Several prominent EU members have announced plans to withdraw from the Energy Charter Treaty (ECT), a multilateral investment treaty protecting energy investment, as they try to break the status quo that has extended ample legal protections to fossil fuels investment over the past three decades.
Spain, the Netherlands, Poland and France have recently announced plans to exit the ECT, which was signed in 1994 to protect energy investments projects from host states’ policy changes. These announcements came after the European Commission finalised negotiations for a modernised version of the treaty in June. But these nations are not the first to go – EU member state Italy left the treaty in 2016.
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These governments argue that the treaty is incompatible with their current energy transition targets. French president Emmanuel Macron announced France’s withdrawal on October 21, saying leaving the ECT is “coherent with European climate strategy”. On October 18, Dutch minister for climate and energy policy, Rob Jetten explained that “despite many of the modernisations that are now in the negotiation outcome, we do not see how the ECT has been sufficiently aligned with the Paris Agreement”.
We do not see how the ECT has been sufficiently aligned with the Paris Agreement.
The treaty allows international energy investors to raise arbitration claims against ECT signatories if they believe policies by the national governments damage the value of their investments. So far, most of the claims raised under the ECT provisions have related to policy changes in renewable energy. However, the assertive energy transition policies set in motion across Europe expose EU members to a new wave of claims by investors in fossil fuel projects.
Indeed, the Netherlands is currently embroiled in arbitration proceedings triggered by German energy company RWE in 2021 over the government’s coal plant phase-out plan. Another German utility company, Uniper, withdrew a lawsuit against the Dutch government over the same issue after the German government handed a $15bn bailout to the company in July. RWE and Uniper have operated five and one coal fired power plants in the Netherlands, respectively.
Overall, foreign investors from ECT countries have announced 78 fossil fuel electricity projects (mostly coal- and gas-fired power plants) worth $41.04bn between 2003 and 2020, according to fDi Markets figures. No such projects have been recorded by ECT members since 2021.
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German, French and Swedish power companies feature among the biggest exporters of fossil fuel electricity technology into other ECT members, while the Netherlands, Germany and the UK are the top recipient countries of such investments from fellow ECT signatories.
“The withdrawal announcements are forcing the Commission’s hand on this issue,” Ignacio Arróniz, a trade policy researcher at climate think tank E3G, tells fDi. “These countries will not backtrack … and will leave the ECT.
“They already represent more than 50% of the EU population. So, the Commission must reckon with this political reality and ensure there is a coherent, unified legal and political framework for the whole EU. This is part of their mandate,” he continued.
“So far, their approach is clearly to push against more countries withdrawing from the ECT, but eventually they should facilitate a political conversation about whether it’s a better option to withdraw jointly from the treaty.”
Yet, the Commission remains defiant. “The modernised ECT leaves the EU and the member states in a much better position compared to the status quo or a withdrawal,” a spokesperson tells fDi.
At the heart of the controversy is the phase-out of protections for fossil fuels investments. The ECT version negotiated by the Commission will no longer protect fossil fuel investments made after August 2023 and phases out protections for existing fossil fuels investments over a period of 10 years. However, the treaty must be ratified by each signatory country, which may extend protections to such investments well into the 2030s and 2040s. Countries withdrawing from the treaty still must guarantee a 20-year sunset clause to existing protections.
Mr Arróniz believes that the risk of the sunset clause can be significantly mitigated at the EU level with separate agreements. “Almost 90% of ECT claims in the EU are invoked by other companies in the EU. If the EU member states who withdrew from the treaty sign agreements not to sue each other over ECT claims, this sunset clause will be neutralised,” he notes.
If the EU member states who withdrew from the treaty sign agreements not to sue each other over ECT claims, this sunset clause will be neutralised.
However, EU states would still be vulnerable to claims brought by the companies outside of the EU. There are bilateral investment treaties (BITs) between countries that protect investments, including fossil fuel investors, in the same way the ECT does, enabling investors to sue governments over policies that damage their investments.
Kyla Tienhaara, Canada research chair in economy environment and assistant professor at Queen’s University, Canada, tells fDi that even with the EU’s agreement to nullify the sunset clause, companies can structure their investments in the EU through non-EU countries in order to access the arbitration claim under BITs.
“Intra-EU BITs have been terminated through an agreement,” she says. “If the EU members adopt a coordinated exit from the ECT, they can have a similar agreement to nullify the sunset clause.
“There will be some remaining risk because companies can structure their investments in the EU through non-EU countries in order to access investor-state dispute settlements (ISDSs) under BITs, or to try to maintain ECT coverage under the sunset clause. A coordinated exit is still, in my view, the best approach with the least risk for climate-related ISDS claims.”
Other countries are now reportedly considering leaving the treaty, which will add additional pressure on the European Commission to find a concerted way out of it.
“There are several strong candidates to announce their decision to withdraw, such as Slovenia, Belgium, Germany or Denmark,” Mr Arróniz says. “If these countries announce their withdrawal, we expect a strong domino effect with other smaller countries.