The purpose of the Energy Charter Treaty (ECT), a multilateral agreement introduced in 1991 and currently boasting 51 signatories, is to allow the creation of open and non-discriminatory energy markets across its member states. By giving foreign investors in the energy sector legally enforceable protections against interference in their projects, the ECT generates investor confidence and stability.
However, the treaty suffers from multiple crucial shortcomings that have attracted severe criticism over the years. Germany, Poland, Spain, Italy, Slovenia and France have all expressed an intention to withdraw.
In a nutshell, the treaty’s design allows foreign investors to initiate arbitral proceedings and claim compensation when host governments introduce policies that hamper the course of their investments. The issue has become a major sticking point in the transition to cleaner technologies because national plans to phase out fossil fuel technologies can fall foul of ECT provisions.
The issue has become a major sticking point in the transition to cleaner technologies because national plans to phase out fossil fuel technologies can fall foul of ECT provisions.
A new study published in Science estimates the costs of possible legal claims from oil and gas investors at around $340bn.
A significant case which highlights the treaty’s precarious position is that of Ascent Resources v. Slovenia. In this case, the investor demanded damages from the government of Slovenia over its requirement to carry out an environmental assessment prior to the company initiating a fracking project.
This reveals the potential for a fossil fuel company being able to use the mechanism of investor-state dispute settlement (ISDS) to penalise a government for implementing its own environmental laws and assessing the environmental impact of projects that, such as in this case, are objected by local communities for their impact on local water resources. Ascent Resources v. Slovenia provides a glimpse into the ECT’s capacity to slow down reforms designed to promote climate justice.
The Energy Charter Conference established a Modernisation Group in response to various criticisms of the ECT, with the aim of negotiating its modernisation into a more environmentally conscious version. Despite these efforts, a major concern regarding the reform process is that it will continue to safeguard existing fossil fuel investments for 10 years after its ratification. Additionally, there is a proposal to incorporate “flexibility” in the definitions of fossil fuel investments protected by the ECT, leading to worries that some countries may continue to legally defend such fuels for longer than 10 years.
Therefore, despite the steps taken towards the reform of ECT, multiple countries are contemplating withdrawal. However, this highlights another problematic aspect of the charter: the sunset clause in article 47. According to this provision, investor protections for investments made prior to the withdrawal remain in place for 20 years even after the country has exited the treaty. Therefore, the threat to climate justice actions of the governments persists even after withdrawal, earmarking the treaty as an ‘anti-climate agreement’.
While withdrawal may continue to pose problems as a result of the sunset clause, it is worth exploring transitional solutions. For example, the sunset clause could be neutralised and an inter se agreement between the withdrawing countries could be crafted to do away with the ISDS resolution system.
That being said, the extinction of the ECT appears to be the unavoidable future because multiple countries refuse to abide by it and modernisation looks set to fail.
Julien Chaisse is professor of law at City University of Hong Kong and president of the Asia Pacific FDI Network. Twitter: @JChaisse
Julien's previous columns:
- FDI screening: CFIUS is the benchmark, the EU’s is toothless (for now)
- Is the US going to screen outbound FDI?
- Is an eNato the right solution for a bipolar economic world?
- Data regulation is more important to digital FDI than you think
This article first appeared in the February/March 2023 print edition of fDi Intelligence. View a digital edition of the magazine here.