How trade deals allow private sector interests to hinder development
by Léa Brette
In December 2019, the Netherlands passed legislation to shut down all coal-fired power plants by 2030. The adopted law supports the Netherlands’ commitment to reduce CO2 emissions by 49% in 2030 and 95% in 2050, based-off its 1990 levels. However, far from rallying a consensus, the vote was largely contested by the giants of the fuel’s industry. Disagreement and complaints aroused as multinational corporations defended their rights to high compensations, eventually triggering concerns amongst taxpayers.
By February 2021, RWE, the second largest producer of electricity in Germany, filed a lawsuit against the Dutch government, suing them for 1.4 billion euros of compensation. Roger Mieson, CEO of RWE, stated that the compensations were relative to the damages that would result from the Netherlands’ decision. The argument of the company was thus formulated: ‘The company’s emission reduction targets are in line with the Paris Agreement. RWE will be carbon neutral by 2040. The Dutch law does not provide proper compensation for this interference, and we do not consider this to be legal’.
But how does it work? What mechanisms allow multinationals to make sovereign states liable for their domestic policy decisions?
The answer lies in the most obscure clauses of both Bilateral and Multilateral Investment Treaties (BITs and MITs), which implement a mechanism of Investor State Dispute Settlement (ISDS), a binding instrument of public international law allowing companies to hold states accountable for domestic policies deemed discriminatory towards investors. This mechanism can be triggered when investors consider that they are being victim of indirect expropriation, and that their potential profits are suffering from shortfalls caused by host state’s legislation. The disputes are settled behind closed doors, in Courts of International Arbitration. The arbitrators, who are business lawyers, are not expected to publicly-announce legal outcomes. The ISDS system gave way to a similar agreement, the Energy Charter Treaty (ECT), which is the MIT being triggered by RWE. The ECT is an international agreement for investor’s rights directly targeted at the energy sector, and consequently at governments’ environmental policies. Whilst the ECT is an independent treaty, currently counting 53 signatories, ISDS are clauses integrated in BITs and international treaties such as CETA, NAFTA, CPTPP and USMCA. The ISDS mechanism thus binds states to transnational corporations, by tying their domestic policies to the legal economic obligations they have towards foreign investors.
The secretive legal framework established by the ISDS system aggravates power disparity between weakened states and increasingly influential multinationals. The power conferred by these clauses to investors undermines in an unprecedented way the ultimate principle of state sovereignty. Even Juan Fernández-Armesto, an arbitrator himself, remains startled by the absurdity of the system: “When I wake up at night and think about arbitration, it never ceases to amaze me that sovereign states have agreed to investment arbitration at all… Three private individuals are entrusted with the power to review, without any restriction or appeal procedure, all actions of the government, all decisions of the courts, and all laws and regulations emanating from parliament.”
There is no shortage of precedents to the resort of multinationals to ISDS or the ECT, each more controversial than the next. In 2009, Vattenfall, a Swedish energy firm, sued the German
government under the ECT, contesting the anti-pollution measures implemented in Hamburg, and demanding 1.9 billion euros in compensation. In 2012, the French multinational Veolia launched an ISDS against the Egyptian government, demanding 174 million euros in compensation for the national increase of minimum wage under a new labour law. In the case of Vattenfall versus Germany, the dispute was settled but the arrangement was kept secret. As of Veolia versus Egypt, Veolia was defeated after 6 years and millions of euros spent in judicial expenditure. Whilst exact figures have not been made public in this particular dispute, the OECD estimates the average costs of ISDS proceedings for states are circa 8-10 million USD. Furthermore, whilst the aforementioned cases exemplify the controversy behind arbitrary dispute system, they are only the tip of the iceberg. The biggest compensation to-date is of 40 billion USD in the Hulley versus Russia dispute.
The social costs of ISDS are tremendous. The ability of multinationals to abuse this legal framework incentivises states to protect their legal liability. This often results in the undermining and reversal of progressive social and environmental policies. This framework also allows multinationals to wield parallel powers and possess similar capabilities to sovereign regimes. But whilst states are accountable to their citizens, who are multinationals accountable to? Where do their legitimacy to shape domestic politics come from, and how do the laws that allow them to bend these policies reflect the popular will? Their ability to resort to arbitration in multinational vs states disputes is problematic. By definition, arbitration is a mechanism that allows two actors to reach an agreement. However, the implications of these disputes extend beyond the actors directly involved. Private decisions directly impact citizens, their salaries, health, rights, and environment. Furthermore, government-sourced compensation and judicial expenditure are financed with taxpayer money.
The legality of these lawsuits held in secrecy is extremely questionable. The repercussions that private decisions have on public development justify the claim to at least publicise these audiences, if not completely ban them. Asking the question of the legitimacy of the ISDS system is asking the question of the kind of globalization we want: one that promotes profit at all costs, and where economic interests of multinationals supersedes public development? or one where growth can be sustainable, and where international law encourages companies to adapt to current challenges instead of hindering development for profit?