The Energy Charter Treaty (ECT) has been making headlines this week following the announcement from French President Emmanuel Macron that his country would withdraw from the investment treaty because it did not align with the Paris Agreement. This follows announcements from Poland, Spain, and the Netherlands that they were pulling out of the agreement as well. The ECT is a multilateral investment treaty which protects and enables foreign energy investors to obtain financial compensation from states whose changes in energy policies negatively impact their investments. It establishes a legal framework and provides substantive protections for investors who can bring claims against ECT member states in front of international arbitration tribunals for the violation of substantive ECT rights, such as fair and equitable treatment (FET) (Article 10), freedom from expropriation (or measures having equivalent effect), and compensation (Article 13). The treaty, signed in 1994 between fifty-three countries, was originally designed to protect western investment in post-Soviet states.
The ECT is supposedly “energy agnostic,” yet in recent years as countries have tried to introduce policies to phase out fossil fuels the treaty has become the darling of fossil fuel companies as it acts as a deterrent for policies that favour renewable energy. The ECT offers protections for an estimated €344.6 billion worth of fossil fuel investments in the EU, UK, and Switzerland alone and can effectively subvert the green ambitions of countries. Five energy companies including Germany energy companies RWE AG and Uniper and UK firm Rockhopper Exploration PLC have launched ECT claims in the Netherlands, Italy, Poland, and Slovenia for an estimated €3.7 billion following those states’ decisions to phase out coal and to ban new drilling. These claims, and the prospects of claims such as these, greatly hinder the green transition and make the treaty unappealing for countries.
The treaty has garnered much criticism in the last ten years for being inconsistent with net-zero transition. The ECT can create something called a “regulatory chill” effect, where countries that are party to it are dissuaded from changing their policies for fear of arbitration. In June, a group of five young individuals launched a claim in the European Courts of Human Rights (ECHR) against twelve states (Austria, Belgium, Cyprus, Denmark, France, Germany, Greece, Luxembourg, the Netherlands, Sweden, Switzerland, and the UK) for their active membership in the ECT. The claimants argued that the states’ continued ECT membership violates Article 2 (the right to life) and Article 8 (the right to and respect for private and family life) of the European Convention on Human Rights. Some of these countries have since left the ECT. Despite leaving the ECT investors can still sue states for up to twenty years after they’ve exited, because of a sunset clause, still leaving room for legal liability. According to POLITICO, Germany is considering exiting the treaty and Belgium’s Climate Minister Zakia Khattabi also called for her country to pull out on Monday, describing the treaty as a “Trojan horse” that endangers European climate policy.
The ECT commission and pro-ECT observers suggest that some EU member states leaving and the prospect of further disintegration leaves room for China to take the lead to invest more in countries’ energy systems. Some call for a reform of the ECT, saying withdrawal is not a panacea. Reform has proved difficult as not all member states have the same agenda on energy policy. There were talks to reform the treaty in the summer that did not go anywhere because of some member states’ affinity for the fossil fuel industry. Whether the treaty completely falls apart and the EU decides to pull out is unknown. One thing, however, is for certain: Fossil fuel companies should be put on notice that the appetite for foreign investment in the oil and gas industry is shifting. The actions of EU nations signify that they are serious about climate action, which means introducing policies that contribute to a green energy transition. They clearly see the ECT, and fossil fuel companies, as a roadblock to achieving their green agendas.
