Biden block of Keystone XL Pipeline exposes ISDS threat to other government actions on global warming

January 27, 2021: Incoming US President Joe Biden has cancelled a vital permit for the environmentally contentious Keystone XL pipeline proposed to take Canadian tar sands to refineries in Texas. This decision to protect the environment could trigger a compensation claim under Investor-State Dispute Settlement or ISDS.

Dr Kyla Tienhaara, Canada Research Chair in Economy and Environment, Queen's University, Ontario argues in The Conversation that such a case would be a harbinger of a massive wave of ISDS cases against government climate action in the Global South, but also including Australia.

The former North American Free Trade Agreement investment chapter allowed foreign investors to sue governments in international tribunals if they could claim a government decision harmed their investment. The owner of Keystone XL — TC Energy (previously TransCanada) — used NAFTA to launch a US$15 billion lawsuit in 2016 after President Barack Obama cancelled the project’s permit, but it was then restored under Trump.

NAFTA has been replaced by the US-Mexico-Canada Agreement, which does not allow ISDS claims from Canadian or US corporations against the other government. But TC Energy could proceed with a claim, because NAFTA provided for legacy claims for pre-USMCA investments until 2023.

TC Energy’s claim may now be weaker because the permit issued by the Trump administration explicitly stated that it could be rescinded, essentially at the president’s whim. But many investors have proceeded with ISDS claims on the basis of much weaker cases. Investors bet on positive outcomes in arbitration, as much as they bet on governments not taking action to halt catastrophic climate change. This is because the anticipated rewards, in both instances, are high.

Dr Tienhaara notes that the US government has the resources to fight the case, and has so far not lost an ISDS case brought against it, but argues that poorer and smaller countries will not be as capable of fighting cases over early closure of coal fired power stations and coal mines.

“We need climate action to happen everywhere, not just in the countries where governments can afford to fight legal challenges. This is one of the reasons why many are calling for radical reform or complete abolition of international investment treaties,” said Dr Tienhaara.