On 24 June, the European Union and the 52 other Contracting Parties to the Energy Charter Treaty (ECT) reached an agreement in principle to modernise this international treaty to bring it more in line with today’s economic and energy reality, concluding a negotiation process that began in July 2020. While the European Commission welcomed the agreement, several NGOs and think tanks criticised it.
According to the European Commission’s press release, the agreement “provides legal certainty and ensures a high level of investment protection while reflecting clean energy transition goals and contributing to the achievement of the objectives of the Paris Agreement”.
Opponents of the ECT criticised it for being an obstacle to the energy transition by providing fossil fuel companies with legal protection for their investments through an Investor-State Dispute Settlement (ISDS) mechanism.
Under the ECT, fossil fuel companies can sue ratifying states before private arbitration tribunals on the grounds that certain decisions of these states represent direct or indirect expropriations, possibly forcing these countries to pay compensation. A possibility which, in the view of some civil society organisations, may also discourage some governments from taking action to move away from fossil fuels.
The ECT “has become the most litigated investment agreement in the world, with the majority of dispute being intra-EU, that is involving investors from an EU Member State against another EU Member State”, the Commission’s statement acknowledges.
Under pressure from civil society organisations (see EUROPE 12618/10, 12943/21), but also from many MEPs (see EUROPE 12594/11) and some Member States (see EUROPE 12658/6), the Commission had provided the ECT secretariat with a document setting out the revised EU negotiating position on 15 February 2021 (see EUROPE 12659/16).
This document, adopted after difficult negotiations between EU Member States (see EUROPE 12646/7), proposed in particular that the legal protection provided by the ECT should cease to apply to future investments in fossil fuels and fossil fuel-fired power generation as soon as the revised version of the ECT enters into force. However, the Commission provided for a derogation allowing certain fossil fuel investments to be still covered by the Treaty until 31 December 2030, or even until 31 December 2040 in some cases.
Content of the agreement
Finally, the agreement in principle allows the EU to exclude new fossil fuel investments from legal protection under the ECT after 15 August 2023. For existing investments, legal protection will expire “after 10 years from the entry into force of the relevant provisions”, the communication from the ECT secretariat states, while noting that there are “limited exceptions”.
For the NGO ClientEarth and the think tank E3G, this deadline is much too far away.
“With a 10-year phase out period for fossil fuel investments, EU countries could still be sued for putting in place progressive climate policies for at least another decade”, said Amandine Van Den Berghe, a lawyer at ClientEarth.
Ignacio Arroniz, a researcher on trade and climate at E3G, also points out that the deadline could be extended by another ten years if the exclusion of fossil fuels requires the ratification and entry into force of the entire revised treaty. In fact, “some amendments to the ECT passed in 1998 only came into force in 2010”, he told EUROPE.
Andrei V. Belyi, Assistant Professor of Energy Law and Policy at the University of Eastern Finland, considers that a 10-year transition “is quite logical and is not in contradiction with the energy transition goals”.
In particular, he stresses that phasing out fossil fuels requires retraining for workers, new investments and compensation. Furthermore, the agreement in principle “makes it clear that the implementation of climate policies does not constitute indirect expropriation”, he says.
The communication from the ECT secretariat in fact contains the following sentence: “As a general rule, non-discriminatory measures that are adopted to protect legitimate policy objectives, such as public health, safety and the environment (including with respect to climate change mitigation and adaptation), do not constitute indirect expropriation”.
According to Mr Belyi, the new version of the ECT “ practically annihilates any potential abuse of companies to sue states against new climate measures”.
Ignacio Arroniz is much more sceptical about the ability of the revised treaty to “protect EU climate policies from fossil fuel investors”.
“Countries have experimented with smart amendments for years now (...) The problem with smart treaty language are smart lawyers and private arbitrators that interpret treaties in the broadest, most investor-friendly way imaginable”, he stressed.
Mr Arroniz is also not convinced by the addition of language in the preamble and throughout the treaty to strengthen the right of contracting parties to “regulate in the interest of legitimate public policy objectives such as the protection of the environment, including climate change mitigation and adaptation”.
In his opinion, this wording could help countries win some cases they are currently losing, but “it certainly does not fully protect taxpayers’ money from having to compensate fossil fuel investors”.
ISDS
In its communiqué, the Commission also welcomes the changes to the ISDS mechanism.
The agreement in principle provides that an investor from one EU Member State will no longer be able to bring an Investor-State Dispute Settlement (ISDS) claim against another EU country, thereby responding to a recent judgment by the Court of Justice of the EU (see EUROPE 12782/13).
While Mr Arroniz welcomes this development, he notes that fossil fuel companies will still be able to use the UK and Switzerland, “two key investment hubs” to “attack EU climate policies”.
Exit the ECT?
Like ClientEarth and E3G, Anna Cavazzini MEP (Greens/EFA, Germany) says that the agreement in principle is insufficient to align the ECT with the objectives of the Paris Agreement and the ‘European Green Deal’.
They therefore call on the European Union and its Member States to exit this treaty in a coordinated manner.
Mr Belyi, on the other hand, criticises this option. In particular, he recalls the existence of a clause in the ECT that allows investors to sue a state for 20 years after it withdraws from the ECT, provided that it concerns investments made before the date of exit from the Treaty (‘sunset clause’).
He also argues that the EU cannot overturn the sunset clause because it “takes roots from the international law, not the European law”.
“However, in most of the EU Member States, international law prevails. So to do this, EU member states need to change their constitution, which will take even longer”.
For Mr Arroniz, the coordinated withdrawal of the EU should be accompanied by an agreement, negotiated between the withdrawing parties, to cancel the ‘sunset clause’ between these countries.
Then the EU “would be able to throw its diplomatic weight behind this option to push the UK and Switzerland to join”.
On 23 June, the European Parliament adopted a resolution, sponsored by Ms Cavazzini, in which MEPs called on the Commission and the Member States to prepare a coordinated exit from the ECT (see EUROPE 12978/10)
See the Communication on the agreement in principle: https://aeur.eu/f/2bs (Original version in French by Damien Genicot)