A powerful legal tool designed to protect foreign investors could undermine commitments made in Paris last month to reign in climate warming emissions.

The tool is tucked into two pending trade deals President Obama wants to finalize this year. The language is de rigueur for trade agreements and is designed to protect against what’s known as “loss of expected profits.”

TransCanada, citing this clause in the North American Free Trade Agreement, on Wednesday filed a $15 billion lawsuit against the United States for blocking its Keystone XL pipeline.

The language gives companies an avenue to challenge regulations that undermine investment plans, and it could chill or even curtail global efforts to trim carbon emissions.

Almost 200 countries pledged last month to cut global warming gases in an attempt to keep temperatures “well below” 2 C above pre-industrial times.

But under either trade pact, if a new air rule, for instance, creates disincentive for an international energy company to build a coal plant, it can sue the government for investment losses if the company can prove the policy was adopted after initial plans for the plant were made.

Both trade agreements limit “the ability of governments to put in place climate and other public interest policies” and give “huge power” to big polluters,” said Ilana Solomon, director of the Sierra Club’s Responsible Trade Program.

The two trade deals in question capture most of the world’s economic might.

In his final year in office, President Obama hopes to finalize both the Trans-Pacific Partnership and the Trans-Atlantic Trade and Investment Partnership.

The Pacific partnership involves 11 countries on the Pacific Rim and is awaiting Congressional approval. The Atlantic version, still on the negotiating table, incorporates the 28 member states of the European Union.

Designed to ease trade obstacles between countries, both agreements include something called an “investor-state dispute settlement,” which allows corporations to file lawsuits based on “loss of expected profits.”

Under such agreements, if a foreign corporation is doing business in a country and it feels that basic investment rules have been breached, it can bring the country before an international tribunal in an effort to recoup lost or potentially lost profits.

The settlements—even if won by the corporation—don’t overturn the laws or regulations that were challenged.

TransCanada this week opened the largest such case ever brought against the U.S.—seeking $15 billion due to President Obama’s rejection of the Keystone pipeline last year.

Brought under NAFTA, the 1994 treaty that contains similar investor-state dispute settlement language, the case immediately became Example No. 1 in critics’ argument against the two pending agreements—corporations suing big when they don’t like environmental laws.

Democratic presidential candidate Martin O’Malley called the lawsuit “outrageous” in a tweet. “Trade deals shouldn’t value corporate profits over national interests.”

Solomon and others add that granting companies such power elevates foreign corporations to near equal standing with governments in environmental rulemaking. In the United States, they say, that would chill state and federal attempts to reign in global warming gases.

Trade advocates say this fear is overblown and maintain the tool keeps a level playing field for corporations operating abroad.

Chilling effect

Investor-state dispute settlements rose 50 years ago, as investors sought a way to bring claims against states, said Kara Sutton, policy director with the Trans-Atlantic Business Council.

Some form of investor-state dispute settlements exists in about 50 current U.S. trade agreements.

Sutton and others in support of the trade agreements say the investment language is necessary to protect companies doing business abroad from countries that may not have highly developed legal systems or may have bias against foreign investors.

Bill Reinsch, president of the National Foreign Trade Council, said objections to investor-state dispute settlements are borne out of “misplaced understanding” of how they work.

Arbitrators don’t have authority to order a country to change its laws, he said. “What they can do is require compensation.”

Reinsch sees no evidence that investor-state dispute settlements have had any “chilling” effects on regulators.

But environmentalists and social justice activists, among others, often fault international trade deals for giving unfettered economic activity precedent over social, environmental and democratic goals.

The U.S. has never lost such a case.

In the first investor-state dispute settlement case that targeted environmental law in the U.S., a decade ago a Canadian company sued the federal government over California’s prohibiting the compound methyl tertiary butyl ether, MTBE, as a gasoline additive because of health concerns.

Methanex Corp. brought case and sought more than $900 million in damages. The U.S. won the case but spent millions in defense.

This week’s announcement that TransCanada is suing the U.S. is a stark reminder of this legal weapon—and how the two pending trade agreements open up the U.S. to far more attacks, said Carroll Muffett, president and CEO of the Center for Environmental Law.

He added this threat of such litigation definitely impacts regulators. “Even sophisticated regulators operating at the national level in large countries are easily dissuaded” if they see a risk of trade complaints, he said.

The Obama Administration did not return requests for comment.

How do investor-state dispute settlements work?

In 2009, Swedish energy giant Vattenfall ran into a problem with a massive coal plant it planned for the banks of the Elbe River in Hamburg.

At issue were new Germany’s environmental restrictions— specifically water discharge regulations — that Vattenfall argued would render the 1,600 megawatt plant uneconomical. The policies were drafted years after Hamburg officials had accepted initial plans for the plant.

Germany’s federal regulators and the energy company at first tried to play nice but couldn’t hash it out. They stepped inside the ring at the Washington, D.C.-based International Center for Settlement of Investment Disputes, with Vattenfall using the dispute settlement clause in the international Energy Charter Treaty as its go-to punch.

Germany didn’t quite hit the canvas. But it suffered a behind-the-scenes TKO of a sort—settling with Vattenfall in 2010. As part of the agreement, Germany agreed to roll back some of the new environmental protections designed to protect water quality. The coal plant starting churning at full power this year.

Regulators tend to notice that kind of pushback.

A study last year from researchers at York University’s Osgoode Hall Law School interviewed 51 current or former Canadian officials involved in environment or trade in Ontario about investor-state dispute settlements and “regulatory chill.”

Researchers found that trade deals altered decision-making and created some obstacles for environmental rulemaking.

“About half of the interviews from Canada recalled one or a few situations in which [investor-state dispute settlements] or other trade concerns were raised in internal decision-making,” the authors wrote.

At the 2014 United Nations’ World Investment Forum, Malan Lindeque of Namibia’s Ministry of Trade and Industry said the arbitration for the settlements can be costly and pose major risks for developing nations. Such language in international trade agreements “limit their right to regulate and for developing countries hampers their ability to act in their own interest,” he said.

At the same forum, Champika Malagoda of Sri Lanka’s Research and Policy Advocacy Department said for international trade agreements her country “would not want the provision for state-investor dispute settlement, which gives investors the power to drag governments to dispute over policy changes.”

In addition, Muffett pointed out that the National Conference of State Legislators, a nonpartisan non-profit that supports U.S. state legislatures, has come out against investor-state dispute settlements.

The investor-state dispute settlement has prolonged negotiations between U.S. and Europe on the Trans-Atlantic deal as both France and Germany have expressed concern over its inclusion.

Plenty of precedent

Muffett and others skeptical of the agreements say cases like Vatenfall’s are just the tip of the iceberg.

The nonprofit organization Public Citizen estimates that governments have paid out more than $3 billion to investors in investor-state disputes under U.S. free trade agreements and other investment treaties, with more than 85 percent of this related to “oil, mining, gas, and other environmental and natural resource disputes.”

Some high profile examples: a Chevron Corporation case against Ecuador for its push for the company to clean up Amazon rainforest contamination; the Clayton Family, owners of U.S. concrete company Bilicon, against Canada for the country’s attempt to protect habitats and key species from Bilicon’s proposed basalt extraction in Nova Scotia; and U.S.-based waste management firm Metalclad Corp. against Mexico over a municipality’s decision to not grant permits to expand a toxic waste facility.

“This system has existed for decades, and these very vague concepts of fair treatment—or if they feel something reduces their profits—has given broad, expansive powers to foreign investors and corporations,” Solomon said.

Muffett said a “cottage industry” is growing around this practice as law firms increasingly seek ways to guide corporations to use the powerful investor-state tool in trade agreements.

“This is one of the most troubling things about investor-state protection: … Many companies operate on a multinational basis. It’s easy to move money across borders and give foreign investors access to alternate legal systems,” he said.

Another concern is the international tribunals’ arbitration process, which critics say primarily takes place behind closed doors and lacks a proper appeals system.

At odds with Paris agreement?

Sutton, with the Trans-Atlantic Business Council, said an uptick in “frivolous cases” might be possible if the two trade deals are ratified. But “no company wants to use [investor-state dispute settlements] at the end of the day. It’s a last resort to get back investments.”

The Obama Administration has touted that the U.S. has never lost an investor-state dispute cases in spite of having 50 such agreements in place, and publicized the trade deals as way to expand “economic opportunity for American workers, farmers, ranchers, and businesses.” It is not worried about environmental loses or handicapping the climate deal.

In an October statement on the Trans-Pacific Partnership President Obama said it “includes the strongest commitments on labor and the environment of any trade agreement in history.”

Muffett said the advisory boards for the agreements are overwhelmingly dominated by trader interest and the environment will come out on the losing end if the investor-state dispute settlement tools remain.

These “agreements’ express purpose is to reduce regulatory barriers and increase coherence between countries,” he said. “The problem is each country is farther along in certain environmental regulations.”

Adding to the skepticism around the trade agreements is a recent bill by the Republican-controlled House that would block trade deals from being used to cut greenhouse gas emissions.

“The Paris agreement set out a framework, now it’s up to all national governments to meet emissions targets,” Solomon said.

“We need to be clearing a path … (for) strong policies that keep fossil fuels in ground, and these free-trade agreements create new roadblocks and empower the very industries we’re trying to regulate.”