Phasing out fossil fuel is a crucial step to address the climate emergency. But to do so will mean facing not only political and economic obstacles, but legal ones. Fossil fuel companies can use domestic and international laws to demand compensation for bans on fossil fuels or prohibitions on the extraction of oil or coal. The legal system can make our collective transition to a green economy easier, or more difficult; among other things, it can increase the bill we pay for a healthy environment. Like big tobacco, big oil can and will litigate.
This legal question becomes especially serious because companies like Shell and Exxon-Mobil can bring cases to a jurisdiction that they contributed to creating in the first place – a forum specially fit for their purposes.
In the late 1950s, Shell and other oil firms were concerned about maintaining control of the global south’s natural resources. Decolonization was a risk to their business model. They were also worried that governments in both south and north were taking a more active role in the economy. The lawyers of oil firms and international bankers joined forces to imagine a legal regime that would protect their oil and mineral businesses from state intervention. This regime would consist of a structure of international treaties and international arbitration known as investor-state dispute settlement, or ISDS. Although the wording of these treaties remained vague, their expectation was that international arbitration would serve to develop the proper legal rules to promote and protect foreign investment.
The two masterminds of this project were Hermann Abs and Hartley Shawcross. Abs was a famous German banker who was also a director of several corporations, including Deutsche Shell. Shawcross, a renowned English politician, was the chief counsel of Royal Dutch Shell. Together the two gathered the support of fellow foreign investors to form the International Association for the Promotion and Protection of Private Foreign Investments. The members of its directing committee included V Cavendish-Bentinck (director of Rio Tinto), Arthur Dean (chief counsel to Standard Oil of New Jersey, now ExxonMobil), Michael H Haider (chairman, Standard Oil of New Jersey) and Victor de Metz (president of Compagnie Française des Pétroles, now known as Total).
Shell lawyers were particularly active in the project. GW Haight, who was counsel for Shell in the United States, was involved in promoting commercial arbitration and creating the International Centre for Settlement of Investment Disputes (ICSID). John Blair, another adviser of Shell, also worked closely in the creation of ICSID. Blair later directed the team that drafted the 1972 Guidelines for International Investment at the International Chamber of Commerce. These guidelines reflect current international law in this field: strong obligations for states, vague standards and non-binding principles for corporations. Unsurprisingly, an observer reported that technical discussions in those years were being “overcome by the fumes of petrol”.
These efforts were not in vain. ISDS took some time to take off, but countries signed investment treaties en masse in the late 1980s and 1990s. The Energy Charter Treaty was signed in 1994. This is a plurilateral investment treaty that deals solely with foreign investment in the energy sector.
Thanks to this network of treaties, foreign investors can bring ISDS cases against states without exhausting local remedies – a privilege exclusive to foreign investors. Further, international arbitrators protect foreign investors’ expectations, but not the expectations of states or local communities. This legal regime also allows oil companies to strike back after local courts find them responsible for environmental degradation, like Chevron did in the Lago Agrio (Ecuador) case. A few weeks ago, Shell did the same thing. It launched an ISDS case against Nigeria after a domestic court ordered the multinational giant to compensate the Ejama-Ebubu community.
ISDS has served firms in the extractive sector, including oil firms, to maintain and expand their rights over natural resources worldwide. It can help them likewise to fight the phasing-out of fossil fuels. They can bring ISDS cases for the breach of their legitimate expectations and, if they prevail, would probably receive compensation far above what a domestic court would order. Producers of nuclear and coal energy have already filed arbitration cases against Germany, Canada and the Netherlands for the phasing-out of their licences. New ISDS cases only depend on the will of corporations, lawyers’ creativity and, of course, the existence of investment treaties and ISDS.
In the last years, the critique against ISDS has increased, and the United Nations Commission on International Trade Law is considering reform options. None of them is serious enough. Phasing out ISDS, as much as phasing out fossil fuels, should be an option on the table. The climate emergency not only calls for phasing out fossil fuels but also for reimagining the laws and regulations that have been implicated in years of unchecked extraction of natural resources. The two must go hand in hand.