“The Union shall end protection of investments in fossil fuels in the context of the modernisation of the Energy Charter Treaty” ( European Parliament, 2020). 

 The above quote refers to  amendment 143, which introduced Article 8a,  to the European Climate Law adopted by the European Parliament on 8 October 2020, , establishing the framework for achieving climate neutrality. The objective of the amendment is to transform political promises, made by Member States to become climate neutral by 2050, into binding obligations and thus give European citizens legal certainty and reliability in relation to this transition. Actually, the Energy Charter Treaty (‘ECT’) has become a major obstacle to reach this target. In this article, we will have a closer look at the ECT and talk about its negative impact on the European climate objectives.

The ECT is  a  multilateral  agreement that promotes energy security through the operation of more open and competitive energy markets. It was signed in December 1994 and entered into  force in April 1998. It is the first and the only trade  agreement uniting all the Republics of the Former Soviet Union, countries of Central and Eastern Europe, and Western Europe, as well as Japan, Australia, Norway, Turkey, and Switzerland. Currently, there are 56 contracting parties to the ECT including the European Union (‘EU’) and nearly all Member States (Energy Charter Treaty. org) , 2020). Italy is the only EU Member State who withdrew from the ECT in 2016.  

In the early 1990s, the central reason for joining the ECT was to secure the trade of energy and supply of Western Europe with fossil  energy resources from the Soviet Union. Consequently, the ECT aimed to ensure Western Europe had permanent access to fossil fuels. However, this reason is no longer applicable as Russia withdrew from the ECT in 2009 – as the Duma had never ratified it. Furthermore, according to the European Green Deal, the EU will no longer be dependent on fossil fuels in the near future. In addition, there was a need to shield oil and gas companies from ‘political risk’ when investing in the former communist bloc after the collapse of the Soviet Union, as the region was perceived as an unreliable party without legal mechanisms to protect Western foreign investors. However, despite the attempt, the ECT itself could not provide the expected political and financial stability in the region. 

The ECT was the first binding multilateral investment protection agreement of which also covered both investment protection and trade. Additionally, it was the first example of an application of transit rules to energy networks as well as the first multilateral treaty to provide binding international dispute settlement as the general rule. As such the ECT protects foreign investors in the energy sector with a mechanism called investor-state dispute settlement (‘ISDS’), which enables foreign investors to resolve disputes with the government of the country in which they invested through international arbitration rather than national courts (Energy Charter Treaty, 2020). These arbitral panels are able to award very large monetary sums as compensation. It is important to note that the ECT contains no mechanism for review of the arbitral awards by national courts unless there has been a challenge to said award. Thus, the ECT is a powerful tool that is being used to the benefit of fossil fuels entities.

In conclusion, there were many important factors for why the EU and Member States first became party to the ECT. However, as outlined above, these reasons are out of date and as such, the ECT is no longer in line with the EU’s latest development strategy, the European Green Deal. To succeed in the EU energy transition and reach the climate neutrality target by 2050, the EU and the Member States should act quickly to mitigate the negative impacts of the ECT. The first attempt has been to initiate the modernisation process of the ECT, of which started in 2018 and is currently ongoing. However, the process in itself is facing many challenges due to the absence of a specific deadline for the negotiations as well as the pushback from interested parties who strongly benefit from the protection of fossil fuels and wish to see the ECT remaining as it is. Thus, if the process to modernise the ECT fails, the EU and Member States should strongly consider more concrete measures, such as the potential  withdrawal from the ECT itself. If you want to discover more about the ECT modernisation process and the way forward, read  our article entitled  “The ECT, an obstacle to the energy transition: the way forward”

Written by Gaïa Bottoni, Bilge Seneroglu, Zaraï De Pelsmacker, Alexandra Aldou

The ECT poses many problems today. First of all, the protection of fossil fuels investments prevents Member States from implementing the necessary legal framework to encourage an energy transition, a key step to achieve the Paris Agreement and the European Green Deal’s targets. In fact, these fossil investments will not only be protected as long as the EU and all Member States are parties of the ECT, but also for 20 years after withdrawal, of which is deeply concerning. According to the ‘sunset clause’ (Energy Charter Treaty, Article 47 – 3), the post-withdrawal period will allow the ECT to continue to apply to pre-existing qualifying investments over a 20 year period. Thus, those investors who make qualifying investments today will still enjoy the protection of the ECT for another 20 years post a Member State’s withdrawal. When the EU environmental targets will be agreed  for 2030 and 2050, it is clear that the EU will not succeed in meeting those targets if fossil fuels investments would still be protected after 2020. . 

From a financial perspective, the transition would be expensive and burdensome for Member States if they have to invest in all necessary structures to ensure a green energy production and of paying large monetary sums as compensations within ISDS disputes. Stranded fossil fuels assets protected by the ECT would potentially reach 2.15 trn € by 2050 and the potential cost of ISDS legal expenses for Member States would reach at least 1.3 trn € (OpenEXP, 2020). The cost of the continuation within the ECT will surely exceed the investment needed to finance the European Green Deal over the next ten years.

Moreover, out of the 135 ISDS cases to date, at least 88 are intra-European disputes. This means that EU investors are suing EU Member States of which the European Court of Justice (‘ECJ’) has deemed contrary to EU law as per the Achmea decision whereby Intra-EU Bilateral Investment Treaties were ruled inapplicable. Thus, the resolution of disputes through international arbitration between Member States is against the principles of mutual trust and sincere cooperation, of which are core pillars of the TFEU (European Court of Justice, 2018). The ECJ has not clearly explicitly answered the question related to the ECT, but a decision is expected for 2020 and the controversy of the ECT is well known. From both a legal and political perspective, the recent amendment adopted by the European Parliament to Article (8a) of the Climate Law could also represent an important step with regards to the modernisation or even withdrawal from the ECT, subject to being accepted by the Council on 10 of December. 

In conclusion, there were many important factors for why the EU and Member States first became party to the ECT. However, as outlined above, these reasons are out of date and as such, the ECT is no longer in line with the EU’s latest development strategy, the European Green Deal. To succeed in the EU energy transition and reach the climate neutrality target by 2050, the EU and the Member States should act quickly to mitigate the negative impacts of the ECT. The first attempt has been to initiate the modernisation process of the ECT, of which started in 2018 and is currently ongoing. However, the process in itself is facing many challenges due to the absence of a specific deadline for the negotiations as well as the pushback from interested parties who strongly benefit from the protection of fossil fuels and wish to see the ECT remaining as it is. Thus, if the process to modernise the ECT fails, the EU and Member States should strongly consider more concrete measures, such as the potential  withdrawal from the ECT itself. If you want to discover more about the ECT modernisation process and the way forward, read  our article entitled  “The ECT, an obstacle to the energy transition: the way forward”

Written by Gaïa Bottoni, Bilge Seneroglu, Zaraï De Pelsmacker, Alexandra Aldou