This year, the Energy Charter Conference will take place on 16-17 December 2020 under the Chairmanship of Azerbaijan. All States or Regional Economic Integration Organisations who have signed or acceded to the Energy Charter Treaty (‘ECT’) are members of the Conference, which meets regularly to discuss issues affecting energy cooperation among the ECT’s signatories. The Conference’s aim is to review the implementation of the provisions of the ECT and the Protocol on Energy Efficiency and Related Environmental Aspects, and to consider possible new instruments and joint activities within the Energy Charter framework. As mentioned in our article entitled  “The ECT, an obstacle to the energy transition: how did we get here?”, the ECT is a problematic and outdated treaty which has to be modernised. In this article, we will discuss the modernisation process of the ECT, including the objectives and challenges that the process is facing.

The modernisation of the ECT is a long and multistep process which started in 2009 with the Russian withdrawal from the ECT. The following year, a Strategy group was set “to examine the possible options with regard to the modernisation of the Energy Charter Process” (Energy Charter Secretariat, 2009). The first step in the ECT modernisation process was to develop a modernisation roadmap with identified areas. After the approval of the roadmap the following year, the Energy Charter Conference led to the adoption of a Policy on Consolidation Expansion and Outreach (‘CONEXO’) in order to consolidate the ECT among its original signatories, to attract key energy players and to promote the ECT at a global level. Countries with the status of observers of the Energy Charter Conference were mostly targeted. Afghanistan, Montenegro, Jordan and Yemen are the only four observer countries who joined the ECT. While Iceland ratified the ECT in 2015, Italy withdrew from it in the same year.

The second step of the ECT modernisation process was the adoption of the International Energy Charter (‘IEC’) in May 2015, which was a political declaration to attract Latin American and African countries. The IEC aims to “support the Charter’s policy of Consolidation, Expansion and Outreach to facilitate the expansion of the geographical scope of the ECT and Process” as well as “to support active observership in the Energy Charter Conference, aiming at close political cooperation and early accession of observer countries to the Energy Charter Treaty” (OpenEXP, 2020). Targeted countries for the ECT expansion are mainly developing countries with populations lacking access to energy, but many of them have important fossil fuels reserves.

After internal discussions, ECT signatories decided to consult with the representatives from observer countries and industry. In 2018, 25 modernisation topics were discussed and agreed. The objective was to prevent the broad interpretations given by the arbitral tribunals to some of the ECT provisions (OpenEXP, 2020). Albania, Azerbaijan, the EU, Georgia, Japan, Kazakhstan, Luxembourg, Switzerland and Turkey are the only Contracting Parties who advanced proposals to modernise the 25 points.

The negotiation phase started in July 2020. The aim of the negotiations was to modernise the provisions of the ECT so that they take account of sustainable development and climate change goals, as well as modern standards of investment protection and investor-state dispute settlement (‘ISDS’). Three negotiation rounds of four days each have taken place in 2020 and  the last negotiation round took place in November. However, all negotiations happened behind closed doors and even if the official EU proposal should have been ready for July, the document has been published with some delay even for the November negotiation round. Although the EU presented the most detailed proposal, it still remains an extremely weak suggestion which does not cover all essential issues related to the ECT. In fact, the EU proposal does not include the phase-out of fossil fuels from the ECT investment protection provisions nor aligning disputes resolution with the most recent EU trade agreements. The mandate for negotiations on the modernisation of the ECT envisages that in December 2020 “the Conference should take stock of the progress made” (Energy Charter Secretariat, 2019).

The modernisation process is facing many challenges, but the main one resides in the very structure of the ECT. To modify the ECT in a binding and permanent way, all parties should agree on each specific amendment. The unanimity vote is required to adopt amendments. It is unlikely that unanimity vote could be reached on hot questions raised by the ECT. For example, Article 1.5 of the ECT clearly defines the ‘Economic Activity in the Energy Sector’ and explicitly includes oil, gas, coal and uranium resources. Given the climate emergency, an amendment is urgently needed to phase out fossil fuels from the investments protection, but there are too many parties for which fossil fuels represent a high percentage of the GDP. Those countries do not have any interest in agreeing with a modernisation of the ECT which will phase-out fossil fuels.  As a majon example, Japan declared, already in 2019, its willingness to refuse any change to all the 25 points selected for the modernisation process.

Additionally, it is important to stress that within the three main issues of concern for the EU – namely fossil fuels, the ISDS system and the intra-EU disputes – only the first one is officially recognised as a point of discussion as part of the modernisation process. As a matter of fact, all questions related to the ISDS system and its application within the EU are not even  subject to  negotiations. This unfortunately means that even if the EU succeeds in reaching a compromise about fossil fuels, many questions will remain over the next 20 years on how to deal with internal disputes. 

Not only is the negotiation process very difficult and limited with regards to its focus, but its deadline remains undecided at this moment. This means that the debate could go on forever without reaching any successful conclusion, of which results in EU Member States being legally bound to potentially pay enormous sums of money as well as preventing them from implementing the necessary energy transition frameworks to achieve the neutrality target for 2050. 

At this very moment there are three possible scenarios with regards to the evolution of the modernisation process of the ECT: the ‘no change scenario’, the ‘trade scenario’ and the ‘1.5 °C scenario’. Firstly, the ‘no change scenario’ relates to the preservation of the status quo, as desired by Japan, of which will result in adverse environmental consequences. Secondly, the ‘trade scenario’ would be the result of the adoption of the Commission’s proposals, which imply few changes in the ECT. In this case, the cumulative emissions for 2050 would still exceed the remaining EU carbon budget. Thirdly, the ‘1.5 °C scenario’ would meet the Paris Agreement’s targets and allow the EU to succeed in its very recently adopted development strategy. However, it is clear that the last scenario is not possible within this modernisation process because, as mentioned in our previous article investments made until today will be protected for another 20 years under the ‘sunset clause’. (OpenEXP, 2020). 

In conclusion, the European Union should, above all, advocate for the determination of a deadline for the negotiations. This pivotal moment should not be too far away as the time to achieve EU climate objectives is very short and few months should be sufficient to understand if there is willingness within the ECT parties to reach a compromise on phasing-out fossil fuels from the ECT investment protection provisions. Thus, if no satisfying progress is made by mid 2021, the EU and all Member States should be ready to withdraw from the ECT. In this case, an agreement would  also be needed  between EU countries to end the ‘sunset clause’ between themselves. Within the disputes pending with other countries, 80% are with EU and EFTA parties (Norway, Switzerland, Liechtenstein, Iceland) and 20% are linked to Australian investments on coal (OpenEXP, 2020). In both cases the EU should try to find separate agreements to suspend the ‘sunset clause’ and only postpone the shutdown of the few susceptible power plants left which are not from EU/EFTA investors. . 

This is the only way for the implementation of the EU climate law towards a successful EU sustainable transition.  The Just Transition Fund should be used to support  those European countries which still strongly depend on fossil fuels instead of paying high compensations to investors in fossil fuels. This effort should be backed by the empowerment of civil society in the region and a strong cooperation between EU countries.

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