The German government has firmly earmarked the forest as a climate asset. But recent official calculations cast doubt on whether trees can store greenhouse gasses. Bernhard Pötter analyzes why this important German carbon sink could run out soon and how the Environment Ministry plans to close this climate action gap.
One month before the COP29 world climate summit in Azerbaijan, we look at the protracted conflict with Armenia over Nagorno-Karabakh. One year ago, Azerbaijan attacked the enclave. Maximilian Arnhold has investigated why the conflict in the Caucasus is dominated by climate and energy issues and what COP29 has to do with it.
We also report on new support for Ukraine’s damaged energy infrastructure, a German draft on climate adaptation, and the growing number of jobs in the green energy sector. However, the latter is clouded by a particular statistic.
Forests and agriculture in Germany will probably contribute significantly less to climate action in the coming decades than expected. The carbon sink capacity of the land use sector (LULUCF) has decreased considerably in recent years and practically disappeared. Experts expect the sector to emit more greenhouse gasses than it stores in the coming years up to 2030 – in other words, it will change from a carbon sink to a carbon source. This is based on projections by the Thünen Institute. A new study by the Federal Environment Agency (UBA) also suggests this.
The “Projection data on greenhouse gas emissions” from the Johann Heinrich von Thünen Institute, German Federal Research Institute for Rural Areas, Forestry and Fisheries, states that “Land Use, Land-Use Change and Forestry (LULUCF) sector absorbs considerably less carbon dioxide in total than previously assumed.” This trend is also clearly described in the “National Forest Inventory,” which the Federal Ministry of Agriculture BMEL will present on October 8: Over the last few years, forests have stored less and less carbon dioxide.
The official data from the National Inventory Report for the German Greenhouse Gas Inventory and the National Forest Inventory may even underestimate the problem, suggests the latest study by the Öko-Institut on behalf of the German Environment Agency. This is because the official calculations “do not adequately factor in natural disturbances in the forest such as severe drought, damage caused by beetles and the associated decline in the vitality of trees and their death,” according to the Oeko-Institut. Overall, the carbon sink function of the German forest is probably “55 to 60 million tons of CO2 per year less than previously assumed for the years 2018 to 2021,” it concludes.
However, official German climate policy urgently plans to utilize the forestry sector as a sink: According to the Climate Change Act (KSG), 25 million tons of CO2 are to be stored every year from 2027 to 2030 – this figure is set to rise to 35 million tons per year between 2037 and 2040. And the target for the last three years before the legally stipulated net zero in 2045 is even 40 million tons. According to the KSG, the forests, which cover one-third of Germany on 11.4 million hectares, will offset emissions from the cement industry, for example, which would otherwise be very difficult to avoid.
However, according to current projections by the Thünen Institute, these figures will be missed by a wide margin. In a scenario that factors in all climate action measures up to spring 2024, the sector will save a maximum of around one million tons in the years around 2030, resulting in a shortfall of around 24 million tons compared to the statutory targets. The shortfall will increase even further in later years: While the KSG expects the German forest to store 35 to 40 million tons annually, the sector barely manages to keep its total emissions at around zero.
It is an open secret among experts that the German forest threatens to disappear as a climate asset. However, the official line continues to see forests as an essential carbon sink, reportedly having offset three percent of German emissions in 2019 – compared to 12 percent in 2012, according to official figures. The current Federal Forest Inventory will also hardly provide any additional insight into this, as it is based on data from the past ten years.
However, the responsible Federal Ministry for the Environment confirmed the Thünen Institute’s gloomy prediction: “We see no reason to fundamentally question the results of the current climate projections for the LULUCF sector (…),” it said in a statement.
The Ministry of the Environment relies on the “Action Program Natural Climate Protection” (ANK) to close this climate action gap. The German government is using this special program, funded to the tune of 3.5 billion euros, to promote forest conversion, peatland rewetting and the restoration of floodplains. The Thünen report does not mention these measures because they were only initiated later. The ANK measures were designed to “achieve the objectives of the KSG,” a spokesperson told Table.Briefings. However, the Ministry is not sure about this. It refers to a changed calculation methodology and a “readjustment mechanism” in the ANK.
The Ministry is “aware that the climate targets for the land sector are very ambitious,” said the spokesperson. Droughts, storms and climate change have a major effect on the sector’s emissions balance, which is difficult to predict. “We know that there is still a significant need for action in the land sector,” it says. That is why it asked the Scientific Advisory Board for Natural Climate Protection to “show us possible courses of action.”
The German government is now coming under pressure from the courts. Environmental Action Germany (DUH) had filed a lawsuit against the German LULUCF regulation, claiming it was inadequate. The Berlin Higher Administrative Court ruled in favor of DUH in the spring. In late August, the Ministry of the Environment decided not to appeal against the ruling, thereby accepting the sentence to increase climate action efforts in the LULUCF sector.
According to the DUH, this means that the government must disclose its future plans by the end of October and adopt them within six months. Otherwise, “enforcement proceedings will be initiated against the federal government,” the association says. DUH calls for:
It is “the first time that an environmental organization was able to obtain a legally binding ruling from an administrative court ordering the German government to take immediate concrete climate action measures,” the DUH said. According to Executive Director Sascha Müller-Kraenner, the “positive effect of this ruling on nature conservation and land use cannot be overestimated.” The government will be forced also to step up climate action in forestry policy, “an ambitious new forest law that focuses on the forest ecosystem and not one-sidedly on the interests of the forestry industry is overdue.”
Over a year ago, Azerbaijan attacked the enclave of Nagorno-Karabakh. More than a hundred thousand people fled to Armenia. The two warring parties might be able to reach an agreement before the COP29 world climate summit hosted in Azerbaijan’s capital Baku in November. These seven climate, energy and resource issues play an important role in the Caucasus’ oldest conflict:
Azerbaijan is rich in fossil fuels: Oil and gas exports account for around 90 percent of Azerbaijan’s exports and 60 percent of the national budget. Its autocratic president, Ilham Aliyev, used this income to recapture Nagorno-Karabakh in a blitz offensive in September 2023. The region is internationally recognized as Azerbaijan territory, but was almost exclusively populated by Armenians.
Europe provided indirect support: EU Commission President Ursula von der Leyen signed a gas partnership with Azerbaijan in July 2022 – with the aim of doubling gas imports to the EU by 2027. The gas from Azerbaijan is actually intended to replace Russian gas due to the war in Ukraine. The catch: Azerbaijan cannot supply the planned amount of gas itself. That is why the country is also importing Russian gas, which will be forwarded to the EU. Due to the human rights situation in Azerbaijan, the EU Parliament is calling for the suspension of the gas deal and sanctions against Baku. However, despite all the criticism, gas imports continue.
Armenia, on the other hand, has no fossil resources of its own – the small country’s energy supply is almost entirely dependent on Russia. In 2022, around three-quarters of all oil imports came from Russia, and nearly 90 percent of natural gas. Armenia mainly generates its energy from hydropower, and the Mezamor nuclear power plant, the only nuclear power plant in the Caucasus, contributes a good quarter of the country’s electricity supply. According to the International Energy Agency, renewable energies accounted for around 30 percent of electricity production in 2021. Their share is expected to rise to 66 percent by 2036.
Experts certify the small country’s enormous potential. “The government under Prime Minister Nikol Pashinyan has recognized the danger of energy dependency,” says political economist Armen Sahakyan. “With fewer imported fossil fuels, Armenia can act more confidently in international relations.” Sahakjan cites neighboring Georgia, which is pursuing similar plans: A new undersea cable through the Black Sea will transport electricity from hydro and wind power to Europe in the future. “Armenia’s participation in the undersea cable project would enable the country to export green energy to European markets via Georgia – and thus promote closer cooperation with the EU,” explains Sahakyan, who works as a consultant in Yerevan.
Armenia needs the support of rich countries to escape its energy dependency on Russia. As a developing country (Non-Annex I) to the UN Framework Convention on Climate Change, it calls for global climate aid to implement its Nationally Determined Contribution (NDC). In addition, the “debt-for-climate-protection swaps” mechanism is intended to mobilize additional funding for climate measures.
Climate action is undoubtedly necessary as climate change is hitting the South Caucasus hard. In May, Armenia experienced its worst flooding in decades. At least four people lost their lives in the country’s north and almost 270 people had to flee their homes. For the first time, the EU also helped and supported the flood victims with 100,000 euros in humanitarian aid. According to a study by the World Bank and the Asian Development Bank, Azerbaijan will face increasing extreme weather events, agricultural losses and adverse effects on health.
Water problems exacerbate the crisis. Even before the 2020 offensive, Azerbaijan accused Armenia of using water access in Nagorno-Karabakh as a means of exerting pressure. Around 75 percent of Azerbaijan’s water resources come from surface water outside the national territory. Since Nagorno-Karabakh has been in Azerbaijani hands, Azerbaijan controls all springs and tributaries that feed Lake Sevan, Armenia’s largest body of water. The water issue would theoretically also offer an opportunity for cooperation. Experts believe that intergovernmental water management would be necessary. This is where the climate summit could come in.
Azerbaijan is building model eco-settlements in recaptured Nagorno-Karabakh of all places – according to critics such as human rights activist Arshak Makichyan, “to color a war green before the COP.” A smart village in Zangilan is under construction and will be powered by renewable electricity generated by a small hydropower plant. In 2021, President Aliyev declared Nagorno-Karabakh a “green energy zone” and promised investments primarily in hydropower as well as wind and solar energy. Meanwhile, the resettlement of Azerbaijani citizens is progressing.
Azerbaijan makes no secret that by seizing the region, it is also securing its own future after the end of oil and gas. This is revealed in a government report on “Economic Minerals” in Nagorno-Karabakh: 350 deposits of critical raw materials were found there, including copper, cobalt and lithium. Materials that the EU also urgently needs for its energy transition. Just one month after the conquest, Mukhtar Babayev, the country’s Minister of Environment and Natural Resources, invited visitors to “GeoMining Baku” – Azerbaijan’s first mining trade fair. He said the new regions are rich in natural resources and will play an important role in rebuilding efforts. Babajew is also COP29 President-Designate
The international climate conference is considered temporary safety for Armenia. However, high-ranking diplomats fear that another attack could follow COP29. “Armenian President Pashinyan is constantly making concessions to Azerbaijan – in the hope of appeasing Aliyev,” criticizes political scientist Tigran Grigoryan, who worked in the Armenian Security Council office from 2020 to 2021. Yet, according to Grigoryan, Aliyev needs Armenia as an external enemy to maintain his own power. Azerbaijan also urges Armenia to amend its constitution, as it stipulates territorial claims to Nagorno-Karabakh. Pashinyan acknowledges that this is necessary, but expects that amendments will not be completed before 2027 – which could delay the peace process.
So far, negotiations have only been held on a framework agreement that is to include principles of international law. Although such a peace agreement before or during the opening of the climate summit would be conceivable, it would be “a PR victory” for Azerbaijan, says analyst Grigoryan. The disputed border issues must also be addressed to achieve lasting peace.
In 2021, the German energy company RWE demanded compensation of 1.4 billion euros from the Dutch government for the country’s decision to phase out coal by 2030. The government, RWE claimed using an international arbitration procedure, had not provided adequate compensation for phasing out coal in RWE’s power plants. Later, the company withdrew its lawsuit. But the case exemplifies how dangerous international arbitration courts can become for global climate protection. Because they protect fossil interests.
RWE raised its claim on the basis of the Energy Charter Treaty (ECT). It is the investment treaty most often invoked by foreign investors – but it is not the only one. There are almost 2,500 other investment treaties worldwide that, like the ECT, contain controversial provisions on so-called investor-state dispute settlement (ISDS) mechanisms. They allow investors to bring claims against the governments of their host countries before international arbitration tribunals if their policies affect their business interests.
Because ISDS also protect investments in fossil fuels, they pose a high risk to the global energy transition. This risk is still overlooked in the international climate debate.
In the past, the fossil fuel industry has benefited most from the use of the ISDS mechanism. In publicly known cases – many proceedings take place behind closed doors – this industry has won at least 82.8 billion US dollars. A successful case, and even the mere threat of being sued in an ISDS case, increases the cost of climate action and reduces the fiscal space to respond to climate change.
The European Union and eleven other countries, including Germany, are aware of the threat posed by the ECT. Since 2022, they have withdrawn or decided to do so. But because there are so many other investment treaties with ISDS that protect fossil fuel investments in the same way, the danger remains.
E3G’s latest report, titled “Investment Treaties are Undermining the Global Energy Transition,” shows just how big the risk is. They have mapped the global assets of the fossil fuel industry and the associated greenhouse gas emissions protected by investment treaties with ISDS:
Globally, investment treaties protect fossil fuel assets that together can emit up to around two gigatons (Gt) of CO₂ equivalent (CO₂e) per year. Parent companies based in the G7 are responsible for 50 percent of the total volume. Their share corresponds to over 40 percent of the G7’s greenhouse gas emissions from electricity generation in 2022.
The seventh-highest amount of emissions potentially protected by ISDS comes from Germany. Egypt and Nigeria are at the highest risk of being prosecuted under ISDS. Indonesia, supported by a Just Energy Transition Partnership (JETP), is also at high risk.
The example of the Clean Energy Transition Partnership (CETP) illustrates the tension between investment treaties and international climate efforts: Six of the 15 countries that protect particularly high greenhouse gas emissions through ISDS beyond their borders have also joined the CETP and have thus committed themselves to no longer support new export financing for fossil fuel projects abroad. Germany is also among them.
If countries that pursue bold climate action take their commitments seriously, investment treaties must be reformed. These reforms must be led by countries that are particularly ambitious in climate protection. For example, countries withdrawing from the Energy Charter Treaty can ensure the coherence of their climate commitments by tackling other investment treaties. Germany should review their approach and develop a strategy to effectively tackle their entire stock of investment treaties, including considering excluding ISDS provisions in new treaties.
Multilateral organizations such as the OECD, the United Nations Commission on International Trade Law (UNCITRAL), and the United Nations for Trade and Development (UNCTAD) have continued talks on reforming international investment treaties. However, the discussions are not progressing fast enough to do justice to the urgency of the climate crisis.
Therefore, the investment treaty reform agenda must be integrated as soon as possible into broader climate negotiations in multilateral forums such as the G7, G20 and UNFCCC processes. The upcoming COP29, which will focus on climate finance, also offers an opportunity to do so. Climate leaders who featured on E3G’s ranking of the most responsible countries for protecting ISDS-covered greenhouse gas emissions, including the UK, Germany, and France, should lead these discussions.
Investment treaties with ISDS are at odds with the international efforts of the richest countries to phase out fossil fuels and redirect international financial flows towards net-zero targets. Our recommendations give countries another tool to respond to investment treaties. It would be an important building block in achieving coherent climate protection.
Jordan Dilworth is a Research Associate in the E3G Clean Economy team, where he is performing research on investment treaties to deepen the evidence base for moving away from traditional investment governance.
The German government has firmly earmarked the forest as a climate asset. But recent official calculations cast doubt on whether trees can store greenhouse gasses. Bernhard Pötter analyzes why this important German carbon sink could run out soon and how the Environment Ministry plans to close this climate action gap.
One month before the COP29 world climate summit in Azerbaijan, we look at the protracted conflict with Armenia over Nagorno-Karabakh. One year ago, Azerbaijan attacked the enclave. Maximilian Arnhold has investigated why the conflict in the Caucasus is dominated by climate and energy issues and what COP29 has to do with it.
We also report on new support for Ukraine’s damaged energy infrastructure, a German draft on climate adaptation, and the growing number of jobs in the green energy sector. However, the latter is clouded by a particular statistic.
Forests and agriculture in Germany will probably contribute significantly less to climate action in the coming decades than expected. The carbon sink capacity of the land use sector (LULUCF) has decreased considerably in recent years and practically disappeared. Experts expect the sector to emit more greenhouse gasses than it stores in the coming years up to 2030 – in other words, it will change from a carbon sink to a carbon source. This is based on projections by the Thünen Institute. A new study by the Federal Environment Agency (UBA) also suggests this.
The “Projection data on greenhouse gas emissions” from the Johann Heinrich von Thünen Institute, German Federal Research Institute for Rural Areas, Forestry and Fisheries, states that “Land Use, Land-Use Change and Forestry (LULUCF) sector absorbs considerably less carbon dioxide in total than previously assumed.” This trend is also clearly described in the “National Forest Inventory,” which the Federal Ministry of Agriculture BMEL will present on October 8: Over the last few years, forests have stored less and less carbon dioxide.
The official data from the National Inventory Report for the German Greenhouse Gas Inventory and the National Forest Inventory may even underestimate the problem, suggests the latest study by the Öko-Institut on behalf of the German Environment Agency. This is because the official calculations “do not adequately factor in natural disturbances in the forest such as severe drought, damage caused by beetles and the associated decline in the vitality of trees and their death,” according to the Oeko-Institut. Overall, the carbon sink function of the German forest is probably “55 to 60 million tons of CO2 per year less than previously assumed for the years 2018 to 2021,” it concludes.
However, official German climate policy urgently plans to utilize the forestry sector as a sink: According to the Climate Change Act (KSG), 25 million tons of CO2 are to be stored every year from 2027 to 2030 – this figure is set to rise to 35 million tons per year between 2037 and 2040. And the target for the last three years before the legally stipulated net zero in 2045 is even 40 million tons. According to the KSG, the forests, which cover one-third of Germany on 11.4 million hectares, will offset emissions from the cement industry, for example, which would otherwise be very difficult to avoid.
However, according to current projections by the Thünen Institute, these figures will be missed by a wide margin. In a scenario that factors in all climate action measures up to spring 2024, the sector will save a maximum of around one million tons in the years around 2030, resulting in a shortfall of around 24 million tons compared to the statutory targets. The shortfall will increase even further in later years: While the KSG expects the German forest to store 35 to 40 million tons annually, the sector barely manages to keep its total emissions at around zero.
It is an open secret among experts that the German forest threatens to disappear as a climate asset. However, the official line continues to see forests as an essential carbon sink, reportedly having offset three percent of German emissions in 2019 – compared to 12 percent in 2012, according to official figures. The current Federal Forest Inventory will also hardly provide any additional insight into this, as it is based on data from the past ten years.
However, the responsible Federal Ministry for the Environment confirmed the Thünen Institute’s gloomy prediction: “We see no reason to fundamentally question the results of the current climate projections for the LULUCF sector (…),” it said in a statement.
The Ministry of the Environment relies on the “Action Program Natural Climate Protection” (ANK) to close this climate action gap. The German government is using this special program, funded to the tune of 3.5 billion euros, to promote forest conversion, peatland rewetting and the restoration of floodplains. The Thünen report does not mention these measures because they were only initiated later. The ANK measures were designed to “achieve the objectives of the KSG,” a spokesperson told Table.Briefings. However, the Ministry is not sure about this. It refers to a changed calculation methodology and a “readjustment mechanism” in the ANK.
The Ministry is “aware that the climate targets for the land sector are very ambitious,” said the spokesperson. Droughts, storms and climate change have a major effect on the sector’s emissions balance, which is difficult to predict. “We know that there is still a significant need for action in the land sector,” it says. That is why it asked the Scientific Advisory Board for Natural Climate Protection to “show us possible courses of action.”
The German government is now coming under pressure from the courts. Environmental Action Germany (DUH) had filed a lawsuit against the German LULUCF regulation, claiming it was inadequate. The Berlin Higher Administrative Court ruled in favor of DUH in the spring. In late August, the Ministry of the Environment decided not to appeal against the ruling, thereby accepting the sentence to increase climate action efforts in the LULUCF sector.
According to the DUH, this means that the government must disclose its future plans by the end of October and adopt them within six months. Otherwise, “enforcement proceedings will be initiated against the federal government,” the association says. DUH calls for:
It is “the first time that an environmental organization was able to obtain a legally binding ruling from an administrative court ordering the German government to take immediate concrete climate action measures,” the DUH said. According to Executive Director Sascha Müller-Kraenner, the “positive effect of this ruling on nature conservation and land use cannot be overestimated.” The government will be forced also to step up climate action in forestry policy, “an ambitious new forest law that focuses on the forest ecosystem and not one-sidedly on the interests of the forestry industry is overdue.”
Over a year ago, Azerbaijan attacked the enclave of Nagorno-Karabakh. More than a hundred thousand people fled to Armenia. The two warring parties might be able to reach an agreement before the COP29 world climate summit hosted in Azerbaijan’s capital Baku in November. These seven climate, energy and resource issues play an important role in the Caucasus’ oldest conflict:
Azerbaijan is rich in fossil fuels: Oil and gas exports account for around 90 percent of Azerbaijan’s exports and 60 percent of the national budget. Its autocratic president, Ilham Aliyev, used this income to recapture Nagorno-Karabakh in a blitz offensive in September 2023. The region is internationally recognized as Azerbaijan territory, but was almost exclusively populated by Armenians.
Europe provided indirect support: EU Commission President Ursula von der Leyen signed a gas partnership with Azerbaijan in July 2022 – with the aim of doubling gas imports to the EU by 2027. The gas from Azerbaijan is actually intended to replace Russian gas due to the war in Ukraine. The catch: Azerbaijan cannot supply the planned amount of gas itself. That is why the country is also importing Russian gas, which will be forwarded to the EU. Due to the human rights situation in Azerbaijan, the EU Parliament is calling for the suspension of the gas deal and sanctions against Baku. However, despite all the criticism, gas imports continue.
Armenia, on the other hand, has no fossil resources of its own – the small country’s energy supply is almost entirely dependent on Russia. In 2022, around three-quarters of all oil imports came from Russia, and nearly 90 percent of natural gas. Armenia mainly generates its energy from hydropower, and the Mezamor nuclear power plant, the only nuclear power plant in the Caucasus, contributes a good quarter of the country’s electricity supply. According to the International Energy Agency, renewable energies accounted for around 30 percent of electricity production in 2021. Their share is expected to rise to 66 percent by 2036.
Experts certify the small country’s enormous potential. “The government under Prime Minister Nikol Pashinyan has recognized the danger of energy dependency,” says political economist Armen Sahakyan. “With fewer imported fossil fuels, Armenia can act more confidently in international relations.” Sahakjan cites neighboring Georgia, which is pursuing similar plans: A new undersea cable through the Black Sea will transport electricity from hydro and wind power to Europe in the future. “Armenia’s participation in the undersea cable project would enable the country to export green energy to European markets via Georgia – and thus promote closer cooperation with the EU,” explains Sahakyan, who works as a consultant in Yerevan.
Armenia needs the support of rich countries to escape its energy dependency on Russia. As a developing country (Non-Annex I) to the UN Framework Convention on Climate Change, it calls for global climate aid to implement its Nationally Determined Contribution (NDC). In addition, the “debt-for-climate-protection swaps” mechanism is intended to mobilize additional funding for climate measures.
Climate action is undoubtedly necessary as climate change is hitting the South Caucasus hard. In May, Armenia experienced its worst flooding in decades. At least four people lost their lives in the country’s north and almost 270 people had to flee their homes. For the first time, the EU also helped and supported the flood victims with 100,000 euros in humanitarian aid. According to a study by the World Bank and the Asian Development Bank, Azerbaijan will face increasing extreme weather events, agricultural losses and adverse effects on health.
Water problems exacerbate the crisis. Even before the 2020 offensive, Azerbaijan accused Armenia of using water access in Nagorno-Karabakh as a means of exerting pressure. Around 75 percent of Azerbaijan’s water resources come from surface water outside the national territory. Since Nagorno-Karabakh has been in Azerbaijani hands, Azerbaijan controls all springs and tributaries that feed Lake Sevan, Armenia’s largest body of water. The water issue would theoretically also offer an opportunity for cooperation. Experts believe that intergovernmental water management would be necessary. This is where the climate summit could come in.
Azerbaijan is building model eco-settlements in recaptured Nagorno-Karabakh of all places – according to critics such as human rights activist Arshak Makichyan, “to color a war green before the COP.” A smart village in Zangilan is under construction and will be powered by renewable electricity generated by a small hydropower plant. In 2021, President Aliyev declared Nagorno-Karabakh a “green energy zone” and promised investments primarily in hydropower as well as wind and solar energy. Meanwhile, the resettlement of Azerbaijani citizens is progressing.
Azerbaijan makes no secret that by seizing the region, it is also securing its own future after the end of oil and gas. This is revealed in a government report on “Economic Minerals” in Nagorno-Karabakh: 350 deposits of critical raw materials were found there, including copper, cobalt and lithium. Materials that the EU also urgently needs for its energy transition. Just one month after the conquest, Mukhtar Babayev, the country’s Minister of Environment and Natural Resources, invited visitors to “GeoMining Baku” – Azerbaijan’s first mining trade fair. He said the new regions are rich in natural resources and will play an important role in rebuilding efforts. Babajew is also COP29 President-Designate
The international climate conference is considered temporary safety for Armenia. However, high-ranking diplomats fear that another attack could follow COP29. “Armenian President Pashinyan is constantly making concessions to Azerbaijan – in the hope of appeasing Aliyev,” criticizes political scientist Tigran Grigoryan, who worked in the Armenian Security Council office from 2020 to 2021. Yet, according to Grigoryan, Aliyev needs Armenia as an external enemy to maintain his own power. Azerbaijan also urges Armenia to amend its constitution, as it stipulates territorial claims to Nagorno-Karabakh. Pashinyan acknowledges that this is necessary, but expects that amendments will not be completed before 2027 – which could delay the peace process.
So far, negotiations have only been held on a framework agreement that is to include principles of international law. Although such a peace agreement before or during the opening of the climate summit would be conceivable, it would be “a PR victory” for Azerbaijan, says analyst Grigoryan. The disputed border issues must also be addressed to achieve lasting peace.
In 2021, the German energy company RWE demanded compensation of 1.4 billion euros from the Dutch government for the country’s decision to phase out coal by 2030. The government, RWE claimed using an international arbitration procedure, had not provided adequate compensation for phasing out coal in RWE’s power plants. Later, the company withdrew its lawsuit. But the case exemplifies how dangerous international arbitration courts can become for global climate protection. Because they protect fossil interests.
RWE raised its claim on the basis of the Energy Charter Treaty (ECT). It is the investment treaty most often invoked by foreign investors – but it is not the only one. There are almost 2,500 other investment treaties worldwide that, like the ECT, contain controversial provisions on so-called investor-state dispute settlement (ISDS) mechanisms. They allow investors to bring claims against the governments of their host countries before international arbitration tribunals if their policies affect their business interests.
Because ISDS also protect investments in fossil fuels, they pose a high risk to the global energy transition. This risk is still overlooked in the international climate debate.
In the past, the fossil fuel industry has benefited most from the use of the ISDS mechanism. In publicly known cases – many proceedings take place behind closed doors – this industry has won at least 82.8 billion US dollars. A successful case, and even the mere threat of being sued in an ISDS case, increases the cost of climate action and reduces the fiscal space to respond to climate change.
The European Union and eleven other countries, including Germany, are aware of the threat posed by the ECT. Since 2022, they have withdrawn or decided to do so. But because there are so many other investment treaties with ISDS that protect fossil fuel investments in the same way, the danger remains.
E3G’s latest report, titled “Investment Treaties are Undermining the Global Energy Transition,” shows just how big the risk is. They have mapped the global assets of the fossil fuel industry and the associated greenhouse gas emissions protected by investment treaties with ISDS:
Globally, investment treaties protect fossil fuel assets that together can emit up to around two gigatons (Gt) of CO₂ equivalent (CO₂e) per year. Parent companies based in the G7 are responsible for 50 percent of the total volume. Their share corresponds to over 40 percent of the G7’s greenhouse gas emissions from electricity generation in 2022.
The seventh-highest amount of emissions potentially protected by ISDS comes from Germany. Egypt and Nigeria are at the highest risk of being prosecuted under ISDS. Indonesia, supported by a Just Energy Transition Partnership (JETP), is also at high risk.
The example of the Clean Energy Transition Partnership (CETP) illustrates the tension between investment treaties and international climate efforts: Six of the 15 countries that protect particularly high greenhouse gas emissions through ISDS beyond their borders have also joined the CETP and have thus committed themselves to no longer support new export financing for fossil fuel projects abroad. Germany is also among them.
If countries that pursue bold climate action take their commitments seriously, investment treaties must be reformed. These reforms must be led by countries that are particularly ambitious in climate protection. For example, countries withdrawing from the Energy Charter Treaty can ensure the coherence of their climate commitments by tackling other investment treaties. Germany should review their approach and develop a strategy to effectively tackle their entire stock of investment treaties, including considering excluding ISDS provisions in new treaties.
Multilateral organizations such as the OECD, the United Nations Commission on International Trade Law (UNCITRAL), and the United Nations for Trade and Development (UNCTAD) have continued talks on reforming international investment treaties. However, the discussions are not progressing fast enough to do justice to the urgency of the climate crisis.
Therefore, the investment treaty reform agenda must be integrated as soon as possible into broader climate negotiations in multilateral forums such as the G7, G20 and UNFCCC processes. The upcoming COP29, which will focus on climate finance, also offers an opportunity to do so. Climate leaders who featured on E3G’s ranking of the most responsible countries for protecting ISDS-covered greenhouse gas emissions, including the UK, Germany, and France, should lead these discussions.
Investment treaties with ISDS are at odds with the international efforts of the richest countries to phase out fossil fuels and redirect international financial flows towards net-zero targets. Our recommendations give countries another tool to respond to investment treaties. It would be an important building block in achieving coherent climate protection.
Jordan Dilworth is a Research Associate in the E3G Clean Economy team, where he is performing research on investment treaties to deepen the evidence base for moving away from traditional investment governance.
