISDS and commitment to not negotiate or enter into any new agreements that contain ISDS and use their diplomatic power to encourage other countries to not enter into new agreements with ISDS. The U.S. government must take steps to remove ISDS from existing FTAs and BITs. The United States–which is party to over 50 agreements with ISDS–has an opportunity to take great leadership at the intersection of trade and climate change and reduce its own and other countries’ liability to ISDS claims by:
• Terminating BITs to which it is a party. The process by which a country can terminate a BIT is determined by international law, as laid out in the Vienna Convention (Article 54) and typically in the BIT itself. Importantly, most BITs include what is referred to as a sunset, or survival, clause. The survival clause specifies a time period in which the legal effects of the investment provisions continue even after agreement has been terminated. Therefore, any commitment to terminate a BIT must also come along with an agreement to neutralize the sunset clause.
• Removing ISDS provisions from its FTAs and BITs. This can happen through renegotiation of the agreement or, for example, through side agreements or letters between the governments. TRADING AWAY OUR CLIMATE 5 In 2023, global ocean heat content rose to a record high,1 Antarctic sea ice coverage dropped to a record low,2 and global temperatures reached approximately 1.4°C above pre industrial levels3 – dangerously close to the 1.5°C threshold that scientists state risks “crisis after crisis for the vulnerable people and societies” and “irreversible loss of the most fragile ecosystems.”4 These numbers are not just statistics; they have real-life implications for communities across the globe – especially for historically marginalized and vulnerable groups, including communities of color and low-income communities. In just a few examples of the dangers of climate change from 2023:
• The United States experienced 25 weather and climate disasters which cumulatively resulted in nearly 1,000 lives lost;5 • In Phoenix, Arizona, communities experienced a record 31 consecutive days above 110 degrees; the heatwave was partly responsible for more than 500 heat-related deaths in Maricopa County;6 • Intense rainstorms flooded Vermont’s capital, destroying thousands of people’s homes and businesses;7
• Historic wildfires in Maui caused over 100 deaths8 and displaced thousands of people;9
• Florida’s Gulf Coast was hit by its second major hurricane in two years,10 causing widespread destruction.11 These climate-induced disasters reinforce the need for governments across the globe, with the United States and other developed countries taking the lead, to meet the goal they committed to in the Paris Climate Agreement: limiting global warming to well below 2°C and preferably 1.5°C above pre-industrial levels. Whether the global community meets that goal hinges largely on one question: are governments willing to put in place the policies needed to stop the expansion of fossil fuels, which account for over 75% of greenhouse gas emissions and nearly 90% of all carbon dioxide emissions?12 According to the International Energy Agency (IEA), limiting global temperature rise to 1.5ºC will require no new oil, gas, or coal development beyond existing fields.13 World leaders are echoing that message in calls to action. United Nations Secretary-General Antonio Guterres, for example, has been calling on governments to phase out fossil fuels in order to avoid climate catastrophe. “The I. Introduction
• Withdrawing consent to ISDS claims from BITs and FTAs. Withdrawal of consent essentially means that a government or governments suspend the application of ISDS by explicitly withdrawing consent to arbitration. This could happen unilaterally, bilaterally, or via a multilateral instrument, which could take the form of a declaration or opt-in agreement. With public and policy-maker sentiment against ISDS rising, there is only one sensible choice to protect our planet and its people: end the era of ISDS once and for all by both stopping its expansion and eliminating its existing threats.
