Fossil fuel investors sued states under ISDS to chill climate law and won 72% of cases

Climate policy strands fossil assets: France's environment minister drafted a law to end fossil fuel extraction by 2040, and Joe Biden revoked the Keystone XL pipeline permit on his first day in office. The conventional corporate response is to lobby each measure and fight it through domestic politics and courts, one regulation at a time. A growing minority of investors chose a different forum: investor-state dispute settlement (ISDS), the little-used arbitration clauses that entered international treaties in the 1980s and 1990s to protect foreign investors.

Under ISDS, a foreign company that believes regulation harmed its investment bypasses local courts and claims compensation before a private tribunal, arguing the policy breached treaty promises of fair and equitable treatment or amounted to expropriation. The investor helps choose the three arbitrators, the decision is final with no appeal, results can be kept confidential, and governments cannot counter-sue. Experts describe the arbitrators as an elite circle of about fifty private business lawyers; Joseph Stiglitz called the resulting pressure "litigation terrorism."

The results favor the tactic. Decided on their merits, fossil fuel ISDS cases went to investors 72 percent of the time, with average compensation of $600 million; fossil fuel is the most litigious industry, 20 percent of all arbitrations, with oil and gas at 92 percent of those. Because defending a case costs millions even when the state wins, the threat alone produces what researchers call regulatory chill: after Canadian producer Vermilion threatened arbitration in 2017, France's draft law to end fossil extraction by 2040 was watered down to allow new exploration after that date.

The playbook reached the United States after the Keystone XL permit was revoked: TC Energy sued the U.S. government and claimed $15 billion in damages. The Energy Charter Treaty, ratified by fifty mostly European countries, offers energy investors the same clauses, and a Science paper put potential damages from net-zero cancellations at $60–234 billion. By mid-2022 the backlash was mounting: NAFTA's renegotiation removed ISDS between the U.S. and Canada, European Parliament leaders called for a coordinated EU exit from the Energy Charter Treaty, and the UN was considering reform.

Make climate regulation a compensable taking via ISDS

Forum selection is decisive: a private tribunal whose arbitrators the investor helps choose, with no appeal and optional secrecy, is far friendlier ground than a state's own courts.

The system is asymmetric: governments can only be defendants and cannot counter-sue, so every climate measure carries a downside with no offsetting legal leverage for the state.

The threat works without a win: expected defense costs in the millions to billions make regulators preemptively weaken laws, as France did after Vermilion's 2017 arbitration threat.

The track record makes the threat credible and repeatable: 72 percent wins on the merits, roughly $600 million average awards, and an industry share of one in five of all ISDS cases.

A treaty arbitration clause can turn a political loss into a financial claim, and the threat alone deters the rule — map those protections before regulation lands

When The Lever reported it in June 2022, the tactic was still expanding — a Science paper warned net-zero cancellations could bring $60–234 billion in claims — while reform advanced: the 2018 NAFTA renegotiation dropped ISDS between the U.S. and Canada and scaled it back with Mexico, the European Parliament's environment chair called for a coordinated EU exit from the Energy Charter Treaty, and UNCITRAL weighed changes. The story drew 192 points and 43 comments on Hacker News on 9 June 2022, where readers debated whether the biggest oil companies actually use the mechanism.