Raising the cost of climate action? Investor-state dispute settlement and compensation for stranded fossil fuel assets

Global efforts to combat climate change will require a transition to renewable energy and government action to reduce reliance on fossil fuels such as coal, oil and gas. If followed through, such action will create stranded assets – in other words, economic assets affected by premature write-downs or downward revaluations, or converted to liabilities.To protect their assets from measures to phase out fossil fuels, foreign investors may resort to investor-state dispute settlement (ISDS), which allows them to bring disputes to an international tribunal and sue states over conduct they believe breaches investment protection rules, and to obtain compensation if the claim is successful. Even in the absence of legal proceedings, the explicit or implicit threat of recourse to ISDS can provide leverage to the fossil fuel industry and strengthen its position in negotiations with governments over possible compensation. As a result, more public funds may be spent on compensating the fossil fuel sector than would otherwise be the case, making it more costly for states to take energy transition measures. This report develops a framework for assessing the extent to which energy transition measures could result in ISDS claims; explores the extent to which treaties with ISDS protect foreign-owned coal plants worldwide; and provides policy recommendations to help states preserve their ability to facilitate the low-carbon energy transition.