The Energy Charter Treaty: an obstacle to climate action

energy-charter-treaty

 

Why the ECT recently hit the headlines

 

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.

 

 

 

A double incompatibility

 

The reasons invoked by the withdrawing states are the Treaty’s incompatibility with (1) EU law, but most of all with (2) the 2015 Paris agreement 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 in the energy sector can sue governments through a very favourable Investor-State Dispute Settlement (ISDS) mechanism. 

 

 

 

The chilling and regulatory effects

ISDS mechanisms (included in most investment treaties such as the ECT) allow foreign investors to bypass national courts and claim huge amounts of compensation from governments for introducing policy changes and laws that impact their profitability directly before private and secretive tribunals. Such mechanisms are known for generating what is called  “regulatory chill effect”. Such an effect can be defined as a situation in which the mere existence of investment treaties and ISDS discourage host states from taking regulatory action in the public interest because of the fear of being sued before an ISDS tribunal. In other words, governments may refrain from implementing environmental requirements or shutting down fossil fuel infrastructures, just because certain undertakings could trigger arbitration proceedings and obtain the payments of awards. This therefore creates 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…

 

 

How should these withdrawals be interpreted?  

 

Countries that decided to exit the ECT are sending a very  strong political message conveyed to accelerate climate transition.

However, such withdrawals won’t be enough. First, next to the ECT, there are more than 2000 bilateral investment treaties in force in the world that also protect coal, oil, gas and other high-emissions investments, and that would need to be terminated. Second, even if a State pulls out of the ECT, the Treaty still continues to apply for a period of 20 years to investments made before the withdrawal (so-called “sunset clause”). This means that investors and companies in the fossil fuel sector could still turn against the states for the climate laws that they consider harmful to their economic interests. 

That’s why some scholars like Wagner and Tropper rather pleaded for its modernisation over withdrawal. However, the proposed reforms continue to allow indefinitely the protection of fossil fuels investments in most ECT members’ territory and for at least another decade (potentially until 2040) in the EU. On top of that, the entry into force of the reforms depend on ratification by ¾ of ECT members, which questions whether a reformed version would even ever come to light. In making the  balance between modernisation and withdrawal, several EU countries decided to withdraw, and the European Parliament also called the Commission to organise a coordinated EU exit.  

Indeed, as other legal experts argue, the sunset clause can be significantly neutralised among countries that want to, thereby reducing the risk of claims being brought against climate measures. 

Finally, ECT proponents also argue investors in renewable energy have generated more than 50% of investment cases under the ECT and that a modernised version of the ECT could contribute to increasing the attractiveness of renewable energy investments. However, withdrawal from the ECT would not affect investments in renewables: in fact, as explained in a recent  study, decades of research have failed to establish that treaties such as the ECT have a discernable impact on investment flows, including in the renewable energy sector. The ECT regulatory chill may even undermine states’ measures that are effective at promoting investments in renewable energy. 

The ECT fall down shows a clear shift is needed in the way the EU conceives its investment policy and it’s time to develop alternative solutions for an international governance framework for sustainable investment.

 

 

Organisations and businesses as main drivers  

 

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 theinertia provoked by geopolitical imperatives. 


Acknowledgement : We would like to thank  Amandine Van Den Berghe, Trade and Environment Lawyer at ClimateEarth  for giving her input and suggestions to this article. Working on the intersection between trade and environment, Amandine is also in charge of ClientEarth’s Trade campaign.

 

 

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