Climate crisis: Energy Charter Treaty reforms languish as EU heads for exit
Paul HatchwellWednesday 4 October 2023
At a time of accelerating climate breakdown and heightened energy security concerns, there’s a great need to defuse costly arbitration claims under the 1994 Energy Charter Treaty (ECT) – which, it’s argued, constrains the energy transition. Yet resolution remains elusive.
The ECT is a binding international agreement that establishes ‘a multilateral framework for cross-border cooperation in the energy industry’. Crucially, it enables foreign investors to bring action against host governments through international arbitration tribunals where they’ve reason to believe their commercial interests could be adversely affected by energy policy and incentive changes implemented in breach of the international obligations of the host state under an investment agreement in force.
After fifteen rounds of negotiations, a package of ECT reforms was finally agreed in principle in June 2022 between the European Commission and other parties. The Commission had argued that reforms would allow parties to exclude existing fossil fuel from investor protection after ten years rather than 20 years under the current onerous sunset clause, while new fossil fuel investments would be excluded after nine months. The reforms would also have blocked investor–state dispute
settlement (ISDS) claims within Regionally Integrated Economic Organisations such as the EU, introducing an environmental non-regression clause and clearer dispute settlement rules. Further, the reforms would have banned mailbox company speculative claims – ie, those made by companies who hold only the minimum presence needed in a specific jurisdiction to pursue ISDS arbitration claims against it or other ECT parties at low cost.
Yet opposition from several EU Member States and the European Parliament to a package they saw as not going far enough prevented the bloc reaching a common position in November 2022. Since then, the European Commission has abandoned its advocacy for the approval of reforms and now instead strongly advocates for collective withdrawal.
The Treaty is not in line with the CO2 emissions reduction objectives and does not allow signatories flexibility in renewable energy support mechanisms
Philippe Raybaud
Chair, IBA Power Law Committee
Italy was first to exit the ECT, in 2016, yet still faces costly ISDS actions. Since then, despite prolonged negotiations that achieved consensus on modest reforms, France, Germany and Poland have notified their withdrawal and will exit by the end of 2023, while Luxembourg will leave by 2024, explains Ignacio Arróniz Velasco, Senior Policy Advisor on EU Climate Foreign Policy at think tank E3G. Denmark, the Netherlands, Portugal, Slovenia and Spain are preparing to leave and Ireland has said it would support joint withdrawal at EU level. Some countries are still in favour of staying while others are watching before deciding. The UK government, strongly supportive of reform and continued membership, said in September that it would consider withdrawal if modernisation isn’t agreed in November as an unreformed treaty could threaten its clean energy transition.
For many EU Member States, reforms are simply too little, too late and follow long-standing opposition by the EU and individual countries to the growing use of ISDS arbitration by foreign investors looking to overturn both national and EU legislation, notably through Article 26 of the ECT.
Philippe Raybaud, Chair of the IBA Power Law Committee and a partner at Jeantet in Paris, explains that, firstly, the ECT is ‘not in line with the CO2 emissions reduction objectives. Second, it does not allow ECT signatories flexibility in renewable energy support mechanisms’, which need to be regularly updated.
Lukas Schaugg is an international law analyst at the International Institute for Sustainable Development. He highlights the risk to timelines under the Paris Agreement and to flexibility for renewable policy as issues for the ECT, and also points to the need for policy flexibility for experimental technologies such as hydrogen.
In a September 2022 briefing, E3G also stated that the proposed modernised ECT is still ‘a very tall barrier to climate action’, noting that ‘carveouts from the new ECT proposed by the EU and the UK are not compatible with the Paris Agreement’. It added that exceptions would ‘create massive loopholes that investors and ECT tribunals can abuse to extend protections to investments incompatible with net zero, such as unabated gas plants, LNG [liquefied natural gas] ports and gas pipelines’.
E3G’s report also expressed concern that the delay in removing investment protections for new fossil fuel production ‘may lead to frontloading the current investment pipeline’, as appears to be happening already in the UK’s North Sea waters. It considers ‘the EU and UK will not reclaim enough policy space to ensure an orderly and just transition to a decarbonised power system […] Their available policy toolbox will continue to be strongly limited by the risk of ECT litigation until the mid-2030s’.
A tidy, coordinated withdrawal is now far from assured, while support for reforms has drained away as many EU Member States have lost patience with negotiations and look to exit speedily. Deadlock over ECT reforms ‘has obviously been a bit of an embarrassment for the Commission’, says Schaugg, with a non-paper on options, which was leaked in February, pointing to internal discussion over its formal position. The three options included collective withdrawal without reforms; partial withdrawal with some EU Member States remaining in the ECT; or all agreeing to reforms and then withdrawing. Discussions are continuing, but the European Commission now firmly advocates collective withdrawal without reform. Yet Member States such as France and Spain are now thought likely to be more flexible towards partial withdrawal without reform.
The Commission’s non-paper stressed that, without reforms, remaining in the ECT is ‘not in line with the EU policy on investment protection or the EU Green Deal [and is] neither legally nor politically sustainable’. It suggested collective withdrawal without reform as the preferred option, in parallel with an inter se agreement confirming non-application of ECT investor protection provisions between EU Member States to neutralise most arbitration claims. The option of collective withdrawal after reforms, set out in a Commission proposal in July, could arguably have helped resolve several issues but failed to get adequate support for modernisation. The Commission confirmed in June that under these circumstances, ‘we consider that the EU, Euratom and Member States should carry out a coordinated withdrawal from the ECT’.
Withdrawal by only some Member States is fraught with legal and policy risk, requiring authorisation under Article 2(1) of the Treaty on the Functioning of the EU, and those remaining to approve reforms in a specified period. There are risks to the integrity of the EU’s legal and policy framework, and it would struggle to get backing from the European Parliament. Under the Swedish Presidency this idea gained traction, according to Arróniz Velasco, but it’s ‘procedurally heavy […] not a very clean choice’.
Meanwhile, Raybaud believes that a coordinated exit could work. ‘My understanding is that a bloc-wide collective withdrawal of the EU Member States would give the majority required to repel the 20-year sunset clause.’ Yet, while this could happen, ‘the most likely [scenario now] is that EU Member States will withdraw individually with a domino effect’.
The ECT Secretary-General, Guy Lentz, argued in February that leaving the treaty without reform leaves the EU open to arbitration claims for longer and also to legal uncertainty. He also stressed that without EU pressure, non-EU parties face carbon lock-in. Yet whatever the merits of these claims, the EU’s plans for collective withdrawal are being rapidly overtaken by events.
Neither the European Commission nor the Energy Charter Secretariat responded to Global Insight’s request to update their comments made earlier in the year.
Image credit: Ignacio Ferrándiz/AdobeStock.com
