African Climate News | 21 October 2022
EU States start exiting the Energy Charter Treaty whilst African signatories increase
The Netherlands became the latest EU country to recently announce it would withdraw from the Energy Charter Treaty (ECT). Last week, Spain announced it would exit the treaty, and Poland is also in the process of withdrawal. There are concerns that the ECT locks signatory countries into unsustainable climate policies at the risk of litigation from oil and gas investors. Proposed draft amendments to alleviate this risk are considered insufficient and unclear. At the same time, African countries are increasingly becoming signatories to the ECT potentially tying the hands of government to freely design their climate policies.
Last week, France announced its intention to withdraw from the Energy Charter Treaty (ECT). This follows a statement by the Netherlands on 18 October 2022, that it would withdraw from the Treaty (ECT). Spain also recently announced it would exit the treaty, and Poland is in the process of withdrawal. Italy withdrew in 2016. In response to a query of whether these countries were organising a mass withdrawal of the EU from the Charter, the spokesperson stated that there was no formal coordination at present but that “there are all sorts of conversations going on.”
The ECT is a multilateral treaty for energy co-operation, that entered into force in 1998. One of its main objectives is to protect investors in the energy sector, in particular transnational companies operating in coal, oil and gas extraction, from the political risks involved in investing in a foreign country. It expressly requires host countries to ensure such investments “enjoy the most constant protection and security”. If a government policy change has the effect of curtailing such projects, it is obliged to compensate the investor for its future loss of earnings. It also allows for private arbitrations between investors and member states. The Treaty further has a sunset clause which holds parties liable for two decades after leaving. One potential way of avoiding this clause is for parties to leave the treaty en-masse and to enter into an agreement that excludes investor-state disputes between such states, and which is partly why there is such interest in a mass exit from the treaty.
The agreement has more than 50 countries as signatories. They are mostly EU countries, but in recent years, The Gambia, Mali, Burkina Faso, Nigeria, Rwanda, Senegal and Eswatini have all signed the ECT and are preparing for their accession. The ECT Secretariat has also invited Burundi, Eswatini and Mauritania to become signatories.
The treaty has been criticised as presenting an obstacle in the development of national low carbon polices, and for actively disincentivising national governments from enhancing their ambition under the Paris Agreement, who fear litigation and consequential financial loss under the ECT. For example the Netherlands is a party to two lawsuits under the treaty brought by coal fired power plant operators who are suing the government for lost profits as a result of national plans to phase out coal. Spain and Italy have also been embroiled in similar litigation, with a UK oil company Rockhopper recently winning a £210m award in a case against the Italian government for banning offshore drilling in its territorial waters.
Draft Amendments have been made to the ECT which are due to be approved at the Energy Charter Conference on 22 November this year. There is however no certainty that this will take place, with the EU reportedly in a tug of war on whether to do so. The amendments introduce a flexibility mechanism that enables Contracting Parties (at their own election) to exclude investment protections for fossil fuels in their territories based on their climate and energy goals. For example, the EU and the UK have opted to have a carve out of ECT protection for new fossil fuel investments after August 2023, and for existing fossil fuel investments within 10 years of the amendment coming into force.
An analysis by IISD, however, found that even with these reforms, the revised ECT would still leave new and existing fossil fuel investments in at least 20 contracting parties protected indefinitely. They also found that the 10 year protection for existing EU and UK investments was too long, an issue aggravated by the fact there is no certainty of when the fossil fuel carve outs will enter into force. Their view is that the amendments also still leave many core provisions of the Treaty open to interpretation and debate.
Commenting on the ECT, Nathalie Bernasconi-Osterwalder, Executive Director of IISD Europe and Senior Director of IISD’s Economic Law and Policy Program, stated that “[w]e are staring down a climate crisis that requires decisive, ambitious, and targeted action, not piecemeal reforms of problematic treaties. The ECT was never designed for our climate challenge, and trying to retrofit it now around that goal just won’t be enough.”
While most African signatories are still in the process of accession, the commercial and environmental sensibility of acceding to a treaty, the climate related amendments to which are unclear and uncertain to come into operation, which has a 20 year sunset clause that makes the treaty difficult to leave, and which potentially can tie government’s hands in crafting climate policies and protections, remains in question.