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The Global Laws That Help Corporations Block Climate Action

The year 2022 marked one of the biggest ice melt years for Greenland in recorded history. (Thor Wegner / DeFodi Images via Getty Images)

However much the British government plays fast and loose with our future by treating climate change as a political football, there is a reality it can’t deny: climate action is necessary. That’s why, against all its better instincts, it announced last month that Britain would exit the most climate-wrecking treaty of all — the Energy Charter Treaty (ECT).

The ECT is the product of a previous era. It was invented in the 1990s to protect Western energy interests in the countries of the former Soviet Union. At its heart is a mechanism called investor-state dispute settlement, or ISDS — a kind of corporate court system which allows transnational businesses and investors to sue governments for regulatory changes that damage their bottom line.

Countries have been inserting these ISDS clauses into trade and investment deals for decades now. They were dreamt up by oil barons and financiers back in the 1950s. As countries across the world broke free of imperial ties, these corporate executives worried about how their economic interests could be protected from national liberation governments, which were coming to power in the Global South.

The nationalization of Iran’s oil was a turning point. While the United States and Britain orchestrated a coup to remove Iran’s government, there was a recognition this wasn’t a sustainable way of running the world. Far better to create a series of legal obligations.

Through ISDS, if a government expropriated a foreign corporation’s assets, they could bypass the local legal system and go straight to international arbitration where, with no transparency, no proper judge to weigh different interests, no right to appeal, and the weight of international law to bolster any successful claim, corporations effectively gained their own one-sided legal system.

Fast forward to the 1990s. When the Soviet Union collapsed, there was a wealth of new opportunities for Western business, but corporations didn’t want to take the risk of new governments coming to power that might feel differently about their operations. The ECT was designed to eliminate that risk, and lock in business-friendly regulations into the far future.

What the Western countries didn’t realize was that they too would one day become targets for these corporate courts.

West-on-West

As the 2000s dawned, corporations realized that the biggest threat they faced wasn’t from a government taking over their oil rigs. It was climate action that was seen as a growing necessity across Europe.

City lawyers worked overtime to expand the types of cases they could take under the ECT, and countries saw themselves sued repeatedly for bringing forward action to improve environmental quality and phase out the exploration of fossil fuels. German coal companies sued the Netherlands over their coal phase-out. Slovenia for banning fracking. Denmark for its windfall tax on excessive oil profits.

What’s more, corporations didn’t simply sue for the money they’d already invested in projects. They’d often been offered compensation to recompense them for these costs anyway. Instead, they would sue for many times more, basing their claims on lost future profits.

British company Rockhopper sued Italy when protesters forced the government to ban oil drilling off the country’s Adriatic coast — the area Rockhopper had hoped to explore. The compensation claimed by Rockhopper totaled about $350 million, seven times what the corporation had invested in exploration. The company then announced it was investing in a new project off the Falkland Islands. The lesson here was that the ECT doesn’t simply shift the cost of climate action from the private to the public sector — it actively keeps the fossil fuel economy going.

Many of these cases look like attempts to punish governments for making decisions in response to protests and campaigns against unpopular mining projects. Elsewhere in the world, ISDS cases have been brought specifically on the basis that governments have not done enough to suppress protest movements in the interests of foreign capital. Little wonder then that these protest movements turned their attention to the problem of the ECT as an impediment to popular sovereignty.

Politicians of all persuasions have seemed genuinely surprised about the existence of the ECT, and horrified at the way in which it impinges upon their sovereignty so fundamentally. From the left-wing government in Spain to the right-wing government in Poland, protests convinced politicians to move toward exit from the energy pact.

By 2023, nine countries including Italy, France, Germany, and the Netherlands all announced they were off. For many of these countries, the ECT was now a clear and present danger to the imperative of gearing their economy to a point where it could deal with the climate transition, adding legal obstacles and extortionate costs to that already difficult process.

They still faced a problem though. The ECT has a deeply undemocratic twenty-year sunset clause, which means that even if a country left today, cases could still be brought for the next two decades. Furious diplomatic activity began in the EU to find ways of abrogating this clause, with governments hitting on the solution that if they all left together, in a coordinated manner, they could sign a deal that at least prevents cases being brought against each other, limiting their exposure.

The British Particularity

Outside the EU, Britain saw things differently. Still wedded to an outdated view that “the market knows best,” and that we can overcome our severe economic difficulties by embarking on endless trade talks — most of which have come to naught — the British government dragged its feet. Perhaps it even hoped to attract more fossil fuel investment by being the last bastion of investor protection in Europe.

Rishi Sunak is clearly trying to whip up a culture war with his dangerous drive to “max out” North Sea fossil fuel reserves. However much he rails against the incoming tide, though, he can’t stop it. Reality is catching up.

Since Joe Biden became US president, there is a recognition that climate change necessitates a change in attitude toward the economy. A race is now on between the big power blocs, using government money and power to build the industries of tomorrow.

Here, Britain is well behind the curve. While a part of the business community — most importantly fossil fuel corporations and part of the financial sector — back the ECT, another section realizes that the British government’s laissez-faire approach is leaving them chronically uncompetitive.

As EU countries started leaving the ECT, the realization that Britain would face proportionally higher obstacles to a green transition started to worry manufacturing unions, parts of the business community, and even a few Tory MPs. This started to create pressure within government, and, over the last year, the line has changed from full-throated support to — finally, last month — an acceptance that the costs of remaining were just too high.

None of this undermines the role that campaigning has played in getting us to this point. At the broadest level, only significant campaigning by the climate movement over decades has forced the massive change in which climate action is seen now as a necessity. The people defeated the rule of “market knows best” economics — though of course we have a long way to go to reach the economic change we need.

More specifically, only because of campaigning across Europe was the problem of the ECT raised to the point that politicians began thinking about withdrawal. And in most countries, it was campaigning that forced them to the exit. That applies to Britain too, where the divisions over ECT were forced open by campaigners over four years, with the climate movement — from Green Alliance to Extinction Rebellion (XR) — joining in the critique of the system.

Next Steps

Of course, last month’s announcement is only a first step, removing one structural impediment to the climate transition. It’s significant nonetheless. The UK’s withdrawal may well herald the end of the ECT as a whole. It’s now widely viewed as a dead man walking and will only be mourned by those profiting from the destruction of our planet. In turn, this means that one small but significant element of our neocolonial, market-knows-best economy has been dismantled.

Those who have suffered most from the ISDS system live in the Global South. In numerous trade deals, ISDS is being used to bully and extract from countries across Asia, Africa, and Latin America. Honduras and Colombia are currently facing eye-watering claims for doing no more than trying to protect the interests of their citizens from rapacious capital.

A recent development is corporations using ISDS to secure access to the critical minerals they need for the green transition and getting them on the terms they demand. While these metals might indeed be necessary for green industry, we cannot build a future economy on the poverty and exploitation of those who’ve done least to cause climate change in the first place. It should be for those countries to decide how their own resources can be used to bolster their development.

The good news is that countries from Pakistan to South Africa to Bolivia are, like the UK, also pulling out of treaties which subject them to this treatment. Most recently, the left-wing government of Honduras gave notice it would withdraw from the World Bank’s own corporate court system, the International Centre for Settlement of Investment Disputes ICSID. The victory over the ECT will help them point the hypocrisy in a global economy that increasingly allows the Global North to embark on economic planning — albeit still woefully insufficient — but demands the rule of the market for everyone else.

More than anything, it’s now clear that the debate on climate change has shifted decisively to a point where there is at least space to argue for radical economic transformation. Last week’s victory is a definite step forward.

Nick Dearden
Nick Dearden
  Nick Dearden is the director of Global Justice Now. He regularly contributes political analysis to publications including the Guardian, Al Jazeera, Open Democracy, Red Pepper, and Soundings.
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