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Why a coordinated withdrawal from the Energy Charter Treaty is inevitable

Euractiv | 24 January 2023

Why a coordinated withdrawal from the Energy Charter Treaty is inevitable

By Christina Eckes, Lea Main-Klingst and Lukas Schaugg

Christina Eckes is a professor of European Law at the University of Amsterdam. Lea Main-Klingst is a lawyer in Public International Law at ClientEarth. Lukas Schaugg is an international law analyst at the International Institute for Sustainable Development (IISD).

Since October 2022, seven EU member states have announced plans to withdraw from the European Charter Treaty (ECT). Across the board, the message is clear: the insufficient and potentially climate-damaging treaty reform effort is no longer a politically viable option, write Christina Eckes, Lea Main-Klingst and Lukas Schaugg.

The ECT is an international agreement dating from the 1990s with the EU and its member states among the contracting parties. Among other functions, the treaty enables energy investors to sue for compensation before international arbitration tribunals if political measures or laws have an adverse effect on their profits. And this is the case even if these measures serve the legitimate objectives of protecting the environment and climate.

Seven EU member states have recently announced a withdrawal from the treaty, and a coordinated withdrawal of the EU is now inevitable.

Past arbitration claims have, for instance, concerned the phase-out of coal or restrictions on offshore drilling or fracking. An arbitral tribunal has recently awarded the British company Rockhopper €190 million in compensation, holding that Italy had banned the development of further oil fields near the coast for environmental reasons.

Meanwhile, according to a large consensus across multiple climate and energy pathways, developing any new oil and gas fields is incompatible with the Paris Agreement and limiting global warming to 1.5°C, as demonstrated in IISD’s recent report “Navigating Energy Transitions”.

The ECT is thus doubly at odds with the climate crisis: On the one hand, it protects climate-damaging investments in fossil energies, and on the other, it puts the brakes on measures to protect the climate and the environment. The threat of astronomical compensation payments alone acts as a deterrent.

Reform raises new concerns

Since 2017, attempts have been made to “reform” the ECT. Negotiators concluded the reform talks last year, yet while the proposed package of reforms improves some aspects of the treaty, it worsens others.

One positive but insufficient feature of the reform package is the “flexibility mechanism” that allows states to remove fossil investment protection, subject to certain conditions. However, states are not required to do so. In several contracting parties, the extensive protection remains in place.

A negative feature of the reform package is that it extends investment protection to controversial new energy sources, such as biomass or biofuels. The newly introduced right-to-regulate clause – attempting to safeguard contracting parties’ right to regulate in the public interest – is also unlikely to reduce significantly the risk of arbitration claims. Only recently, environmental exceptions were found to be virtually irrelevant in a lawsuit brought by an extractive company against Colombia. Thus, the treaty remains incompatible with the Paris Agreement on climate change.

In recent months, pressure on the European Commission to withdraw has been mounting steadily. Since October 2022, seven EU member states (France, Germany, Spain, Poland, the Netherlands, Luxembourg, Slovenia) have announced plans to withdraw from the ECT.

Together with Italy, which already withdrew in 2016, they represent about 75% of the EU population. In the EU Council, support for the ECT reform fell short of the necessary majority. On November 24, 2022, the EU Parliament also called for a coordinated EU exit. Meanwhile, the European Court of Justice has held unequivocally that the ECT in its current version is incompatible with EU law.

Across the board, the message is clear: the insufficient and potentially climate-damaging ECT reform effort is no longer a politically viable option, and the EU must initiate a coordinated withdrawal.

A coordinated withdrawal

A unilateral withdrawal from the ECT triggers the treaty’s so-called sunset clause, which extends protection for existing investments for another 20 years.

However, this clause is not applicable among EU states, which never intended the ECT to apply to their investment relations. The EU Commission has also clarified this in its draft inter se agreement – an agreement to be concluded among the EU member states. In addition, any withdrawing states (including those outside the EU) are free to “neutralise” the clause among themselves, as this does not affect the rights of third countries.

The sunset clause would only continue to apply to investors of states that remain ECT parties and investors of withdrawing states that have investments in those states that have not left.

Some commentators argue that arbitral tribunals would not respect a neutralisation of the sunset clause. However, one significant problem in these arguments is that they call into question states’ capacity to reform a treaty based on mutual consent – a fundamental tenet of public international law.

In other words, the EU must not let private arbitral tribunals dictate the limits of its course of action.

The need for a European solution

What happens now? As a mixed agreement under EU law, the ECT falls within the competence of both the EU (foreign direct investment) and that of its member states (investor-state dispute settlement).

Therefore, if the EU withdraws, individual member states cannot remain contracting parties of the ECT. The EU would have first to authorise such a unilateral step in a separate EU Council decision. However, since the revised ECT violates the EU climate protection targets and the old ECT also violates EU law, this is not a legally viable scenario – yet another sign that a coordinated withdrawal is without alternative.

Despite these concerns, some EU member states (including Sweden, Austria, Belgium, and Denmark) have not yet announced plans to withdraw from the ECT. In terms of climate protection, it is high time for states to take this step.

Only a coordinated withdrawal by the EU and its member states can create better conditions for urgently needed climate protection measures.

 source: Euractiv