Nov. 14, 2022
Signed in 1994 and entered into force in 1998, the Energy Charter Treaty (ECT) is composed of more than 50 signatories and provides a framework and forum for cooperation on energy security through operations of more open and competitive energy markets. After the collapse of the Soviet Union, the objective was to integrate the energy markets of Eastern European countries and to encourage investors to spread their activities on the more open and competitive markets in the new democracies of Eastern Europe.
With the Paris Agreements of 2015 and the increasing raise-awareness on climate issues in the world, the ECT needed to be modernised, a task for which the EU Commission was given an ultimatum in July 2022. One major ambition was to remove the protection of fossil fuels projects as guaranteed by ECT’s system of investment protection. However, the lack of significant progress and the willingness to take concrete steps in terms of climate action made some EU Member States (France, Germany, the Netherlands, Spain and Poland) notify their intention to withdraw from the Treaty.
The reasons invoked by the withdrawing States are the Treaty’s incompatibility with (1) the EU law, but most of all with (2) the 2015 Paris agreements and the decarbonization targets of the Green Deal (halving CO2 emissions by 2030 and carbon neutrality by 2050). In a nutshell, the ECT prevents the EU from abandoning fossil fuels, especially since the EU is home to €345bn of assets protected by the ECT, under which investors and energy companies can sue governments through very favourable Investor-State Dispute Settlement (ISDS) Mechanisms.
These ISDS specific to the Treaty generate what we call chilling or regulatory effects. These effects can be defined by a situation in which the mere existence of investment treaties and ISDS discourage host states of extractive facilities from taking regulatory action. In other words, preventing them from implementing strong environmental policies or shutting down fossil fuel operators, just because such undertakings would trigger arbitration proceedings and payments of awards. This represents a significant obstacle to climate action.
Such scenarios already happened in the past. In 2021, the Netherlands was sued by the German energy giants RWE and Uniper under the ECT over its plans to take coal power plants offline. Another significant example is the case of 2017 where the UK-based oil and gas company Rockhopper Exploration sued the Italian government over the state’s refusal to grant it a concession for oil drilling in the Adriatic Sea. This was especially striking not only because the Italian State had been ordered to pay up to EUR 190 million in damages to Rockhopper – more than seven times the money which it allegedly spent on exploring the project (EUR 29,2 million) - but especially because Italy withdrew from the Treaty in 2016...
Despite the strong political message conveyed to accelerate climate transition, such withdrawals won’t be enough. Even if a State pulls out of the ECT, the Treaty still continues to apply for a period of 20 years (Sunset clause). This also means that investors and injured companies can still turn against the states for the climate laws that they consider harmful to the fossil fuel sector.
That’s why scholars like Wagner and Tropper rather plead for its modernisation over withdrawals. For them, the Treaty has apparently allowed investors in renewable energy to generate more than 50% of investment cases. Consequently, a modernised version of the ECT could contribute to increasing the attractiveness of renewable energy investments. In the meantime, the European Commission appeals to States to reconsider their intention to withdraw at a time when the EU needs to diversify sources of energy due to the current geopolitical challenges with Russia and China.
Another huge obstacle is the tensions triggered among ECT’s members by modernisation processes that rather encourage the status quo at a time where natural disasters multiply. This would be especially the case with countries whose export of fossil fuels is a core economic activity like Azerbaïdjan or Japan that already blocked ECT’s reform in 2020 asked by the EU to align it with climate goals. However, as expressed by Cornelia Maarfield, Europe trade policy expert at Climate Action Network Europe (CAN), with the climate and fossil fuel crisis we are living through, we cannot allow countries to waste public money on compensating fossil fuel companies for undertaking policies that help curb emissions.
Tensions as described above are a clear example that a lot of states still depend on fossil fuels and will barely be able to cope with the deadlines established by the IPCC or the Green Deal. Significant changes are likely to happen at the level of businesses and civil society actors (e.g. organisations, associations) rather than at state-level. Obstacles preventing businesses from taking action are numerous. But most of the time, they do not know where to start or struggle with finding the benefits of making a carbon report or implementing a climate strategy.However, turning climate challenges into opportunities at businesses’ and civil society actors’ level appears to be the most relevant solution to overcome the inertia provoked by geopolitical imperatives.