The Energy Charter Treaty: a barrier to climate action
Several European states have recently announced their intention to pull out of the Energy Charter Treaty. This agreement was devised in the early 1990s to protect fossil fuel investments from the impacts of policy changes and enable companies to sue states when they approve environmental laws that jeopardise their profits. The treaty is helping prevent government action to fulfil their commitments under the Paris Agreement. Negotiations have been held this year to revise the treaty, with a decision to be made soon. Civil society is urging European Union states to reject the reforms and carry out a coordinated withdrawal instead.
A few weeks ago it looked like the Energy Charter Treaty (ECT) was set to crumble. On 12 October, the Spanish Minister of Ecological Transition, Teresa Ribera, announced the country’s withdrawal, sparked an apparent domino effect among European Union (EU) states. In a matter of days, France, the Netherlands and Poland stated that they too were pulling out, plunging the future of this harmful international trade agreement into uncertainty. But attempts to revise it may mean its malign influence continues.
A relic of the past and a threat to the future
The ECT is a child of a world that no longer exists. Its genesis goes back to the break-up of the Soviet Union, when major international fossil fuel companies were keen to exploit the hitherto inaccessible oil and gas reserves of Eastern bloc countries but viewed their volatile political environment as a potential threat to their expected long-term profits.
The treaty was designed to offer companies protection. It was signed in 1994 and became effective four years later. It’s the only inter-governmental cooperation treaty focused on liberalising energy investment and trading. Its original contracting parties comprised 54 states, including all EU member states and other countries with significant fossil fuel reserves, plus the EU and the European Atomic Energy Community, also known as Euratom.
Two of its 54 signatory states – Belarus and Norway – never ratified the treaty, but in the case of Belarus it still applied provisionally. One state – Italy – has so far withdrawn. Many additional states that signed the 1991 European Energy Charter or the 2015 International Energy Charter, including Australia, Canada, China and the USA, also have a stake as observers of the Energy Charter Conference, the governing body for the treaty process.
To counter investors’ concern about the potential nationalisation of energy companies, the ECT granted major legal safeguards through an ambiguous definition of expropriation. The way the text was drafted, almost any regulation or policy that could jeopardise an investment project’s profit could be interpreted as expropriation.
The ECT allows investors to sue governments through an investor-state dispute settlement system, which creates special international tribunals that are opaque, not subject to the jurisdiction of domestic courts and not required to take human rights or public interest issues into account. Through this mechanism, biased in the private sector’s favour, the ECT has enabled a billionaire litigation industry used by fossil fuel investors to keep governments in check.
So far, 12 countries, most of them EU members, have been subject to claims. Spain has been the most affected, with a total of 51 claims over the past decade. Not surprisingly, expropriation has been one of the most frequent allegations.
The Energy Charter Treaty is having a chilling effect on climate legislation: governments anticipate they will be sued so they either weaken their legislative proposals, delay them or discard them altogether.
Over the past years, the ECT has enabled extractive industries to block the adoption or implementation of climate change policies. Faced with the risk of being sued, many countries have backed off from adopting ambitious policies. This ‘regulatory chill’ poses a major threat to climate change action.
There’s also an opportunity cost: the investor-state dispute settlement system diverts public resources away from environmentally critical areas. According to research, the high-end estimate of ECT settlements – US$340 billion – could surpass the global amount spent by states in 2020 to support mitigation and adaptation actions to address climate change.
Voices from the frontline
Paul de Clerck is the Economic Justice Coordinator at Friends of the Earth Europe, Europe’s largest grassroots environmental network.
Investment tribunals are completely industry-biased as they don’t take human rights, labour rights, environmental rights or other public interest issues into consideration. As lawsuit processes are usually negotiated in secrecy, there is very little information available regarding the amounts of the settlements.
Lawsuits have become increasingly frequent in Europe as states have adopted climate transition policies. This mechanism not only forces governments to pay for compensation, but also stops them introducing new sustainable energy policies.
The ECT is an old treaty which main purpose is to protect fossil fuel companies, and it’s completely at odds with the Paris Agreement on climate change and the EU’s climate and sustainability agenda.
The treaty’s so-called ‘sunset clause’ gives an almost unlimited right to companies and investors and is one of the reasons why we are urging EU states to leave the treaty all together, in a coordinated way. If they did so, they could agree on passing EU-level legislation preventing further investor-state dispute settlement cases.
We are campaigning for the EU and its member states to reject the reform. Along with other European civil society organisations, we have been doing a lot of joint advocacy with European institutions and coordinating actions, messages and strategies across Europe. We must put pressure on governments. The next few weeks will probably be decisive.
This is an edited extract of our conversation with Paul. Read the full interview here.
Withdrawal vs reform
Quitting the treaty doesn’t instantly solve the problem, as the case of Italy shows. Following a surge of public mobilisation against an oil drilling project in the Adriatic Sea, in 2015 the Italian government banned the company Rockhopper Exploration from operating. A year later, Italy left the ECT, but that didn’t stop investors launching a claim: Italy was ordered to pay €190 million (approx. US$195 million) plus interest to the UK-based company. This is because the ECT has a ‘sunset clause’ that keeps contracting parties subject to action by investors for a further 20 years after withdrawal.
The EU enshrined its climate commitments in the European Green Deal framework, but its implementation is being systematically undermined by the ECT. Seven additional EU member states – Belgium, France, Germany, the Netherlands, Poland, Slovenia and Spain – have announced they will abandon the treaty. But given the problem with the sunset clause, civil society is urging joint withdrawal by all EU member states to dismantle the treaty and unblock progress towards the Paris Agreement.
However, the EU’s executive body, the European Commission, is aiming to revise the treaty rather than withdraw. In May 2019 it approved a proposal to begin a reform process, which brought strong opposition from a group of countries led by Japan, fearful that any change could jeopardise energy investments.
After months of talks, climate campaign groups considered the negotiation process to be a failure. Among the reform priorities, only one point addressed sustainable development.
The new ECT proposal, unveiled in June 2022, proposes to grant protection to existing fossil fuel investments for another 10 years, during which time governments could still be sued. While limiting the scope of the current sunset clause, this will still inhibit the rapid phaseout of fossil fuels required to keep global warming in check. The deeply problematic investor-state dispute settlement system remains unaddressed.
The revised ECT would expand to cover other sources of energy – ammonia, biomass, biogas, hydrogen and synthetic fuels – making these growing areas subject to the same dispute settlement process. And new members could be in the wings. In the midst of Europe’s energy crisis caused by Russia’s war on Ukraine, European states and businesses are increasingly finding the idea of developing gas projects in Africa attractive – something several African states have been pushing for at the COP27 climate summit. Now several states in Africa and Latin America are said to be in the process of joining the treaty. This could only further limit the scope for global climate action.
ECT state parties are being asked to ratify the reform at the Energy Charter Conference, to be held in Mongolia on 22 November.
Bold action needed
Civil society has pushed back. In December 2020, a petition signed by over a million people was submitted to the EU urging it pull out of the ECT. In the run-up to last year’s COP26, over 400 civil society organisations and scientists around the world signed an open letter rejecting the revised agreement as an ‘obstacle to the clean energy transition’.
🥊CRITICAL MASS: with major EU countries announcing their withdrawal from the #EnergyCharterTreaty, it would be inconceivable for the 🇪🇺 to remain in the climate-killer agreement!— CAN EUROPE (@CANEurope) November 14, 2022
📣@TimmermansEU @KadriSimson @VDombrovskis @vonderleyen @EU_Commission stop stalling & #ExitECT! pic.twitter.com/I1wOjNEc44
The EU is divided: the European Commission continues to promote the revised treaty as best serving collective regional interests, but several EU states still seem set on withdrawal, while many representatives in the European Parliament are demanding a coordinated retreat and the reform of the investor-state dispute system.
This means if the states gathered in Ulaanbaatar ratify the changes, civil society advocacy will turn to the European Parliament, including for the development an EU-wide law to block any further use of the investor-state dispute mechanism.
The Global Legal Action Network, an independent international civil society organisation comprising legal practitioners, investigative journalists and academics, has also filed a case with the European Court of Human Rights on behalf of six young activists, claiming that climate change interferes with their right to life, their right to respect for their private and family lives and their right not to be discriminated against. Thirty-three states are being sued, including all EU members. The claimants are seeking a legally binding decision to force governments to implement urgent measures to stop the climate crisis; if successful, it would also evidently be incompatible with the ECT.
As the negotiation process approaches its decisive moment, civil society will keep pushing for action, calling on governments and the EU to do the right thing and shift their protection from the powerful fossil fuel industry to the territories and people most affected by the impacts of their deadly business.
OUR CALLS FOR ACTION
European Union member states should reject the proposed revision of the Energy Charter Treaty in favour of a coordinated withdrawal and an agreement to end the investor-state dispute system.
European Union member states must take urgent and effective action to phase out fossil fuel projects and lead the transition to sustainable energies.
Civil society should continue to put pressure on European Union states and institutions to effectively implement measures aimed at fulfilling their commitments under the Paris Agreement.
Cover photo by Andreas Rentz/Getty Images