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November 28, 2022

EU under pressure to quit Energy Charter Treaty

The post-Cold War international trade treaty is increasingly seen as incompatible with the Paris Agreement and national climate legislation. The European Parliament voted on Thursday to back calls for the EU to leave the treaty.

The urgent need to move investment from fossil fuels into clean energy was underlined once again at COP27. Yet the Energy Charter Treaty, and other international investment treaties, allow corporates to sue countries if they feel their investments are threatened by policy changes, including regulation aimed at cutting emissions. 

A qualified majority of EU member states refused last week to back European Commission plans to reform the ECT, seeing an exit from the treaty as the only viable option to reduce pressure on governments to support fossil fuel investments. This position was backed by the European Parliament on Thursday, leaving the EU executive with few options but to consider withdrawing the EU from the treaty. 

Set up in the early 1990s after the fall of the Berlin Wall, the ECT was devised to give investors confidence in countries previously part of the Soviet Union, allowing them to sue governments through private investor state dispute settlement tribunals. It boasts around 50 member countries today with the majority in and around continental Europe, though Japan, Mongolia and a handful of other countries are also part of the club.

Many EU countries and international scientists say the treaty is incompatible with efforts to reduce emissions and create a clean energy economy. “The ECT is mainly used to protect investments in fossil fuels,” states a January 2022 briefing paper from the Brussels Office of the Austrian Federal Chamber of Labour. The treaty “totally contradicts the goals set by the Paris Agreement and the EU 2030 and 2050 climate objectives,” said Rob Jetten, Dutch energy and climate policy minister, when announcing the country’s withdrawal in October. “[It] continues to offer too much protection to the fossil fuel industry.”

The Intergovernmental Panel on Climate Change came to a similar conclusion in its April 2022 climate mitigation report. “Trade rules have the potential to stimulate international adoption of mitigation technologies and policies, but may also limit countries’ ability to adopt trade-related climate policies,” it stated, singling out the ECT for the number of claims settled “in favour of foreign investors” and “against much needed climate action”.

Italy withdrew from the ECT in 2016, and seven other EU countries – Poland, Spain, France, the Netherlands, Germany, Luxembourg and Slovenia – have declared their intention to quit the treaty. “Countries representing over 70 per cent of the EU population no longer believe in the treaty,” says Cornelia Maarfield, senior trade and investment policy coordinator at CAN Europe, an NGO. Belgium and Austria have also said they are considering quitting.

Stick or twist?

Instead of the EU leaving the treaty, the commission has proposed reforming it, but opponents say the plans would change little. Fossil fuel assets in the EU and the UK would remain protected for at least 10 years after the reform enters into force, while elsewhere there would be no requirement to end fossil fuel investment protection, says Maarfield. 

“Exiting this obsolete treaty is the only way,” said Spanish left-wing MEP Sira Rego in June. “We need to be out so that economic interests stop imposing their agenda on a planet that cannot withstand the constant exploitation of its resources.”

CAN Europe suggests that signing off on the reform would breathe new life into the ECT, “making it likely that new countries will join and spread ECT risks to the ‘global south’”.

A number of companies have recently challenged fossil fuel phase-outs through the treaty. The Netherlands decided in 2019 to phase-out coal power generation by the end of 2030. In 2021, two coal companies – Uniper and RWE – started an ECT claim to receive around €2.4bn in compensation. Similarly, German coal companies received extra compensation for the country’s coal phase-out by agreeing not to sue under the ECT, says CAN. “The German coal phaseout will only take place in 2038, yet companies were able to use the threat of an ECT claim to receive extra compensation now,” says the NGO. Meanwhile British oil and gas company Rockhopper was awarded €250m in damages by Italy when it decided to stop issuing licences to drill for oil.

One of the commission’s arguments for reform, rather than withdrawal, is the treaty’s sunset clause, which means that states can still be sued for 20 years after leaving it. Maarfield argues that “if several countries withdraw jointly, they can neutralise the sunset clause”. Not everyone agrees with this conclusion, however. “There are still serious concerns about the legal and political feasibility,” not to apply the sunset clause in the event of a coordinated withdrawal by EU member states, wrote Irina Kustova, a researcher with Brussels-based think tank CEPS, in a recent blog. 

More harm than good?

Leaving the ECT would also remove EU investors’ protection for new investments in renewables in non-EU countries that are members of the treaty, argues Kustova. The European People’s Party, the centre-right group in the European Parliament, makes a similar point and voted against the EU leaving the treaty on Thursday. A modernised ECT “would provide a much-needed incentive to investments in renewables,” insists Portuguese MEP Maria da Graça Carvalho.

The ECT could “give greater protection to investments into renewables,” agrees a paper published by the University of Amsterdam in April. The researchers add, however, that, “the growing climate emergency will only require more fundamental socioeconomic changes and the tremendous gap between states’ international commitments and their actual reduction policies at present lead to the reasonable expectation that the greatest future beneficiary of enhanced investment protection under the ECT will be the fossil fuel industries”, since they “will necessarily be subject to the most far-reaching restrictions”.

Russia left the treaty back 2009, and if the EU were to quit, climate campaigners suggest it would be unlikely to survive, certainly not in its current form – the treaty was initiated by the then European Community and the EU is by far the largest financial contributor to the charter’s Brussels-based secretariat. “It is very likely that other ECT contracting parties would question their own membership and kick-start discussions on terminating the treaty,” says Maarfield. Kustova argues, however, that if the EU leaves, “the political vacuum may be filled by other ambitious states that probably won’t waste the opportunity to take the lead”. Even China, not currently a member of the ECT, could be interested, she suggests. 

It is now up to the commission to make the next move and decide whether the EU leaving the treaty en masse is the option most compatible with the worldwide goal of keeping global heating on or below a 1.5C pathway.

A service from the Financial Times