U.S. Climate Leadership Must Reject ISDS: As the United States Faces Another $15 Billion Suit from the Fossil Fuel Industry, it’s Time for President Biden to Take a Decisive Stance

Ella Merrill and Martin Dietrich Brauch
July 13, 2021

On his first day in office, President Biden signed an executive order revoking the Keystone XL Pipeline’s construction permits and halting the pipeline as utterly incompatible with U.S. commitments and leadership on climate change. Canadian company TC Energy announced in June that it would abandon the Keystone XL pipeline. Less than a month later, it filed a claim for $15 billion in compensation from the United States Government for allegedly breaching its rights under the investment chapter of the North American Free Trade Agreement (NAFTA). 

TC Energy is the latest of a growing number of investors using investor-state dispute settlement (ISDS) mechanisms in thousands of investment treaties and chapters to challenge urgent measures necessary to respond to the climate crisis. This abusive use of treaty protections underscores how ISDS has gone completely awry and threatens to undermine U.S. as well as global climate goals. As a candidate, Biden opposed ISDS, pledging not to include it in new treaties; now as President, he should take steps to remove ISDS from existing U.S. treaties through amendments or terminations of those agreements.

This most recent claim is not the first time an ISDS claim has been filed over the cancellation of Keystone XL. The project gained international notoriety as a symbolic battleground over climate justice, due to powerful, years-long Indigenous-led protests. In 2015, President Obama denied TransCanada (now named TC Energy) a Presidential permit, with then Secretary of State John Kerry (President Biden’s Special Presidential Envoy for Climate) stating that “moving forward with this project would significantly undermine [the U.S.’s] ability to continue leading the world in combating climate change.” TransCanada swiftly followed with the first $15 billion NAFTA claim in 2016, alleging that the international treaty entitled it to the profits it expected to earn from the project. 

In the five years between the first and second TransCanada claims, the United States has taken marginal steps to limit its exposure to these kinds of claims, most notably by significantly limiting the reach of ISDS in NAFTA's replacement, the U.S.-Mexico-Canada Agreement (USMCA). However, it didn’t completely close off exposure to ISDS claims under the USMCA, and has done nothing to address the dozens of other U.S. treaties that still have ISDS provisions. Through these treaties, U.S. companies have brought over $30 billion worth of claims against other countries for environmental, fiscal, and other legitimate public measures, including Occidental v. Ecuador, Chevron and TexPet v. Ecuador, Mobil and Murphy v. Canada, Burlington v. Ecuador, Lone Pine v. Canada, and Mobil v. Argentina. 

Unsurprisingly, as countries have begun to take measures in line with their commitments under the Paris Climate Agreement, ISDS cases challenging climate-related policies have quickly followed. ISDS poses a serious threat to goals of achieving net-zero emissions by 2050, stranding fossil fuel assets, and putting into place climate-advancing regulations that will impact profits of carbon-intensive companies. In just the past two years, investors have used ISDS to challenge climate action by states. The list of cases includes  Vermillion v. France, Westmoreland v. Canada, Uniper v. the Netherlands, and RWE AG and RWE Eemshaven Holding II BC v. the Netherlands, and now the TC Energy case. 

Leaving ISDS in place allows companies to challenge a range of critical government actions including the discontinuation of fossil fuel subsidies; the imposition of carbon taxes; stricter emissions standards; denial or suspension of permits for the development, transport, or burning of fossil fuels; phase-outs of specific energy sources; plans to strand existing fossil fuel reserves; the failure to protect investments against protests by impacted communities; the nationalization of fossil fuel companies; and a slew of measures crucial for adaptation, including changes to zoning laws limiting development in areas threatened by rising sea levels. Companies and their shareholders will continue to use it as a last-ditch effort to extract profits where they still can, leaving the public to subsidize companies who gambled with climate science and climate policy and pursued projects that had no place in a climate-safe world.

President Biden has recently set out a series of ambitious climate targets, as have other world leaders. The International Energy Agency (IEA) has just affirmed that achieving net-zero emissions by mid-century is feasible and that there is neither room nor need for new investments in new fossil fuel production in that pathway. From both an economic and environmental perspective, it makes sense for countries to keep fossil fuels in the ground. Yet countries that heed this guidance, follow their Paris Agreement commitments, or otherwise pursue planet-saving measures to avoid climate catastrophe face growing threats of multi-billion dollar claims. U.S. leadership is crucial to stop this trend of intimidation. 

There is momentum in the United States to drop ISDS from its own treaties. Elizabeth Warren has cited the TransCanada case as an example of the “dangers” of including ISDS in U.S. treaties. In 2016, a dozen U.S. senators, including Ed Markey, Sherrod Brown, Bernie Sanders, and Elizabeth Warren urged President Obama to exclude it from the Trans-Pacific Partnership (TPP), calling it just another “profit-maximizing strategy” used by multinational corporations, and a “corporate handout” from states to investors, and highlighting that it will diminish the ability of state parties to effectively govern. The U.S. Trade Representative, Katherine Tai, has committed to putting climate policy at the center of her mandate and U.S. trade policy. The U.S. is also presently working on ISDS reform as part of a UN-housed initiative, and, through that process, can advance a coordinated effort to finally excise the exploitative ISDS mechanism from international treaties. Rejecting ISDS in all future U.S. treaties as well as removing it from existing ones—reducing U.S. and global exposure to claims—would signal the President's firm commitment to ending the growing threat of ISDS to crucial climate policy action, and to placing climate at the heart of trade policy.

Activists are calling on the United States to halt more fossil fuel projects, most recently the Minnesota Line 3 pipeline. President Biden’s ambitious climate agenda absolutely depends on having the policy and fiscal space to take swift, bold and necessary measures. In addition to action at home, the United States can also play a crucial role in driving international progress on this issue. Part of President Biden’s plan must be to decisively disavow ISDS and mitigate its risks for climate safety in the United States and abroad.