Energy charter treaty makes climate action nearly illegal in 52 countries – so how can we leave it?

Published: July 6, 2022 6.28pm BST

Five young people whose resolve was hardened by floods and wildfires recently took their governments to the European Court of Human Rights (ECHR). Their claim concerns each country’s membership of an obscure treaty they argue makes climate action impossible by protecting fossil fuel investors.

The energy charter treaty has 52 signatory countries which are mostly EU states but include the UK and Japan. The claimants are suing 12 of them including France, Germany and the UK – all countries in which energy companies are using the treaty to sue governments over policies that interfere with fossil fuel extraction. For example, the German company RWE is suing the Netherlands for €1.4 billion (£1.2 billion) because it plans to phase out coal.

The claimants aim to force their countries to exit the treaty and are supported by the Global Legal Action Network, a campaign group with an ongoing case against 33 European countries they accuse of delaying action on climate change. The prospects for the current application going to a hearing at the ECHR look good. But how simple is it to prise countries from the influence of this treaty?

The energy charter treaty started as an EU agreement in 1991 which guaranteed legal safeguards for companies invested in energy projects such as offshore oil rigs. Under Article 10 (1) of the treaty, these investments must “enjoy the most constant protection and security”. If government policies change in order to curtail these projects, such as Italy’s 2019 decision to ban drilling for oil and gas within 12 miles of its coast, the government is obliged to compensate the relevant company for its lost future earnings.

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The legal mechanism which allows this is known as an investor-state dispute settlement. A letter to EU leaders signed by 76 climate scientists argues this could keep coal power plants open or force governments into paying punishing fees for shutting them down, at a time when deep and rapid cuts to emissions are desperately needed.

Money spent compensating fossil fuel investors will deprive investment in renewable energy and other things vital to the green transition, such as public transport. While withdrawing from the energy charter treaty is possible for any country to do, losing the benefits of membership – such as fewer duties and taxes on imports of oil and gas – will make it a difficult decision.

Furthermore, the obligations of countries that have been signatories to the treaty are not nullified upon exiting it, but instead linger for 20 years thereafter. Investors can still bring disputes against former members and, if successful, must be compensated by the state in question. Russia and Italy withdrew from the energy charter treaty in 2009 and 2016 respectively, and continue to face multiple claims.

Leaving the treaty

Meanwhile, the European Commission is poised to expand the influence of the energy charter treaty into countries in Africa and Latin America, potentially embroiling these states in the same investor-state dispute settlements that have hindered climate action in Europe.

The political declaration for a new international energy charter, based on the principles of the original European treaty, was signed by 87 countries in 2015. Negotiations continue, but the 25-point list setting out the priorities of the signatories only includes one reference to “sustainable development”.

An update on negotiations mentioned that existing fossil fuel investments are due to be protected until 2033, meaning governments will be liable for compensation if they close a coal plant prematurely. The UK and EU reached a deal to exempt new fossil fuel projects from protection as of mid-August 2023.

A striped chimney belching sooty smoke.
Investment earmarked for renewable energy could go up in smoke. Savva_25/Shutterstock

Drastic action is urgently needed to meet the goals of the Paris Agreement and reduce greenhouse gas emissions in line with limiting warming to 1.5°C at best and 2°C at worst. Countries will need to regulate and close emission sources – yet at the same time, fossil fuel investors, including oil and companies and energy utilities, are asking for more time and money in order to adapt to the transition.

The claim filed by RWE against the Dutch government in February 2021 argued the latter had failed to give enough time for the company to transition from coal to biomass. But this is something the Dutch government cannot afford to do – it was found to be acting unlawfully by its own supreme court in 2019 in taking too long to implement emissions cuts.

One way to address this problem is for parties contracted to the energy charter treaty to withdraw from it en masse, and so escape the sunset clause which holds them liable two decades after leaving. These countries could also enter into a separate agreement to exclude investor-state dispute cases against each other.

Sustained public pressure – and a favourable ruling in the ECHR for the five claimants – could encourage enough governments to act decisively, fatally weakening the treaty and its grip on international climate action.

Energy Charter Treaty

The Energy Charter Treaty (ECT) is a plurilateral investment agreement between 53 European and Central Asian countries. It was signed in 1994 and entered into force in April 1998.

About 30 countries around the world are at different stages of joining the ECT. Burundi, Eswatini (formerly Swaziland) and Mauritania are first in line, followed by Pakistan and Uganda.

The original objective of the ECT was to overcome the political and economic divisions between Eastern and Western Europe after the demise of the Soviet Union, as well as to strengthen Europe’s energy security. European countries wanted to secure the access to fossil fuel resources of the former Soviet countries by protecting foreign energy investments in these countries.

The ECT provides for an Investor State Dispute Settlement (ISDS) mechanism to resolve disputes between an investor and a member state. To this day, it is the world’s most widely used legal instrument for initiating ISDS arbitrations. It has been invoked by investors in 124 cases.

Critics argue that as with most other investment agreements, it places investors’ economic rights and interests over the social, ecological and economic interests of host states and their societies. The ECT imposes obligations on the host state but not on foreign investors. The ECT has also been condemned by environmental activists for protecting the fossil fuel industry and undermining serious climate action.

Spain has been subject to 45 arbitration disputes under the ECT after it implemented a series of energy reforms affecting the renewables sector, including a reduction in subsidies for producers. While some cases are still pending, Spain has already been ordered to pay over €800 million.

You can find out more about the Energy Charter Treaty on the ECT’s dirty secrets website.

Key cases include:

• Vattenfall (Sweden) vs. Germany: In 2007 the Swedish energy corporation was granted a provisional permit to build a coal-fired power plant near the city of Hamburg. In an effort to protect the Elbe river from the waste waters dumped from the plant, environmental restrictions were added before the final approval of its construction. The investor initiated a dispute, arguing it would make the project unviable. The case was ultimately settled in 2011, with the city of Hamburg agreeing to the lowering of environmental standards.

• Yukos (Isle of Man) vs. Russia: Yukos was a Russian oil and gas company. It was acquired from the Russian government during the controversial “loans for shares” auctions of the mid 1990s, whereby some of the largest state industrial assets were leased (in effect privatized) through auctions for money lent by commercial banks to the government. The auctions were rigged and lacked competition, and effectively became a form of selling for a very low price. In 2003, the Yukos CEO was arrested on charges of fraud and tax evasion and the following year Yukos’ assets were frozen or confiscated. In 2007 Yukos’ former shareholders filed a claim for over US$100 billion, seeking compensation for their expropriation. The dispute resulted in 2014 in the arbitrators awarding the majority shareholders over US$50 billion in damages. The investors have been trying to enforce the award in several countries since then.

• NextEra (Netherland) vs. Spain: The Dutch investor filed for arbitration in May 2014, after Spain changed the regulatory framework applicable to its investment, namely the construction of two solar power plants. NextEra claimed that Spain abolished the long-term premium and tariff system, negatively affecting the profitability of the project. However, Spain alleged that NextEra should have been aware that changes could be made to the regulatory regime. In May 2019, the investor was awarded around €290 million. Spain filed for annulment in October 2019.

Photo: Marc Maes / Twitter

Last update: April 2020

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