Future of Energy Charter Treaty uncertain

A growing number of European countries are looking to quit the Energy Charter Treaty, a controversial international accord that protects energy investments and that environmentalists say is jeopardizing climate transition efforts in member countries, sparking new hopes that the agreement might eventually be shelved.

The Netherlands, Poland, Spain, France, Slovenia and Belgium have all said in recent months that they want to withdraw from the Energy Charter Treaty, following in Italy’s steps, with the country being the first one in the EU to initiate withdrawal procedures in 2015.

The Energy Charter Treaty is a legally binding multilateral agreement which was created in the ‘90s to protect European companies’ investments in fossil fuel assets in ex-Soviet states.

It is estimated to protect €344.6 billion of fossil assets in Europe, with three-quarters of its 150 recorded disputes involving European firms suing EU states, according to an investigation by Investigate Europe.

Environmental groups have been campaigning for EU countries to withdraw in a coordinated fashion from the treaty, which is currently being revised in an attempt to bring it more in line with Paris agreement goals.

One key change in the revised Energy Charter Treaty is that it allows contracting parties to exclude new fossil fuel-related investments from investment protection and to phase-out protection for the already existing investments.

The types of energy investments covered have also been expanded to include carbon capture and storage, hydrogen, biomass and biogas.

Moreover, under the new rules an investor from a contracting party that is part of a regional economic integration organization (REIO), such as the EU, will not be able to bring an ISDS claim against another contracting party member of the same REIO, thus ending intra-EU applications under the Energy Charter Treaty.

Despite these changes, the modernization of the Treaty “has brought a fresh wave of skepticism among EU Member States” Matteo Fermeglia, assistant professor of International and European Environmental Law at Hasselt University in Belgium told Gas Outlook.

There has been an acceleration in the number of countries now wanting to exit because they are dissatisfied with how the revision fails to address climate change, he added.

And prominent cases such as Uniper’s and RWE’s against the Netherlands have sparked concerns about the treaty among member states, he said.

The fact disputes are dealt with in international arbitration courts through a so-called Investor-State Dispute Settlement (ISDS) rather than in national courts, as well as the fact the revised treaty continues to provide some protection for fossil fuel investments are among the main points of contention, he said.

While the revised treaty allows for a suspension of fossil fuel investments’ protection for 10 years, this is on a voluntary basis, he said.

Amandine Van Den Berghe, lawyer and trade expert at ClientEarth told Gas Outlook that the reforms to the Energy Charter Treaty (ECT) have “failed to fix the treaty’s climate problem. At best, the new agreement would still leave EU governments vulnerable to lawsuits by the fossil fuel industry for at least 10 years. But in reality, that’s likely to extend until 2040 – risking the key window for effective action to avoid catastrophic climate change.”

“With five EU countries abandoning the ECT, the Commission faces an uphill struggle in swaying the Parliament’s vote” she said.

“It’s also highly unlikely that the amendments will be passed in countries that have signalled their withdrawal” she said.

“The future of the treaty looks extremely hazy. A coordinated withdrawal between the EU and member states is the cleanest solution” she added.

The recent announcements by several EU countries of their intention to leave the accord “make a huge difference, as all EU member States have to ratify the revised treaty for this to eventually come into effect” Cornelia Maarfield, senior trade and policy coordinator at Climate Action Network (CAN) Europe, told Gas Outlook.

The EU is also a member of the treaty, with some areas of the agreement, such as trade, falling in the EU’s exclusive competence and is therefore required to ratify the revised treaty in addition to individual member states.

A withdrawal by the EU would help speed up the process of dissolution of the treaty.

“It is a realistic prospect as the reform is bound to fail and some EU countries have already said that they would only remain in the treaty in its revised form” she said.

The EU Parliament also has to vote on the ratified treaty, amid growing hostility of MEPs against the accord, highlighting an increasingly strained relationship between Parliament and EU Commission on this issue.

In that respect, it’s unlikely that the EU Commission will change its view on the treaty, Fermeglia said.

The most likely scenario moving forward is for individual states to progress the process of withdrawal as announced, he anticipated.

There is little hope however that the controversial ‘sunset clause’, which ties a country to ECT rules for 20 years after it has withdrawn from it, will be dropped.

Italy is a prominent example of the clause being applied, as it was recently sentenced to pay £210 million in compensation to UK company Rockhopper despite having already exited the Treaty.

And while the ECT is among the most invoked agreements in legal disputes, there are  myriad other similar bilateral agreements protecting energy investments in fossil fuels which remain in place and present a potential risk to decarbonisation efforts of countries.

Environmentalists have warned of a ‘regulatory chill’ effect on governments coming from this type of agreement, amid fears of legal disputes and expensive compensation settlements.

To address that risk, it is paramount that governments implement climate legislation that is “linear and predictable” for private investors, which would shield them from the risk of lawsuits moving forward, said Fermeglia.

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