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Why shifts in energy transition policy are driving a new wave of legal disputes

By Marie Stoyanov and David Ingle
Lithium mining in Chile: Lithium is crucial to powering batteries in electric cars but governments are finding mining for alternative energy sources can be contentious. (Photo: Martin Bernetti/AFP via Getty Images)
Lithium mining in Chile: Lithium is crucial to powering batteries in electric cars but governments are finding mining for alternative energy sources can be contentious. (Photo: Martin Bernetti/AFP via Getty Images)

An increase in litigation is a likely result of government measures to fulfil climate change pledges, as every scenario has its winners and losers.

The Paris Agreement obliges most governments to reform our centuries-long dependence on fossil fuels. Inevitably, this will trigger a vast amount of litigation. 

First, governments may be sued if their decarbonisation policies do not go far enough, as has already happened in the Netherlands. A 2020 judgment of the Dutch Supreme Court upheld a claim that the government’s overly modest targets to reduce carbon emissions were a violation of the European Convention on Human Rights, on the basis that climate change was a “grave risk that “endanger[ed] the lives and welfare of many people in the Netherlands”.

This type of litigation is likely to increase in the years to come as the impact of climate change becomes more severe.

Conversely, where governments enact ambitious decarbonisation policies, they may face claims that their reforms disrupt existing interests. This has already happened with several governments, which are seeking to phase out coal power plants, being sued in domestic courts and before international tribunals.

The aggrieved parties complain that, after sinking vast capital to develop power plants with operating lives stretching decades into the future, they are now left holding stranded assets. Governments rebut these claims by pointing to both their sovereign rights and their obligation to protect the environment. They further argue that the harmful economic impact of the measure on private parties is reasonable and proportionate when weighed against the devastating consequences of climate change. 

These arguments are likely to be less persuasive where governments adopt an erratic approach to decarbonisation, and seek to prohibit activity that they have previously endorsed. An example of this is a recently decided claim brought by a British oil and gas exploration company against Italy.

The company had obtained a concession in 2015 to produce oil and gas in the Adriatic Sea and had a favourable environmental impact assessment. The project was then made worthless by a law passed the following year that banned all exploration and production within 12 nautical miles of the Italian coast. An international arbitral tribunal found Italy to have expropriated the project, and ordered it to pay millions in compensation. 

Renewable inconsistency

Perhaps even more contentious than inconsistent regulation of fossil fuels is inconsistent regulation in the renewable energy sector, as renewable energy projects continue to be buffeted by economic and political developments.

This has seen governments seeking to induce investment in renewable energy projects through attractive incentive schemes, and then subsequently attempting to modify those schemes. For example, following the 2008 financial crisis some European states cut renewable energy subsidies to address budget shortfalls, which triggered an avalanche of claims that remain pending to this day.

More recently, the windfall taxes imposed on renewable energy producers – following the spike in energy prices prompted by Russia’s invasion of Ukraine – have also been highly contentious. Another example of claims following radical political changes is the attempt of the current Mexican administration to reimpose a form of state monopoly over the electricity sector, after years of liberalisation reforms that sought to develop its renewable energy capacity through private capital. 

Claims against governments may similarly emerge from a new wave of “resource nationalism” linked to minerals critical to decarbonisation. The dramatic spike in lithium prices in 2022 was accompanied by Mexico nationalising all lithium resources within its territory. Other countries have publicly announced an intention to enact their own nationalisation policies.

Though states are fully within their rights to exercise sovereignty over their natural resources, they will surely be exposed to claims if they fail to provide adequate compensation to parties who have had their property taken.

Location, location, location

This threat – in addition to general geopolitical considerations – will lead many nations to source critical minerals closer to home, which will in turn create new controversies.

For example, Spain’s San José Valdeflóres deposit is touted as a crucial source of lithium for the European market but its location near the Unesco world heritage site of Cáceres has made it the subject of considerable local opposition. If the mining project is prevented from going ahead, however, it is likely a large dispute will arise between the opposing positions.

This type of claim will be a new iteration of a familiar conflict. While many people may favour tackling climate change, they may also object to having a lithium mine or a wind farm in their backyard. As such, while the decarbonisation of the global economy is crucial, it is set to be highly contentious.

Marie Stoyanov is a partner and David Ingle is senior counsel at Allen & Overy

A service from the Financial Times