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The 1994 International Treaty protects investors in the energy sector from States policy changes. This firmly blocks the EUs available spending towards its long term goal of becoming the first climate-neutral continent by 2050.

Europes Ambition?

In December 2019, the European Commission presented its goal to make Europe the first climate-neutral continent by 2050 an ambitious goal presented with a roadmap to make the EUs economy sustainable, the European Green Deal.

In other words, this represents the worlds second-largest economy no longer adding to the earths stock of greenhouse gases within 30 years. In the 24-page report, the EU described the steps to this urgent new challenge. Among other points, the EU has presented the need to change current policies in order for the economy to modernise and transform. Because, if between 1990 and 2018, the EU was able to reduce greenhouse gas emissions by 23%, and have economic growth by 61%, current policies will only reduce greenhouse gas emissions by 60% by 2050. Therefore, to ensure that all policies contribute to this goal, a proposal for the first European Climate Law was submitted to the other EU institutions by the Commission to write into law this new goal. However, many challenges remain for the EU, among others the little-known Energy Charter Treaty.

What is the Energy Charter Treaty (ECT)?

Signed over two decades ago, the treaty currently has fifty-three Signatories and Contracting Parties, including the European Union and Euratom. It was signed in 1994 and entered into force in 1998. The Energy Charter Treaty is a multilateral legal framework for international cooperation in the domain of energy. More importantly, the Treaty was created at the end of the Cold War to facilitate East-West cooperation over energy. On one side, the West would give access to its markets, capital and technology, while the East, to its natural resources. There was a need to reverse the decline of the then Soviet economy by attracting foreign capital, by reducing political risk and strengthening security through close co-operation in a critical economic sector. With the fall of the USSR, new objectives appeared. The first one was the need to set new standards for the energy market economy. The second was to create a basis for the rule of law to facilitate, in particular, activities of smaller companies which could not negotiate individual agreements with governments. Finally, the third objective argued for a new foundation for contractual and trade relations to replace the broken-down system. This binding international treaty was, therefore, both a necessity and an economic success as it contributed to the development of energy trade in Europe at the end of the Cold War.

The EUs environmental ambition blocked by the 1994 Energy Charter Treaty.

In a statement issued by the Commission, the Institution stated that the little-known Energy Charter Treaty (ECT) is threatening the climate ambition of the EU domestically and internationally. The EU argues that the Treatys original mission of reuniting both sides of Europe became obsolete after Russias withdrawal in 2009. Therefore, while still protecting investors, it undermines the Institutions mission. Another issue comes from the lack of information about the Treaty. EU citizens have supported the EUs move towards a greener region, but are unknowingly funding the life insurance that the ECT provides to fossil fuels investors.

The EU illustrates the need to modernise the Treaty and the urgency of the situation with telling statistics. In November 2020, the EU agreed that 30% of its 1.8 trillion budget land recovery plan for 2021-2027 would be made available for the green transition.

However, the Commission estimates that if fossil fuels are not phased-out from the ECT binding investment protection, traded fossil fuel-assets protected by the ECT would potentially reach at least 2.15 trillion by 2050. However, it is also estimated that the potential cost of Investor-State-Dispute-Settlement (ISDS) claims enacted through the ECT could reach at least 1.3 trillion by 2050 out of which 42% will be paid by EU taxpayers.

There is a need for a new balance between the protection of investments and investors, which represents the primary goal of the ECT today, and the minimisation of fossil fuels leading to greenhouse gas emissions.

What can we expect?

Today, the protection of fossil fuels investments prevents the Member States from implementing the necessary legal framework to encourage an energy transition, a pivotal step to achieve the Paris Agreement and the European Green Deals targets. The cost needed to implement the European Green Deal is impossible to cover if the ECT remains as it is. Therefore, if the ECT was enacted with values that resonated with the EU and its members several decades ago, this has now changed. The modernization process, which would delete those lines in the ECT protecting fossil fuel investors, started in 2018 and is still ongoing without any deadlines to the negotiations.

However, without a successful outcome to reform the ECT, a unilateral withdrawal of the EU and the Member States from an unreformed ECT would trigger the sunset clause, whereby the ECT would continue to apply to existing investments during 20 years. This could result in new investor-to-state disputes under the unreformed rules, including in existing investments in fossil fuels. The alternative of a withdrawal presents an unlikely outcome at this moment.

The three rounds of negotiations, started in July 2020, regarding a reforming of the ECT have been led by the European Commission. The European Parliament has submitted questions regarding the negotiations deadline, which remains to be determined, and the possibility of considering a withdrawal before November 2021. The EU is bound to submit its enhanced determined contribution to the Paris Agreement on that date, toward which the Commission was unfavourable. The European Court of Justice has been asked to opine on the compatibility of Energy Charter Treatys investor-State arbitration provisions with EU law.

It is in the EUs institutions and citizens best interest to work towards reforming the Treaty so that it once again resonates with its values and moves forward towards a Greener region.

Read more:
The Energy Charter Treaty: a Threat to the European Unions Climate Ambition - Global Risk Insights