The UK and EU must leave the Energy Charter Treaty together
Open Democracy | 10 March 2023
The UK and EU must leave the Energy Charter Treaty together
by Kyla Tienhaara and Rachel Thrasher
he European Union’s exit from the controversial Energy Charter Treaty (ECT) now appears to be a matter of when, not if.
In a leaked document, the European Commission informed member countries last month that a coordinated withdrawal from the treaty is “unavoidable”. France, Germany, Luxembourg, the Netherlands, Poland, Slovenia, and Spain have already announced their intentions to withdraw unilaterally.
The ECT, signed in 1994 and ratified by 50 predominantly European countries, is increasingly being used by fossil fuel companies to sue governments for introducing climate policies.
The European Parliament has called for an exit from the treaty, noting among other concerns that it is incompatible with the landmark 2015 Paris Agreement by 196 countries to set ambitious emissions-reductions targets.
The UK government has expressed similar concerns about the ECT. But last year, it committed to new terms to “limit costly legal challenges from fossil fuel investors” in a proposed ‘modernised’ version of the treaty. This position must be reconsidered now that the EU seems poised to abandon the modernisation process.
Experts in the UK support withdrawal and polling indicates that the British public does too.
Chris Skidmore, a former UK energy minister and chair of the Net Zero Review to help map out a transition plan for UK climate targets, has called the ECT “a threat to the UK’s net zero ambitions at home and its credibility abroad.”
Research conducted by the Global Development Policy Center at Boston University finds that the UK working with the EU on a coordinated withdrawal from the ECT could avoid potential liability for about £4.4bn worth of oil and gas projects by reducing the risk of legal challenges far more than the planned modernised agreement.
In order to understand why the ECT is just not suited to 21st-century challenges, let us examine what it is.
What is the Energy Charter Treaty?
The ECT requires countries to compensate foreign investors when new laws significantly interfere with the value of their investments or undermine their “legitimate expectations”.
To enforce this, it allows a process known as investor-state dispute settlement in which corporations bring complaints against governments before private tribunals. Last year, a tribunal ordered Italy to pay a UK oil and gas company £210m in “lost future profits” after the government banned offshore drilling to protect the Italian coastline.
Governments have raised concerns about the ECT, and the European Court of Justice has ruled that disputes between EU investors and member states violate EU law because “the ECT adversely affects the autonomy of EU law”.
ECT members have tried to address these issues and “modernise” the treaty with an Agreement in Principle that was announced in June 2022. A vote on adopting the modernised agreement was meant to take place in November but was delayed until April this year when it became clear there would not be enough votes in favour.
Protecting oil and gas projects
A modernised ECT would cease to protect new investments in fossil fuels after 15 August 2023. It would also include a ‘flexibility’ mechanism that would allow member states to phase-out protection for existing fossil fuel investments.
The UK has indicated that under this mechanism, existing fossil fuel investments in its territory would cease to be protected 10 years after the modernised ECT comes into force. As the ratification of the agreement could be a drawn-out process, protection could extend as late as 2040.
Allowing fossil fuel investors a further 10-plus years to challenge climate action is extremely risky. A considerable amount of fossil fuel reserves must remain in the ground if catastrophic climate change is to be avoided. In 2021, the International Energy Agency (IEA) modelled an energy pathway that would limit global warming to 1.5ºC above pre-industrial levels, which was the ambition of parties to the Paris Agreement. The IEA pathway involved no new oil or gas developments.
A coordinated UK-EU exit from the ECT would be a win-win for taxpayers and the environment
In a recent global study, we calculated the number of projects that would need to be cancelled under the IEA pathway but are protected by investment treaties that allow access to investor-state dispute settlement. We also estimated the value of these projects under different oil price scenarios.
The ECT stood out as the single most critical treaty, protecting more oil and gas projects that are incompatible with the 1.5ºC goal than any other. It also puts governments at risk for at least $20bn in liability – a figure that is likely to be a significant underestimate. A further investigation of the corporate structure of two large European oil and gas firms identified many more projects that may be protected by the treaty.
Exit options
Termination of the ECT, with a decision by all the parties to nullify its 20-year sunset clause, would immediately end protection for fossil fuel projects. It would allow countries adequate policy space for this critical decade for climate action.
If a full termination is not possible, then a coordinated exit between the UK and the EU would be the best path forward. In our dataset, almost all foreign investors with UK oil and gas projects protected by the ECT and incompatible with the 1.5ºC -goal are based in the EU. Only a fraction of the investment comes from Japan and Azerbaijan.
A withdrawal agreement between the UK and the EU would need to neutralise the ECT’s sunset clause. That would eliminate 99% of the risk the UK would be involved in the investor-state dispute settlement process (worth about £4.4bn, based on an average of oil price scenarios). For 1.5ºC-incompatible projects in the EU, all ECT-covered investors are European or British, so collective withdrawal would eliminate 100% of possible claims.
A coordinated UK-EU exit from the ECT would eliminate substantial liability risks and preserve the policy space that governments need to tackle climate change. It would be a win-win for taxpayers and the environment.
