Close-up of the Energy Charter Treaty
Source: Energy Charter Treaty website
By Aydın Clara Orberk, 9 minutes
The European Union is a party to over 700 bilateral treaties and over 200 multilateral treaties. These are generally legal agreements between two (bilateral) or more (multilateral) state entities. One example of a bilateral treaty is the 2016 free-trade agreement between Canada and the EU, the Comprehensive Economic and Trade Agreement, or CETA. In turn, one example of a multilateral treaty is the Energy Charter Treaty (ECT). It is not very well known, but it could well be the most decisive Treaty for the energy transition in the coming years. The ECT has been greatly debated recently and notably alleged to seriously jeopardize Europe’s Fit for 55 climate neutrality project, which led to it being amended after two years of negotiations. What is the Energy Charter Treaty and why should you care? Continue reading to find out!
What is the Energy Charter Treaty and why should you care?
The Energy Charter Treaty is a binding international agreement for cooperation in the energy sector with 53 current members, among which are the EU and all its constituent Member States except Italy. Amid partly executed threats of Russia to stop its gas exports, energy and energy security are pressing concerns in Europe. Relatedly, the ECT started out in 1991 as an initiative of the then European Community to ‘promote international energy cooperation’. It was meant to secure the energy supply to the EU by protecting the interests of western energy companies wherever they exported fossil fuels from, notably in post-soviet States at that time. Essentially, if companies are prevented from executing their projects and thus incur losses, they can go to court to get financial compensation.
Energy security or energy disaster?
Today, Russia, the biggest fossil fuel energy supplier to the EU, is not a party to the ECT anymore and exited the Treaty in 2009. In addition, Australia, the biggest coal supplier to the EU, exited the treaty in 2021. Hence, about 30 years after its creation, the ECT no longer seems to have any utility in securing energy supply. Nowadays, however, energy transition laws could force such companies to slow down the extraction of fossil fuels or not go through with new fossil fuel extraction projects in the making such as EACOP, the controversial 1400 km long East African Crude Oil Pipe Line project which insurance banks such as Allianz Group and Deutsche Bank have pulled out of. The ECT thus currently protects the profits of energy companies by giving them the possibility to sue states unfavourable to fossil fuel projects.
Scheme depicting the investor-state dispute settlement (ISDS) mechanism. Credit: Bonpote
As depicted above, whenever states party to the Treaty wish to pass a law favouring low-carbon energies, or a law setting greenhouse gas (GHG) emission reduction targets, foreign investors, notably big fossil fuel companies, could lose profits as a result. A coal mine could for instance be forced to reduce its activity and eventually close, or plans of building infrastructure could not go through.
A high stake investor-state dispute settlement (ISDS) mechanism
By invoking article 26 of the ECT (settlement of disputes between an Investor and a Contracting Party) disputes concerning Parts II (Commerce) and III (Investment Promotion and Protection) of the treaty can be submitted to either the national courts of the contracting party or international arbitration or conciliation procedures. Those latter arbitration tribunals are private, meaning that lawyers, not magistrates, operate them. These arbitrations occur behind closed doors and lack transparency. It is also not insignificant that two-thirds of the lawyers on the ECT’s Legal Advisory Task Force have a financial stake in investor lawsuits against states. Crucially, it is for the investor party to choose the means for resolution - article 26 (3) states that each contracting party gives its unconditional consent to the submission of a dispute to international arbitration or conciliation procedures.
To give some examples,
German company Uniper announced that it would sue the Netherlands and claim compensation of 1 billion euros if the Netherlands were to approve a law to phase out coal power.
UK-based oil and gas company Rockhopper has been suing Italy since 2017 over the state’s refusal to grant a concession for oil drilling, on top of a claim for compensation for its lost potential future profits. Italy had exited the treaty in 2015, but Rockhopper could still sue them because, in the exit clause of the treaty, article 47, the so-called sunset clause in § 3 provides that ‘the provisions shall continue to apply to investments made in the area of a contracting Party by a contracting State (...) as of the date when the Contracting Party’s withdrawal takes effect for a period of 20 years from such date’.
This investor-state dispute settlement (ISDS) mechanism has been debated because the stakes are high: companies can be compensated for any actions from contracting parties that harm the companies’ current profits. Companies have even been compensated for future profits on the basis of ‘legitimate expectations’. For taxpayers, the consequences are as follows: if climate policies are to be rolled out, and investors invoke the ECT, Member States and thus European taxpayers could have to pay billions in compensation to the investors - up to 340 billion, researchers found.
ECT and European Green Deal: an unhappy marriage
The Treaty has been under fire for two reasons, namely that it gives disproportionate power to companies to sue countries and that it favours fossil fuel energy production: 70% of lawsuits up to date indeed concern oil, gas or coal. The first of these is evidenced by the fact that the researchers criticize the tendency of ISDS tribunals’ to award compensation to investors based on the would-be revenue, which results in vastly inflated financial awards, potentially summing up to 340 billion dollars, as aforementioned. Up until now, ECT settlements have cost governments 57.2 billion dollars, with the inter arbitration tribunals siding with corporate-friendly interpretations of the ECT.
In turn, the fact that ECT favours fossil fuel energy is problematic because it clashes with the Paris agreement and EU climate policy as it seriously undermines the EU’s objective to become the first climate-neutral continent by 2050. The European Parliament indeed saw the incompatibility of the ECT with the European Green Deal (EGD) and pushed for an amendment of the ECT in 2020. Forty-eight MEPs commented that the ECT ‘undermines any regulatory attempt to change the crashing course of fossil fuel consumption and forces EU citizens to pay for the life insurance of fossil fuel investors’ in a question to the Commission inquiring about the deadline of the ongoing amendment process ‘to prevent it from dragging on’. A modernisation process, therefore, started in 2020 and the negotiations were finalized the last June in an attempt to align the ECT with the EU climate policy enshrined in the EGD.
To tackle or not to tackle: 87% of Europeans agree that tackling climate change can help improve their own health and well-being, according to a study by the European Commission and European Parliament. Meanwhile, stakeholders in the energy industry such as Shell and Total, which are also stakeholders of the ECT, in turn spend a combined few hundred millions on climate lobbying - spending to delay, control or block policies tackling climate change - each year, an analysis by Forbes showed.
Modernisation: What’s new?
Commission-led negotiations ended on Friday, 27 June 2022. Under the so-called flexibility clause, EU member states essentially agreed that:
New fossil fuel-related investments made after 15 August 2023 are not protected anymore.
Existing fossil fuel-related investments are protected 10 years from the entry into force of the amendment.
Yet major loopholes remain: new investments for gas pipelines would notably be protected until the end of 2040, and the proposal foresees expanding the scope of investment protection to new technologies that are currently not covered, such as hydrogen and biomass, adding to the list of industries that can sue states for taking action harming their interest. The amendments must still be approved unanimously by all member states, many of whom export fossil fuels.
Profits over People and Planet or People and Planet over profit?
Some argue that the ECT is not only a global tragedy for taxpayers and public budgets but also that it outright threatens the government's right to regulate. Indeed, while climate change policies are not necessarily politically costly according to a recent assessment by the International monetary fund, with the ECT the much-needed climate policies become seriously financially costly. In a nutshell, the ECT modernisation does not convince us at all. While modernisation is welcome, it is considered that it is not and may never be adequate. Indeed, the IPCC itself stresses that the ECT constitutes a tremendous obstacle for climate policies which can no longer be put off: another decade of costly, and climate legislation-freezing fossil fuel investment protection (two other decades in terms of gas) cannot be afforded. Expensive compensation payments divert critical public finance from climate mitigation and adaptation to polluters - profits are privatized, but the costs are socialized. Is this what Europeans want?
‘It just can’t be that the fossil fuel industry is still more protected than our human rights’
Five young Europeans that have experienced fires and floods as a result of climate change consider that an exit from the ECT is the only viable option and have filed an action before the Strasbourg Court of Human Rights last June. Julia, the youngest claimant, is a German high school student and experienced the lethal flooding of the Ahr Valley last summer. ‘It just can’t be that the fossil fuel industry is still more protected than our human rights’, she says. The claimants hope their lawsuit will increase support for an ECT exit strategy, and you can read another article on climate litigation here.
Floods and other disasters: Increased flooding is one of the most serious effects from climate change in Europe over the coming decades, according to the European Environment Agency (EEA).
Investor-arbitration clauses - Leitmotiv or Dead end?
At the beginning of the article, the Comprehensive Economic and Trade Agreement between the EU and Canada was taken as an example of a bilateral treaty. To circle back to this, the CETA treaty too had come under fire and caused a stir with some Member States refusing to sign it for a while because it also comprises a controversial Investor-arbitration clause. An investor-state dispute settlement mechanism gives multinational corporations the possibility to sue national governments for billions of dollars if they thought that the government policies had a bad impact on their business - for instance, if a government wishes to launch campaigns against smoking or increase taxes on cigarettes which increases the price of the goods, tobacco companies exporting from Canada could sue the State, making any such policies costly for states. It is interesting to reflect on how this fares with representative democracies’ functioning without restraining the legislators’ right to regulate, and which safeguards need to be put in place.
To conclude, today, the ECT no longer safeguards energy security but instead massively profits investors to the detriment of states, taxpayers, and climate policies. On a forward-looking note, while no agreement to collectively exit the Treaty was found at the EU level, some states consider the ISDS mechanism a serious hindrance to the transition away from fossil fuels and this could initiate processes to exit the Treaty. Spain was the first State to call for an exit of the treaty after the modest modernisation negotiations, and the Dutch parliament passed a motion on June 22 calling for the government to withdraw the Netherlands from the ECT as well, ‘Bad news for multinationals that want to undermine our climate policy with billions of dollars in claims’, MP Christine Teunissen tweeted. Furthermore, jurists are exploring ways to overcome the sunset clause obstacle in order to exit the ECT.
