British investors could sue Australia over climate action if UK joins trans-Pacific trade pact

British oil and gas miner Rockhopper Explorations last month won £210 million plus interest (about A$360 million) in compensation over Italy’s 2015 ban on oil and gas drilling within its territorial seas.

It’s a portent of claims Australia may face from British companies invested in Australia’s fossil-fuel industries if the United Kingdom gets its way and joins the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), to which Australia is a signatory.

Rockhopper had invested £33 million in plans to drill for oil off Italy’s east coast in the Adriatic Sea. The compensation covers all profits it would have made. Its claim was enabled by a so-called investor-state dispute settlement (ISDS) clause in the Energy Charter Treaty signed by Italy and Britain in the 1990s.

All trade agreements have systems for settling disputes between governments. Some also have ISDS clauses that give private foreign investors the right to claim compensation for future lost profits due to changes in law or policy.

Since the late 1980s, British companies have lodged 90 claims against foreign governments using ISDS provisions – the third-highest number after US and Dutch companies.

This raises the question of what may happen if British mining and energy companies gain ISDS provisions to seek compensation from the Australian government over its climate policies.

Britain’s interest in the CPTPP

ISDS provisions are what tobacco giant Philip Morris used to claim A$4 billion in compensation after the Australian government introduced plain packaging laws for tobacco products in 2011.

It did so under an Australian investment agreement with Hong Kong. Though this gambit ultimately failed, the case took years and cost the Australian government $12 million in legal costs

Read more: When even winning is losing. The surprising cost of defeating Philip Morris over plain packaging

Currently there are no ISDS provisions in treaties between Australia and the UK.

ISDS was excluded from the Australia-UK Free Trade Agreement (AUKFTA) signed in December 2021 due to “the confidence we share in each other’s legal systems” – although only after a robust public debate. (The treaty, not yet in force, is being reviewed by an Australian parliamentary committee prior to ratification.)

But ISDS is included in the existing Comprehensive and Progressive Agreement for Trans Pacific Partnership (CPTPP) between Australia and ten other Pacific rim nations, which the UK is keen to join.

As UK Trade Secretary Anne-Marie Trevelyan outlined while in Australia last week:

The UK is aiming to accede by the end of this year, and joining CPTPP is a demonstration of our foreign policy focus aligning with the global economic tilt towards the Indo-Pacific.

British interests in Australian mining and energy

Australia and the CPTPP’s other members – Brunei, Canada, Chile, Japan, Malaysia, Mexico, Peru, New Zealand, Singapore and Vietnam – must agree for the UK application to succeed.

Trevelyan argued the UK would “bring a new, strong and persuasive voice” to the partnership as “a like-minded friend to Australia”. But its membership would also expose the Australian government to ISDS cases by UK companies against climate action regulation.

The UK is the second-highest source of foreign investment in Australia. UK-based fossil-fuel investors include Anglo American, BP and Shell.

Climate concerns about ISDS claims

A comprehensive study published in May shows increasing use of ISDS clauses in trade agreements by fossil fuel companies to claim billions in compensation for government decisions to phase out fossil fuels. The study’s authors recommend ISDS mechanisms be removed from trade agreements.

The Intergovernmental Panel on Climate Change’s May 2022 report Climate Change 2022: Impacts, Adaptation & Vulnerability also warns that ISDS clauses in trade agreements threaten action to reduce emissions.

Read more: How treaties protecting fossil fuel investors could jeopardize global efforts to save the climate – and cost countries billions

For example, the Westmoreland Coal Company sought compensation from Canada over the province of Alberta’s decision to phase out coal-fired electricity generation by 2030.

The US-based company, an investor in two Alberta coal mines, did so using ISDS provisions in the North American Free Trade Agreement (NAFTA). It case was unsuccessful, but only due to technicalities regarding changes in the company’s ownership.

In Europe, German energy companies RWE and Uniper have ISDS cases pending against the Netherlands (under the Energy Charter Treaty) over its moves to phase out coal-fired power stations by 2030.

But there is a simple solution

The Australian government has an easy option to stop this exposure, based on two precedents: the exclusion of ISDS from the Australia-UK free-trade deal; and how Australia and New Zealand have dealt with ISDS in the CPTPP.

Before signing the CPTPP in 2018, Australia and New Zealand exchanged legally binding side letters excluding each other from using the ISDS clauses against each other.

It makes sense for the Australian government to do the same with the UK, given the disproportionate risk of ISDS claims by British fossil fuel investors.

The Albanese government was elected with a policy platform opposing ISDS. It can easily implement this by making a similar exchange of letters a condition of agreeing to the UK joining the CPTPP.